metadata: authors: 0: author: Arezki,Rabah
1: author: Djankov,Simeon
2: author: Nguyen,Ha Minh
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docna: 0: docna: Reversal of Fortune for Political Incumbents
            : Evidence from Oil Shocks
docty: Policy Research Working Paper
subtopic: Commodity Risk Management,Natural Disasters,International Trade and Trade Rules,Trade and Multilateral Issues,Employment and Unemployment
teratopic: Agriculture,Environment,International Economics and Trade,Social Protections and Labor
abstracts: cdata!: Using a new dataset of 207 national
            elections across 50 democracies, this paper is the first to
            systematically examine the effects of oil price shocks on
            incumbents’ political fortunes in developed oil-importing
            countries. We find that oil price increases systematically
            lower the odds of reelection for incumbents and increase the
            likelihood of changes in the ideology of the incoming
            government. These shocks are found to operate through
            lowering consumption growth.
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            Incumbents : Evidence from Oil Shocks
display_title: Reversal of Fortune for Political
            Incumbents : Evidence from Oil Shocks
listing_relative_url: /research/2020/06/32158922/reversal-fortune-political-incumbents-evidence-oil-shocks
topicv3: Economic Shocks and Trade m1326672 1141,Trade m1326924 698,Natural Disaster m1503325 3138,Commodity and Resource Prices m1503849 3034,Unemployment m1504051 2747
publishtoextweb_dt: 2020-06-22T00:00:00Z
historic_topic: Agriculture,Environment,International Economics and Trade,Social Protections and Labor
origu: Office of the Chief Economist (MNACE)
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model_extractions: Policy Research Working Paper 9287

# Reversal of Fortune for Political Incumbents Evidence from Oil Shocks

_Rabah Arezki Simeon Djankov Ha Nguyen Ivan Yotzov_ Middle East and North Africa Region Office of the Chief Economist June 2020
Policy Research Working Paper 9287

# **Abstract**

Using a new dataset of 207 national elections across 50 democracies, this paper is the first to systematically examine the effects of oil price shocks on incumbents’ political fortunes in developed oil-importing countries. We find that oil price increases systematically lower the odds of reelection for incumbents and increase the likelihood of changes in the ideology of the incoming government. These shocks are found to operate through lowering consumption growth.

This paper is a product of the Office of the Chief Economist, Middle East and North Africa Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at rarezki@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# Reversal of Fortune for Political Incumbents: Evidence from Oil Shocks<sup>_∗_</sup>

Rabah Arezki, Simeon Djankov, Ha Nguyen, Ivan Yotzov Originally published in the Policy Research Working Paper Series on _June, 2020._ This version is updated on _March, 2021._ To obtain the originally published version, please email prwp@worldbank.org.

**Keywords:** Elections, Incumbent, Oil Prices, Economic Shocks.

**JEL Codes:** D72; E21; P16; Q43.

> _∗_ Rabah Arezki is the Chief Economist of the African Development Bank and a Senior Fellow at Harvard’s Kennedy School of Government. Simeon Djankov is Director for Policy with the Financial Markets Group at the London School of Economics and Senior Fellow at the Peterson Institute for International Economics. Ha Nguyen is a Senior Economist in the Chief Economist Office of the Middle East and North Africa at the World Bank. Ivan Yotzov is PhD candidate at the University of Warwick. We thank Jeremy Evans and Nick Lore-Edwards for comments. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the World Bank, the African Development Bank, or the governments they represent. The World Bank and the African Development Bank do not guarantee the accuracy of the data included in this work.
# **1 Introduction**

The increase in gasoline prices stemming from the oil crisis overshadowed the United States presidential debate of October 1980. Ronald Reagan and then-President Jimmy Carter were going head to head in the election. Carter’s loss that year coincided with a peak in oil prices. Other modern US presidential incumbents – for example, Presidents Ford and George H.W. Bush - also lost their reelection bids following oil price spikes. This anecdotal evidence points to a broader question about the role of exogenous shocks in determining electoral outcomes.

