Electoral Volatility in the Modern Democratic Polity

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Electronic Theses, Treatises and Dissertations The Graduate School

2013 Cause and Consequence: Electoral Volatility in the Modern Democractic Polity James R. Martin Jr.

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COLLEGE OF SOCIAL SCIENCES AND PUBLIC POLICY

CAUSE AND CONSEQUENCE:

ELECTORAL VOLATILITY IN THE MODERN DEMOCRACTIC POLITY

JAMES R. MARTIN JR.

A Dissertation submitted to the Department of Political Science in partial fulfillment of the requirements for the degree of Doctor of Philosophy

Degree Awarded: Spring Semester, 2013

James R. Martin Jr. defended this Dissertation on March 25th, 2013. The members of the supervisory committee were:

Brad T. Gomez Professor Directing Dissertation

Jill B. Quadagno University Representative

Sona N. Golder Committee Member

Eric A. Coleman Committee Member

Christopher Reenock Committee Member

The Graduate School has verified and approved the above-named committee members, and certifies that the Dissertation has been approved in accordance with university requirements.

I dedicate this dissertation to my loving wife Mia, my children

Joe and Caitlin, my parents and my fellowship of friends and mentors.

Without your support and inspiration this long-held

ambition would remain an unfulfilled dream.

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ACKNOWLEDGEMENTS

Pursuing a doctorate in one’s fourth decade is not an accomplishment that can be done alone. As such, I would like to acknowledge the assistance of the Department of Political

Science at Florida State University. Without the help of individual faculty and staff members I could not have completed this pursuit. In particular, I would like to thank Brad Gomez, Sona

Golder, Eric Coleman, Chris Reenock, Cherie Maestas, Dale Smith, Charles Barrilleux and Mark

Souva. Your collective enthusiasm and insistence on rigor, discipline and intellectual clarity was invaluable to my development as a scholar. Additionally, the manner in which each of you went out of your way to help me pursue the PhD is humbling and much appreciated. Finally, I would like to Jill Quadagno for her participation on my committee. Your willingness to contribute outside of your field serves as an excellent example of service for my career in academia.

TABLE OF CONTENTS

List of Figures ...... viii

List of Tables ...... x

Abstract ...... xi

1. ELECTORAL VOLATILITY IN DEMOCRACY ...... 1

1.1 What is Electoral Volatility? ...... 1

1.2 The Plan of the Dissertation ...... 5

2. THE CAUSES OF ELECTORAL VOLATILITY IN DEMOCRACIES ...... 9

2.1 Introduction ...... 9

2.2. The Testable Implications of a Conditional Theory of Electoral Volatility .. 16 2.2.1 Retrospective Voting and Volatility ...... 16 2.2.2 Restrictive and Permissive Institutions ...... 17

2.3 Hypotheses ...... 20 2.3.1 Control Hypotheses ...... 20

2.4 The Research Design and Estimation Strategies ...... 23 2.4.1 The Dependent Variables ...... 24 2.4.2 The Independent Variables ...... 26 2.4.3 Empirical Models ...... 28 2.4.4 Estimation Strategies ...... 28

2.5 The Results...... 29 2.5.1 Existing Party Volatility ...... 30 2.5.2 New Party Electoral Volatility ...... 37

2.6 Conclusion ...... 41

3. ELECTORALVOLATILITY AND GOVERNMENT FORMATION DELAYS .... 44

3.1 Government Formation Delays ...... 45 3.1.1 Bargaining Complexity ...... 48 3.1.2 Uncertainty in the Government Formation Process ...... 50

3.1.3 The Argument of Marks...... 51 3.1.4 Hypotheses ...... 55

3.2 The Research Design, Empirical Models and Estimation Strategies ...... 58 3.2.1 The Dependent Variable ...... 58 3.2.2 The Independent Variables ...... 58 3.2.3 The Empirical Models...... 60 3.2.4 The Estimation Strategy ...... 60

3.3 Results ...... 61 3.3.1 Simulations of Political Interest ...... 66

3.4 Conclusions ...... 69

4. INSIDE THE BLACK BOX: GOVERNMENT FORMATIONS IN ISRAEL ...... 72

4.1 Case Selection, Recruitment, Data and Methods ...... 74

4.2 Democracy in Israel ...... 77 4.2.1 Institutions and Bargaining Complexity in Israel ...... 79

4.3 Contextual Features and Complexity ...... 83

4.4 Electoral Volatility and Government Formation Delays in Israeli Politics ... 88

4.5 An Additional Influence: The Role of Personal Connections in Politics ...... 92

4.6 Conclusion ...... 94

5. THE EFFECT OF ELECTORAL VOLATILITY ON INFLOWS OF FDI ...... 96

5.1 FDI, Electoral Volatility and Government Formations ...... 98

5.2 A Theory of FDI Inflows within Advanced Democracies ...... 101

5.3 Hypotheses ...... 105

5.4 Data and Models ...... 108 5.4.1 The Dependent Variable ...... 109 5.4.2 Political Independent Variables ...... 109 5.4.3 Control Variables Related to Economic Rewards ...... 110 5.4.4 Estimation Strategy ...... 112

5.5 Results ...... 113 5.5.1 Simulations of Political Interest ...... 119

5.6 Conclusion ...... 121

6. CONCLUSIONS AND IMPLICATIONS ...... 123

APPENDICES ...... 129

APPENDIX A: CHAPTER 2: CODING, DIAGNOSTICS AND DATA ...... 129

A.1 Coding Existing and New Party Electoral Volatility ...... 129

A.2 Diagnostics for Models in Chapter 2 ...... 130

APPENDIX B: CHAPTER 3: DATA AND DIAGNOSTICS ...... 132

APPENDIX C : CHAPTER 4: ISRAELI CASE STUDY ...... 134

C.1 IRB Approved Informed Consent Letter ...... 134

C.2 Human Subjects Committee Approval Letter ...... 139

APPENDIX D: CHAPTER 5: DATA AND DIAGNOSTICS ...... 141

D.1 The Polarization Variable ...... 141

D.2 The College Participation Variable ...... 141

D.3 Contract Intensive Money ...... 141

D.4 The Party Family of the Prime Minister ...... 142

D.5 IRB Approved Informed Consent Letter ...... 144

D.6 Human Subjects Committee Approval Letter ...... 149

REFERENCES ...... 151

BIOGRAPHICAL SKETCH ...... 160

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LIST OF FIGURES

1.1 Electoral Volatility and Support for Democracy (1994-2006) ...... 2

1.2 Total Electoral Volatility in Germany and the United Kingdom ...... 3

1.3 Total Electoral Volatility in Belgium, Iceland and the Netherlands ...... 5

2.1 Voter Preferences Conditioned by Electoral Institutions ...... 11

2.2 Restrictive Electoral Systems ...... 12

2.3 Permissive Electoral Systems ...... 13

2.4 Existing and New Party Volatility in the Netherlands ...... 25

2.5 The Effect of Changes in GDP on Existing Party Volatility ...... 33 In Non-Presidential Systems and Presidential Systems

2.6 The Marginal Effect of Increases in GDP in Directly ...... 34 Presidential Systems

2.7 A Comparison of Means: Existing Party Volatility ...... 35 Across Electoral System Types

2.8 The Marginal Effect of Increases in GDP on Existing ...... 36 Party Volatility Across Electoral System Types

2.9 The Effect of Increasing Unemployment Rates on ...... 39 New Party Volatility in Non-Presidential and Presidential Systems

2.10 A Comparison of Means: New Party Volatility across Electoral System Types ...... 40

3.1 Post-Election Government Formation Delays in Europe (1970-2011)...... 47

3.2 The Effect of Existing Party Volatility on Formation ...... 64 Delays across Investiture Systems

3.3 The Marginal Effect of Increases in Existing Party ...... 65 Volatility on Formation Delays across Levels of Polarization

3.4 The Effect of New Party Volatility on Formation Delays ...... 66 Under Positive Parliamentarism

viii

4.1 Vote Shares of Israeli Party Families (1969 – 2009) ...... 78

4.2 Parties in Israel (1981 – 2009) ...... 83

4.3 Ministers and Deputies in Israel Governments (1974-2012) ...... 85

4.4 Electoral Volatility and Formation Delays in Israel (1973 – 2009)...... 91

5.1 Inflows of Foreign Direct Investment in Ireland ...... 100

5.2 The Marginal Effect of Existing Party Volatility on Foreign Direct ...... 115 Investment across Levels of Government Formation Delays In Consolidated Democracies

5.3 The Marginal Effect of Increases in New Party Volatility on Foreign Direct ...... 116 Investment across Levels of Government Formation Delays in Consolidated Democracies

5.4 The Marginal Effect of Increases in Existing Party Volatility on ...... 118 Foreign Direct Investment across Levels of Government Formation Delays in Transitional Democracies

5.5 The Marginal Effect of Increases in New Party Volatility on Foreign Direct ...... 119 Investment across Levels of Government Formation Delays In Transitional Democracies

LIST OF TABLES

2.1 The Determinants of Existing Party Electoral Volatility ...... 31

2.2 Difference of Means: Existing Party Volatility ...... 35 Across Electoral System Types

2.3 The Determinants of New Party Electoral Volatility ...... 38

2.4 Difference of Means Test: New Party ...... 40 Volatility across Electoral System Types

3.1 The Determinants of Government Formation Delays (1970-2011) ...... 62

4.1 The Composition of the 32nd Government of the State of Israel ...... 86

5.1 The Determinants of Foreign Direct Investment in Democracies ...... 114

A 1 Variable Inflation Factor Test ...... 130

A 2 Unit Root Test ...... 130

A 3 Hausman Test Between Fixed and Random Effects ...... 130

A 4 Countries, Years, and Election Cycles ...... 131

B 1 Countries and Elections ...... 132

B 2 Descriptive Statistics ...... 133

D 1 Descriptive Statistics ...... 142

D 2 VIF Scores ...... 142

D 3 Test for Serial Correlation ...... 142

D 4 Unit Root Test ...... 143

D5 Countries and Years ...... 143

ABSTRACT

This dissertation investigates the causes and consequences of a core value of democracy: the ability of citizens to change the balance of power amongst the political parties that represent them—a phenomenon known as electoral volatility. I first study causes, arguing that citizens

support parties that successfully implement important policies during their time in office and

reject those that do not. I advance previous work by testing the argument that institutions

channel the sort of change that may occur. I argue that institutions act to moderate the prospects

of opposition parties at election time, presenting two aspects of change: shifts in support for

existing experienced parties and emerging support for new parties. I find, among other results,

that mixed electoral systems provide opportunities for new parties that other systems impede.

In the next analyses, I examine the effects of existing and new forms of electoral

volatility on delays in bargaining over cabinet positions after elections. I contend that delays are

conditioned by two factors: uncertainty regarding the preferences of potential government parties

for certain posts and the complexity of rule sets and contextual situations. I advance a counter-

intuitive argument: experienced parties should know the rules and their partners—hence

complexity should not be a problem. Yet as these experienced parties seek to maximize the

number of posts they hold, concessions should be difficult to achieve—thus formations should

take longer. On the other hand, new parties should be inexperienced and should hold known

preferences for particular cabinet posts. Veteran bargaining partners are likely to exploit this, satisfying new partners with less than they might cede otherwise and forming governments faster. My results, derived from quantitative analysis and field work in the state of Israel, support these arguments.

Finally, I examine the effects of both electoral volatility and government formation delays on a critical source of income for modern democracies: the purchase of domestic businesses by foreign firms—a practice known as foreign direct investment (FDI). I test the argument that democratic political phenomena often considered abhorrent (such as volatile elections and lengthy government formations) can serve to attract investors by keeping governments and lawmakers out of the way. Among other interesting results, I find that new party volatility and legislative polarization can serve to increase FDI rather than reduce it.

This dissertation provides important contributions to the understanding of democratic politics in several ways. First, it helps to explain why established parties succeed and why new parties emerge within democracies. Second, it advances the study of government formations by allowing for nuanced view of cabinet negotiations following elections. Finally, my work provides insights for scholars of both comparative politics and political economy as it connects democratic politics to an important tangible consequence: inflows of foreign direct investment.

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CHAPTER 1

ELECTORAL VOLATILITY IN DEMOCRACY

1.1 What is electoral volatility?

Simply put, it is changes in the balance of power amongst political parties in legislatures across

time. It is a reflection of a fundamental principle of democracy—the ability of citizens, through the process of peaceful elections, to select the political parties that represent them. The

importance of volatility and debates about it resonate through the history of political thought.

