Orthodox vs Heterodox Adjustment Policies and Authoritarian Regime Survival during Financial Crises

Why do some authoritarian regimes collapse during financial crises while others survive financial turmoil without any political consequences? I suggest an answer to this question by focusing on adjustment policy choices of authoritarian regimes in financial crises from the perspective of the Mundell-Fleming trilemma. I utilize the growing literature on the varieties of authoritarianism to develop an argument linking the different incentives and constraints (both from the elites and from the citizens) that leaders in singleparty, personalist, and military regimes face when dealing with financial crises. Specifically, I argue that orthodox adjustment policies, also known as the economic recipes of the Washington Consensus, constrain a government’s ability to implement independent monetary policy, have higher short-term economic costs, may have damaging effects on underdeveloped financial institutions, and thereby could lead to discontent with the way the crisis is resolved both among the elites and the citizens and increase the probability of authoritarian breakdown. On contrast, by opting for heterodox policies (such as capital controls), autocratic governments have higher chances to neutralize major threats from within society and to solicit cooperation of the elites, because by cutting the link between interest rates and exchanges rates, they get more autonomy to adopt expansionary macroeconomic policies that are otherwise not feasible (e.g., policies that benefit certain business interests, protect weak financial institutions, and prevent mass unemployment). Empirically, I analyze 179 authoritarian regimes in 97 countries from 1960 to 2011. I limit my analysis to currency crises and estimate a series of regressions that model the probability of autocratic regime breakdown (measured as autocracy-to-autocracy or autocracy-to-democracy transitions) as a function of adjustment policy choices during currency crises and other potential determinants of regime survival. As a proxy for adjustment policy choices, I use the data on countries’ policy choices among the three Mundell-Fleming trilemma goals (i.e. exchange rate stability, monetary policy independence, and capital account openness). I test my argument in two steps. First, I restrict the analysis to instances of currency crises only and test whether certain adjustment policies during currency crises increase the probability of authoritarian regime survival. Second, I test my argument on the entire population of authoritarian country years and employ time-series/cross-sectional analysis of data using my whole dataset of authoritarian regimes. I find strong support that autocracies opting for heterodox solutions are less likely to break down during currency crises. This finding suggests that macroeconomic adjustment policies in financial crises carry not only economic but also political risks. In particular, heterodox adjustment policies have an unpleasant consequence of prolonging the durability of autocratic regimes.