When governments in new democracies increase fiscal redistribution immediately before an election, their cunning isn''t just selfish opportunism: it''s also a device to consolidate a vulnerable democratic structure. That''s the conclusion of new research to be presented at the Royal Economic Society''s 2015 annual conference by Pantelis Kammas and Vassilis Sarantides.
Analyse data on 65 developed and developing countries between 1975 and 2010, and treating the first four elections after a shift to a democratic regime as elections being held in a ''new'' democracy, they find that:
• Governments increase fiscal redistribution, financed by increased fiscal deficits, by 6% in election years in comparison with non-election years.
• In a new democracy, fiscal policy does not only improve re-election prospects, but also signals to the masses that democracy works, an important way to prevent a return to autocratic government.
• Established democracies use fiscal manipulation before elections too – but it does not involve redistribution.
It is well-known that incumbent governments in all democracies tend to adopt expansionary fiscal policies immediately before elections. Previous studies have shown that this type of opportunistic pre-election behaviour is more common in new democracies, but the authors also show that, in new democracies, pre-election expansion implies redistribution to the masses.
Empirical and anecdotal evidence strongly suggests that mass support for new democracy cannot be taken for granted. For example, in 1992, a few years after Brazil adopted a democratic regime, the Brazilian national survey showed that the poorest citizens were the least supportive of democracy.
The authors conclude:
''Our analysis suggests that fiscal redistribution acts as a mean of consolidating a democratic regime in the first years after the political transition.''
In newly established democracies (such as Portugal after 1974 and Uruguay after 1984), the political instability during the first years of the transition, and especially around elections during that period, induces incumbent governments to redistribute income through fiscal policies.
Political economists typically assume that incumbent governments behave opportunistically around elections, adopting expansionary fiscal policies, to improve their chances of staying in office. Previous studies have provided abundant evidence that this opportunistic behaviour is far more intense in ''new democracies''.
This study argues that incumbents in ''new democracies'' adopt policies that generate fiscal redistribution not only to improve their re-election prospects, but also as a device to consolidate the newly established and vulnerable regime.
Governments can redistribute income most directly through the collection of taxes, which are subsequently distributed to households through social transfers. Although incumbents may avoid increasing taxes pre-electorally, due to the fear of voters'' disfavour, they can intensify social redistributive transfers that are financed by increased fiscal deficits.
To have an adequate measure of ''actual'' fiscal redistribution, it is very important to take into account the effectiveness of the implemented fiscal policy in reducing income inequality. For this reason, the study defines fiscal redistribution as the percentage reduction in gross income inequality due to taxes and government transfers, with higher values indicating a higher level of fiscal redistribution. According to the descriptive statistics, Denmark and Sweden are the countries in the sample that achieve the maximum level of fiscal redistribution (54.2% and 59.9% respectively).
To check for differences between ''new'' and ''established democracies'', the researchers analyse data for a panel of 65 developed and developing countries over the period 1975-2010. They consider the first four elections after a shift to a democratic regime as elections held in a ''new democracy''. The analysis suggests that, incumbent governments in ''new democracies'' seem to increase fiscal redistribution by around 6% in election years in comparison to non-election years.
On the contrary, for the ''established democracies'' the observed fiscal manipulation around elections does not seem to have any distributional implications. The behaviour of the incumbent in a ''new democracy'' deviates because fiscal policy does not solely serve to improve re-election prospects, but also to ''signal'' to the masses that democracy works and prevent a reversion to autocracy at a time of high vulnerability.
It is frequently argued in the literature that only anti-democratic elites (military groups, oligarchs etc.) can pose a serious threat in the newly established democracy. Nonetheless, empirical and anecdotal evidence strongly suggest that the support of the citizenry towards democracy cannot be taken for granted.
For example, a few years after the democratisation in Brazil, according to the Brazilian national survey published at February 1992, the poorest citizens were the least supportive of democracy. Apart from the anti-democratic sentiments, the tension that surrounds the pre-electoral campaigns is another important factor that contributes significantly to the political instability. In many cases it has been observed that periods around elections are the periods of highest vulnerability for the democracy (for example, Bolivia, 1978-80; Nigeria, 1993; Pakistan 1977 etc.).
This analysis suggests that fiscal redistribution acts as a mean of consolidating a democratic regime in the first years after the political transition. The effect of redistribution policies on economic incentives and consequently on economic growth remains always a highly controversial issue. But placing the spotlight on the political dimension of fiscal redistribution, allows us to explain why this kind of policies is implemented so extensively and by so many different incumbents in ''new democracies''.