These debates are a reflection of the uncertainty inherent in democracy. First, how can citizens

ensure that government is responsive to their preferences? The second aspect involves a

symmetric component: can citizens be trusted to elect responsible representatives? From

Aristotle to Madison to philosophers and pundits of current times, the ability of citizens to select

their leaders is characterized as both a great virtue of liberty and, if unconstrained, a perilous

threat to social stability. Voters can change the balance of power in legislatures and

governments legally and peacefully, allowing these bodies to reflect the changing preferences of

the polity for new leadership and policies that address pressing concerns. Yet, as Madison

admonishes, change can also be a vehicle of instability: at best “it may clog administration, it

may convulse society” and at worst lead to “mortal diseases under which popular governments

have everywhere perished.”1

Such concerns about political change remain pertinent to scholars and citizens today.

The rise of radical left-wing parties during the 1970s and 80s in Europe and, more recently, the

emergence of right-wing extremist parties espousing nationalist and xenophobic sentiments raise

1 Madison, James. 1787. “Federalist #10”. Library of Congress: http://www.constitution.org/fed/federa10.htm

the specter of revolution and authoritarianism. For example, the campaign statements of the

Greek party, Golden Dawn, a new nationalist party opposed to EU membership, openly reject agreements to reinforce the Greek economy and include thinly veiled threats about retribution towards those opposed to the party’s radical nationalist agenda.2 Pundits and scholars alike fear that changes in the balance of power among previously stable party systems may lead to economic consequences, political violence, unstable governments and the potential for authoritarian reversals even in consolidated democracies (Powell 1986; Mainwaring and Zoco

2007; Daly 2012; Hertling 2012). Evidence to support these arguments is not merely a matter of conjecture. The percentage of citizens who feel that democracy has been “fairly bad” for their respective countries is higher in countries that express high levels of electoral volatility.3 Figure

1 provides a sense of the impact of volatility on this perception in several democracies. 50 40 30 20 10 0 Germany UK Netherlands Hungary Slovenia Lithuania Mean Electoral Volatility Democracy: "Fairly Bad"

Figure 1.1: Electoral Volatility and Support for Democracy (1994-2006).

2 “Greece Election: Vote Threatens EU Bailout Split” http://www.bbc.co.uk/news/world-europe-17975370 3 World Values Survey question: “Is having a democratic system: Very Good; Fairly Good; Fairly Bad, or Very Bad”? These data are country means for the time period 1994-2006. (Correlation: .965, p<=.05)

At the same time, the ability for citizens to express their support or to reject political

parties based on their performance is a critical element in democracy. It is clear that

“Democracy is a system in which parties lose elections. There are parties: divisions of interest, values and opinions. There is competition, organized by rules. And there are periodic winners

and losers” (Przeworksi 1991, 10). In this light, electoral volatility is a natural function of

democracy—an ebb and flow of voter policy preferences over political parties transformed

through voting into seats within the legislative bodies present within particular countries. Figure

1.2 provides a contrast of rather typical levels of total electoral volatility in two countries (The

United Kingdom and Germany) that display these ebbs and flows of influence.

50 40 30 20 Total Electoral Volatility Electoral Total 10 0

1970 1980 1990 2000 2010 Germany United Kingdom

Figure 1.2: Total Electoral Volatility in Germany and the United Kingdom.

This more tranquil expression of volatility is exemplified by the 2010 elections in the

United Kingdom. While the elections were contested by dozens of parties, the real outcome was

constrained to a match between the three major parties in English politics: the Labour,

Conservative, and Liberal Democratic parties. Each of these parties has a long tradition of

winning representation in Parliament, although the Liberal Democrats had not been part of

government for several decades. After a spirited election campaign held in the midst of a

historic financial crisis, the Conservatives and Liberal Democrats were able to secure a coalition

government. The Labour Party, in government with a majority in Parliament since 1993, was

left in a minority role. Yet this election could hardly be characterized as destabilizing. The

entire affair consisted of 11% of the votes cast changing hands (Nordisieck, 2010). Experienced

political parties switched roles, and the business of governance continued without a hitch.

Despite many examples of this relatively calm electoral cycle, it is clear that there are

qualitatively different aspects of electoral volatility and that these changes are expressed quite

differently across the breadth of democracies. Elections in post-Soviet Lithuania have displayed a more unruly form of electoral volatility. Since 2000, fifteen new parties have competed in

Lithuanian’s legislative elections—many of them surviving for only a single term. In the 2008

Seimas elections, two new parties, the National Revival and Liberal’s Movement, emerged to win over 20% of the vote (Nordisieck, 2008). In the months preceding Lithuanian’s 2012 elections, the National Revival Party and the New Union of Social Liberals party merged into the

Liberal Central Union and Labour Party respectively, while yet another new party, the Way of

Courage, emerged to win 8% of the vote and seven seats. Fully 56% of the votes changed hands between 2008 and 2012 (Nordisieck, 2012). To be sure, these sorts of changes are not restricted to post-communist democracies. During the last twenty years Andorra, Austria and Belgium, among others, have witnessed periodic episodes of such shifts in the balance of power among

political parties. Figure 1.3 provides a view of such episodes in elections held in Belgium,

Iceland, and the Netherlands. In these cases, the percentage of votes changing hands fluctuates wildly— some elections express relatively small changes while others display trends which led

80 60 40 20 Total Electoral Volatility Electoral Total 0

1970 1980 1990 2000 2010 Belgium Netherlands Iceland

Figure 1.3: Total Electoral Volatility in Belgium, Iceland and the Netherlands.

to the electoral decimation of the previously established parties. These examples suggest that electoral volatility varies across time and space—not only within countries but between them as well. Many countries present a rather sedate record of electoral change over time while periodically displaying more tumultuous electoral cycles. Still others display somewhat higher levels of change overall while some countries seem to overturn the apple cart of politics on a regular basis. Why these variations in electoral volatility occur and the nature of the

consequences is the central purpose of this dissertation. I investigate the impact of retrospective

voting in various institutional settings in Chapter 2; the influence of volatility on government

formation delays in Chapters 3 and 4, and finally examine the impact of both volatility and

formation delays on investor decisions in Chapter 5.

1.2 The Plan of this Dissertation

This dissertation examines the causes and consequences of electoral volatility in the

modern democratic polity. As such, Chapter 2 presents a study of the causes of electoral

volatility. I begin with a straightforward retrospective voting argument: voters reward or punish

parties for their policy performance while in office. I use an economic voting argument: voter

preferences over political parties are influenced by national economic performance. Hence,

during good times, voters are likely to continue supporting the parties that seem responsible for

the policies that have led to economic growth while in bad times incumbent parties will be

rejected by voters. During such episodes, larger changes in the balance of power between

political parties are more likely (and thus electoral volatility higher). However, I maintain that

institutions condition the sort of change that may occur. I contend that differing electoral

institutions act to restrict (or increase) the prospects of electoral success for opposition parties at election time, presenting two aspects of change: shifts in support for existing experienced parties as well as emerging support for new parties. I refer to these expressions of volatility as existing

and new party volatility throughout Chapter 2 and the remainder of the dissertation. Among

other notable results, I find that directly elected presidents can create competitive advantages for

experienced existing parties, attracting more voters during periods of economic growth. I also

find that and that certain forms of permissive electoral systems provide channels for new parties

to successfully compete with existing parties.

Chapters 3 and 4 examine the political consequences of these two forms of electoral

volatility by analyzing their effects on government formation delays, or the length of time it

takes to form a government after elections. Building on previous work that establishes

uncertainty about the combination of cabinet portfolios will satisfy bargaining partners as a

central cause of these delays, I contend that the length of time it may take to form a government

after elections is conditioned by two factors: uncertainty regarding the cabinet preferences of

potential government parties and the complexity of rule sets and contextual situations. My

argument has a counter-intuitive implication: experienced parties should know the rules and their

partners—complexity should not be troubling to veteran politicians. However, as each party

seeks to maximize political influence (and control more posts) over a broad range of cabinet

positions, concessions are likely to be incremental and difficult to achieve – thus formations

should take longer. On the other hand, new parties are likely to be unfamiliar with complex

situations and should hold known preferences for particular cabinet posts. More experienced

partners are likely to take advantage of these weaknesses, and may satisfy new partners with less

than they might otherwise concede. Hence, agreements should be concluded earlier.

Quantitative analyses of government formations in Eastern and Western Europe in Chapter 3 and

field work in the state of Israel in Chapter 4 support these arguments. I find that, after elections,

the presence of new parties in the government formation process tends to reduce the length of

time it takes a government to form.

In Chapter 5, I examine the effects of both new and existing party electoral volatility and

government formation delays on a critical source of income for modern democracies: the

purchase of domestic businesses by foreign firms—a practice known as foreign direct

investment. In this study, I argue that, ceteris paribus, phenomena such as often considered destabilizing such as tumultuous shifts the balance of power between parties and lengthy delays in the government formation process serve to attract investors by keeping governments and

lawmakers out of the way. Among other interesting results, I find that new party volatility and high levels of legislative polarization can attract foreign investors rather than repel them.

In sum, this dissertation traces the causes and effects of changing voter preferences over the political parties that represent them. Using a blend of quantitative and qualitative methods, I seek to establish a connection: linking changes in voter preferences to shifts in the balance of power between political parties through to impacts on governments and finally to economics.

In this manner, I provide insights that may benefit comparative scholars of party systems, government formations and political economy.

CHAPTER 2

THE CAUSES OF ELECTORAL VOLATILITY IN DEMOCRACY

2.1 Introduction

Electoral volatility—fluctuations in voter support for political parties—is present to some degree in every democratic election. It is a natural byproduct of democracy: the structured opportunity for changes in the balance of power between political parties. In some countries, electoral volatility involves relatively minor fluctuations. Parties can win or lose elections but enjoy relatively stable levels of voter support over spans of electoral cycles. In other cases volatility reflects wild swings in voter support between established parties, leaving observers unsure of which party might be in power next. Other countries express electoral volatility of a qualitatively different sort. Shifts in party support are not only more chaotic, but new parties may (indeed, in some cases, frequently) enter the electoral arena to compete with their more experienced counterparts. Often, such countries witness the splintering of established parties under the pressure of political competition with new adversaries. Voter support for all parties may fluctuate wildly, sweeping away traditional parties within the span of a few elections.

The consequences of such environments may be destabilizing for party systems and democratic politics (Massicotte, Blais, and Yoshinka 2003; Mainwaring and Zoco 2007). High levels of electoral volatility can increase uncertainty for voters and elites alike and reduce accountability for parties in power. When partisan loyalties are weak, voters are unsure of which parties to support, and are unable to identify “the rascals” when they wish to throw them out

(Birch 2001, 2). Volatile party systems create difficult political environments in which the expectations of voters are hard to meet (Mair, Muller, and Plasser 2004, 149). In environments

9 of continual electoral upheaval, parties and their leaders may become confused about how to position their parties, leading to strategic mistakes that benefit their competitors (Mair, Muller, and Plasser 2004, 220). Finally, highly volatile democracies may present opportunities for radicals, threatening democracy itself (Mainwaring and Zoco 2007, 158; Epperly 2011).

Why do these variations in electoral volatility occur? I argue that shifts in voters’ political preferences, caused by the failure of incumbent parties to address their policy concerns are the driving force behind electoral volatility. I begin with a straightforward retrospective voting argument: voters reward parties that produce successful policies while in office and punish those that do not by switching votes to other parties. I use economic voting as a proxy for this concept: growing economies reinforce the position of existing incumbent parties in the minds of voters while bad times provide opportunities for parties in the opposition.4 The state of the economy is a good place to start; retrospective voting in conjunction with economic voting is a phenomenon confirmed extensively in the literature (Lewis-Beck 1986; Powell and Whitten

1993; Duch and Stevenson 2008). All else being equal, growing economies tend to reinforce the

positions of parties in power. Such times represent barren ground for existing opposition parties.

The prospects of a new party are also likely to suffer at such times. Voters have little reason to

switch loyalties or support a new party. Yet periods of economic contraction represent

opportunity—a solution to the coordination problem that confronts parties and supporters (Cox

1997). If parties fail to deal with these problems, voters may switch support to the opposition or

support new parties (Brady 1988; Powell and Whitten 1993; Duch and Stevenson 2008).

However, I maintain that changes in voter preferences expressed through economic

voting are conditioned by institutions that restrict (or liberate) the actions of voters and the

4 Salient events such as scandals or military defeats might also serve to shift voter preferences. However, I view economic voting as a critical test: if such a well-established theorem fails to integrate with the conditional approach I espouse, it is doubtful that other, less pronounced influences would either.

10 strategies of parties. Such institutions can, for instance, reduce competition to only large and influential parties. These restrictive electoral institutions can impede the ability of new parties to enter the polity and mute how many votes change hands between existing parties. Strategic voting is more common in such systems, reinforcing this tendency (Cox 1997). On the other hand, permissive institutional arrangements that allow voters to vote sincerely not only create the potential for erratic levels of support for existing parties but also allow new parties to enter the electoral arena (Benoit 2007; Boix 2007). Such systems tend to make fielding consistent and

competitive (let alone dominant) parties more difficult, thus preventing voters from solving the

collective action problem of how to react to the failure of government policies. Figure 2.1

illustrates this mechanism—voter preferences for returning incumbent parties to power if their policies are deemed effective or rejecting them in favor of alternatives if their policies are ineffectual are conditioned by restrictive or permissive institutions. I contend that this mechanism serves to generate the types and severity of volatility we observe.

