Do weak institutions prolong crises? On the identification, characteristics, and duration of declines during economic slumps

This paper defines economic slumps as a sequence of structural breaks exhibiting a specific pattern. We identify 58 such episodes between 1950 and 2008 among a large sample of countries, and then examine the phases of decline. In several countries declines last extremely long, and we suggest several likely contributing factors. We find evidence of weak institutions before the crisis hits and, interestingly, of positive reforms thereafter. Strong institutions shorten the duration of crises, ethnic cleavages do the reverse. However, the detrimental effects of ethnic cleavages are not insurmountable: an interaction effect suggests they can be offset by appropriate institutions.

Keywords: economic slumps, crises, institutions, structural breaks, duration analysis

JEL Classification: O43, O11, C41, F43