How much will they hate it? Unrest and budget cuts over the long run

Hans-Joachim Voth, Jacopo Ponticelli 10 August 2011

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August 2011 has seen days of rioting in London and other cities in the UK. In Spain, demonstrators known as indignados recently occupied town squares and demanded a full-scale change of the political system. And Greece continues to see violent clashes between the police and demonstrators protesting against round after round of budget cuts.

By historical standards, however, all of these incidents are still quite mild – nowhere near the property damage and human cost of, for example, the 2005 violence in France (Ireland 2005).

What should governments expect if the scale of cutbacks increases? What drives such outbursts of violence against property and people, leading to buildings and vehicles burned, confidence in civic institutions and the police severely dented, and ultimately lives lost?

The austerity effect

There are many incidents that can lead to an eruption of violence – from the killing of Mark Duggan in London last Saturday to a high-speed pursuit gone wrong in the case of the Rodney King riots in LA in 1992. The more interesting question is: Why are cities at some points in time more akin to a tinderbox? Why does it only take one incident for massive violence, riots, or anti-government demonstrations to erupt? Here, the role of budget measures is important.

From the end of Germany’s first democracy in the 1930s to the anti-government demonstrations in Europe after 2009, austerity has tended to go hand-in-hand with politically-motivated violence and social instability. Economists have long argued that unrest and attempts at revolution are more likely when incomes are temporarily depressed – the opportunity cost of trying to change the existing order is low (Acemoglu and Robinson 2001). One key determinant of the level of unrest should then be the scale of government expenditure cuts. 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.

In a new working paper, we examine if there any regularities that emerge from the history of political and social unrest since World War I (Ponticelli and Voth 2011).

We look at five different types of instability – anti-government demonstrations, riots, assassinations, general strikes, and attempted revolutions – in Europe over the period 1919-2009. The data comes from a large-scale international data collection (Banks 1994), and is based on an analysis of reporting in the New York Times. The individual indicators are then aggregated by summing them up for each country and year. This gives the variable called CHAOS. Figure 1 shows how it evolved over time since 1919, presenting the mean and the maximum. The interwar years show a high level of unrest, as does the immediate post-World War II era, and the period from 1970 to the early 1990s.

Figure 1. Number of incidents in Europe, 1919-2009

Next, we examine if the level of unrest in Figure 1 can be explained by the scale of austerity measures. Figure 2 summarises the main result. The bars show the number of incidents per country and year. As the bars get darker, budget cuts get deeper. In an average country and year, when spending is increasing, one should expect about 1.5 incidents.

Once expenditure is cut by more than 2% of GDP, instability increases rapidly in all dimensions, and especially in terms of riots and demonstrations. Severe cuts – of 5% or more, as in Greece today – are associated with the highest level of instability. A similar pattern has been documented for Latin America after World War II (Voth 2011).

Figure 2. Unrest and budget cuts

Tax changes do not have the same effect. While they are also associated with increasing unrest, the link is weak and could be due to chance. We also test if the relationship between cutbacks and instability that we document simply reflects that both are more likely in economic downturns, and conclude that this is not likely. Hard times tend to see more unrest, but cuts deepen the degree of instability even when we control for this effect. Finally, we look at a subset of budget cuts that are clearly driven by policy actions, and not simply by automatic stabilisers and the like. The IMF has recently compiled a detailed list of policy-driven austerity episodes (Devries et al. 2011). These show exactly the same pattern as in Figure 2.

To examine if we are picking up some confusing third variable, we conduct a “placebo test”. For a small subset of our data, we have information on the main cause of each demonstration. We test if demonstrations focused peace issues or ecology are similarly associated with austerity measures. The answer is a resounding “no” – only demonstrations aimed at protesting against cut-backs actually show a significant association with the timing and scale of expenditure reductions.

We also analyse interactions with various economic and political variables. While autocracies and democracies show 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.