Figure 2.1: Voter Preferences Conditioned by Electoral Institutions.

A simple example may provide a sense of this logic. Imagine an electorate that displays two extremely different distributions of voter preferences on a right-left scale at two different election periods with roughly equal distributions of votes across both. The first scenario involves a restrictive system with two parties: in the first period, the distribution is unimodal and symmetric while during the second election it is bimodal, reflecting, perhaps, a failure of government parties to address a policy concern. Here, parties are not ideologically centered within the vote share space, and thus can remain relatively static in terms of their proximity to the preferred policy positions of voters. Under either scenario, Party A and B are unlikely to

suffer substantive losses in the legislature—they still capture the same voter groups despite the

shift in voter preferences to extreme poles. Figure 2.2 provides a view of restrictive systems.

Figure 2.2: Restrictive Electoral Systems.

Now consider Figure 2.3, which presents the same scenario—a shift from unimodal and symmetric preferences to bimodal and symmetric—but this time under permissive rules. In this case, the system allows for multiple parties. In the first scenario each party is well matched to the preference distribution of voters regardless of their preferences. However, in the 2nd, Parties

B and C are likely to be entirely wiped out by the new radical polity. Note that if the stringent assumptions of this model are relaxed, space for new parties (represented by Party E) could be present – such parties could take advantage of opportunities created by policy failures by existing parties in the polity. In fact, it seems likely—large parties often fail to shift their positions to match the constituent preferences (Mair, Muller and Plasser 2004; Benoit 2007).

Figure 2.3: Permissive Electoral Systems.

This argument implies that all systems, given the lack of a focal point issue to help voters solve coordination problems may present an ebb and flow of preferences and thus minor changes in the balance of power between political parties. It also suggests that important policy failures on the part of incumbents can lead to pronounced changes. Furthermore, given such motivations, restrictive and permissive electoral systems may, ceteris paribus, display two different forms of volatility at varying levels: restrictive systems should restrain change and discourage new parties while permissive systems should enhance opportunities for opposition parties and new parties alike—and may create especially promising openings for new parties. I

refer to these two forms of electoral volatility as existing party volatility and new party volatility.

Since the emergence of studies of volatility in the 1960s and 70s (Rae 1967; Pedersen 1979)

scholars have measured volatility in ways that capture these forms of political competition in a

variety of ways. (Roberts and Wibbels 1999; Tavits 2005; Mainwaring and Zoco 2007).

However, the explicit differentiation of new and existing party volatility is a relatively new

development and such approaches have not been tested extensively.

In fact, the literature on electoral volatility is splintered in terms of approaches and

findings. While providing important insights, previous studies tend to focus on small groups of

countries, are temporally truncated, or do not examine the conditional impact of institutions. For

example, while Roberts and Wibbels (1999) examine volatility in Latin America and Pacek

(1994), Tavits (2005, 2008), Epperly (2011) and Powell and Tucker (2013) in Eastern Europe,

these studies do not extend their focus beyond sixty elections. On the other hand, while

Mainwaring and Zoco examine volatility using a large dataset, they focus their conditional

inquiries on authoritarian legacies (2007). Each arrives at differing conclusions: for example,

Pacek finds that economic downturns drive voter turnout lower, increasing the impact of partisan

14 voters and increasing volatility, while Epperly, using additive models, finds little evidence for

economic voting instead suggesting that volatility in post-communist countries is primarily a product of historical legacies. Powell and Tucker find similar evidence for path dependency arguments, suggesting that the entrance of new parties is a function of the passage of time and economic performance – yet find that economics and institutions do not appear to affect the fortunes of existing parties in Eastern Europe. Similarly, Mainwaring and Zoco find that total volatility subsides over time as actors within democracy learn how the system works.

These conflicting results are a consequence of two issues: first, most studies do not contrast the volatility introduced by competition between well-known parties and that introduced by new parties. Only Birch (2001) and Powell and Tucker (2013) provide this distinction.

Second, only Mainwaring and Zoco test for conditional relationships. Are the changing preferences of voters conditioned by the opportunities afforded by electoral institutions, affecting the two forms of volatility in different ways? These works do not address this question.

To investigate this, I test my argument that retrospective voter are conditioned by the opportunities afforded by institutions, producing the forms and levels of volatility we observe. I test this argument using a data set composed of volatility scores for both new and existing party forms for democratic elections within Eastern and Western Europe from 1970 to 2011—the largest test to date. The evidence I find provides support for arguments that economics, social cleavages, and path dependency concepts are important predictors of electoral volatility.

However, I also find that institutions condition the types of volatility we observe. For instance, I find that mixed electoral systems increase the ability of new parties to enter the polity during period of economic contraction by allowing small parties to strategically campaign within the majoritarian districts of these systems. Furthermore, I find that directly elected presidents

15 increase volatility only for existing parties and most interestingly that this occurs during periods of economic growth – an effect that might be referred to as positive coattails.

2.2 The Testable Implications of a Conditional Theory of Electoral Volatility

I contend that voter preferences for the political parties that represent them in legislatures can shift as a result of policy failures. In this manner, both existing and new party forms of electoral volatility are a function of the responsiveness of incumbent parties to these shifts. Yet I also maintain that the realization of these changes at election time is constrained by institutions, in this case the institutional framework within which parties form and compete. Consider a

democracy during a deepening crisis or scandal. Government parties have failed to craft policies that provide voters with the expectation that conditions may improve. Therefore, voters should be willing to consider the opposition, and party leaders should be aware that changes in the balance of power are likely. However, if electoral institutions restrict opportunities for small or new parties, only the largest opposition parties will benefit. On the other hand, if institutions are permissive towards small or new parties, voters may shift their loyalties more readily, and opportunistic elites may support new parties to press the weaknesses of their opponents.

2.2.1 Retrospective Voting and Volatility

A variety of policy failures could lead voters to reevaluate their support for a particular party. For example, defeat in war, scandals, and the response of government to natural disasters can lead to the defeat of parties and politicians who fail to properly address these failures

(Bowler and Karp 2004). However, these events are sporadic and, in many cases, relatively rare.

In contrast, economic performance is a standard by which most incumbent parties are judged.

Economic expansions and contractions occur regularly in democracies, and thus provide a useful tool for evaluating my arguments. Economic voting theories suggest that when the economy is

16 contracting, the party in power will be punished by the electorate (Brady 1988; Duch and

Stevenson 2008; Mainwaring and Zoco 2007; Powell and Tucker 2013). Yet there is more to

economic voting than a story of expansion or contraction. Characteristics such as increasing

unemployment may drive voters to reject the parties in government (Franzese 2002, 347; Kwon

2008, 518). Additionally, evidence suggests a connection between economic voting and the

bonds that connect political parties, societal actors and voters (Powell and Whitten 1993). In

countries lacking partisan relationships, financial concerns outweigh other matters, leading to

greater levels of economic voting (Kayser and Wleizen 2007) and thus more electoral volatility.

2.2.2 Restrictive and Permissive Institutions

My argument suggests that economic voting alone is not enough to explain the levels and types

of volatility observed in democratic elections – I argue that institutions act to restrict (or

enhance) the prospects of opposition parties at election time, presenting two aspects of change:

shifts in support for existing experienced parties as well as emerging support for new parties.

Furthermore, I argue that party leaders are aware of these conditions. Voters and party leaders

must ponder electoral institutions when attempting to change the balance of legislative power.

Restrictive electoral institutions (like plurality and majoritarian systems) can make

starting a new party difficult or alternatively make the prospects of winning a significant number

of seats more likely for such parties. They tend to provide clear choices between relatively small

numbers of large parties composed of nationally known candidates (Martin and Wattenberg

2001). Voter and party strategies should reflect these institutional characteristics as well. I agree

with those who find that electoral systems channel the decisions of elites, party leaders, and

voters through mechanical and psychological effects (Birch, 2001; Clark and Golder 2006;

Powell 2007; Pappalardo 2007; Tavits 2008). Hence, restrictive systems advantage larger parties

and curtail the potential success of small or new parties.

On the other hand, permissive systems (such as proportional arrangements) provide fewer

barriers to such strategies, thus increasing the opportunities for small opposition parties.

Proportional (PR) systems provide this space, often presenting a number of parties with what can

be strong constituencies, reinforcing the ability of these parties to compete (Boix, 1999; Golder

2006). PR systems are thought to reduce (though not eliminate) strategic voting, leading to

greater partisan loyalties and stronger parties centered on issues or cleavages (Cox 1997).

In this way restrictive and permissive systems might be viewed as a continuum of

proportionality (Cox 1997, 31). Yet a continuum is a simplifying assumption. There are many

variations of electoral systems and constitutional rule sets that allow greater variations in

strategy. For instance, mixed electoral systems span the continuum by providing two tiers of

seats within the legislature, yet may not be highly proportional. In these systems, one tier of

district level seats is elected by majoritarian methods, while the second is elected using national

level proportional elections for party lists. Thus, the PR tier is thought to reinforce large national

level parties while the plurality tier allows for strong politicians connected to local

constituencies. Occasionally, some systems further modify the results through the post-election

application of a proportional formula.

These characteristics can produce uncertainty for voters, leading some to cast votes for

parties that have little chance of winning (Sartori 1997, 74-5; Kostadinova 2006) but also leading

to strategic voting by knowledgeable voters who carefully consider the prospects of parties

running at the district level in such systems (Martin and Wattenberg 2001; Duch and Palmer

2002). There is also evidence that party leaders strategically plan campaigns in such systems to

18 take advantage of the regional weaknesses of their opponents (Ferrara and Herron 2005; Rickard

2012), possibly increasing the impact of strategic voting by citizens. In an odd twist, this logic suggests that the majoritarian tier in mixed systems may allow new parties to gain entry in favorable regions or district. This strategic campaigning pits large national parties that must consider the preferences of voters at the national level against smaller parties that can selectively campaign only in districts where they know they might win, allow the latter to create platforms specifically tailored for those districts alone (Bawn and Thies 2003; Ferrara and Herron 2005;

Pekkanen, Nyblade and Krauss 2006; Rickard 2012).

There are other institutions that complicate such strategies. For instance, directly elected presidents may confound voter and elite calculations by contributing to political schisms driven by populist campaign strategies. Such conflicts increase the reaction of voters, elites, and parties to tough economic conditions, either through conflicts over legitimacy with prime ministers in parliamentary systems or through the use of campaign strategies critical of the establishment

(Cox 1997; Clark and Wittrock 2005). As focal points, presidents can have strong coattail effects, linking the fate of presidents to that of their party (Golder, 2006). Moreover, presidential candidates are usually political insiders and rely on existing parties for support rather than creating new parties to assist their candidacies (Cheibub 2007, 84). Yet it is also common for directly elected presidents to use the rhetoric of the populist political outsider to stand above the hue and cry of politics (Linz 1990; Cheibub 2007). In this manner, they may create focal points for assigning blame (or credit) to political parties, providing voters the opportunity to solve collective action problems. Parties are likely aware of this and should tailor their campaign strategies accordingly, especially considering that large national parties may tend to moderate their platforms to win office, yet may still wish to appeal to more partisan supporters. One can

19 imagine that presidents might be used (willingly) as focal points during good times to press an advantage over opponents, perhaps capturing votes from opposition parties. It also makes sense that this dynamic may be reversed—the association of presidents and ruling parties may form an easy target for opponents during tough times. These discussions of electoral systems provide the basis for the central hypothesis tested in this chapter

2.3 Hypotheses

As economic conditions worsen (improve)…

H1: Existing party volatility should increase (decrease) in both restrictive and permissive institutions, but such increase more readily in permissive institutional arrangements.

H2: New party volatility should increase (decrease) only within permissive institutional settings.

H3: Executive selection strategies involving direct national elections should increase existing party volatility but should have no effect on new party volatility.

2.3.1 Control Hypotheses

As noted earlier, a variety of explanations that do not involve economics or institutions also exist. I offer several as controls. Increases in voter turnout, presumably driven by the desire to reject incumbents, can be the result of mobilization efforts financed by elites or political parties and may be based on non-economic salient issues (Cox 1997). However, parties and social groups that once could mobilize blocs of supporters are finding it increasingly difficult to do so (Gallagher, Laver, and Mair 2006; 295). Additionally, new and sporadic voters are less likely to possess enduring partisan attachments, increasing volatility in both the short and long term (Hansford and Gomez 2010, 286). Alternatively, voters in some democracies may be disillusioned by politics and fail to vote at all, increasing the impact of highly partisan voters

(Duch and Palmer 2002). The effect of this “dealignment” of party systems has resulted in

20 parties that are unsure of what strategies to pursue to capture votes (Mair, Muller, and Plasser

2004, 210). Thus, strategic mistakes are more likely, advantaging those parties or groups that can mobilize their followers more effectively. This logic produces my first control hypothesis:

H4: Increases (decreases) in voter turnout will lead to higher (lower) levels of both new and existing party electoral volatility.

