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Political Power and Regional Economic Performance

Who is the boss here? Regional power and participation of the Caribbean coast in the ministerial cabinets, 1900-2000.
(Original title: ¿Quién manda aquí? Poder regional y participación de la costa Caribe en los gabinetes ministeriales, 1900-2000)

by Adolfo Meisel Roca (


Abstract (Translated from Spanish by the reviewer)

It is well known that regional identities are very strong in Colombia and that they have had an influence in the politics of the country. One of the dimensions that Presidents of the Republic take into account for the composition of their cabinet is regional origin. In this paper we analyse the regional origins of Colombian ministers at cabinet level during the twentieth century. This to identify whether particular regions dominate the number of ministers in the cabinet and whether individuals from a particular region were overwhelmingly appointed to a specific ministry. To analyze the regional participation in the cabinet, we constructed a database with the names of the 702 persons that served as ministers during the twentieth century. The paper focuses on the Caribeann region, because we wanted to study its participation in the national political scene, during a century in which its economy lagged behind in comparison to the central region of the country. However, to articulate a comparative regional perspective, we have also widely discussed the cases of Antioquia and Bogotá and, to a lesser extent, of other regions of the country. The results show the strong influence of Antioquia and the departments of the coffee-growing region on the cabinets of the first part of the twentieth century, as well as the rise of Bogotá in the last decades of the century.

Review by Sebastián Fleitas

This paper was distributed by NEP-HIS on 2012-04-17. It addresses the role of the Caribbean region in the executive branch of the Colombian government, given that it was a region that fell behind in terms of economic development, human capital and political power throughout the twentieth century. The regional inequality in Colombia is well-know. It is an issue of economic and political policies to the extent that each president of Colombia has had to take into account while aiming for a balanced regional composition of his cabinet. To describe and interpret the links between political power and economic development at the regional level, Adolfo Meisel constructs a database with the information about regional origin for all the 702 persons that were ministers during the twentieth century in Colombia.

Colombian Regions (number two is Caribbean Region)

Colombian Regions (number two is Caribbean Region)

I think that this paper makes two important contributions. The first one is that the article describes in a very precise way that the Caribbean region had a low participation in the executive branch during the twentieth century and that in fact this low participation contrasts with the increased influence of the capital city (Bogotá) and the coffee-growing region. This trends can be seen in the fact that no president was born in the Caribbean region; in the participation of the Caribbean region in the total number of ministers during the century (about 12%); and also in the fact that the participation of ministers born in the Caribbean region in key areas (like the Treasury, Trade, Defense, Education or Economic Development) was lower than than the average participation of individuals from other regions. Meisel also advances some possible explanations regading the change in regional political power in Colombia: the backwardness of the Caribbean region, the rise of the coffee-growing region and the consolidation of Bogotá as the most important economic center.

Second, this paper addresses the important issue of political power and economic development, making focus in the regional dimension in a country with strong regional inequalities. The literature on the linkages between political power and economic development has a long tradition. More recently it has had a big impulse with the work of Acemoglu and some of his co-authors (see Acemoglu, et. al., 2005, the recent book by Acemoglu and Robinson´s Why Nations Fail as well as Anna Missiaia’s entry to NEP-HIS entitled Acemoglu on Past, Present, Future and Beyond). However, similar efforts to understand the institutional factors and the role of political power in economic development in Latin America are few and far apart (such as the work of Roderic A. Camp for Mexico). This issue is of great importance in Latin America due to the persistence of institutions that have been blamed of deterring economic development. Moreover, Latin America exhibits significant levels of inequality that could lead to worse economic performance if the elites use their political power to perpetuate themselves using these extracting institutions.

Cartagena de Indias (The most famous Caribbean region city)

There are, however, two major concerns that limit the scope of the contributions in this paper and in particular, regarding the linkages proposed between regional political power and economic development. The first one relates to the fact that the author uses the place where the minister was born in order to assess the regional origin, which in turn is used to assess the political power of the regions during the twentieth century.

It is not straightforward that the origin of the minister is a good indicator of the political power of a region and even more that this type of political power could be transformed into a better economic performance of that region. At least two reasons can be argued. First, the region where the minister was born might not be a good indicator of his commitment with that region, either because this commitment is not strong before being elected or because after being elected his preferences can change. For instance, whether President Obama was born in Kenya or Hawaii is somewhat besides the point as he took office as Senator from Illinois.

