Monthly Archives: August 2011

Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009

By: Jacopo Ponticelli and Hans-Joachim Voth


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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

JEL: H40

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.

Mobile banking and financial inclusion: The regulatory lessons

By: Michael Klein and Colin Mayer


Mobile banking is growing at a remarkable speed around the world. In the process it is creating considerable uncertainty about the appropriate regulatory response to this newly emerging service. This paper sets out a framework for considering the design of regulation of mobile banking. Since it lies at the interface between financial services and telecoms, mobile banking also raises competition policy and interoperability issues that are discussed in the paper. Finally, by unbundling payments services into its component parts, mobile banking provides important lessons for the design of financial regulation more generally in developed as well as developing economies. —

Keywords: Banking,Regulation,Microfinance,Payments System,Mobile Money

JEL: G21

Through the case study of M-PESA in Kenya, Klein and Mayer argue that a “revolution” in payment systems is taking place. It is emerging amongst poor people in less industrialized nations rather than the well-off and technologically savvy in the US-Europe-Japan triangle. And, they conclude, it illustrates how banks need not be the sole administrators of payment systems, that there is yet another process of bank disintermediation in the make.

The M-PESA case resembles that of the Octopus card in Hong Kong, where the transport authority has been the main driver and today about 40% of its use relates to micro-payments other than transport. Banks were not interested in helping develop it and today they have been either marginalized or had to respond offering hybrids (that is, cards with dual VISA/Mastercard chips and Octopus). While Turkey offers an example where only a combination of banks and telecoms results in the right mix of capabilities to bring about change. There telecom operators (Turkcell), banks, authorities and a private e-identity service-providing company (E-Güven) have agreed upon a common SIM-based identification solution. As a result, Turkish customers can use their mobile phone for secure connections to online banking, government services etc.

I take it that there is a case of path dependence in industrialized nations for banks to be the most successful creators of means of payment. Early forms of fiat money and London coffee houses are two examples that readily come to mind. Therefore, an non-industrialized nation is closer to the “natural state” and alternative forms are easier to flourish, particularly if, as in the case above, deploying say a large network of cash machines involved a substantial investment (with the price tag of each individual device requiring some three to ten thousand dollars). Mobile phones offer a cost effective alternative, among other things because they are a platform that already has a large number of users.

But however much retail payments and consumer credit are “hot topics” (see call below), we know very little about financial transitions. I can be wrong in this comparison but I think of co-existing payment systems just like there are co-existing alternative energy supplies. According to Roger Fouquet’s studies in energy transitions (see, it takes at least 50 years to move form one source of energy to the other. So I am not totally clear how cases in Kenya, Hong Kong or Turkey are the dawn of a new era. The same reasons that have made them successful could bring about their failure in other geographies. Klein and Mayer admit that it is too early to tell whether most experiments in mobile payments will be financially successful. But to the best of my knowledge, we know little on transitions in financial payment systems. An area where it seems we banking historians could make an important contribution.

PS A conference on the economics of retail payments and consumer credit has been organized by the Federal Reserve Bank of Philadelphia in September 2011 (see