Political Business Cycles in Dictatorships

This paper explores the conditions under which authoritarian leaders engineer political business cycles. In addition to ballot stuffing and election violence, dictators hold manipulation of economic policy in their toolbox used to overwhelmingly win elections. I argue that dictators have a strong incentive to overspend before elections when they can credibly signal popularity via elections. In rigged elections where election results are almost predetermined, election results may not function well to demonstrate the dictators’ de facto popularity. When elections are less fraudulent, however, whether dictators will “win big” is uncertain. In such circumstances, autocrats are more inclined to manipulate policy instruments before elections, which in turn enable them to convey a credible signal of their ability to mobilize popular support. Cross-national statistical analysis covering 131 countries (1970-2008) uncovers two main findings. First, fiscal deficits in electoral years exist in authoritarian regimes, and their magnitude is larger than those in democracies. Second, among authoritarian regimes, autocrats with semi-competitive, less fraudulent elections are most likely to adopt expansionary fiscal policy prior to elections. There is an inverted Ushaped relationship between election-year fiscal deficits and political regime types: In electoral authoritarianism, fiscal deficits tend to reach a peak; election-year fiscal imbalance tends to diminish as countries become either more democratic or more authoritarian. * Earlier versions of this paper were presented at the 2015 annual meetings of Southern Political Science Association and European Political Science Association, the “Growth, Crisis, Democracy” workshop, and Kobe University. I would like to thank all the participants in those conferences for their comments and feedback. I also wish to thank Faisal Ahmed, Marisa Kellam, Mary Stegmeyer, and Hiroyasu Uemura for their helpful feedback and suggestions on previous versions of this paper. This research project has been funded by a Waseda University Grant for Special Research Projects (Project number: 2015S-177) † Assistant Professor of Political Science in Institute for Advanced Study at Waseda University. WIAS Discussion Paper No.2016-002 2 Introduction Scholars have found ample evidence demonstrating that political leaders in democracies manipulate fiscal and monetary policies before competitive elections (Nordhous 1975, Tufte 1978). Recent literature on authoritarian politics shows that some dictators also adopt expansionary economic policy prior to elections (e.g. Magaloni 2006; Pepinsky 2008; Blaydes 2010). The similar findings of case studies from different regions suggest that autocrats generate political business cycles by utilizing a variety of policy instruments and raise the following questions: Do political business cycles generally exist in authoritarian regimes? 3 If so, why do authoritarian leaders create electoral business cycles, given that they rarely lose elections? Do some types of authoritarian regimes create greater incentives to manipulate policy instruments than other types? In autocracies, where reliable political information is hard to obtain, potential opponents find it difficult to discern to what extent the dictator is popular. To signal his strength, the dictator uses elections in which he aims to score an overwhelming majority (Geddes 2006; Magaloni 2006; Simpser 2013). For this purpose, besides ballot stuffing and election violence, dictators use economic policy manipulation. Since semi-competitive, relatively fraud-free elections render more credible election results, I argue that dictators have a stronger incentive to 3 Throughout the paper, I use terms autocracies, dictatorships, authoritarianism, and nondemocracies interchangeably. By dictators and autocrats, I refer to top political leaders who hold de jure supreme authority in authoritarian regimes. I use the male pronoun to refer to authoritarian leaders, given the fact that, according to Archigos Version 2.9, 99.7 percent of political leaders in authoritarian regimes after World War II have been male. WIAS Discussion Paper No.2016-002 3 adopt expansionary fiscal policy to overwhelmingly win in electoral authoritarian regimes than they do in closed authoritarian regimes. The contribution of this paper is twofold. First, the paper explores empirically and theoretically the conditions under which governments overspend prior to elections. Building upon the signaling game framework in the study of political business cycles in democracies and recent discussion on the roles of elections in autocracies, I contend that political leaders in competitive authoritarian regimes are most inclined to manipulate economic policy before elections. Second, the paper also contributes to the burgeoning literatures of electoral fraud and authoritarian politics. It is well known that autocrats use various tools to win