As a cabinet minister rather than an elected official, a politician might wish to maximize, among other things, their continuity in the Executive branch, which depends more on the President’s decisions than on the regional support for a particular individual. On the other hand, there is not a direct relationship between this kind of political power and the economic performance of a region, because even when if a minister wants to favor a region, policies enter in a political process in which the other ministers take part, and also a complex process of negotiation in the legislative branch (were possible lobbyists can take action). For these reasons, I think that the paper would benefit if the author discussed a little bit more the relationship between the executive and legislative branch, the role of regional lobbyists and the existence of regional development policies, in order to try to isolate the effect of the regional composition of the cabinet on the performance of the Caribbean region.

Casa de Nariño (Colombian Government House)

A second important issue that Meisel could address is the existence of endogeneity between political power and economic development. It is key to address this endogeneity in order to make conclusions and to determine the causality in the relationship. An example may help to make this point more clear. Assume that a region that has better performance over time due to different commodity endowments and invests some of the proceeds to improve its educational system. Assume that eventually the more educated people serve in the cabinet. In this example, the composition of the cabinet will show that people from more developed regions have a greater participation in cabinet, but note that the causality goes from a better performance to increased participation.

But the things can be the other way around. Assume now that exogenously a president born in the central region decides to appoint only ministers from his region for the Cabinet. Assume also that these people decide to allocate the resources for education in a very unequal way, favoring this region. Assume that eventually by this process the people from this region get more educated than the people from other regions and that this increase in human capital boosts economic growth. Under the assumption that the more educated people have better opportunities to be in the Cabinet, then the data will again show that people from more developed regions have a greater participation in cabinet, but note that this time the causality goes from the political power to economic development.

These two very simplified examples predict the result that the author finds for the composition of the Colombian Cabinet during the twentieth century. However, the reasons for this are very different in each example. In the first example economic development generates political power while in the second political power causes a better economic performance. Overall, I find that the discussion of the linkages between political power and economic development are really important to economic development. This is particularly true for Latin American countries, where the existence of a huge inequality could be seen as a hint of the presence of an economic elite that reproduces its privileges over time. However, in order to advance in the understanding of the linkage between political power and economic development, the big challenge is to find exogenous shocks that allow to draw conclusions about the direction of the causality.

How did the antipope affect the distance to school?

Medieval Universities, Legal Institutions, and the Commercial Revolution

By Davide Cantoni ( and Noam Yuchtman (



We present new data documenting medieval Europe’s “Commercial Revolution” using information on the establishment of markets in Germany. We use these data to test whether medieval universities played a causal role in expanding economic activity, examining the foundation of Germany’s first universities after 1386 following the Papal Schism. We find that the trend rate of market establishment breaks upward in 1386 and that this break is greatest where the distance to a university shrank most. There is no differential pre-1386 trend associated with the reduction in distance to a university, and there is no break in trend in 1386 where university proximity did not change. These results are not affected by excluding cities close to universities or cities belonging to territories that included universities. Universities provided training in newly-rediscovered Roman and Canon law; students with legal training served in positions that reduced the uncertainty of trade in medieval Europe. We argue that training in the law, and the consequent development of legal and administrative institutions, was an important channel linking universities and greater economic activity.

Review by Chris Colvin

The “distance to” literature, as I like to call it, has just had an exciting new addition, from Davide Cantoni (University of Munich) and Noam Yuchtman (Haas School of Business, UC Berkeley). As UK readers will know all too well, our tabloid press is quite obsessed with stories about the distance to school (sometimes even more than house prices). In their new working paper (circulated by NEP-HIS on 2012-04-17), Cantoni and Yuchtman apply this English obsession to explain something altogether different; they use the distance to new post-Schism universities as an indicator of human capital in what may well be a 14th-century natural experiment.

Recent contributions to the “distance to” literature include Sascha Becker and Ludger Woessmann’s 2009 QJE article, which uses distance to Wittenberg as an instrument for Protestantism, Jeremiah Dittmar’s 2011 QJE article, which uses distance to Mainz as an instrument for the adoption of the printing press, and, in an interesting combination of the two, Jared Rubin’s working paper, which uses distance from Mainz as an instrument for the spread of Protestantism through the printing press.

