Jul 9, 2012

Grading Latin American Presidents

How can Presidents be graded? One can look at the changes in indicators of economic well-being during their mandate relative to previous presidential periods, or one can compare the performance of those indicators across countries for the same periods. The problem with these procedures is that they do not separate the effect of the presidents' policies (local policies) from the international context -- some factors that are beyond the control of the presidents that might affect some countries more than others. 

In the new paper (June 2012) "Grading Latin American Presidents: A View from the Stock Markets" Cruces and García-Cicco try to separate local factors from international factors to grade the performance of presidents, they use stock market returns. Their results in one graph:

The authors conclude:

Colombia, Peru and Chile stand out as the countries that had the greatest national differential contributions, a proxy for the quality of policies that were implemented.
One concern about their methodology is the lagged effects of previous policies that might have consequences later in time, although the authors can argue that financial markets have the advantage that they incorporate most of the information (some would say all the information) available. One would like to see more countries in the sample but stock market data is not available or stock markets are inactive in several countries.
The abstract of the paper:

We use stock returns to grade presidential economic performance. In efficient markets, asset prices are unique in that they impound the long term effects of changes in the environment, including government policy. To purge national returns of state-of-the-world conditions that do not result from local events, we introduce a global twin portfolio and a regional return. The twin portfolio for a country reports the return of a combination of world stocks that each month has the same industrial composition as that one country’s stock index. These benchmark external conditions are most volatile: they vary between a 295% appreciation (or tailwind under some interpretations) and a 30% reduction (or headwind) in asset prices over extreme four-year presidencies in our sample. We interpret the gap of national performance over these counterfactual returns as a proxy for the quality of domestic policies during a given presidency, as seen from the standpoint of equity investors. We apply this approach to seven Latin American countries from 1980 until 2011. From this perspective, Colombia, Peru and Chile stand out as the countries that have implemented the best long run policies over the sample. In addition, we provide a grading of relative presidential performance.

HT: Maximo Rossi. 

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