Sociological arguments suggest that social cleavages are a powerful influence on political relationships in democracies. Class is an important social cleavage, and labor unions are a clear

expression of social class. It follows that class should encourage partisanship. In democracies,

labor unions tend to establish strong bonds with influential political parties rather than

supporting new parties. A primary goal of unions is lobbying, a task that implies durable

relationships (Mair, Muller, and Plasser 2004, 171). Unions provide information to supporters

about which parties are supportive of the labor agenda and temper their reactions to difficult

economic times. However, unions in advanced democracies have been in decline over the last several decades. As a result, unions are increasingly circumspect about the party they encourage their members to support.5 This suggests that parties of the left can no longer count on their

unswerving support (Mair, Muller, and Plasser 2004, 171). The implication is clear: strong

social cleavages should reduce electoral volatility of both forms, but should particularly degrade

the ability of new parties to win votes at election time by encouraging the loyalties of voters and

elites to existing parties and reduce vote switching, reducing existing party volatility. This

sociological argument produces a second control hypothesis:

H6: The presence of strong social cleavages should reduce electoral volatility of both forms but

should particularly reduce new party volatility.

5 Cleavage groups such as ethnic or religious minorities could also be considered.

The final control hypothesis involves the experience of voters with democracy. Some maintain that a lack of experience with democratic politics introduces uncertainty into the calculations of voters, elites, and parties (Pierson 2000; Mainwaring and Zoco 2007). Early in democracy, actors are unsure of the future and unable to predict economic and political conditions in the future. Citizens are uncertain about what parties represent and whether or not democracy will survive. Hence, partisan loyalties should be weak, leading to vote swings among

existing parties and creating the expectation that new parties are a better option. However, as

democracy persists, actors gradually become familiar with each other, reducing volatility of both

forms as voters and elites coordinate on particular parties (Bielasiak 2005; Mainwaring and Zoco

2007; Powell and Tucker 2013). Therefore, ceteris paribus, voters ought to reject new parties as

actors become embedded in democracy – they should not be needed in most cases. However, the

political decisions made by transitional leaders regarding institutions and the types of parties that

are created within new democracies may lock political actors into patterns of behavior that are

difficult to break, leading to nearly continuous political unruliness (Pierson 2000, 258). I view

this final control hypothesis as a test of these alternative approaches – one that implies a gradual

equilibrium and a second that predicts spiraling levels of uncertainty.

H7: As democracy persists, electoral volatility of both existing and new party forms should

subside, with new party volatility expressing a more pronounced decline.

In conclusion, my argument and the hypotheses derived from it suggest that electoral

volatility is driven by changes in voter preferences regarding the political parties that represent

them is driven by the success or failure of the policies of government parties—and I propose that

economic voting is a clear reflection of this relationships. However, I argue that the actions of

voters at election time (and the strategies of political parties and elites beforehand) are

22 conditioned by institutions that either permit or restrain certain strategies. Permissive institutions allow voters to consider switching their allegiances more readily and also allow entirely new parties to compete effectively while restrictive institutions mute these changes, particularly hindering new parties. I argue that these relationships are generalizable even in the presence of powerful contextual arguments derived from sociological and historical theories. Tests of these

hypotheses reveal the channels through which elite, party, and voter choices are directed as they seek change the balance of power between political parties.

2.4: The Research Design and Estimation Strategies

To test my argument, I construct a design that allows for the detection of both existing and new party electoral volatility associated with the reactions of voters to the effectiveness of incumbent parties in managing the economy within restrictive and permissive institutional environments while controlling for sociological and historical influences. To this end, I have assembled a data set of volatility scores, along with data on economic performance, institutions,

and controls. For this study, my unit of analysis is each democratic election within each country

in Eastern and Western Europe from 1970 to 2011. The states in this study represent a wide

spatial domain with broad economic, social, and institutional features. These data are drawn

from the website Parties and Elections in Europe, the website of the International Parliamentary

Union, and the Golder database of electoral institutions (2005).6 Economic data are drawn from

the World Bank and the International Monetary Fund (IMF).

I use data from each election year within each country in the database since 1970.

Consolidated democracies and the transitional democracies of southern Europe during the 1970s

and 80s and the post-communist period during the late 1980s and early 90s are included as are

6 The URLs for these sites: http://www.parties-and-elections.de/; http://www.ipu.org/english/home.htm; and http://dvn.iq.harvard.edu/dvn/dv/mgolder.

23 sovereign democratic micro-states. Given that democratic transitions have occurred at a variety of times, this conservative approach reduces the possibility that contextual factors associated with a period of time might bias results in favor of one region or time period over another.

This raises the question of democracy. There are several states within Europe that have transitioned to democracy during the time frame of this study. Not all have remained democratic. As the focus of this study involves democratic politics, I use the Polity Index to date transitions and to provide a relative sense of democratic consolidation.7 Whether a country remains democratic is also important. I adopt the view that in democracies, parties and leaders lose elections (Przeworski, Alvarez, Cheibub, and Limongi 2000, 16). At the same time, there are political elements related to both contestation and inclusiveness, especially in transitional democracies, that must be considered. In this spirit, I exclude any country that, after an initial transition period, displays a score below “6” on the Polity Index.

2.4.1 The Dependent Variables

There are several measures that could be used to analyze the forms of existing and new party electoral volatility introduced in Chapter 1 and used in this analysis and throughout this dissertation. I use the Type A measure to capture new party volatility and the Type B measure to capture existing party volatility (Powell and Tucker 2013).8 Figure 2.4 provides a sense of these

two forms of electoral volatility. This figure examines new and existing party volatility over the

course of several elections in the Netherlands and provides insights into the variations I seek to

7 Polity IV ranks countries on institutional dimension to provide an overall score between -10 (Complete Autocracy and 10 (Consolidated Democracy). I use Freedom House to provide a sense of democracy within micro-states not covered by Polity IV. In each case, the states in question score a “1/1” for political rights (the most democratic score on a 7 point scale) for the duration of their inclusion in these data. 8 Other measures of electoral volatility include Robert and Wibbel’s incumbent vote share (1999) and the Birch measures of “replacement” and existing party volatility (2001; 2003). Tests of alternative measures produced results that closely match the results presented here.

24 explain: in some elections, new party volatility is quite high, while in others, it is lower. At some points, both forms seem to co-vary, while at other times they do not. 40 30 20 10 Existing and New Party Electoral Volatility New and Electoral Party Existing 0

1970 1980 1990 2000 2010 CEyear Existing Party Volatility New Party Volatility

Figure 2.4: Existing and New Party Volatility in the Netherlands.

Contextual research is required to ensure that existing and new party volatility are coded

correctly. I refer to the coding rules proposed by Powell and Tucker (2013). In order to

calculate these, reports from the European Journal of Political Research were consulted, along

with reports produced by the website Parties and Elections in Europe.9 Each measure captures

the absolute value of vote share changes over two consecutive elections between legally

recognized political parties and yields a score between 0 and 100. All measures exclude the vote

9 While the authors of the Type A and Type B measures created the measures, data are not yet available. As such, I calculated and coded them. Any errors introduced are mine, solely.

25 shares of independent candidates and involve calculations and coding requirements involving

which parties are included or excluded from each specific calculation.10 11

2.4.2 The Independent Variables

As I am interested in tracing the impact of the reactions of political actors to economic

conditions within institutional environments while simultaneously controlling for sociological and historical conditions, I use variables that allow me to follow these processes. I use two variables to capture shifts in voter preferences captured by economic voting in response to the failure (or success) of government policies: a measure of year to year changes in Gross Domestic

Product (GDP) in percentage form, referred to as GDP Change and an alternative measure of this

concept, a year to year measure of changes in the unemployment rate, referred to as

Unemployment Change. These variables allow me to capture variance in economic performance

of incumbent government parties within and between countries.

The effect of restrictive and permissive institutional environments on the reactions of

voters at election time is operationalized by a series of binary, trichotomous and continuous

variables. These variables include a variable to capture three forms of electoral systems

(Plurality, Mixed, and PR systems) as well as a continuous variable for the natural log of district

magnitude. I refer to these as System Type and Log of District Magnitude.12 13 I view plurality

systems as the most restrictive—especially with regard to new parties (Martin and Wattenberg

2001). PR and Mixed electoral systems should be more permissive towards both vote switching

10 For more information on the Pedersen Index and the Type A and B measures, see Rein Taagepera’s 2007 book “Predicting Party Sizes” and Powell and Tucker’s website (http://homepages.nyu.edu/~jat7/). Also: these rules are presented in the appendix of this dissertation. 11 The Type B measure includes only parties that have contested two consecutive elections and won 2% of more of the vote each time. This is done to avoid problems introduced by parties with very small vote percentages and that are often unidentified within electoral reports in Eastern European elections (Powell and Tucker 2009[a], 8). 12 Logging the variable accommodates the expectation that the difference between a magnitude of 1 and 5 may be considerable, while the difference between systems with magnitudes of 25 and 30 may not be as important. 13 A VIF test suggests that multi-collinearity is not an issue here. Results are available in appendix table 1.

(Cox 1997) and to new party entry (Martin and Wattenberg 2001; Birch 2005). I also test the concept that electoral thresholds or legal rules requiring that a party win a certain percentage of votes nationally before winning seats may influence the ability of new parties to compete. I refer to this variable as Threshold, and present it as a percentage. Moreover, I hypothesize that directly elected presidents may increase existing party volatility. I use a binary variable for this and refer to it as Direct President. I draw these data from Golder’s dataset of legislative systems

(Golder 2005) but update to 2011 using data from the International Parliamentary Union.

For the control hypotheses, I use variables to capture Voter Turnout Change and Union

Density, both measured as percentages. The sources of these data are the IDEA website, the IMF

and a report supplied by the International Labor Organization. Finally, I control for experience

with democracy (thus testing path dependency arguments) by operationalizing this concept using

a measure of the length of time in years that a country has been a democracy. To accommodate

arguments in the literature involving gradual equilibrium or increasingly unsettled electoral

outcomes, I test this argument using the natural Log Years as Democracy.

These variables allow me to trace the processes outlined by my arguments. The potential

for economic voting among citizens (and therefore the potential for changing preferences) are

captured by the variables measuring economic change. The institutions that condition the

reactions of political actors to economic conditions are captured by a variety of institutional

variables that operationalize the constraints imposed by these institutions. Finally, I control for

the impact of sociological and historical influences. The dependent variables measuring existing

and new party electoral volatility allow me to detect differential effects.

2.4.3 Empirical Models

To present the conditional relationships suggested by my argument, I use the following model used to test it implication for both existing and new party forms of electoral volatility, with measures for each country (i) and each election (j).

= + + �� + ( ) + + + 0 �� 2.4.4 Estimation Strategies�� ∗ ��

These observations are panel data. As such, I use appropriate regression techniques to analyze them.14 I opt for random effects. Methodologically, such models assume that omitted variables are randomly distributed and uncorrelated with explanatory variables across panels (Wooldridge

2009, 481). I maintain that relevant differences between the countries in my data are captured by the variables I have chosen. Furthermore, random effects models are between and within estimators. These models allow for the detection of variation both within countries as economic and social conditions change over time and between countries that display marked differences in institutional and social structure, yet may not present changes in these institutions internally.

These are important facets of my analysis and reinforce my argument for the use of random effects. Fixed effects models mask these differences, and the fact that within country variation on institutional explanatory variables is non-existent or minimal in many cases violates a central assumption supporting the use of fixed effects (Wooldridge 2009, 503). In addition, statistical tests exist to analyze the efficacy of using fixed or random effects (Wooldridge 2009, 493). I use the Hausman test, a χ2 test that tests the null hypothesis that coefficients of a random effects

14 These data are unbalanced. While missing data are often the cause, the cause here involves the fact that elections do not occur regularly. Given that problems arise only when missingness is correlated with unobserved data (Wooldridge 2009, 488) due to the number of cases, control variables used and owing to the unit root tests provided in the appendix, the possibility that these data contain errors correlated via time across the panels is limited.

28 model are the same as those as from a fixed model. If a small and non-significant (at the .05 level) test statistic is returned random effects may be safe to use (Scheve and Slaughter 2004,

669). This was the case.15 Finally, the potential that outliers may bias estimates is a concern.