Whilst these all focussed on questions involving the 16th-century Reformation, Cantoni and Yuchtman look at a much earlier Christian division: the 14th-century Papal, or Western, Schism that led to the Avignon-based Antipopes. Europe’s German areas had no universities before this schism. German states largely chose to follow the Roman pope, as a result of which German academics and students could no longer get to school; German academics found themselves in the antipope’s realms and were exiled. Returning home, they establish their own schools in places like Erfust, Heidelberg and Cologne.

Antipope Clement VII: Cantoni and Yuchtman think he may have helped cause the Rise of the West

Cantoni and Yuchtman argue that this influx-of-the-educated led to a proliferation of legal education, which in turn facilitated economic exchange and helped lead to the Commercial Revolution and the Rise of the West. Their core “distance to” instrument for education is defined as the change in distance between a market and its closest university following the establishment of a new German university. Markets in the west of the German parts of the Holy Roman Empire saw a larger reduction in this distance-to-school measure than in the east, and the interaction of the timing of universities’ arrival and this change in distance correlates nicely with the founding of organised markets.

As with all papers involving natural experiments of history, the authors devote considerable time convincing readers that the arrival of new universities was truly an exogenous event, that these universities would not have been established were it not for the Papal Schism. One of the ways they do this is with “placebo regressions” involving parts of Europe affected by the Schism, but which saw no change in the trend in university establishment, such as England. However, by their own admission, the most important part of English legal education at the time took place in London, at the Inns of Court, rather than at Oxbridge, which were basically glorified seminaries for the rich; perhaps they could consider the Inns as a de facto university in their next version of the paper. Another placebo regression I would like to see would involve ancient universities (like Northampton, Lucca and Würzburg) that were short-lived: do their results still hold if these failed universities are included?

Unfortunately, Cantoni and Yuchtman decided to distribute their working paper using the NBER, which means it is behind the Great Academic Firewall; only individuals clicking on the paper from within a university network can download it for free. Fortunately, Yuchtman has also uploaded a copy on his personal webpage. I think it is high time for the NBER to stop charging punters to access its papers; members should vote with their feet and distribute their work-in-progress in alternative ways!

Latin American Economic History: new questions, new data, old problems

Intraregional trade in South America, 1913-50. Economic linkages before institutional agreements

by José Peres Cajías, Marc Badia-Miró ( and Anna Carreras-Marín ( (Universidad de Barcelona)



With the exception of the North American Free Trade Agreement (NAFTA), trade integration is still modest in Latin America, at around 20% of total trade. Surprisingly, these levels were higher in 1945, when the figure for imports stood at 25.6%. Paradoxically, this result shows that trade integration reached its peak before trade integration agreements were signed. To understand the reasons for this, we examine intraregional trade throughout the interwar period (1913-1950). We analyze five national cases: Argentina, Bolivia, Brazil, Chile and Peru. As far as we know, this is the first paper in the literature on intraregional trade during the interwar period. There are other papers on intraregional trade in Latin America, but they focus on the period after the 1960s. The analysis of intraregional trade in the interwar period is also useful to the Latin American industrialization debate. Given the disruption in world trade flows and the existence of some industrial capacity, the paper looks at any possible increase in intra-industry trade. There are two main conclusions: a) with the exception of the World War periods, intraregional trade has been low since 1913; b) in general, intraregional trade reflects the overall trade specialization: there is a high concentration of low value added products.

Review by Sebastián Fleitas

This paper was distributed by NEP-HIS on February 20, 2012 and deals with the fact that in spite of the many trade agreements that have been signed since the 1990s, actual international trade between Latin American Countries (LACs) remains quite low. The authors tell us that low trading volume is not at all new. This by looking at intraregional trade between 1913 and 1950, They construct a new database to describe the intensity and characteristics of trade for five LACs: Argentina, Bolivia, Brazil, Chile and Peru.

Two main conclusions arise from their analysis. The first one is that trade among Latin American countries was low during the first half of the 20th Century, but similar to the current levels. Interestingly, intraregional trade only increased during the WWI and WWII. The second conclusion by Peres Cajías and colleagues is that the flow of goods and services in intraregional trade reflect the same pattern as the flows with countries outside the region, namely there is a high concentration of low value added products.