The media connection

Anecdotal evidence about the “Arab Spring” and the indignados movement suggests that modern forms of telecommunications can facilitate the growth of unrest. To test if this is true, we examined two types of media penetration – radio and TV, typically uni-directional forms of that make it easier to spread the government’s message, and peer-to-peer communications, such as the telephone.

Growing media penetration does not lead to a stronger effect of cutbacks on the level of unrest. For both types of telecommunications, the link between austerity and unrest becomes weaker as more people can exchange more information more easily. This is not to say that Facebook, SMS, and email did not play a role in early 2011. It simply suggests that, until recently, higher levels of media penetration did not fan the flames of unrest in the same way as they apparently do now.

Political implications

When the Great Recession spread, many governments embraced the advice from leading economists who had argued in a number of papers that budget cuts can be good for growth (Alesina et al. 2002; Alesina and Ardagna 2010; Giavazzi and Pagano 1990). In addition, an important literature has argued that there is no effective penalty for budget cuts at the ballot box – voters apparently understand the need for austerity, and do not punish governments that implement it (Alesina et al. 1998 and Alesina et al. 2010).

These results suggest a paradox – if austerity is good for growth, and the electorate doesn’t mind, why aren’t governments keener to cut their countries back to prosperity? Our findings suggest that fear of political unrest may be an important factor that is holding back governments. As expenditure cuts start to bite, the number of anti-government demonstrations, riots, general strikes, attempts to overthrow the established order, and political assassinations increases dramatically. In line with our results on expenditure, Woo (2003) shows that countries with higher levels of unrest are more indebted.

References

Acemoglu, Daron and James A Robinson (2001), “A theory of political transitions”, American Economic Review, 938-963.
Alesina, Alberto, Silvio Ardagna, Roberto Perotti, and Fabiano Schiantarelli (2002), “Fiscal policy, profits, and investment”, American Economic Review, 92(3):571-589.
Alesina, Alberto, Dorian Carloni, and Giampaolo Lecce (2010), “The electoral consequences of large fiscal adjustments”, Harvard University, mimeo.
Alesina, Alberto, Roberto Perotti, and Jose Tavares (1998), “The political economy of fiscal adjustments”, Brookings Papers on Economic Activity, 1998(1):197-266.
Alesina, Alberto, and Silvio Ardagna (2010), “Large changes in fiscal policy: taxes versus spending”, Tax Policy and The Economy.
Banks, Arthur S (1994), Cross-National Time-Series Data Archive. Binghamton, New York.
Devries, Pete, Jaime Guajardo, Daniel Leigh, and Andrea Pescatori (2011), “A New Action-based Dataset of Fiscal Consolidation”, IMF Working Paper No. 11/128.
Giavazzi, Francesco, and Marco Pagano (1990), “Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries”, NBER Macroeconomics Annual: 75-111.
Ireland, Doug (2005), "Why is France burning?", The Nation, 28 November.
Ponticelli, Jacopo and Hans-Joachim Voth (2011), "Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2010", CEPR Discussion Paper No. 8513.
Voth, Hans-Joachim (2011), "Tightening Tensions: Fiscal Policy and Civil Unrest in Eleven South American Countries, 1937-1995", Fiscal Policy and Macroeconomic Performance, Central Bank of Chile.
Woo, Jaejoon (2003), “Economic, political, and institutional determinants of public deficits”, Journal of Public Economics, 87(3-4):387-426.

 

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Topics:  Macroeconomic policy Politics and economics Poverty and income inequality

Tags:  austerity, Social unrest, riots

Comments

 This is really an interesting paper - hence I've written about it on "Economics Intelligence".
http://economicsintelligence.com/2011/08/11/the-economics-of-riots-and-austerity/
 
I think the result that the relationship did not exist anymore in the last 20 years deserves a little bit more publicity. 
 
There's also a German version of my text available: http://www.handelsblatt.com/politik/oekonomie/wissenswert/die-oekonomie-der-unruhen/4492522.html
 
Best regards
Olaf Storbeck (Handelsblatt / Economics Intelligence)