overwhelmingly at elections, yet we still know little about when they choose to rely more on one strategy over others from their “menu of manipulation” (Schedler 2002). Investigating how the magnitude of electoral business cycles changes depending on transparency of elections in authoritarian regimes, this paper explores the relationship between two primary tools available to dictators at the ballot box – electoral fraud and pre-electoral economic policy manipulation. In order to test my theoretical expectations, I employ a global dataset of fiscal surplus/deficits that covers 131 countries around the world during the period of 1970-2008. Cross-national statistical analysis confirms that fiscal deficits tend to increase in election years also in authoritarian regimes, which is consistent with existing single-case studies evidence on PBCs in authoritarianism. Perhaps surprisingly, my analysis suggests that authoritarian PBCs are larger than those in democracies, which has been the conventional research focus in the study of PBCs. I also find that fiscal deficits in election years tends to be most serious in autocracies with relatively fraud-free elections: autocrats seem to engineer political business cycles when they (1) hold semi-competitive elections in which they permit opposition parties and multiple candidates WIAS Discussion Paper No.2016-002 4 and (2) commit less electoral fraud. Using the Polity IV score as an indicator of competitiveness, it turns out that fiscal balance in elections years follows a U-shaped function of political competitiveness: the size of political business cycles reaches a peak in autocracies with high political competition, it then tends to shrink as countries become either more authoritarian or more democratic. The paper proceeds as follows. In next section, I review literature on political business cycles. The third section provides theoretical considerations on how and why political business cycles emerge in authoritarian regimes and derive testable implications. In the forth section, I test the hypotheses by conducting a cross-national statistical analysis. Lastly, conclusions follow to derive some policy implications from my analysis. Literature Review Since the pioneering work by Nordhous (1975) and Tufte (1978), political scientists and economists have refined the theory of political business cycles (PBCs) and tested its implications by conducting a host of empirical analyses. The earliest model, assumed that voters decide whom to vote for based on the government’s pre-electoral economic performance. Assuming such voters, governing parties were thought to implement expansionary fiscal and monetary policies before elections to garner political support, resulting in real economic growth and increases in incomes. A large body of empirical studies using cross-national data from advanced democracies, however, did not find compelling evidence that governments achieve pre-electoral improvements in economic performance in the form of incomes, growth, and a temporal drop in unemployment rates (Lewis-Beck 1988; Alesina, Cohen and Roubini 1992; Drazen 2000, 238WIAS Discussion Paper No.2016-002 5 239). Further, the assumption that voters myopically decide their voting behavior based on short-term, pre-electoral economic performance was too strong to be plausible. Yet, another strand of empirical studies found that governments in advanced democracies manipulate economic policies before elections, leading to the exacerbation of election-year fiscal deficits and high inflation after elections (e.g. Nishizawa and Kohno 1989; Alesina, Cohen and Roubini 1992, Berger and Woitek 1997; Reid 1998). In other words, pre-electoral economic manipulation does not necessarily have a strong impact on real growth rates, but governments do tend to exercise expansionary fiscal policy during election years, resulting in fiscal imbalance and inflation. In providing a theoretical explanation to this puzzle, political economists introduced the idea of “information asymmetries” between voters and a government (Alesina 1987; Rogoff and Silbert 1988; Rogoff 1990). Since voters are unable to gather information on the government’s de facto competence, they try to estimate it based on the government’s policy performance in the past and then decide whether to vote for the governing party or not. Knowing this, the governing party attempts to send a signal of their competence by manipulating economic policies before elections, leading to fiscal deficits and high inflation around election time. This progress in the study on PBCs was largely built on data analyses using samples of advanced democracies. Applying the signaling game framework, more recent studies tend to shift their empirical focus to developing countries as well as new democracies. And, scholars conclude that governments in these countries are more prone to engineer electoral budget cycles than those in advanced democracies (Schuknecht 1996; Block, Ferree, and Singh 2003; Sh