The Applicability of Political Business Cycle Theories in Transition Economies

Abstract

The paper focuses the applicability of political cycles theories in specific circumstances of economies in transition which are at the same time the new democracies. Economic and political transition in these countries change both people’s and politicians’ preferences, institutions and generate specific politically motivated misuse of economic policymaking. Theories of political cycles in macroeconomics have been developed since 1970s, when the fact that policymakers could use economic policy as an efficient tool for increasing their chances for reelection became obvious. In countries with parliamentary democracies, incentives of policymakers to influence election results could be opportunistically motivated (opportunistic models) or ideologically motivated (partisan models). On the other side, voters could be naïve or rational, with different economic outcomes, as argued in extensive political cycles literature. The paper studies specific political motives of politicians in transition economies which are faced, especially in first fazes of transition with weak institutional mechanism and rules, and naïve voters. Consequently, opportunistic motives dominate ideological ones. The paper also focuses how the development of the institutional environment, especially in the context of international integration, such as accession to the European Union, reflects on the political business cycles in these countries.

Delphi Method in Analyzing of Minimum Wage Setting in Indonesia: Formula vs. Negotiation Model

“…Nordhaus (1975) called this phenomenon 'a political business cycle' when politicians manipulate economic considerations to gain electoral interests. Praščević (2020) added that in transition economies with weak institutional mechanisms and rules, and naive voters, specific political motives of politicians become apparent.…”

Multivariate analysis of post-transition OECD countries in the context of inequality measures

“…In the scientific and professional literature, there is no consensus about the completion of the transition process in the countries of Central and Eastern Europe (CEE). Some authors [13,22,30] suggest that the process is still active, while others [8,15,23] close the door and turn to the observation of post-transition effects. However, public concern over the growing income gap between the rich and other parts of the distribution makes this issue an important topic.…”

Political Budget Cycles in Early Versus Regular Elections: The Case of Serbia

“…Lack of (or limited) voter experience can explain why voters in new democracies do not behave rationally or punish such incumbent behaviour (Praščević 2020 ; Hanusch and Keefer 2014 ; Rose 2006 ; Shi and Svensson 2006 ; Brender and Drazen 2005 ). On the other hand, this is more likely to be the case in developed economies where voters have experience and understanding of the costs of PBC.…”

“…Even in the context of a relaxed/weak institutional environment, which characterizes Serbia (see more details later in the paper), the incumbent faces limitations on the timely execution of fiscal expansionary policies. It is even more important, since the changes in the institutional framework for conducting monetary policy considerably reduce the possibility of monetary policy misuse, also in transition economies (Praščević 2020 ). The findings suggest that the elections-related deterioration of the fiscal balance is clearly present in Serbia—this phenomenon is driven by regular (scheduled) elections, while there is no significant increase in the deficit prior to early (snap) elections.…”