Tests for outliers revealed three outliers for the models estimating existing party volatility: the

Albanian legislative elections in 2001 and 2009 and the Spanish elections in 1982. Tests for outliers amongst the collection of new party volatility scores revealed three: Belgium 1981,

Iceland 1999, and Moldova 1998. I remove these outliers from the analyses. In the Belgian case, the 1981 election was marked by the almost total disintegration of the party system along linguistic lines, resulting in tremendously high new party volatility and almost no existing party volatility. Given the unusual circumstances, it seems likely that the inclusion of this case could bias the results towards my expectations. The other outliers display similar contextual issues that make it likely that their inclusion would introduce similar biases. Thus, I remove them.

2.5 The Results

Table 2.1 presents the results of four models testing my expectations for existing party electoral volatility: two models testing arguments concerning the effects of changes in GDP within various institutional environments on existing party volatility (Models 1 and 2) and two models that examine the effects of changes in unemployment rates in conjunction with these institutions on existing party volatility (Models 3 and 4). Table 2.3 tests my arguments for new party volatility, examining changes in GDP (Models 5 and 6) and changes in the unemployment rate (Models 7 and 8) within a variety of institutional environments.16

15 Results available in appendix table 2.1. The potential that unobservables may be correlated across the time within the panels of these data is a concern (Wooldridge 2009, 350). However, tests (Wooldridge 2002, 282-283) failed to detect autocorrelation. I did use a jackknife procedure to examine the potential for temporal dependence. The results, while displaying slightly smaller coefficients than the standard models, provide results that are not substantively different from those presented. Finally unit root tests suggest that multiple panels are stationary-see results in the appendix of this dissertation. 16 Somewhat counter intuitively, GDPCH and unemployment rates are often not concomitants.

Before proceeding, a short discussion regarding interpretation is in order. The measures

of existing and new party electoral volatility use calculations based on the sums of absolute

values of vote share changes for parties between two elections, and a rough translation of .5 point

change in a particular volatility score vote share changes to a 1% change in vote share change is a good rule of thumb for a sense of how they work. As such, the effect of an independent

variable on a measure can be conceived of in terms of changes in the percentages of votes that

change hands between parties. For instance, an independent variable that causes a 1 unit

increase in the Type B measure of existing party volatility can be thought of as producing a 2%

increase in in total vote share changes among the parties competing in an election.17

2.5.1 Existing Party Volatility

My arguments are of a conditional nature. However, the constituent and interactive terms

in Table 2.1 do not, in and of themselves, tell us anything substantive about how voter

preferences under changing economic situations conditioned by different institutional

environment affect existing party volatility. Hence, I first discuss the control variables.

In Model 1, a one percent increase in Unemployment Change causes a .212 increase in existing party volatility. Substantively, this effect can be interpreted as increasing vote share changes by about 4/10ths of 1%. While this does not seem like much, consider the effect of a

5% increase in unemployment rates in the year preceding an election: such an increase could

increase vote share changes among existing parties by around 2%. In many cases, this could be

the difference between being in government or in opposition. Another interesting relationship

amongst the control variables involves Union Density, a measure of social cleavages. As noted

previously, larger social cleavages are thought to mute volatility by encouraging partisan

17A note on interpreting the coefficients on logged variables: An interpretation of the effect of these coefficients requires the following equation: The change in y = (β/100) with respect to a % change in x.

Table 2.1: The Determinants of Existing Party Electoral Volatility.

Existing Party Volatility Model 1 Model 2 Model 3 Model 4 GDP Change -.402 *** -.075 -.269 *** -.269 *** (.102) (.293) (.077) (.077) Direct President 2.864 * 3.401 ** 3.536 ** 3.545 ** (1.449) (1.431) (1.394) (1.414) GDP ∙ President .305 * - - - (.149) - - - System Type 2 (Mixed) 4.576 * 4.869 * 4.319 * 4.431 * (2.598) (2.652) (2.586) (2.621) System Type 3 (PR) 1.013 1.078 .969 1.108 (2.740) (2.818) (2.723) (2.758) GDP ∙ Mixed - -.450 - - - (.327) - - GDP ∙ PR - -.111 - - - (.306) - - Unemployment Change .212 * .243 ** .133 .517 * (.098) (.098) (.132) (.296) Unemployment ∙ President - - .195 - - - (.193) - Unemployment ∙ Mixed - - - -.144 - - - (.375) Unemployment ∙ PR - - - -.374 - - - (.315) Voter Turnout Change .042 .031 .035 .041 (.051) (.052) (.052) (.052) Union Density -.051 * -.051 * -.051 * -.051 * (.027) (.028) (.028) (.027) Threshold .037 .016 .024 .031 (.264) (.267) (.263) (.266) Log of District Magnitude .468 .467 .489 .469 (.666) (.679) (.663) (.669) Log Years as Democracy -1.463 *** -1.407 ** -1.512 *** -1.453 *** (.475) (.482) (.477) (.479) Constant 14.481 *** 13.906 *** 14.378 *** 14.111 *** (3.381) (3.423) (3.373) (3.401) N 309 309 309 309 R-Squared (Overall) .20 .20 .19 .19 *p<=.05, **p<=.01, ***p<=.001, one tailed, standard errors in parentheses

31 loyalties. The results across all four models support this argument. Substantively, a one percent increase in union labor reduces existing party volatility by around 1/10th of 1%. While not a

large effect, some countries present more influential unions than others. Differences of the

magnitude of 20 to 30% exist. Such effects could be quite sizable in a comparative sense.

Finally, the effect of the passage of time presents significant results in all four models in

Table 2.1. However, the effects are rather small: given that this variable is logged, the passage

of time in the short term doesn’t do much to reduce existing party volatility. However, in a

cumulative sense, such effects could build to produce more stable environments. None of the

remaining control variables present significant relationships across theses four models.

To understand the effects of the conditional relationships inherent within my argument, I

present a selection of marginal effects plots. A brief note on these plots: I present sets of plots

for each relationship: the first plot in each set presents the marginal effect of economic changes

across system types while accompanying plots present the marginal effects of the two economic

variables within a variety of institutional settings.

The first relationship involves the conditional impact of economic conditions on existing

party volatility across systems that incorporate directly elected presents and those that do not.

Figure 2.5 examines the effect of increases in GDP Change in systems that do not directly elect a

president and in those that do. First, it appears that the marginal effect of a 1 unit increase in

GDP change in the year preceding an election in systems that do not feature a directly elected

president depresses existing party volatility. This result is in accordance with my expectations: I

expect that directly elected presidents should provide voters with the ability to readily assign

credit or blame, and thus should increase existing party volatility when economic conditions are

improving (or worsening) in comparison to systems. Substantively, note that there are many

32 countries within the data that do not directly elect a president: the United Kingdom, Norway,

Belgium, and the Czech Republic are a few examples. .2 0 -.2 -.4 Effects Effects on Existing Party Volatility -.6

Non-Presidential Presidential

Figure 2.5: The Effect of Changes in GDP on Existing Party Volatility In Non-Presidential Systems and Presidential Systems.

On the other hand, the effect of systems that feature a directly elected president does not

appear to be significant. However, we need to see within the system to judge this. Figure 2.6

examines this effect. A brief note on this plot: first, a fair number of countries within the data use directly elected presidents: Austria, Cyprus, Iceland, Ireland, and Portugal are notable examples. Also note that the histogram behind the plot shows the percentage of cases within the data that fall within the significant range of the relationship. Here, the results suggest that while decreases in GDP do not appear to increase vote share changes for existing parties, increases in

GDP do increase this form of volatility. This suggests that parties associated with directly elected presidents can have their cake and eat it too—avoiding fallout from tough economic times by deflecting blame while taking credit for good times through the presidency. Such tactics

33 might be expected when one considers the competing interests of presidents and political parties, especially in systems that feature both a prime minister and a directly elected executive. In such systems, party leaderships and presidents use one another when it suits strategy best, yet may betray policy and electoral interests of each other as well (Samuels and Shugart 2010, 52-3). This result provides a further confirmation of the difficulties presented by the separation of powers. 15 30 10 20 5 0 Percent of Cases of Percent 10 -5 Effect on Existing Party Volatility Party on Existing Effect 0 -10 -20 -10 0 10 20 Changes in GDP

Percent Parameter estimate Lower 95% limit Upper 95% limit

Figure 2.6: The Marginal Effect of Increases in GDP in Directly Elected Presidential Systems.

The next relationship involves the effect of increases in GDP on existing party volatility across three electoral system types: plurality/majoritarian systems like those used in the UK and

France, mixed electoral systems such as those employed by Andorra, Germany, and Lithuania, and PR systems akin to those in Belgium, Finland, and the Czech Republic. First, I present a simple comparison of means in Table 2.2 and Figure 2.7. These results suggest that mean values of both forms of volatility present different levels across electoral system types.

Table 2.2: Difference of Means: Existing Party Volatility across Electoral System Types.

Existing Party Volatility Contrast SE P Mixed vs. Plurality 5.26 (1.69) .01 PR vs. Plurality 1.55 (1.39) .50 PR vs. Mixed -3.72 (1.17) .01

15 10 5 0 Plurality/Majoritarian Mixed PR

Figure 2.7: A Comparison of Means: Existing Party Volatility across Electoral System Types.

It appears that mixed electoral systems present the highest levels of existing party volatility while proportional systems present greater levels when compared to plurality systems.

Table 2.2 supports these differences to a point: mixed systems appear to be quite different than either PR or plurality systems, yet PR and plurality systems do not present statistically significant differences. Models 1 through 4 (in Table 2.1) support this evidence, presenting statistically significant and substantively strong effects for mixed systems in the two models

35 where their independent effect can be assessed: mixed electoral systems appear to, ceteris paribus, increase existing party electoral volatility by about 4 points, a figure that represents, on average, about an 8% increase in vote share changes for existing parties within these systems across spans of elections. This finding is reinforced by Figure 2.8, a marginal effects plot drawn from Model 2. Notable relationships emerge: both mixed electoral systems and PR systems (to a lesser degree) appear to depress existing party volatility when economies are improving. .5 0 -.5 Effects on Existing Party Volatility -1

Plurality/Majoritarian Mixed PR

Figure 2.8: The Marginal Effect of Increases in GDP on Existing Party Volatility across Electoral System Types.

Models 1 through 4 and the marginal effects plots drawn from them examining the determinants of existing party volatility support my arguments: directly elected presidents appear to increase vote share changes among existing parties, but interestingly only when economies are improving. Furthermore, permissive electoral systems, most notably mixed electoral systems, seem to depress this form of volatility to a greater degree during periods of economic growth.

Interestingly, increases in unemployment, while having independent effects, do not appear to

36 present conditional effects on existing party volatility within specific institutional settings.

Incumbent parties appear unable to deflect blame when voters are concerned about jobs.

2.5.2 New Party Electoral Volatility

I now turn my focus to an examination of the factors that affect the entrance of new

parties. Table 2.3 presents Models 5, 6, 7, and 8. Models 5 and 6 examine the impact of changes

in GDP while Models 7 and 8 examine the effects of changes in the unemployment rate. As I

noted earlier, the significance (or lack thereof) of terms within a conditional model are not

particularly informative in and of themselves. Thus, I begin by examining the impact of the

control variables within each model.

Among these controls, Union Density appears to depress new party volatility: a 1%

increase in the percentage of unionized labor appears to depress this form of volatility by about

1/10th of 1%. As noted previously, this may not seem like a large effect, but differences amongst

countries in this regard are quite substantial. When one notes that levels of new party volatility

generally tend to be lower than levels of existing party volatility, the impact can be substantively

impactful in a comparative sense.

Interestingly, Voter Turnout Change presents a significant result in all four models: a 1 %

increase in Voter Turnout from one election to the next appears to increase new party volatility

by a bit over 1/10th of 1%. Again, while this may not seem like a strong effect, several elections

within the data display swings of 5% or more. Thus, such increases in voter turnout, perhaps

driven by scandals or voter enfranchisement efforts can increase vote share changes among new

parties by 2% of more. 2% could make the difference here: the line between winning seats and

sitting the next legislative session out is quite thin for new parties. Finally, Log Years as

Table 2.3: The Determinants of New Party Electoral Volatility.