Our paper is the first effort to systematically examine the effect of oil price shocks on the reelection probability of political incumbents in oil-importing countries. We use a novel dataset of 207 national elections in 50 mostly oil-importing democracies, which crucially also includes polling data in the run-up to elections. The polling data allow us to explore the effect of exogenous shocks not only on the election outcome, but also on voting intentions in the months leading up to the vote. Depending on the political system, the dataset includes elections of the chief executive in parliamentary or presidential systems. As large oil imports leave a country vulnerable to changes in _international_ crude oil prices, we rely on these prices as an exogenous source of _country-specific_ variation in terms of trade. Specifically, we create a measure of ’oil price shock’ by interacting the fluctuations in international oil prices (over which individual countries do not have explicit control) with the country-specific intensity of oil imports relative to GDP.

An oil price shock one year prior to an election is found to significantly reduce the likelihood of reelection for the incumbent party. Specifically, a 1% increase in our oil shock measure decreases the likelihood of incumbent re-election by nearly six percentage points. Furthermore, novel polling data confirm that these shocks operate by reducing the popularity of the sitting government. We show that both right-wing and left-wing incumbent parties are susceptible to crude oil price increases. We verify that the winning parties are more likely to belong to the opposite end of the political spectrum. In other words, following an oil price increase, a left-leaning incumbent party is more likely to be replaced by a right-leaning party and vice versa.

Since most countries in our sample are oil importers, an increase in crude oil prices would reduce the purchasing power of the population, consistent with Hamilton (2003) and Blanchard and Gali (2009). Consistent with this logic, we show that an increase in oil prices is found to reduce consumption growth. This is a potential 2
mechanism which links oil price movements with voter behavior in elections. Interestingly, oil shocks do not impact output growth significantly, as one would typically expect.

The results remain robust to a variety of checks and alternative specifications. When we use changes in import commodity prices for 45 commodities instead of oil prices only, we find that an increase in the import prices one year prior to elections is significantly associated with a reduction in the odds of incumbent reelection. Our results also survive when we control for voter turnout, pre-determined elections, other macro variables, and different lags for oil shocks.

This paper is related to several strands of the literature. First, it contributes to the literature on retrospective voting, which highlights cases in which incumbent governments are punished for events out of their control<sup>1</sup> . Many studies discuss the effects of natural disasters on local elections (see, for example, Gasper and Reeves, 2011; Healy and Malhotra, 2010; Cole et al., 2012; Wang and Berdiev, 2015; Achen and Bartels, 2017). A consistent finding from these studies is that incumbents’ electoral fortunes suffer after natural disasters. The finding is intuitive as the impacts of natural disasters are generally dramatic and concentrated at the local level. In contrast, we show that relatively more subtle events, such as oil price fluctuations, can also be powerful factors influencing political outcomes.

Our paper is related to a rich literature on the political effects of commodity booms and busts in that via windfalls<sup>2</sup> . commodity exporters operate commodity price These studies can roughly be divided into those studying the effects of commodity price shocks on conflict versus those on elections or democratic transitions. The formers find a nuanced relationship between resource wealth and conflict, depending on the region, time period, and precise commodities considered<sup>3</sup> . The studies of . commodity price shocks and democratic transitions also provide mixed conclusions<sup>4</sup> Our is related but distinct from this literature. It examines the of oil paper impact price shocks on incumbent’s political fortune in a set of predominantly developed oil-importing countries. The impact is found to operate via changes in consumption growth.

Finally, our paper is related to the political business cycle literature that examines

> 1See Healy and Malhotra (2013) for a review of the retrospective voting literature.

> 2See van der Ploeg (2011) for a excellent survey.

> 3See Bruckner and Ciccone (2010), Bazzi and Blattman (2014), Dube and Vargas (2013).

> 4See Bruckner et al. (2012), Caselli and Tesei (2016), Andersen and Aslaksen (2013), Burke and Leigh (2010).

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how political cycles could affect economic outcomes. The literature tends to find weak effects in developed countries, with the US being a notable exception (see Alesina and Rosenthal, 1995 and Alesina et al., 1997). The effects are stronger in more immature democracies. For example, Russia’s regional public expenditure rises shortly before regional elections (Akhmedov and Zhuravskaya, 2004). This lends support to the argument that the strengths of a democracy – such as press freedom, checks and balances, or accountability – can help mitigate opportunistic political cycles (Akhmedov and Zhuravskaya, 2004 and Aidt et al., 2011).

The remainder of the paper is as follows. Section 2 presents the data. Section 3 shows the main results. Section 4 presents several robustness checks. Section 5 concludes.

