Political Liabilities: Surviving Banking Crises

Little is known about the political repercussions of banking crises despite the extensive literature on the link between economic performance and political outcomes. We develop a theory of how clarity of responsibility affects incumbent party survival patterns in 89 democracies between 1975 and 2005. Our results are robust to modeling strategies that include hazard models with shared frailties to account for country-specific factors that affect incumbent survival. We find that globalization weakens the accountability link between politicians and voters. Incumbents in countries with open capital accounts are much more likely to survive a banking crisis than incumbents in closed economies. We do not find conclusive evidence that divided governments or those with multiple veto players enjoy higher survival rates after banking crises; in fact, the opposite seems to be true. We conclude with a discussion of the paradoxical relationship that openness brings to incumbents: greater exposure to foreign shocks and reduced electoral punishment for banking crises.