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Austerity and anarchy: Budget cuts and social unrest in Europe, 1919-2008

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  • Jacopo Ponticelli
  • Joachim Voth

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Abstract

Does fiscal consolidation lead to social unrest? Using cross-country evidence for the period 1919 to 2008, we examine the extent to which societies become unstable after budget cuts. The results show a clear correlation between fiscal retrenchment and instability. Expenditure cuts are particularly potent in fueling protests; tax rises have only small and insignificant effects. We test if the relationship simply reflects economic downturns, using a recently-developed IMF dataset on exogenous expenditure shocks, and conclude that this is not the case. While autocracies and democracies show broadly similar responses to budget cuts, countries with more constraints on the executive are less likely to see unrest after austerity measures. Growing media penetration does not strengthen the effect of cut-backs on the level of unrest. We also find that austerity episodes that result in unrest lead to quick reversals of fiscal policy.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1342.

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Date of creation: Jul 2011
Date of revision: Oct 2012
Handle: RePEc:upf:upfgen:1342

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  1. Kevin Hjortshøj O'Rourke & Alan de Bromhead, 2012. "Right Wing Political Extremism in the Great Depression," Economics Series Working Papers Number 95, University of Oxford, Department of Economics.
  2. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  3. Anjali Thomas Bohlken & Ernest John Sergenti, 2010. "Economic growth and ethnic violence: An empirical investigation of Hindu—Muslim riots in India," Journal of Peace Research, Peace Research Institute Oslo, vol. 47(5), pages 589-600, September.
  4. Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
  5. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
  6. Timur Kuran, 1989. "Sparks and prairie fires: A theory of unanticipated political revolution," Public Choice, Springer, vol. 61(1), pages 41-74, April.
  7. Daniel Leigh & Andrea Pescatori & Jaime Guajardo, 2011. "Expansionary Austerity New International Evidence," IMF Working Papers 11/158, International Monetary Fund.
  8. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
  9. Grossman, Herschel I, 1991. "A General Equilibrium Model of Insurrections," American Economic Review, American Economic Association, vol. 81(4), pages 912-21, September.
  10. Acemoglu, Daron & Robinson, James A, 1998. "Why did the West Extend the Franchise? Democracy, Inequality and Growth in Historical Perspective," CEPR Discussion Papers 1797, C.E.P.R. Discussion Papers.
  11. Joachim Voth, 2011. "Tightening Tensions: Fiscal Policy and Civil Unrest in Eleven South American Countries, 1937 - 1995," Working Papers Central Bank of Chile 612, Central Bank of Chile.
  12. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  13. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
  14. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  15. DiPasquale, Denise & Glaeser, Edward L., 1998. "The Los Angeles Riot and the Economics of Urban Unrest," Journal of Urban Economics, Elsevier, vol. 43(1), pages 52-78, January.
  16. Andrea Pescatori & Daniel Leigh & Jaime Guajardo & Pete Devries, 2011. "A New Action-Based Dataset of Fiscal Consolidation," IMF Working Papers 11/128, International Monetary Fund.
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  1. Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009
    by bbatiz in NEP-HIS blog on 2011-08-21 11:42:59
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Cited by:
  1. Waśniewski, Krzysztof, 2012. "Local governments’ fiscal policy as a factor of urban development – evidence from Poland," MPRA Paper 39176, University Library of Munich, Germany.
  2. Francesco Passarelli & Guido Tabellini, 2013. "Emotions and Political Unrest," CESifo Working Paper Series 4165, CESifo Group Munich.
  3. Kevin H. O'Rourke & Alan M. Taylor, 2013. "Cross of Euros," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 167-92, Summer.
  4. Andini, Corrado & Cabral, Ricardo, 2012. "Further Austerity and Wage Cuts Will Worsen the Euro Crisis," IZA Policy Papers 37, Institute for the Study of Labor (IZA).

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