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Partisan Governments, the International Economy, and Macroeconomic Policies in Advanced Nations, 1960–93
Published online by Cambridge University Press: 13 June 2011
Abstract
This article examines the impact of parties, domestic institutions, and the international economy on the conduct of monetary and fiscal policies using time-series cross-section data from nineteen OECD countries for the years between 1960 and the mid-1990s. The results are as follows. Partisan governments have affected, alone and in interaction with the organization of labor markets, the pattern of macroeconomic management. Still, their impact has varied over time, partly as a function of economic conditions but fundamentally as a function of the degree of financial liberalization and the exchange-rate system in place. After following broadly similar macroeconomic policies in the 1960s, OECD governments pursued divergent monetary and fiscal policies in response to the economic slowdown of the 1970s. Even when they initially adopted countercyclical measures, conservative governments quickly favored tight monetary policies and strove to achieve fiscal discipline. By contrast, taking advantage of generalized capital controls and floating exchange rates, socialist cabinets embraced demand management policies in a systematic fashion—mostly through budget deficits in corporatist countries and through both loose monetary and loose fiscal measures in noncorporatist settings. As financial liberalization progressed in the early 1980s, partisan- and institution-led differences in macroeconomic policies waned across countries.
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References
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29 Results do not vary when the last year of the “stagflation” period is modified, that is, when the historical periods are 1973–79 and 1980–93. The closer the divide is to 1982, the less significant in statistical and substantive terms the effect of socialist cabinets in the 1980s.
30 For the simulation I have set all the variables at their mean levels, with the exception of partisanship and the interactive term “partisanship*organizational power of labor.” The annual change of interest rates that results from the regression is added to the world real interest rates at time t-1 to calculate the level of interest rates at time t (which is the result represented in the simulations). The world interest rate is the weighted average (by size of GDP) of the interest rates of the seven largest economies—Canada, France, Germany, Italy, Japan, the U.K., and the U.S.
31 Results not reported here show that central bank independence is an important factor in the management of monetary policy. When socialist control of government (without adjusting for the level of central bank independence) is regressed on interest rates, the size of the coefficient is smaller. For example, socialist control of the government in the 1970s reduces interest rates by 0.99 points (versus 1.65 in Table 1, model 3).
32 The variable of social democratic corporatism (alone or controlled by partisanship and organization of the labor market) is not statistically significant. Results are not reported here.
33 Corporatist countries are those that score more than 0.5 in the standardized index of the organizational power of labor (Austria, Belgium, Denmark, Finland, Norway, and Sweden). The noncorporatist countries are those that score less than 0.3 in the standardized index (Australia before 1980, Canada, France, Greece, Ireland, Italy, Japan, Portugal, Spain, Switzerland, the U.K. after 1980, and the U.S.).
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41 The sample employed is based on Roubini and Sachs (fn. 37), extended with new OECD data when available. The countries (and sample periods) included are Australia (1967–88), Austria (1972–93), Belgium (1962–90), Canada (1962–93), Denmark (1971–93), Finland (1977–93), France (1970–92), Germany (1962–93), Greece (1984–90), Ireland (1962–93), Italy (1966–93), Japan (1971–93), the Netherlands (1972–93), Norway (1972–91), Sweden (1972–93), Spain (1985–93), Switzerland (1972–93), the United Kingdom (1962–93), and the United States (1962–93).
42 Roubini and Sachs (fn. 37). This difference may be related to the sample employed here, which is two times the size of the Roubini and Sachs sample and which corrects for the bias in the latter's study due to its exclusion of several OECD countries.
43 For the simulation I have set all the variables except partisanship at their mean levels.
44 Martin (fn. 17).
45 I find no empirical evidence to support the claim that public deficits rise both with cabinet fragmentation (Roubini and Sachs [fn. 37]) and under minority governments (Edin, Per-Anders and Ohlsson, Henry, “Political Determinants of Budget Deficits: Coalition Effects versus Minority Effects,” European Economic Review 35 [December 1991]CrossRefGoogle Scholar). The results are not reported in this article.