New Party Volatility Model 5 Model 6 Model 7 Model 8 GDP Change -.072 .054 .052 .034 (.161) (.456) (.119) (.121) Direct President 1.751 2.543 2.457 2.367 (2.269) (2.195) (2.095) (2.102) GDP ∙ President .289 - - - (.234) - - - System Type 2 (Mixed) 5.471 5.113 5.971 5.703 (4.05) (4.071) (3.888) (3.917) System Type 3 (PR) -2.016 -1.479 -1.386 -1.745 (4.285) (4.327) (4.097) (4.115) GDP ∙ Mixed - .333 - - - (.508) - - GDP ∙ PR - -.151 - - - (.476) - - Unemployment Change .222 .207 .588 *** -.225 (.147) (.148) (.187) (.461) Unemployment ∙ President - - -.871 *** - - - (.285) - Unemployment ∙ Mixed - - - .678 - - - (.583) Unemployment ∙ PR - - - .465 - - - (.486) Voter Turnout Change .161 * .167 * .147 * .154 * (.079) (.081) (.078) (.080) Union Density -.113 ** -.115 ** -.116 ** -.114 ** (.043) (.043) (.041) (.042) Threshold .363 .319 .266 .295 (.412) (.411) (.396) (.401) Log of District Magnitude 1.293 1.295 1.318 1.359 (1.042) (1.034) (1.001) (1.008) Log Years as Democracy -2.473 *** -2.584 *** -2.331 *** -2.468 *** (.742) (.743) (.722) (.729) Constant 16.001 *** 15.993 *** 14.887 ** 15.457 *** (5.279) (5.268) (5.085) (5.121) N 309 309 309 309 R-Squared (Overall) .19 .20 .22 .20 *p<=.05, **p<=.01, ***p<=.001, one tailed, standard errors in parentheses

Democracy presents a significant result. The results suggest that as time passes under democratic rules, new party volatility should gradually subside. Regarding the conditional relationships my arguments suggest, I first examine the impact of directly elected presidents on new party volatility during periods of increasing unemployment. 1 .5 0 -.5 Effect on New Party Volatility Party on New Effect -1

Non-Presidential Presidential

Figure 2.9: The Effect of Increasing Unemployment Rates on New Party Volatility in Non-Presidential and Presidential Systems.

Figure 2.9 suggests that increases in unemployment tend to increase new party volatility within non-presidential systems and that systems featuring a directly elected president may serve to reduce this form of volatility slightly. The former supports my arguments: directly elected presidents should provide focal points for voters who wish to vote against incumbent parties, thus increasing existing party volatility rather than new party volatility. Thus, one would expect to see higher levels of new party volatility in systems that do not feature a directly elected president. The latter result, while not statistically significant, may complement the result presented in Figures 2.5 and 2.6: parties associated with directly elected presidents may be able

39 to use this office to deflect blame away from the party during tough times, thus reducing prospects for new parties. I argue that the ability of new parties to win through in should be enhanced within permissive systems to a greater degree than in restrictive systems. To examine this, I present a test of means of new party volatility across electoral systems in Figure 2.10 and

Table 2.4. These results suggest that the prospects of new parties are enhanced under mixed electoral rules. Anecdotal support for this effect within countries that use mixed electoral systems is provided by examining the electoral fortunes of “Politics Can Be Different” a new 15 10 5 0 Plurality/Majoritarian Mixed PR

Figure 2.10: A Comparison of Means: New Party Volatility across Electoral System Types.

Table 2.4: Difference of Means: New Party Volatility across Electoral System Types.

New Party Volatility Contrast SE P Mixed vs. Plurality 7.72 (2.76) .02 PR vs. Plurality 2.84 (2.27) .42 PR vs. Mixed -4.87 (1.91) .03

Hungarian party that campaigned for the first time in the 2010 parliamentary elections. Most of the electoral counties with the highest levels of unemployment (Munkacsy 2010) also provided the highest levels of support for Politics Can Be Different (Carr 2012). Interestingly, a central goal of the party is to provide a solution for agricultural unemployment through green jobs, a platform well matched to these rural districts. This issue as a campaign tactic seems suited to

taking advantage of the majoritarian tier vote transfer mechanisms present in Hungary’s mixed

electoral system.18 This strategy worked well for Politics Can Be Different – the party won 7.5%

of the vote and sixteen seats in parliament in 2010, an impressive result for a new party in a

relatively consolidated democracy (Nordisieck 2011).

However, the results presented in Table 2.3 provide no further insights for the impact of

economic growth or rising unemployment within various electoral systems. The marginal effects

of increases in GDP and for increases in unemployment rates do not present results that are

statistically significant. That being said, suggestive differences are apparent.

2.6 Conclusion

In this chapter, I propose that electoral volatility is the product of changes in voter

preferences over the legislative parties that represent them. I contend that these changes are

driven by the success or failure of government policies to address policy concerns. However, I

argue that the strategies that voters and parties use to affect change when incumbent parties fail

to address these concerns are conditioned by institutional environments that either restrict or

permit a variety of strategies – even in the presence of powerful sociological and historical

influences. I find support for this argument: directly elected presidents appear to increase

volatility for existing parties, yet only when the economy is growing. This suggests that political

parties can use the presidency to encourage voters to switch votes when times are good, yet

18The URL for this website: http://lehetmas.hu/rolunk/celjaink/.

41 avoid fallout when economies are in recession. However, increasing unemployment appears to

be a difficult situation for parties, especially in pure parliamentary systems. New parties appear

to benefit from these circumstances. I also find that both mixed and proportional electoral

systems appear to create more space for changes in the balance of power amongst existing

parties. Mixed systems may have similar effects for the entrance of new parties.

Several valuable conclusions emerge from this research. First, it is clear that the

measures of volatility that differentiate volatility into component forms are valuable tools in

analyzing these relationships. While the coding required by the Type A and Type B measures of

new and existing party volatility is laborious, the results allow a nuanced view of the effects of changes in voter preferences over the political parties that represent them.

Second, I find that institutions matter even the face of powerful economic and social forces. Systems using plurality or majoritarian electoral systems appear to mute the ability of

parties to achieve sizable electoral gains over their competitors at election time, perhaps

suggesting a link to Duverger’s concepts of plurality and majoritarian systems as constraining

competition both psychologically and mechanically (1963). Countries employing mixed electoral

systems appear to be particularly contentious environments during economic contractions.

Existing parties face acute challenges in these systems during difficult times. This suggests a

willingness among voters to forgo partisanship and, perhaps, a relatively high level of

sophistication in the face of complex economic and institutional environments. The leaders of

existing parties as well as elites considering starting new parties may be wise to study carefully

the preferences of constituencies within regional districts.

The detection of such party strategies under a variety of institutional settings is also a

notable contribution of this work – it seems likely that party leaders are taking advantage of

42 particular features of these systems to win office. The manner in which new parties emerge within mixed systems is particularly interesting and the results concerning directly elected presidents and their lack of coattails during economic recessions are also intriguing. The manner in which parties promote their association with presidents during good times or avoid responsibility for economic downturns could be a productive topic for future work. Further research on how parties devise campaign strategies in such systems as well how such parties manage their relations with presidents could produce notable insights.

CHAPTER 3

ELECTORAL VOLATILITY AND GOVERNMENT FORMATION DELAYS

Having examined the determinants of existing and new party electoral volatility in

Chapter 2, I now turn to an examination of the effects of these forms of electoral volatility on delays in the bargaining process over government cabinet positions after elections. Building on previous works, I contend that the length of time it takes to form a government after elections is the product of a conditional relationship between two factors: uncertainty regarding the preferences of potential government parties over cabinet positions and the complexity of institutions and contextual situations. I maintain that uncertainty can be increased by elections involving large vote share changes between existing parties while it should be reduced by the entrance of new parties to the legislature, and that complexity only affects the most uncertain formation opportunities. My argument has a counter-intuitive implication: experienced parties should know the rules and their partners—hence complexity should not be daunting for them.

However, as each party seeks to maximize political influence over a broad range of cabinet positions (most or all of which they are capable of managing), concessions are likely to be incremental and difficult to achieve—thus formations should take longer.

On the other hand, new parties are by definition inexperienced with the process of government formation negotiations—thus the varied legal requirements of crafting a government and the complexities of negotiating with veteran parties are likely to be difficult for their neophyte leaders. Furthermore, such parties should hold known preferences for particular cabinet posts, and in fact may only be capable of managing a limited number of portfolios. This eliminates a position for the veteran parties to battle over, and may allow them to pass off a

44 difficult to manage portfolio on an unsuspecting newcomer. In sum, experienced partners are likely to take advantage of these weaknesses, and thus may satisfy new partners with less than they might cede otherwise. Additionally, new parties that are not formally invited to play a role in government that might otherwise play the role of kingmaker may be unable to capitalize on their positions. Hence, agreements should be concluded earlier when new parties compete in elections and participate in government formations.

3.1 Government Formation Delays

What are government formation delays? This term refers to the length of time it takes for a government to form after a vote of no-confidence, a government resignation, or an election.

The bargaining sessions involve the distribution of cabinet posts, and usually involve parties that hold a substantial number of seats. Generally, these bargaining sessions only take a day or two.

However, in some cases, they can take weeks or even months. Two examples may provide some perspective on these events.

After the premature dissolution of a government lead by the Independence Party in

Iceland in January 2009 in the wake of bank failures and massive popular protests, a caretaker coalition lead by the Social Democratic Alliance (SDA) took power. New elections were held in

May. Several parties participated, including two new left leaning parties—the Civic Movement and the Democracy Movement. After elections, a coalition government led by the SDA and the emerged and was invested by the Iceland parliament in 6 days.19 The new government quickly and successfully introduced a series of reforms in parliament and acquired loans and other funding that solidified the economy.

On the other hand, the government that emerged after the 2011 Finnish elections took considerably longer to form. Elections held at the end of the legislative term were largely a

19 Source: http://www.ipu.org/parline-e/reports/2143_E.htm (accessed January 2013)

45 referendum on three issues: the Finnish Centre (KESK) Party’s poor handling of the economy in

its role as the leading party in the previous government coalition, the potential for joining the EU

and the rights of Swedish minorities. The party was also beset by corruption scandals and for passing a variety of unpopular measures just before the expiry of its term (Sundberg 2011). The

election was a match between eight parties, each with extensive experience both in government

and in opposition. The results featured the fall of KESK, which lost 16 seats, and the rise of the

right wing True Finns Party, which won 34 more seats than its previous showing. Still, no party won a plurality of seats—it was clear a coalition government would emerge. After a variety of proposals were considered, the National Coalition Party, the Social Democratic Party, the Left

Alliance, the Swedish People's Party, the Greens and the Finnish Christian Democrats formed a

government after 61 days—the longest delay since 1979.20

How typical are lengthy delays in government formations after elections? Figure 3.1

provides a sense of how long it takes governments to form after parliamentary elections in

Europe. Approximately 30% of the formations take less than a week. However, about the same

percentage of these formations take more than 40 days to complete—during which the business

of government is largely ignored.21

To understand the causes of this phenomenon, I ask the question: “Why do some

governments take longer to form after elections in democracies than others?” I argue that

electoral volatility—changes in the balance of power between political parties—plays a major

20 Sources: ; < http://www.parties-and- elections.eu/finland.html.> (accessed January 2013). 21 In many countries, bureaucracies appear unwilling to act decisively until a new government is formed, instead ignoring new legislation or pushing controversial decisions into the court system. A recent example : the“children’s pardon” in the Netherlands – the suspension of a decision to deport under aged illegal immigrants under policies passed by the legislature in the previous term. For more information, see:

30 20 Percent 10 0 0 20 40 60 80 100 120 140 160 180 200 Government Formation Delays (in Days)

Figure 3.1: Post-Election Government Formation Delays in Europe: (1970-2011).

role. After elections featuring relatively minor shifts in this balance, delays should be slight—in

many cases, such elections will simply return the existing government to power. However, after more tumultuous elections, I argue that the two forms of electoral volatility introduced in the previous chapter—existing and new party volatility—will display differentiated effects on how long it takes a government to be invested by the legislature. I argue that these effects are divergent: the presence of new parties should reduce uncertainty by marginalizing a potentially aggressive bargaining partner, and thus decreasing delays, while changes in the balance of power among existing veteran parties should increase uncertainty by providing each partner with the opportunity to win additional cabinet seats or influence. At the same time, I contend that the impact of both forms of electoral volatility on government formation delays is conditioned in different ways by institutions and contextual conditions that govern the bargaining process.

3.1.1 Bargaining Complexity

Previous works on government formation delays focus on two general themes: complexity and uncertainty. Complexity involves features of the bargaining process that make agreements more difficult to conclude but do not obscure information about preferences (Martin and Stevenson 2001; De Winter and Dumont 2008). Complexity can involve institutions such as legal restrictions on what sorts of governments can be formed, but also involves factors such as the number of bargaining partners and ideological disputes. In complex situations, partners know one another and their preferences, but characteristics of the specific bargaining situation make it more or less difficult for the players to come to an agreement (Martin and Stevenson

2001; De Winter and Dumont 2008). For example, a party that has won a plurality of seats in the legislature does not face a complex bargaining environment—it can simply fill the cabinet with its own ministers and form a government. However, in most situations, a number of parties are involved in the process. More players makes the process more complex and increase bargaining costs (Muller and Strom 2000, 194; Back and Dumont 2007). Additionally, the ideology of the bargaining partners is a factor in complexity (Golder 2006; 2010). Parties may have committed to strong policy positions during campaigns and are thus unwilling to compromise over ministerial posts they consider critical to their agenda (Golder 2010; Adams et al 2012). Such positions are known to all partners, yet make negotiations more difficult to conclude.

