Media Briefings

WHEN ECONOMIC UNCERTAINTY IS HIGH, POLITICIANS BECOME LESS SHORTSIGHTED AND ADOPT POLICIES FOR THE LONG TERM

  • Published Date: May 2013


Periods of high economic uncertainty like the current one are particularly favourable for the adoption of long-term policies, such as fiscal stabilisations and other structural reforms. The reason is that high uncertainty implies that economic performance and electoral outcomes depend more on luck and less on policy choices. This makes politicians less reluctant to adopt policies with current costs but future benefits.

These are the central conclusions of research by Alessandra Bonfiglioli and Gino Gancia, published in the May 2013 issue of the Economic Journal. Their study provides empirical evidence from 20 OECD countries suggesting that fiscal discipline is indeed higher in periods of high economic volatility.

The authors note that elections are the fundamental instrument of political accountability in modern democracies, but that they may also induce myopic behaviour. As the former Eurogroup president and Luxembourg prime minister Jean-Claude Juncker famously said, ‘we all know what to do, we just don’t know how to get re-elected after we’ve done it’.

Yet according to these researchers, this does not mean that electoral incentives necessarily undermine the credibility of governments to implement the reforms needed to fight the current crisis. On the contrary, the results of their study suggest that times of market turmoil, which are characterised by a high degree of uncertainty, may provide a unique opportunity to implement policies that otherwise would not pass.

The authors analyse a situation in which imperfect information about political ability and policy choices induces citizens to vote based on economic outcomes. This leads politicians to act myopically, choosing too few long-term policies (which have current costs but future benefits) in an attempt to improve economic performance and hence raise their probability of re-election.

When uncertainty increases, the extent to which politicians can affect the state of the economy is reduced and, as a result, so too are their incentives to manipulate the probability of re-election through shortsighted policies.

This theory is consistent with several observations. First, empirical studies show that economic performance affects the chances of re-election of an incumbent politician.

Second, the authors provide new evidence that economic uncertainty is associated with the adoption of long-term policies. To do so, they estimate the correlation between variation in the deficit/GDP ratio, as a measure of fiscal discipline, and the variance of the output gap (the ratio between actual and potential GDP), as a measure of economic volatility.

The results suggest that a 1% increase in volatility is followed by a 0.35 percentage points reduction in the deficit/GDP ratio.

ENDS

Notes for editors: ‘Uncertainty, Electoral Incentives and Political Myopia’ by Alessandra Bonfiglioli and Gino Gancia is published in the May 2013 issue of the Economic Journal.

Alessandra Bonfiglioli is at the Institute for Economic Analysis – CSIC and affiliated to the Barcelona GSE. Gino Gancia is at CREi and affiliated to the Barcelona GSE.

For further information: contact Alessandra Bonfiglioli via email: alessandra.bonfiglioli@gmail.com; Gino Gancia via email: ggancia@crei.cat; or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).