Joachim Voth of Universitat Pompeu Fabra writes this interesting paper.
In this paper he shows why governments are reluctant to press fiscal austerity. It is because they expect it could lead to social unrest. The authors builds on the paper based on experiences from 11 South American economies from 1973-95.
On May 1, 2010, the Greek Prime Minister George Papandreau announced a set of drastic austerity measures. May Day itself saw clashes between police and
demonstrators. On May 5, a general strike paralysed the country; armed demonstrators fought street battles with police. A bank burned down, and numerous
demonstrators and policemen were injured. By the standards of anti-gov ernment protests, the May 2010 incidents in Athens were mild. Many countries have seen severe rioting and political violence following budget cuts. In this paper, I examine the extent to which social unrest is clearly associated with fiscal austerity. Do riots, anti-government demonstrations, political assassinations, and attempts at revolutionary overthrow become more common if governments push through tax hikes and spending cuts?
I analyse this question for South America during the period 1937-1995. The continent’s notoriously volatile politics, combined with large swings in fiscal
conditions, make it a particularly appealing laboratory for exploring the link between fiscal adjustment and social instability. From the popular protests that led to the fall of the de la Rúa administration in Argentina to the ‘Caracazo’ in Venezuela, austerity measures have played a prominent role in numerous cases of
mass protest (Sonntag, Maingón, and Biardeau, 1992; Handelman and Sanders, 1981).
The findings are:
There is clear evidence that reductions in spending clearly and strongly increase the risk of unrest. While the share of strikes, assassinations, riots and demonstrations that can be explained by budget cuts is not very high, the relationship is robust for countries with both democratic and autocratic structures. All indicators of unrest except general strikes are significantly and negatively associated with government expenditure. There is some evidence that the effect of budget cuts in times of inflation is particularly pronounced, and that ‘normal times’ without rapid price increases only see a mild association between austerity and anarchy. Constraints on the executive do not matter for the strength of the link, but a regime’s durability – the length of time since the last significant changes in its political fabric – does: countries with a longer history of stability show a much weaker link between budget cuts and chaos. There is also clear evidence for a discontinuous increase in the effect of budget cuts. Extreme movements in measures of unrest are more readily explained by austerity measures than relatively mild upticks in upheaval.
Our results provide a rationale why governments often find it hard to cut expenditure. While unrest is a relatively low-probability event – even in our sample
of South American countries over the last 70 years – there is a non-zero probability that austerity will fan the flames of discontent, leading to violent anti-government protests. It may also offer a perspective on why public indebtedness differs so much around the globe, and even amongst countries with relatively similar levels of economic development (Alesina and Perotti, 1995).
There are some nice case studies of Brazil, Chile, Peru etc.
Nice different perspective. Links social unrest with macroeconomic performance..