# **2 Data**

Our analysis draws on two main datasets. The first covers election polls and outcomes for 207 elections across 50 countries worldwide over the period 1980-2020. Only elections with available polling data are included. On average, each country has four elections. There are 149 parliamentary and 58 presidential elections. The list of countries and the number of elections in each are country by year presented in Figure 1 and Table A1. The polling data originate from multiple polling agencies for each country. Official election results are available from multiple sources. For each election, voting intentions by political party (i.e. polls) are gathered, alongside election outcomes<sup>5</sup> . It is important to consider the incumbent changes at the political level rather than for individual since term limits could create me- party politicians, chanical turnover of individuals. Countries for which polling data are unavailable are not included in our dataset. In total, the dataset has over 13,333 polling observations, which are aggregated into 2,552 election-month polling observations for the incumbent party. Hence, on average, each election has about 12 election-month polling observations.

In addition to voter intentions, we include data on several additional election characteristics. First, an indicator variable is created to denote elections where the incumbent party remains in power following the election. This variable is at the party-

> 5In some polls, respondents are allowed to answer election questions with “Don’t Know” or “Not Sure”. This will mechanically make voting intentions incompatible with the final election outcomes. In such cases, we drop the extraneous responses, and rescale the polls, considering only respondents who have selected a political party.

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level, and therefore term limits will not affect the outcome. For example, consider the 1988 US Presidential Election. George H.W. Bush was elected president, after Ronald Reagan served two terms. Since the Republican party remained in power, we treat that episode as the incumbent staying in power.

In cases of political coalitions, where multiple parties form the government, our measure of incumbency considers the political party of the chief executive. Second, we use data on the name of the political party incumbent, and the political party which wins the election. With that data, the political orientation of the incumbents and election winners are calculated based on party ideological orientation.

For the majority of elections and parties, data on left-right orientation are taken from the ParlGov Party Database (D ̈oring and Manow, 2019). This database contains information for over 1,600 political parties in 37 democracies in the EU and OECD. For each party, a time-invariant score between 0 and 10 is provided, classifying their political position from left-wing to right-wing, respectively. This score, in turn, is based on data from Castles and Mair (1984), Huber and Inglehart (1995), Benoit and Laver (2006), and Bakker et al. (2015). For example, the UK Conservative Party has a score of 7.4, while the French Socialist Party has a score of 3.2. In our analysis, we do not use the continuous index, but rather split parties into left-wing and rightwing using the threshold value of 5. Overall, this dataset provides information for most countries in our sample. For countries outside the ParlGov sample (primarily South America), we also classify incumbents and election winners as left-wing or right-wing using various online sources. For example, Jair Bolsonaro, the winner of the 2018 Brazilian general election is classified as right-wing, based on his thenparty, Partido Social Liberal. In sum, of the 207 elections in our main sample, there are 91 left-wing incumbents and 116 right-wing incumbents. Separately, there are 82 left-wing election winners, and 125 right-wing election winners.

Finally, voter turnout data are collected, as well as an indicator for whether voting is compulsory for a given election. Most of the data are from the IDEA Voter Turnout Database; any gaps are supplemented using online sources.

The main source of shock is based on changes in international oil prices, weighted by the average country-specific oil import values. International oil prices are obtained from the World Bank “Pink Sheet” data. These data contain real and nominal crude oil prices; for our main analysis, we use real oil prices. Data on the value of oil imports and GDP in US dollars are obtained from the IMF’s World Economic Outlook.

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The country-year weights are constructed by taking three-year rolling averages of oil imports to GDP. Combining these weights with oil prices, our main index for country _i_ and year _t_ is constructed as: The weights, Ω _i_ , _Oil_ , _t_ ,are calculated as: Although the main results in this paper are based on oil shocks constructed with real oil prices and three-year rolling average weights, all results are also robust to the use of nominal prices, and five-year rolling weights.

The next data source is the Commodity Terms of Trade Database introduced in Gruss and Kebhaj (2019). These data consist of country-specific commodity price indices, based on a set of 45 individual commodities. The formula for the gross import price index is: In the above specification, _Pj_ , _t_ refers to the logarithm of the real price of commodity _j_ in time period _t_ . Ω _i_ , _j_ , _t_ denote the commodity-country-specific weights by which the prices are weighted. The country specific weights are based on the ratio of gross imports to GDP. Rolling weights use a moving average of the last three time periods before _t_ to construct Ω _i_ , _j_ , _t_ . The commodity price indices are available at both an annual and monthly frequency over our sample period. We use the annual data for our main specification and turn to monthly data when considering the polling data. We show that our results are robust to using rolling as well as fixed weights.

