Latin American Presidential Elections and Political Business Cycles

Brazil’s president, Dilma Rousseff, has just announced that social welfare payments for the poorest in Brazilian society will increase by ten per cent. These payments will be made through the hugely popular bolsa família conditional cash transfer programme, which covers nearly one-fifth of the total income distribution. This increase also surpasses the current, six per cent rate of inflation.

But why has Dilma decided to pursue this policy now? This move comes just before the presidential election in October, which have seen the popularity of Dilma slide from 43.7 per cent in February to 37 per cent in April, and increased support for her main rival, Aécio Neves, of the Partido da Social Democracia Brasileira (PSDB). Clearly, Dilma Rousseff’s decision to increase bolsa família is not unrelated to her waning public support and the looming election in October. What is more, there is now solid empirical support for the electoral benefit to be accrued for PT incumbents from bolsa família, and conditional cash transfers in general.[1]

What is interesting is that Dilma has decided to increase social transfers as prices are rising, and in a country with a history of hyperinflation. This provides us with the perfect opportunity to reflect on the relationship between inflation, a topic I frequently raise on this blog, political business cycles and Latin American presidential elections.

In a recent book on this very topic, Stephen Kaplan,[2] building on political business cycle theory, argued that in Latin American countries with a history of hyperinflation, politicians, and those on the left in particular, are unlikely to pursue traditional business cycles.[3] The damaging distributive consequences of inflation for middle income and poorer voters, together with the business community, means the electoral cost of price instability forces politicians from inflation-scarred countries to be far more risk-averse than their counterparts in other, less economically volatile countries. Given the credibility problem of the left in Latin American with regard to macroeconomic policy, this effect becomes exaggerated under left politicians. This helps explain Lula’s fiscal reticence (and also that of Néstor Kirchner).

Is Dilma now pursuing a political business cycle? This would be unexpected, given the context of rising prices and the historical record of inflation in Brazil. Well, the short answer is no. At the same time as Dilma has increased social spending, she has also announced spending cuts in other areas, in order to combat the budget deficit and reduce inflation. Dilma’s electoral strategy is therefore targeted social transfers to a specific group, as opposed to a general political business cycle. Similar electoral strategies have been employed elsewhere in Latin America by the likes of Alberto Fujimori (also a country with a history of inflation).

To understand electoral business cycles in Latin America it is worth noting the historical context. In countries with a history of inflation, and where prices are rising, incumbents are more likely to engage in targeted spending. In contrast, in countries with no history of inflation, then we might expect incumbent Latin American presidents to swell the public economy. Compare Dilma’s strategy to the expansive policies of Ricardo Martinelli, whose party competes for the presidency in Panama on Sunday. Of course, to see if this policy has been successful, please check back here next week.

[1]See for example, Zucco, Cesar and Timothy Power. 2013. “Bolsa Família and the Shift in Lula’s Electoral Base, 2002-2006.” Latin American Research Review, 48(2), pp3-24.

[2]Kaplan, Stephen B. 2013. Globalization and Austerity Politics in Latin America. Cambridge University Press.

[3]That is, inflating the public economy just before an election to garner electoral support.

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