Paraguay’s suspension from Mercosur: How does uncertainty affect economic activity?

Jéssica Pinheiro and Philipp Ehrl

Journal of Economic Studies, 2025, vol. 53, issue 2, 318-331

Abstract: PurposeThis paper aims to study how political and economic uncertainty affects productive activity in a developing country.Design/methodology/approachTo capture a period of unusual uncertainty, we use the temporary political suspension of Paraguay from Mercosur between June 2012 and July 2013 as an indicator because it was abruptly caused by the impeachment of Paraguay’s president and ended shortly after the inauguration of a new democratically elected government. We use night lights as a proxy for economic activity and estimate differences-in-differences models with Paraguayan and Brazilian municipalities.FindingsWe find that during the political suspension from Mercosur, the country’s economic activity did not significantly decline. After the repeal of the suspension, we find a positive change of about 2% in the night light intensity.Research limitations/implicationsOur results suggest that the uncertainty about the political and economic future in Paraguay did not severely paralyze economic activity. Possible explanations for the absence of a negative impact are the perceived transitory nature of the uncertainty, low credibility of harsher economic sanctions by the Mercosur, or habituation to high uncertainty.Originality/valueAs far as we know, this is the first empirical paper to analyze how Paraguay’s suspension from Mercosur affected the country’s economy.

Keywords: Customs union; Night lights; Uncertainty; Impeachment (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-09-2024-0599

DOI: 10.1108/JES-09-2024-0599

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