Institutions can create complexity as well. As with my arguments regarding the causes of electoral volatility, I maintain that the institutions can condition the strategies of actors and the outcomes observed in government formations. However, these are temporally oriented processes occurring within to contextually varied situations. In certain situations, institutions may have

48 little or no effect on bargaining sessions, while in others institutions may hopelessly complicate cabinet negotiations—especially when uncertainty is high.

For example, elections in Israel are governed by a set of quasi-constitutional rules called the Basic Law. The Basic Law required that the president, who is elected by the Knesset, select a formateur, or a party leader, after elections to form a government. If this formateur cannot craft an agreement within 28 days, the Basic Law requires that the president select a second formateur. However, if this occurs, the second choice only has fourteen days to complete cabinet negotiations (Knesset 2012). On the face of it, this sounds somewhat constraining until

one realizes that there are no temporal restrictions stipulating when the president must make their

selection. Lengthy bargaining sessions are regularly held immediately after elections, and can theoretically proceed indefinitely until a suitable formateur has a workable coalition agreement in place for approval by the president. After the formal selection is made, agreements are often concluded rapidly—only twice in Israeli history has a second choice been necessary (IDI 2011).

Thus, this rule can affect the complexity of the bargaining environment only in unusual circumstances. It should also be noted that Israel is not the only parliamentary democracy to

employ these types of rules (De Winter and Dumont 2008, 128).

Within parliamentary systems, legal institutions that constrain and complicate the

bargaining environment are quite variable. For instance, some countries constitutionally require

that the formateur be the head of the largest party after elections while in others, this is simply a

norm—and in some countries, “free style” bargaining without formateurs is common (Back and

Dumont 2008; Golder 2010). Such rules creates focal point for others involved in the process—

the allocation of portfolios is likely to be close to the ideal point for the formateur, while the

other options create the opportunity for the head of state to inject his or her political preferences

49 into the process (Cox and Carroll 2012). Yet the presence or absence of the institution in and of itself does not reduce information about what is required. In many circumstances, such characteristics make it easier to form a government, but in others, it may make it more difficult.

Finally, when a potential government does emerge, some countries utilize positive parliamentarism, or the requirement that a government be invested, or confirmed, by an absolute majority vote of the legislature. Other countries utilize negative investiture votes, only requiring that the proposed government avoid an absolute majority vote against the new government, while others only require a quorum to invest a new government (Bergman et al 2008, 101). Still others only require that the head of state confirm the authority of the new government, while yet others only require the legislature to approve of the prime minister (Back and Dumont 2008). Again, these rule sets can make the formation process more or less complex, but they do not reduce information. After elections, all bargaining partners know how many votes are needed to obtain an absolute majority, a quorum, or have an idea of what the head of state wants.

3.1.2 Uncertainty in the Government Formation Process

Uncertainty involves the presence or absence of information problems. Specifically, it is a reflection of the ability of bargaining partners to assess preferences and capabilities: what their potential coalition partners may want in terms of cabinet portfolios or what cabinet positions these parties may be capable of successfully administering (Diermeier and Van Roozendaal

1998; Muller and Strom 2000; De Winter and Dumont 2008). This is a reasonable expectation— especially in close elections. In the weeks leading up to many elections, outcomes can be unsure for voters and party leaders alike. Parties with modest expectations may be thrust into pivotal roles while experienced government parties may find themselves on the outside looking in. In this manner, the nature of the opportunity to change governments plays a major role in

50 uncertainty: intra-election formations lower uncertainty as the agreements required to initiate and prosecute a vote of no confidence are concluded amongst the parties that are already within the legislature while post-election formations increase it, leading to longer delays in government formations (Golder 2010).

I agree that uncertainty is enhanced in post-election government formations, yet I offer a nuanced and somewhat counter-intuitive explanation. I propose that changes in the balance of power between political parties are a direct manifestation of uncertainty in post-election environments. At a basic level, the fundamental constraints offered by all parliamentary systems—that a government must always enjoy a legislative majority and that must always be a government in place—constrain the sorts of governments that emerge after elections or votes of no-confidence (Golder, Golder and Siegel 2012). Hence, the timing of formations can be considered an institutional feature that affects uncertainty. Given a stable environment, players should be able to plan and bargain effectively beforehand—as is the case when a party or group of parties decides to initiate a vote of no confidence (Golder 2010). Elections that present a clear idea of the government that will emerge afterwards should provide a similarly stable bargaining environment. However, after elections that display significant changes in the legislative balance of power, the bargaining environment is unstable. Consequently, uncertainty should be most consequential when changes in the balance of power among traditional experienced parties are high. Yet I argue that this logic also implies that uncertainty should diminish when new parties win enough seats at election time to be considered in the government formation process.

3.1.3 The Argument of Marks

Consider the following scenario: a group of people playing in a high stakes card game. If a game involves experienced players, it is likely to go on for some time. Players will make

51 careful bets, conceal information about their hands, and avoid rash moves that might endanger their place in the game (and their funds). No player stands to suffer dramatic losses, but it is unlikely that a single player will win everything they desire. Such games can be quite lengthy.

On the other hand, if a game includes a mix of knowledgeable and new players, it is likely to proceed quickly. Inexperienced competitors—or marks—tend to make mistakes that enable veteran players to win more, faster, than they might expect to in a game amongst equals.22

A similar logic may hold in negotiations over cabinet positions after elections that present the opportunity for coalition governments. In politics, actors have few incentives to help competing parties—in fact, they tend towards hostility (Martin and Vanberg 2004). Rational choice—expressed in its purest form as a competition among individuals—suggests that actors will take advantage of weaknesses to increase their own utility (Schelling 1960, 22).

Furthermore, incumbents may find it advantageous to avoid certain portfolios if spending cuts or austerity programs are likely (Laver and Schofield 1998, 171). Inexperienced actors are likely to be less familiar with the rules and more likely to accept less than they might – and have less bargaining power than others as a result (Laver and Schofield 1998, 180). Actors who have not been in government for many years (or ever) can also be impatient and willing to accept less

(Falco-Gimeno 2011). These tendencies can also be exacerbated by personality types that avoid information seeking when it may be embarrassing to them personally (Tidwell and Sias 2005,

72). Complex situations or rule sets only intensify the relative informational disadvantage of newcomers—and knowledgeable actors are certain to take advantage. Again, just as in the hypothetical poker game, negotiations are likely to proceed faster than they otherwise might.

Experienced actors in government formations are likely to win more, faster, while neophytes get less and are unlikely to fully understand why.

22 A mark: The victim or potential victim of a swindle.

I expect that elections involving minor fluctuations in the relative seat shares of legislative parties should allow fairly predictable outcomes in terms of the governments that emerge from them regardless of complexity; the actors know each other from previous experience and the outcomes of such elections are typically clear cut (De Winter and Dumont

2008, 126). Thus, uncertainty is low and delays should typically be brief, regardless of complexity. On the other hand, volatile elections should produce unforeseen outcomes in terms of the group of parties that emerge from the election to bargain over ministerial posts. Unlikely bedfellows, thrown together immediately after elections, must bargain effectively over their party’s role in government. Each post should be contested during negotiations as partners seek the upper hand in the government that ultimately emerges. Therefore, changes in the balance of power among existing experienced parties should create delays rather than reduce them.

New parties that have won through to the legislature can also affect these negotiations— yet I argue that the presence of these parties should decrease the length of time it takes to negotiate a government—even if they are not considered for ministerial posts. If such new

parties have won enough seats to be considered for cabinet posts, they are, by definition,

inexperienced negotiators.23 Their leaders may be unsure of what posts may be attainable given

the constraints of the bargaining environment, and may be willing to accept less from their bargaining partners. All of these factors should reduce uncertainty for experienced negotiators, decreasing delays in the government formation process after elections. Consider the following examples: first, imagine that four experienced existing parties have won enough seats at election time to be considered for several cabinet portfolios. Each of the four parties is fully capable of managing any of these ministries and may have done so in the past. Under such conditions,

23 One might ask: how “new” are new parties? A survey of the latest elections in Germany and Israel reveals an interesting fact: in Germany, 40% of the representatives in the Bundestag were new to national politics. After the 2009 Knesset elections in Israel, 57% of the ministers of the Knesset were.

53 bargaining should be more difficult as combinations of cabinet positions are considered and bargained over. Thus, this scenario is likely to express longer delays in the government formation process. Contrast this scenario with one in which three experienced parties and a single new party (a Green Party) have won enough seats to be considered as partners. First, there

is one less party that could conceivably manage any of the ministries. Second: the preferences of

the Green Party are obvious: if they were to control the Environmental ministry, their

constituents and party members (as well as the negotiators themselves) should be pleased. The

posts that remain to be distributed amongst the partners would be reduced, enabling negotiations

to be concluded in an expeditious fashion.24

In sum, I contend that uncertainty about the preferences of bargaining partners involved

in government cabinet formations after elections is a key factor in determining the length of time

it takes a government to form after elections. While institutions can constrain outcomes by

providing more (or less) information about the likelihood that a particular cabinet allocation

scheme will be invested by the legislature, I argue that relative changes in the balance of power

between political parties are an influential causal mechanism in determining how much (or how

little) uncertainty permeates the bargaining environment. Specifically, I expect that when

changes in the balance of power between existing experienced political parties are high, the

potential for prolonged delays in the government formation process should increase—especially

when complexity introduced by institutions and contextual situations is high. However, the

presence of new parties in these negotiations should make concluding such negotiations easier,

leading to the potential for expedited formations.in the government formation process.

24 Another scenario also exists: occasionally, a small party is thrust into the role of “kingmaker”; the party has not won enough seats to be a serious contender for government, yet its’ support during investiture votes is pivotal. Again: an experienced party should be able to maximize the value of this position while the leadership of an inexperienced party may not be able to capitalize upon this turn of events. In either case, complex institutions and contextual settings may intensify this influence.

3.1.4 Hypotheses

I maintain that that uncertainty and complexity condition the length of time it takes a government to form and be invested after an election. I view the nature of changes in the balance of power amongst legislative parties as an expression of uncertainty. I view institutions

that govern the cabinet formation process and contextual circumstances as manifestations of

complexity. I expect that volatile elections involving large vote share changes between existing

parties to create the most uncertainty while elections that involve new parties should reduce it.

However, I expect that while complex institutions and contextual scenarios should make forming

a government more difficult when uncertainty is high, I argue that complexity should have little influence when it is low. This suggests the following set of general hypotheses. 25

In post-election government formation opportunities:

• Increasing uncertainty about the minimum offer of government posts and policy that is

acceptable to potential cabinet partners will make delays in government formation more

likely regardless of the level of complexity in the bargaining environment.

• While bargaining complexity should not affect the length of time it takes to form a

government when there is no uncertainty, it should lead to increasing delays in the

government formation process as uncertainty increases.

A series of refined propositions follow from these general hypotheses. First, I discuss the

testable implications of my arguments regarding complexity. As noted previously, complexity is

considered important in discussions of bargaining delays (De Winter, and Dumont 2008), serving

to make concluding negotiations over government posts more difficult. It involves both

25 The general hypotheses, as well as hypotheses 1, 2, 3, 4, and 5 are taken directly from Golder’s 2010 article: “Bargaining Delays in the Government Formation Process”. Comparative Political Studies 43: 3-32.

55 contextual factors and institutional influences. The first testable implication involves the number of potential bargaining partners. Additional participants can make bargaining sessions more complex (Muller and Strom 2000, 194).

H1: An increase in the effective number of legislative parties will increase the length of time that it takes to form a government after elections.

The second testable implication of my arguments regarding complexity involves the impact of ideology. It stands to reason that a group of parties with opposing political positions may have a more difficult time concluding agreements. Thus:

H2: An increase in ideological polarization in the legislature will increase the length of time it takes to form a government after elections.

The presence of investiture rules (positive parliamentarism) requiring the new government to acquire the support of a majority of legislatures before it can be invested are thought to make bargaining more complex and difficult (Strom, Muller, and Bergman 2008). As such, such rules should increase the length of formation delays. As such:

H3: The need to explicitly obtain the support of a legislative majority (positive parliamentarism) will increase the length of time it takes to form a government after elections.

Continuation rules—or statutes that allow an incumbent government to stay in power indefinitely if a new government cannot form after an election—offer an alternative to the new government, especially if delays are lengthy. Hence, such rules reduce complexity by creating an incentive for potential coalition partners to conclude an agreement. The presence of a party that has won a majority of legislative seats is also quite important to the formation process. Such

a party is in the driver’s seat and can pick coalition partners (if needed) according to the party’s

own preferences. Both of these situations reflect situations in which both complexity and

56 uncertainty are severely constrained. A party that has won an absolute majority does not have to be concerned with other partners, and a government that can stay in power under continuation rules needs only to wait out the period of time required. Accordingly, I present hypotheses four and five as controls.