These results are very important in the context of the early industrialization and the state-led industrialization process that was typical of LACs in the early 20th Century. Intraregional trade provides an opportunity to develop new goods, to attempt technological catch up under better conditions and to export to extra-regional markets. This process allows countries to make the structural change that is the basis for any process of economic development. In this sense, the failure to develop a dense network of intraregional trade could explain some of the difficulties to implement structural transformations and to find a more successful international trade pattern.

Upside-down Map, Joaquín Torres García (1943)

Even when this working paper describes in a very clear way the stylized facts, I think that there are two issues to improve that would contribute to a better understanding of the problem addressed. The first issue is that, in order to see what are the characteristics of the intraregional trade, the authors could compare the data with that of the trade with extra regional countries. A deeper and more formal comparison between these flows for each country can allow us to answer very important questions, for example if these flows were attempts to develop new goods that were frustrated when the developed countries came back to the international markets or if they simply were desperate attempts to increase exports when the international markets were closed. These two scenarios lead to totally different inferences about the role and the performance of the intraregional trade.

The second issue is that, even when the paper describes the findings in a very clear way, it is really important to go one step forward and try to see what factors are determining the intraregional trade flows. During the 20th Century LACs suffered many strong international shocks, followed very different policies and tried to implement a variety of institutional agreements of trade. In this context it is important to have a theoretical framework that provides clear interpretations over periods and countries. Such a theoretical framework would answer why and when we should expect higher levels of intraregional trade. Also, what is the role of some specific factors in the intraregional trade: endowments, (low) levels of productivity, the excessive volatility in macroeconomics variables or the balance of payments constrained growth (Bértola and Ocampo, 2010); what these low amounts of intraregional trade tell us about these factors or about the whole variety of trade agreements that the countries tried to implement over the 20th Century.

Finally, it is important to remark that one very important contribution to this working paper is to construct a new database based on LACs’ sources. As the authors state, the construction of databases of international trade has frequently relied on the use of official sources from developed countries (especially the United States, the United Kingdom and Germany, for example for reliability issues Federico and Tena, 1991). However, some key problems of the development of LACs can only be addressed using Latin American data and a methodology that assures their reliability, even when the sources have different problems as in many

The Economies of Latin America:
New Cliometric Data
César Yáñez and Albert Carreras (Editors)

periphery countries. The task of understanding the process of development in Latin America by the use of new databases is a joint effort of scholars from LAC, Europe and other regions. A privileged example of that is the collective work “The Economies of Latin America: New Cliometric Data”, edited by Carreras and Yañez, which has been released in these days and in which the authors of this paper participate. The volume contains twelve very interesting chapters showing new evidence and their interpretation about key issues from LACs’ Economic History. This new contribution, together with the Montevideo-Oxford Latin American Economic History Database (MOXLAD) among others, makes new data available to better understand old problems but to try to come up with new and better answers.

Mafianomic history

On the Historical and Geographic Origins of the Sicilian Mafia

By Paolo Buonanno, Ruben Durante, Giovanni Prarolo ( and Paolo Vanin



This research attempts to explain the large differences in the early diffusion of the mafia across different areas of Sicily. We advance the hypothesis that, after the demise of Sicilian feudalism, the lack of publicly provided property-right protection from widespread banditry favored the development of a florid market for private protection and the emergence of a cartel of protection providers: the mafia. This would especially be the case in those areas (prevalently concentrated in the Western part of the island) characterized by the production and commercialization of sulphur and citrus fruits, Sicily’s most valuable export goods whose international demand was soaring at the time. We test this hypothesis combining data on the early incidence of mafia across Sicilian municipalities and on the distribution of sulphur reserves, land suitability for the cultivation of citrus fruits, distance from the main commercial ports, and a variety of other geographical controls. Our empirical findings provide support for the proposed hypothesis documenting, in particular, a significant impact of sulphur extraction, terrain ruggedness, and distance from Palermo’s port on mafia’s early diffusion.

