Political business cycles in a democracy

Term Paper, 2012

16 Pages, Grade: 2,7




I. The approach of political business cycles (PBC)
1. Definitions
2. The models of political business cycles

II. The role of PBC in economic crises
1. The concept of two-period formalization
2. The concept of three-period formalization
3. Factors which define the formalization

III. The implications for political parties in times of crises
1. The implications for opportunistic parties
2. The implications for ideological parties




Various economic difficulties and economic crises can be challenges for democratic political systems. In some cases it can lead to social cataclysms and even destruction of political systems. In this connection, different political actors offer different programs in order to solve current socio-economic problems.

However, according to the modern economic theory the free market economy develops cyclical, and the period of recession always comes after the recovery. There is the conception of political business cycles, which confirm it. Nevertheless political parties often have to carry out the policies and even take part in elections in conditions of economic crises. In some cases they even have to change their programs or significantly correct them in order to keep their voters. In this way, the problem of this term paper is the following one: what are the implications for political parties if they stand for elections in times of crises and their behavior towards voters is either opportunistic or ideological?

In order to give the answer for this question which is actual for the current European sovereign debt crisis it is first of all necessary to define political business cycle and to describe their models, which also include the concepts of the parties’ behavior as well as their interaction with voters and issues. Then the role of political business cycles in the economic crises will be explained. The understanding of the nature of political business cycles and the activities of political parties in them reveal the implications which the parties face by elections in times of crises. It can be also helpful for overcoming the consequences of the crisis with simultaneously saving of political stability.

I. The approach of political business cycles (PBC)

1. Definitions

The theory of political business cycles (PBC) analyzes how the economy behaves when political and economic factors interact with one another. Such interactions can damage or destroy the normal economic course and as a consequence of it the economic crises can be provoked. In this way, the PBC approach contributes to the identification of implications for political parties during the economic crises.

The following five issues are central for the theory of political business cycles (Alesina/Nordhaus/Schultze 1989: 2):

- Voters. The main factors, which determine the expression of this issue, are behavior of a voter and its determinants, the looming of economic events in voting behavior, the voters’ extent of rationality and being kept informed as well as the factor if voters are backward-looking or forward- looking.
- Parties. The main factors here are the motives of political leaders and parties, especially if they are vote- maximizing and opportunistic, or if they ideologically pursue a set of economic and social objectives as they serve a given constituency.
- Economic structure. This issue of the PBC approach includes the following factors: a structure of the economy, the ability of parties to affect economic outcomes, instruments of economic policy (for example, fiscal policy, transfer payments, monetary policy), and the subjects who control them (e. g. the president, the government, the parliament, the central bank).
- Shocks. There are various events, which can have destructive influence on politics and the economy. They can be external (such as from hurricanes, droughts, foreign wars, and revolutions) and internal to the political process (as when one president leaves his successor a large deficit or a high inflation rate to reduce).
- Competence. This issue of the PBC approach can be expressed in pursuing of political parties their objectives competently (that is, efficiently) or their bumbling around, neither satisfying voters nor achieving their ideological objectives.

The two sets of these five issues that can explain the nature of different political business cycles are the rationality of voters and the behavior of parties. Voters are defined as ultrarational if they have rational expectations, possess all available information, and evaluate parties by comparing their expected future performances. If voters do not correspond to at least one of these criteria, they are said to be non-rational (Alesina/Nordhaus/Schultze 1989: 2-3).

The other major issue concerns whether parties are opportunistic or ideological. Parties are said to be opportunistic if they choose policies, which increase the probability of election (or reelection) without regard to past positions, the views of the party faithful, or actual economic outcomes. In other words, the main goals of opportunistic parties are to be popular and to attract as much voters as possible. In order to do that they do not have certain objectives and include in their election programs different issues, which can be popular among many of voters from different parts of the society (s. Alesina/Nordhaus/Schultze 1989: 2-3).

Parties are considered to be ideological if they set policies to attain certain economic and social objectives and give no independent weight to gaining office or to political popularity. Ideological parties do not seek to attract as much voters as possible, so they make their election programs according to their main issues, which can be popular only among certain parts of the society (s. Alesina/Nordhaus/Schultze 1989: 2-3).

2. The models of political business cycles

The issues listed above usually interact with each other during a certain business cycle. They consist of certain factors, which can posses various expressions and build different combinations. On the whole the different combinations of the issues serve as the basis of the models of political business cycles. A formal analysis of five main PBC models is represented below.