Table 1 provides summary statistics for the key variables. The average oil shock in election years in real terms is -0.16%, and 0.14% in nominal terms. In slightly more than half of the elections (51%), the incumbent party remains in power.

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# **3 Main Results**

Our baseline specification is as follows: where _c_ is for country, _y_ is for year. **1** ( _Incumbent Stays_ ) _c_ , _y_ takes the value of 1 if the incumbent party wins the election. ∆ ln( _Crude Oil Index_ ) _c_ , _y−_ 1 captures an oil price shock one year ago. Country fixed effect, _αc_ , capture time-invariant difference in political systems and institutional quality. The specification also includes year fixed effects, _βy_ , which capture global shocks over time, such as the worldwide downturn due to the Global Financial Crisis. Finally, the standard errors in our main tables are clustered at the country level, to address the correlation of oil price shocks within each country. In a robustness exercise, we show that the results are robust to multiway clustering across countries and years (Table A2).

We also examine the effect of changes in import commodity prices on election outcomes: where ∆ ln( _Import ComPI_ ) _c_ , _y−_ 1 captures the lagged change in the import commodity price index. Finally, using the polling data, we test the specification: _Voting Intention Incumbenti_ , _m_ = _αi_ + _βm_ + _μ_ ∆ ln( _Crude Oil Index_ ) _i_ , _m−_ 12 + _εi_ , _m_ (3) where _i_ denotes the election and _m_ denotes the month. _Voting Intention Incumbenti_ , _m_ captures the voting intentions for the incumbent party in a given month.

∆ ln( _Crude Oil Index_ ) _i_ , _m−_ 12 captures the country-specific change in the crude oil price index with a 12-month lag. Lastly, _αi_ and _βm_ are election and month fixed effects.

Table 2 presents our main results on the impacts of oil price shocks on electoral turnover. Column 1 shows that an increase in crude oil prices in the previous year systematically and negatively affects the reelection chance of the incumbent party. A 1% increase in crude oil index reduces the reelection chance by 5.9 percentage points depending on the specification. This is quantitatively large given that the average crude oil shock is -0.16%. To address the concern of potential term limits for individual politicians, incumbency is defined at the party-level, as aforementioned.

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Hence, an incumbent is considered winning the reelection even if another member of the party wins the election.

Figure 2 shows the binned scatter plot of the result from column (1) of Table 2. The figure groups observations into 30 equal-sized bins along the horizontal axis. Thus, each point represents seven election results, on average. Overall, Figure 2 shows that the relationship between oil price shocks and election turnover is negative, robust, and not driven by outliers in our data.

As a concrete example, consider the 2011 parliamentary election in Croatia. In that election, the incumbent Croatian Democratic Union (Prime Minister Jadranka Kosor) faced the Social Democratic Party of Croatia (with leader Zoran Milanovi ́c). In our data, the corresponding real oil shock is positive and above average, signifying a price increase for Croatia (an oil importer). Indeed, this election resulted in a significant loss for the incumbent party, and an absolute majority for the opposition. Of course, we do not claim that the outcome was uniquely determined by the oil price shock. However, we document that these exogenous shocks are an important factor influencing voter behavior around elections.

In Column 2 of Table 2, we test whether the baseline result is driven by the political orientation of the incumbent. We define two types of political orientation: left wing (LW) and right-wing (RW). It is noteworthy that the interaction terms between oil shock and the political orientation of incumbents are both statistically insignificant. This result implies that, irrespective of their political orientation, incumbents are vulnerable to oil shocks.

Column 3 shows that the results are also robust when we control for changes in copper prices, a proxy for global demand shocks (see Hamilton, 2015). In Column 4, we show that oil shocks still sway electoral outcomes even when other macro variables at current year and one-year prior are controlled for, namely GDP growth, inflation and unemployment rate.

When controlling for voter turnout and compulsory voting in elections, the baseline results remain qualitatively and quantitatively similar (Column 5 of Table 2). Importantly, this specification also controls for whether the election is a snap election or predetermined. This test addresses the concern that the timing of an election could be influenced by oil price movements.