46 For the simulation I have set the control variables to their mean level in the period under analysis: Deficit t-1 = 0.738, Change in Unemployment Rate = 0.246, Change in Cost of Servicing Debt (DBR) = -1.78
47 The presence of capital controls was initially negatively correlated to the independence of the central bank. This result confirms the findings of Alesina, Alberto, Grilli, Vittorio, and Milesi-Ferretti, Gian-Maria, “The Political Economy of Capital Controls,” in Leiderman, Leonardo and Razin, Assaf, eds., Capital Mobility: The Impact on Consumption, Investment and Growth (New York: Cambridge University Press, 1994)Google Scholar. The degree of financial restrictions and of central bank independence in 1970 shows a Pearson's coefficient of-0.53. For 1993 this coefficient falls to -0.05.
48 Goodman and Pauly (fn. 34); Eichengreen (fn. 34).
49 Simmons (fn. 7).
50 This interpretation borrows heavily from Gruber's concept of “go-it-alone power” to explain the formation of international institutions. In Gruber's account international institutions need not be the result of straight forward Pareto-improving cooperative agreements among equal partners. Instead, they may emerge as a set of core countries that establish agreements or embark on strategies that, modifying the status quo, force the remaining countries to join the same institution or engage in the same pattern of behavior to minimize the losses that may occur from not doing so. The process of capital deregulation (and, in particular, its institutionalization in continental Europe through the European Union project) fits this explanation particularly well. See Lloyd Gruber, “Rationalist Approaches to International Cooperation: A Call for Theoretical Reorientation,” Working Paper Series 14 (Irving B. Harris Graduate School of Public Policy Studies, August 1999); idem, “Interstate Cooperation and the Hidden Face of Power: The Case of European Money,” Working Paper Series 16 (Irving B. Harris Graduate School of Public Policy Studies, September 1999). Notice then that this account differs equally from two other interpretations. First, it differs from those that directly link the process of deregulation to changes in international financial markets. See McKenzie, Richard B. and Lee, Dwight R., Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World (New York: Free Press, 1991)Google Scholar; O'Brien, Richard, Global Financial Integration: The End of Geography (London: Pinter, 1992)Google Scholar; and Goodman and Pauly (fn. 34). Second, it is also distinct from those that attribute the decision to liberalize to purely domestic conditions, such as the hegemony of center-to-right governments in Notermans, Ton, “The Abdication from National Policy Autonomy: Why the Macroeconomic Policy Regime Has Become So Unfavorable to Labor,” Politics and Society 21 (June 1993)CrossRefGoogle Scholar; or such as the internal balance of power among sectoral interests in Frieden, Jeffry A., “Invested Interested: The Politics of National Economic Policies in a World of Global Finance,” International Organization 45 (Autumn 1991)CrossRefGoogle Scholar.
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52 This combination of loose fiscal policies and tight monetary policies was not coincidental. It was related to the structure of electoral incentives confronted by socialist parties in rather different political and institutional environments. Socialist governments in noncorporatist countries could not count on organized labor movements to achieve wage moderation and also carry over broad electoral coalitions. Without a labor movement holding blue-collar workers together and delivering their votes to the Socialist Party, social democratic governments could hardly attract simultaneously both pro-high-spending left-wing voters and moderate middle-class voters concerned with taxes. A natural (and in the short term politically not costly) way to reconcile their competing claims involved running a higher budget deficit. In countries where unions are strong and parties are well-organized political machines, those political dilemmas were less pressing. For a historical account of the Spanish case, see Boix (fn. 51), 105–55.
53 For an analysis of the impact of ideas, see Hall, Peter A., “Policy Paradigms, Social Learning, and the State: The Case of Economic Policymaking in Britain,” Comparative Politics 25 (April 1993)CrossRefGoogle Scholar.
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55 Scharpf (fn. 5, 1987 and 1991).
56 Martin (fn. 17)
57 At this point, it is not difficult to see, however, that a policy of public investment is not restricted to the domain of corporatism. It is an economic strategy that any social democratic government will pursue regardless of how coordinated the domestic labor market is. See Boix (fn. 51).
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