Model 1 ("opportunistic cycle") includes such factors as opportunistic parties and non-rational voters. In this model, voters evaluate incumbent parties or persons by examining their policies in the past or during the current term. They do not attempt to predict future tendencies and developments as well as to define which policies could be rational in the next term. In this way incumbents choose such economic policies, which can probably maximize their vote at the next election (s. Nordhaus 1975).

Ideological parties and non-rational voters are the basic elements of Model 2 ("ideological cycle"). In this model parties are ideologically identifiable (for example, left and right). Voters choose the parties that best represent their preferences. If they identify themselves with the incumbent political party and vote for it, there will be no change of economic policies despite of the necessity of such changes. Ideological parties have certain socio – economic objectives and they will not manipulate the economy in order to be reelected. In this way the economic policies in the model of "ideological cycle" will be changed only if the party in power is replaced. Usually parties replace one another rather than their socio – economic objectives are evolving within the electoral cycle until the elections approach (s. Hibbs 1977, 1982, 1987).

Ultrarational voters are the main feature of Model 3 . Such approach assumes that voters have the same information as parties, are forward-looking, and remember all the events and policies of the past or the current term. In such a situation, parties cannot attract voters by undertaking an opportunistic manipulation of the economy. For example, the government, which is set by the ruling party, decides to stimulate the economy before an election. In this case it is acting on the premise that present positive socio – economic phenomena would in the voters' minds outweigh potential future socio – economic difficulties and negative phenomena. The ultrarational voters would quickly understand that such stimulations of the economy before the elections are the base of the current manipulative policies. According to the understanding of ultrarational voters, there is the high probability of the negative economic development in the future by that kind of manipulations. As a result, rational opportunistic parties know that they could not attract voters through the popular economic stimulations, which can have negative effects in the future. They would not attempt to manipulate the economy and would therefore not induce a new political business cycle (s. Alesina/Nordhaus/Schultze 1989: 4).

Model 4 of the PBC includes such factor as shocks external to the political system . There are two kinds of external shocks: economic and socio – political ones. External economic shocks such as crises do not have explicit sources. Such social phenomena as war or revolution are considered to be shocks external to the political system too. The responses of political system to a shock can be different and depend first of all on the way of behavior of parties towards voters.

If opportunistic parties form the political system, its responses will depend upon the rationality of voters. Ultrarational voters will recognize that the shock has not arisen from the political system. In this way, incumbent party is not responsible for it, and the negative event will have no effect on the parties' tenure of power. The policy response to the shock implemented by the incumbent opportunistic party will also not influence on its popularity, because ultrarational voters realize that it can have positive effects in only the future. Non – rational voters, however, can probably define the source of the shock incorrect and blame the incumbent parties or persons for it. In this way, these parties or persons can be voted out of office.

In the case of the political system set up by ideological parties, its response is more complicated. Rational voters will respond to an external shock by asking which party has the socio – economic objectives and represent the issues, which can deal with the shock in order to overcome it. If the incumbent ideological party is not able to response to the shock, voters will support the other one, which correspond to their demands in conditions of a shock. In this way the regime and the policy will be changed. However, non – rational voters will identify themselves with the issues of a certain party or an ideological party itself and do not pay attention to its ability to response on the shock. As result, a party can be reelected despite of its disability to response on the external shock. In such case the regime and the policy will not be changed (s. Alesina/Nordhaus/Schultze 1989: 4-5).


Excerpt out of 16 pages


Political business cycles in a democracy
Christian-Albrechts-University of Kiel  (Institut für Sozialwissenschaften)
Governing the crisis: how democracies deal with adverse economic conditions
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There are few researches which are directly devoted to the role of the political business cycles (PBC) in economic crises. The given term paper contains the research about the implications which are derived from the PBC and stay before political parties during the times of crises. The definition of the PBC, the different concepts of interactions between voters and parties as well as the role of political business cycles in the crises are revealed. This all serve the base for the revealing of the implications for political parties during the crises which depend on the type of the party.
Political business cycles, Krise, Political economy, Types of political parties
Quote paper
B.A. Andrei Horlau (Author), 2012, Political business cycles in a democracy, Munich, GRIN Verlag, https://www.grin.com/document/211860


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