By: Jacopo Ponticelli and Hans-Joachim Voth
Free to download URL: http://voxeu.org/sites/default/files/file/DP8513.pdf
Does fiscal consolidation lead to social unrest? From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble cross-country evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor. We also analyse interactions with various economic and political variables. While autocracies and democracies show a broadly similar responses to budget cuts, countries with more constraints on the executive are less likely to see unrest as a result of austerity measures. Growing media penetration does not lead to a stronger effect of cut-backs on the level of unrest.
Keywords: demonstrations; Europe; government deficits; instability; public expediture; riots; unrest
There are a number of competing arguments in use to explain the August 2011 riots in London (e.g. BBC News or Tony Blair in The Observer). In a timely piece, Ponticelli and Voth provide empirical support to the debate.
That one should expect some form of that causality between cut-backs in government expenditure and social unrest is probably part of the curriculum of “Politics 101”. The question is by who much. Here Olaf Storbeck’s Ecomics Intelligence noted that, according to Ponticelli and Voth, the relationship has lost strength in the last 20 years needs more attention and that the authors could have expanded in the reasons for this. Perhaps more interestingly, is testing for when and how. For instance, riots in Greece take place when cuts are announced and in London in anticipation of a reduction of police numbers. In this regard Ponticelli and Voth explore “the spread of (uni-directional) mass media” (such as newspapers, television and radio) as opposed to the use of social networks (bi-directional media) in the so called Arab Spring and London riots.
Overall, they offer a robust dataset, a sound estimation and a convincing explanation that budget cuts have a stronger correlation with unrest than changes in GDP:
These findings cast doubts on established wisdom. Until the sovereign debt crisis of 2010, the consensus among economists was unambiguous – expenditure cuts can be growth-enhancing. Also, there was a widely accepted view that there is no penalty at the ballot box for cuts. Governments that implement huge austerity programmes are just as likely to win as the ones doing nothing. While recent research by the IMF casts some doubt on the economic benefits, our results question the political economy side of the story – cuts may not imperil re-election, but they create the risk of major social and political instability.(The Guardian)
There are some methodological issues that need clarification. For instance, what exactly do authors mean by “countries institutions improve”. There is no allowance for the timing of announcements as their data uses actual reductions in government spending. It is also debatable to construct a single index of unrest (whether a simple or weighted index as noted in footnote 6) as opposed to a panel. How different are results when comparing Latin America, Africa, Europe and Asia? But more important, as the authors point out, there might be space for more micro analysis when testing unrest in particular cities (see their summary at Vox) rather than national economies. These and many other questions remain open. It seems that Ponticelli and Voth make an important contribution to researching the economics of unrest.