The results are robust to dropping large countries that could arguably influence oil prices (Column 6). In particularly, this specification drops all election from the US, 8
Germany, France, and the UK. The results remain essentially unchanged compared to baseline. An additional concern be that the results are driven the mass of may by elections over the past decade, and in particular following the Global Financial Crisis (GFC). In Column 7, we drop all elections after 2007 and test our main specification again. Even though this reduces our sample, the results remain robust and highly significant. The main findings are not driven by excessive volatility in international oil prices over the last decade. Nevertheless, we also find a significant negative relationship between oil price shocks and incumbency in the years since the GFC (available on request).

The main result is also robust and quantitatively similar to using the lagged change of the import commodity index, consisting of 45 import commodity prices (Column 8). A 1% increase in import commodity index in the previous year is associated with about 11 percentage point increase in the likelihood that the incumbent party will lose the election.

Finally, in Column 9 we show that a crude oil shock is not only more likely to cause electoral turnover, but it may also cause a reversal in political leaning. In particular, we use an indicator for different types of ideological transitions. A transition is defined as any instance where the incumbent and election winners have a different ideology (i.e. left-wing versus right-wing). The result in Column 9 shows that oil shocks are associated with a reversal in political orientation. A 1% increase in oil price shock leads to a six percentage points increase in the likelihood that the winning party belongs to the other end of the political spectrum. In other words, following an oil price increase, a left-leaning incumbent party is more likely to be replaced by a right-leaning party and vice versa. It is as if voters punish the incumbent party and would like a wholesale change in political orientations.

Oil price shocks reduce consumption growth, suggesting one potential mechanism through which oil shocks affect voting behavior. Columns (1)-(2) in Table 3 shows the results data on household and regression using per capita final consumption by non-profit institutions serving households. The results suggest that oil shocks in the previous period have a significant negative effect on lagged private consumption growth. This reduction could provide an explanation for why voters react so strongly against incumbents in upcoming elections. Meanwhile, Columns (3)-(4) show that there is no corresponding effect of oil shocks on lagged GDP growth, suggesting that the main mechanism works through the consumption channel, not output.

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# **4 Robustness Checks**

Our baseline results survive a number of additional robustness checks. First, a contribution of this dataset is data to election. In Table key polling leading up every A3 we test for the effects of oil shocks on the voting intention for the incumbent party in the polls, as outlined in Equation 3. For example, Column (1) shows that for each election, a 1% increase in the crude oil index 12 months ago reduces voter’s intention to reelect incumbent party by almost 0.5 percentage points. The effect is not large in magnitude, but in close elections, even small effects may be important on the margin. Thus, the fluctuations in oil prices shift the political fortunes of the incumbent party leading up to the vote, consistent with our main results.

Table A4 shows that when the contemporaneous effect and annual lags of oil shocks are used, the one-year lag is the only one that causes significant electoral turnover. Table A5 confirms this finding. It further suggests that when different quarterly lags are used (up to right quarters before the elections), only oil shocks four and five quarters before elections are statistically significantly correlated with the of This best coincide with the electoral change power. period may cycle, though further research is needed to ascertain this hypothesis. The magnitude is also much larger than that of the annual lags. For example, a 1% increase in crude oil index a year (four quarters) before an election reduces the reelection chance by 26 percentage points.

Finally, Table A6 tests for non-linear effects of oil shocks, as it is possible that larger oil shocks could have disproportionately larger impacts on electoral outcomes. However, the quadratic term of oil shocks is not significant, suggesting an absence of non-linear effects.

# **5 Conclusion**

To our this is the to the effect of oil shocks knowledge, paper first analyze price on electoral outcomes. The results show that an oil price increase systematically lowers the odds of reelection for incumbents while increasing the likelihood of an ideology reversal. These shocks are associated with worsening polling performance for incumbents in the run-up to elections. We provide evidence that oil price increases lead to lower consumption growth, and suggest that this may be the mechanism through which these shocks affect voter behavior.

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The systematic nature of the bias against the incumbent irrespective of political leaning suggests a rejection of the often-argued voting patterns on the basis of ideology. Our results are consistent with the research on voter retrospection, and contribute to an extensive literature on the economic and political effects of commodity price fluctuations.

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