Review by Chris Colvin

What are the economic determinants of organised crime? This working paper, written by Paolo Buonanno (University of Bergamo), Ruben Durante (Sciences Po), Giovanni Prarolo and Paolo Vanin (both University of Bologna), attempts to answer this question by looking at the origins of protection rackets on the island of Sicily in the nineteenth century. The authors ask the question: why did the mafia emerge in the west nearly one hundred years before it did elsewhere on the island?

Diego Gambetta, a sociologist at Nuffield College Oxford, has long argued that eastern landlords were better equipped to maintain control as they were present on their lands, whilst western absentee-landlords left their tenants vulnerable to violence by bandits, therefore creating a market for mafiosi. Oriana Bandiera, an economist at the LSE, advances a model that implies that the mafia were more active where landholdings were fragmented. Buonanno et al. add another explanation: there was a high demand for protection in those areas in which citrus crops and sulphur mining were the most important economic activities. These commodities were vulnerable to predatory attacks by bandits when being transported to markets. Property rights on the island were weak, and so areas which specialised in these vulnerable commodities demanded protection services in order to stay in business.

Sketch of a 1901 trial of suspected mafiosi in Palermo (L'Ora, May 1901).

The authors use a sociological survey of Sicily’s mafia conducted in 1900 to code the level of mafia presence at the municipality level. This dataset, which the authors argue has never before been analysed quantitatively, covers more of the island than any other historical source, and does not suffer from the biases inherent in government-collected data. The authors use regression analysis to explain mafia activity with geomorphological (topography), census and road infrastructure data. They find evidence of their hypothesis: the mafia were most present in areas with the right conditions for citric fruits and sulphur extraction. They challenge Bandiera: land fragmentation is not an explanation, but is rather a result of geographic endowment; rugged landscapes lead to small landholdings, which in turn created a demand for mafia services.

Whilst the authors claim to explain the emergence of Sicily’s mafia, I think that they are actually doing something slightly different. Their data on mafia activity refer to 1900, some fifty years after the authors claim that protection racketeers emerged on the island. I think that what they are actually doing is explaining where the mafia was most successful at the end of these 50 years, not where it originated per se. I think that the authors could benefit from using some tools from spatial analysis to strengthen their results. For instance, they could look into spatial autocorrelation, and perhaps need to consider the implications of the fact that western municipalities appear to be much larger than eastern ones. Finally, I think they could be more explicit about how they are addressing the ecological fallacy if they want to prove causality; how do we know that an area’s orange growers and sulphur miners are the ones seeking the mafia protection?

A brief note for those wishing to distribute their working papers using the NEP-HIS email: The working paper reviewed here was added to NEP using the Munich Personal RePEc Archive. This great on-line service allows economic historians with no access to an established institutional working paper series to add their paper directly to the RePEc database.

Electrification, skills and manufacturing

Taking Technology to Task: The Skill Content of Technological Change in Early Twentieth Century United States

By Rowena Gray (



This paper presents a new picture of the labor market effects of technological change in pre-WWII United States. I show that, similar to the recent computerization episode, the electrification of the manufacturing sector led to a “hollowing out” of the skill distribution whereby workers in the middle of the distribution lost out to those at the extremes. To conduct this analysis, a new dataset detailing the task composition of occupations in the United States for the period 1880-1940 was constructed using information about the task content of over 4,000 occupations from the Dictionary of Occupational Titles (1949). This unique data was used to measure the skill content of electrification in U.S. manufacturing. OLS estimates show that electrification increased the demand for clerical, numerical, planning and people skills relative to manual skills while simultaneously reducing relative demand for the dexterity-intensive jobs which comprised the middle of the skill distribution. Thus, early twentieth century technological change was unskill-biased for blue collar tasks but skill-biased on aggregate. These results are in line with the downward trend in wage differentials within U.S. manufacturing up to 1950. To overcome any threat to the exogeneity of the electricity measure, due for example to endogenous technological change, 2 instrumental variable strategies were developed. The first uses cross-state differences in the timing of adoption of state-level utility regulation while the second exploits differences in state-level geography that encouraged the development of hydro-power generation and thus made electricity cheaper. The results from these regressions support the main conclusions of the paper.

Review by: Chris Colvin

What was the effect of electrification on the skill content of manufacturing? Rowena Gray (University of Essex) answers this important question for the case of the US using a new data source and an instrumental variables approach. Gray uses the Dictionary of Occupational Titles, a 1949 publication which describes occupations, to classify the skill content of manufacturing jobs post-electrification. Matching these descriptions with occupational data from decennial censuses and information on plant electrification from the US census of manufacturing, Gray is able to track changes in the skill content of manufacturing due to electrification for the period 1880 to 1940.

