I recently came across an excellent paper called “Going to Extremes: Politics after Financial Crisis, 1870-2014” by Funke, Schularick and Trebesch (2015). It conducts one of the first ever studies of how politics changes after financial crises in 20 advanced economies going back over one hundred years. It seems very apt given the changes we are seeing around the world. The study has four main conclusions:
1) Political parties on the far right tend to benefit most from financial crashes. On average, far-right parties see an increase in their vote of about 30% compared to their pre-crisis level in the five years following a financial crisis. This is not confined to the period before World War Two: in recent decades, far-right parties, including populist parties of the so-called “New Right”, also saw broad-based electoral gains (see chart below “Figure 2: Far right and right-wing…”).
After financial crises, voters seem to be systematically lured by the political rhetoric of the far right, with its frequently nationalistic or xenophobic tendencies. They find that on average, the far left did NOT profit equally from episodes of financial instability. They also find that the same thing does not happen after normal recessions. They think this is because normal recessions are viewed as “excusable”, financial crashes are not. Moreover, financial crashes entail bailouts which are unpopular and disputes between lenders and borrowers tend to be messier.
2) Governing becomes more difficult after financial crises, irrespective of which parties are in power. In particular, after World War II, crises are associated with shrinking government majorities, a strengthening of opposition and greater political fractionalization. This in turn is associated with a higher probability of government crises and changes in the executive branch. They find these effects have become stronger over time.
3) Street protests increase dramatically in the aftermath of financial crises. Riots, strikes and demonstrations can be seen as an additional political constraint on governing. This is irrespective of political factors such as electoral systems, voter turnout, suffrage and different government systems.
4) BUT the political effects are temporary and diminish over time. 10 years after the crisis, almost everything goes back to their pre-crisis levels
Bilal
[wysija_form id=”1″]
