Electoral Fiscal Policy in New, Old, and Fragile Democracies
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Electoral Fiscal Policy in New, Old, and Fragile Democracies ADI BRENDER1 & ALLAN DRAZEN2,3,4 1
Bank of Israel. E-mail: [email protected] Department of Economics, 3105 Tydings Hall, University of Maryland, College Park, MD 20742, USA. E-mail: [email protected] 3 NBER 4 CEPR 2
We review research on political budget cycles across countries, including recent findings that they are a phenomenon of new democracies and are statistically insignificant in old, established democracies. We then consider what may account for this and review several hypotheses. Recent empirical work also finds that voters in new democracies do not reward election-year deficit spending, raising questions about explanations focusing on the use of election-year deficits to gain votes. This suggests that the increase in election-year expenditures and deficits in new democracies may reflect other motives. Specifically, it is suggested that they may reflect attempts to shore up a fragile democracy. Comparative Economic Studies (2007) 49, 446–466. doi:10.1057/palgrave.ces.8100213
Keywords: political business cycle, election-year deficit spending, new democracies, electoral fiscal policy JEL Classifications: P500, E000
INTRODUCTION The last quarter century has been marked by widespread democratisation across the world.1 Since the beginning of the ‘third wave’ of democratisation 1
Prepared for the 12th Dubrovnik Economic Conference, June 28–July 1, 2006. We wish to thank our discussant Alan Deardorff and other conference participants, as well as an anonymous referee, for useful comments. We also wish to thank Assaf Shtauber, Lior Galo, and Liam Malloy for superb research assistance on the research discussed in this paper. The views in this paper do not necessarily represent those of the Bank of Israel.
A Brender & A Drazen Electoral Fiscal Policy
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in 1974 (Huntington, 1991), dozens of states have adopted democracy as a form of government. This includes, of course, most of the former Soviet bloc nations, especially in Eastern Europe. This sea change has raised a large number of crucial questions. On the normative side, there are obviously questions of how democratisation, that is, the transition to a democratic form of government, can be encouraged, as well as how democratic consolidation in new and fragile democracies can be strengthened. On the positive side, there is a range of questions associated with the economic performance of new democracies. (See Rodrik and Wacziarg (2005) for a short summary of results on economic growth.) In this paper, we consider one such positive question: elections in new democracies. Specifically, we consider what they imply for fiscal policy (ie, political budget cycles), how electoral results depend on economic performance and fiscal policy, and how the results that are found in new democracies may be related to democratic fragility and consolidation. As Riker (1982) and others have argued, elections are the defining feature of a democracy. They are not sufficient to defi
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