Using regression analysis, Gray shows that the most skilled blue-collar workers were displaced by machinery, i.e. electrification resulted in unskilled-biased technical change. She also shows that electrification simultaneously necessitated more clerical and supervisory work, a skill-biased change. This bimodal distributional finding is further strengthened in her robustness exercises, which instrument for electrification using cross-state differences in the timing of the adoption of utility regulation and differences in geography necessary for hydroelectric power generation. This instrumental variable approach is needed to address the concern that electrification is endogenous to the pre-existing skill levels present in state’s labour market; various skillsets may have attracted electrification, rather than the other way around.

Gray’s paper is important because previous studies have been unable to quantify the effects of electrification on the skill content of manufacturing, or at least have been unable to demonstrate that electrification has a distributional effect, that it was simultaneously unskilled- and skilled-biased. An alternative approach to instrumental variables which Gray could have employed to determine the direction of causality would have been to complement her regression analysis with detailed business histories, a method suggested recently by Randall Morck and Bernard Yeung. Where her research potentially suffers is her reliance on post-electrification occupational descriptions; her assumption that the tasks required to carry out particular jobs before and after electrification were identical may be unrealistic. Gray’s future research agenda includes using her individual-level dataset to track cohorts across censuses in order to uncover the winners and losers of electrification. Perhaps another task, which could strengthen the results of the paper discussed here, would be to repeat her analysis using a source that describes the task content of jobs pre-electrification.

Gray’s paper is part of the new working paper series of the European Historical Economics Society. The series, edited by Nikolaus Wolf (Humboldt-Universität zu Berlin), offers the society’s members the chance to disseminate their work ahead of journal submission. Other recent papers in this series include one by Geraldine David and Kim Oosterlinck (Université Libre de Bruxelles) on the effects of the War on the Belgian art market, and a paper by Giovanni Federico (EUI and University of Pisa) on market integration across oceans. This series will surely prove to be an important outlet for work-in-progress by historical economists in future; a paper disseminated in this way could be an important signal of quality versus dissemination through the working paper series of individual institutions.

Retail Chain Expansion: The Early Years of McDonalds in Great Britain

By: Otto Toivanen and Michael Waterson


[Earlier version – free download : ]

Understanding the development of chainstores is important given the large GDP share of services and the continuing importance of chains in bringing these services to market. Service chains provide a puzzle because they take a long time to develop even when there are obvious expansion opportunities. We study the spread of McDonalds in Britain. We find cannibalization on the demand side and economies of density both within and between markets on the cost side, and evidence of learning by doing at the firm level. Within-period diseconomies of scale at the firm level help explain the lengthy opening pattern.

Keywords: Cost of entry; diffusion; economies of density; economies of scale; entry; expansion

JEL: L10

Business historians have explored retailing in different forms (such as food in supermarkets and financial services by banks). This article, however, opens a potentially interesting side to the story. Toivanen and Waterson’s tell how McDonald’s entered the UK market in 1974 and follow through until 1990, when Burger King arrives.Theirs is primarily a story of industrial organization. The company provided data on new outlets (few of which were franchises) and this was matched to geo-economic information that results in a fascinating analysis of growth (by measuring how market size attracts different size of entry).

Placing a similar study in its context and cultural implications could be an interesting business history, as well as the dynamics of the competition with the incumbent, Whimpy. Of course, why Whimphy failed to respond appropriately is another part of the story. However, I think the greatest potential Toivanen and Waterson offer to business historians is the linking of retailing studies with “big issues” such as the roots of obesity.

Obesity is an increasing concern for policy makers. For instant, the recent article in The Economist. It a problem of global impact as it seems to be growing faster in less developed countries (says BBC News). Actions of government seem ineffective and some even open to ridicule (such as a direct path to a fast foor resaurant as discribed by Piquant Salty Humour).But academic input from historians seems marginal and perhaps limited to the work of Sander L. Gilman.

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

By: Jacopo Ponticelli and Hans-Joachim Voth


Free to download URL:

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.