H4: The use of continuation rules will reduce the length of time that it takes to form a government after elections.

H5: The election of a party with a majority in the legislature will reduce the length of time it takes to form a government after elections.

Next, I present two arguments related to my contentions regarding uncertainty and

complexity. I argue that vote share changes amongst existing political parties will increase

uncertainty about the preferences of each player regarding cabinet positions, and that complexity

should compound these problems, thus increasing delays, while an increase in the vote shares of

new parties will reduce uncertainty (and delays) by reducing the ability of one or more players to

press for influence in the bargaining process, and that complexity should enhance this tendency

as well. These conditional arguments are presented as hypotheses 6 and 7.

H6: Increases in existing party electoral volatility will tend to increase the length of time it takes

to form a government after elections, especially when complexity is high.

H7: Increases in new party electoral volatility will tend to reduce the length of time it takes a

government to form after an election, especially when complexity is high.

3.2 The Research Design, Empirical Models and Estimation Strategies

To test my arguments regarding the conditional impact of uncertainty in complex

institutional and contextual environments, I use a modified database of government formations

drawn from the Parliamentary Democracy Data Archive (PDDA) appended to 2011 to include

57 countries from both Eastern and Western Europe (Bergman, Strom and Muller 2005). These additions were drawn from Ryals-Conrad and Golder’s (2010) data for government formations in

Eastern Europe and country reports from the European Journal of Political Research and the

International Parliamentary Union.26 These sources provide information regarding bargaining

delays, institutional characteristics and factors involved in complexity. I use the volatility data

base I introduced in Chapter 1 to provide scores for existing and new party volatility for each

election. My data set spans a temporal domain from the early 1970s until 2011. Given that I seek to understand the influence of bargaining complexity and uncertainty on the length of time it takes to form a government after elections, my unit of analysis is post-election formation opportunities within democracies in the dataset.

3.2.1 The Dependent Variable

My dependent variable is the length of time it takes a government to be invested by the

legislature after an election. It is measured in days, and is referred to as Bargaining Days. For those governments that form immediately after an election, this variable is coded as “.1” rather than “0” to avoid technical problems with estimation methods.

3.2.2 The Independent Variables

The independent variables used in this analysis are related to complexity, or factors that do not obscure information about preferences over cabinet positions but rather make arriving at a workable government more difficult and uncertainty, or factors that reduce (or increase) information about these preferences. The first variable related to complexity is Effective

Legislative Parties, and is captured by the following calculation:

n 2 /1 ∑ si i=1

26 The URL of the IPU website: http://www.ipu.org/english/home.htm (accessed January 2013).

Here, si is the percentage of legislative seats won by the ith party (Taagepera, 2007, pg. 49).

This calculation is the common measure for relative legislative party strength (Taagepera, 2007,

pg. 49). The effect of this variable should be positive; as the number of effective legislative

parties increase, bargaining delays should increase.

The second variable related to complexity involves ideology. The Ideological

Polarization measure is calculated by the following equation:

= | | � � ∝+1 �=1 �=1 � � � � This captures the ideological�� spread of party∑ positions∑ �amongst� � legislative− � parties and corrects

for party size and the position of the various parties on an ideological scale (Indridason 2010, 7).

The calculation is composed of n: the number of parties; π; the relative seat shares of parties in

the legislature: i through j and y, and an ideological measure for each party (Golder, 2010, pg.

19).27 Finally, α is a constant equal to 1.6. My expectation for this variable is positive: at higher

levels of Legislative Polarization, bargaining delays should increase as parties find it more

difficult to compromise.

Additional binary variables include Positive Parliamentarism (“1” if present, “0” if not).

This should have a positive relationship with bargaining delays—positive parliamentarism

should increase the amount of time it takes to form a government. Additionally, I present

Continuation Rules (“1” if present, “0” if not). I expect that the presence of continuation rules

should decrease the amount of time it takes to form a government. Finally, Single Party

Majority is coded “1” if a single party controls more than 50% of the seats in parliament and “0”

if it does not. I also expect this to reduce the length of time it takes to form a government.

27 The PDDA database only has polarization scores for the time period ending in 1998. My data extend to 2011 -As I updated these scores using my own calculations based on a coding of party families on a left-right scale. Comparative tests of pre-1998 scores against my own calculations were highly correlated.

To capture the effects of uncertainty on post-election government formations, I use the measures of Existing and New Party Electoral Volatility introduced in Chapter 1. Interested readers can refer to the Dissertation Appendix for specific coding rules for these variables.

3.2.3 The Empirical Models

I present five models: a base model examining the impact of factors used in the Golder

(2010) model of bargaining delays on these data, two models that examine the additive impact of existing and new party volatility respectively on delays in the government formation process and two that examine the conditional impact of increasing levels of existing and new party volatility within complex institutional and contextual settings. These latter models are presented here:

��+ ( �� ) + ( ) +

�0 ( �1 �� ) + ( �2)��+ ��

�3.2.43 �� The Estimation∗ �� Strategy �4 ��

Given the nature of these data and my hypotheses, I use a survival model. The key

element of the survival model is the hazard rate. This is expressed by the following: h(t). This is

a probability function; it estimates how long it takes for an event to occur. In the case of this

work how long it may take a government to form given that it has not yet formed. There are two

elements that combine to form the hazard rate. The first element is the effects of the variables

that we presume are causing negotiations to come to a speedy conclusion or to slow to a crawl.

The second element is the baseline hazard. This element is most important in considerations of

which sort of survival model to use. This combination of elements is expressed by this equation:

xβ ( xth ) = h0 t)( exp

The baseline hazard is captured by h0 while the effect of the variables is expressed by xβ .

I use the non-parametric Cox Model for this work. In comparison to parametric survival models,

Cox models do not specify a particular distributional form, instead allowing the covariates to drive the hazard rate (Box-Steffensmeier and Jones, 2004, pg. 45). This seems appropriate—

there seems to be little reason to assume that the hazard rate should take on a particular form.28

3.3 Results

Table 3.1 presents five models of the government formation process: Model 1 exclusively models theoretical factors of interest that increase (or reduce) complexity in the government formation process. A quick note about hazard models is useful to consider before beginning a discussion of these relationships. I present coefficients rather than hazard rates in this analysis.

Thus, these a negative coefficient indicates that a factor is decreasing the likelihood of a

government formation at any one time, while a positive coefficient indicates that a formation is

more likely to occur. Model 1 suggests two influences on this process: larger numbers of parties

in a post-election legislature are likely to make forming a government more difficult while the

use of continuation rules is like to reduce the length of time it takes to conclude an agreement.

While the remaining factors thought to increase or reduce complexity are signed correctly, none

of them present significant relationships.

Model 2 adds a variable for existing party volatility. Yet, the same pattern remains: A

one unit increase in Legislative Parties tends to make forming a government slightly more

28 A few technical notes related to the use of hazard models: First, some researchers censor data due to individuals or observations leaving the sample for a variety of reasons. These data do not require censoring; the entire sample starts and finishes with the process of government formation. Additionally, there are typically ties within duration data, or governments in different observations that form in the same number of days. Duration models use a variety of computations to break these ties. I use the Efron method as it is recommended for situations where there are not an extremely high number of ties (Imai King and Lau, 2006) in this case. Finally, I use the shared frailty option to allow for the paneled aspects of these data.

61 difficult, while continuation rules make it somewhat easier. Notably, the measure of existing party volatility does not present a significant result. However, Model 3 adds a variable for new

Table 3.1: The Determinants of Government Formation Delays (1970-2011).

Additive Models Conditional Models Existing New Existing New Model 1 Model 2 Model 3 Model 4 Model 5 Legislative Parties -.161 * -.173 * -.197 * .110 -.152 * (.077) (.086) (.079) (.146) (.091) Polarization -.141 -.164 -.237 -1.151 ** .192 (.292) (.301) (.296) (.473) (.349) Positive Parliamentarism -.513 -.519 -.584 -1.212 ** -.896 * (.373) (.374) (.372) (.479) (.400) Existing Party Volatility - .003 - -.137 * - - (.011) - (.059) - New Party Volatility - - .013 * - .079 * - - (.006) - (.035) Existing ∙ Parties - - - -.027 ** - - - - (.010) - Existing ∙ Polarization - - - -.130 ** - - - - (.038) - Existing ∙ Positive - - - -.063 ** - - - - (.023) - New ∙ Parties - - - - -.014 ** - - - - (.005) New ∙ Polarization - - - - -.071 ** - - - - (.028) New ∙ Positive - - - - .048 ** - - - - (.019) Continuation Rules .669 * .667 * .697 * .506 .622 (.404) (.404) (.401) (.428) (.414) Single Party Majority .357 .354 .381 * .415 * .369 (.228) (.228) (.229) (.231) (.231)

Log Likelihood -1134.9 -1134.8 -1133.3 -1124.9 -1126.6 Observations 262 262 262 262 262 * p < .05; ** p < .01; one tailed, standard errors in parentheses

62 party volatility that does present a significant result. In this case, it would appear that an increase of 1 unit (about 2%) in the vote shares of new parties increases the hazard rate, hence decreasing the length of time it takes to form a government after an election. Model 3 is also notable in that the same general pattern remains for the variables involving complexity: increases in legislative parties make it somewhat more time-consuming to form a government while continuation rules make it somewhat faster. The variable for Single Party Governments is also significant in this model and is signed in the anticipated direction: single party governments appear to reduce the length of time that it takes a government to form after an election.

Models 4 and 5 present the conditional models drawn from the implications of my arguments concerning the impact of uncertainty within complex institutional and contextual situations. As with any conditional model, the magnitude and significance of the constituent and interaction terms alone do not tell us much. However, I use both models to produce cumulative hazard plots as well as to produce simulations that provide a better sense of these relationships.

Figure 3.2 examines the effects of existing party volatility on the hazard rate, or the relative probability of a government formation occurring at a particular time. As a reminder, these analyses transform the hazard rate into a coefficient: a negative effect decrease the hazard rate, making it less likely that a government formation may occur at any one point in time. Thus this plot examines the effect of low and high (one standard deviation above and below the mean) levels of existing party volatility in the presence or absence of rules requiring governments to

submit to an explicit confidence vote in the legislature (Positive Parliamentarism) on the relative probability of a government forming at any particular time. The plot suggests that when existing party volatility is low and such votes are not required, the hazard rate is roughly 10% higher— thus governments should form faster. The contrasting scenario suggests that when existing party

63 volatility is somewhat higher and prospective governments face an immediate confidence vote, the hazard rate is lower—thus it should take longer to form a government. .25 .2 .15 .1 Probability of Formation Probability Government .05

0 50 100 150 200 Bargaining Days

Existing Party Volatily Low, No Positive Parliamentarism Existing Party Volatility High, Positive Parliamentarism

Figure 3.2: The Effect of Existing Party Volatility on Formation Delays across Investiture Systems.

Polarization is another factor thought to enhance complexity. Figure 3.3 examines the effect of increasing levels of new party volatility across ranges of Legislative Polarization. It would appear that while a one unit increase in existing party volatility (a figure that presents an increase in votes changing hands of roughly 2%) does not affect delays when polarization is low, yet as the latter increases, the effect of these changes becomes more substantial, making delays in the government formation process after elections more likely—in this case, up to 5% more likely. The effect of these increases becomes significant at the .10 level at a polarization level of

1; this represents a figure just about 1 standard deviation above the mean. Roughly 10% of the elections in the data displayed polarization scores above 1: these include the 1983 elections in

.15 .1 .05 0 Effects on Relative Hazard -.05 -.1 .1 .4 .7 1 1.3 1.6 1.9 Legislative Polarization

Figure 3.3: The Marginal Effect of Increases in Existing Party Volatility on Formation Delays across Levels of Polarization.

the United Kingdom, the 1996 Spanish elections, and the 2006 elections in the Czech Republic.

Hence, Figure 3.3 supports my theoretical expectations: I expect that as existing party volatility and complexity increase, increasing delays in the government formation process should be likely.

Conversely, I argue that higher levels of new party volatility should reduce delays by making it easier for bargaining partners to reach agreements. Figure 3.4 examines the effect of

levels of new party volatility on bargaining delays in systems that require the explicit vote of a majority in the legislature: in short, a complex situation that should place pressures on participants. In this case, I set new party volatility to one standard deviation above and below the mean. This plot suggests that increases in new party volatility increase the hazard rate by 3 to 5%, decreasing the length of time it takes a government to form. Thus, in this case, as complexity increases (in the form of positive parliamentarism) and uncertainty declines (in the form of increases in new parties), delays are lessened. This result also supports my arguments

65 delays should be reduced as a result of new parties entering the legislature, reducing the impact of potential cabinet partners in the negotiation process—and complexity enhances this effect. .15 .1 .05 Probability of Formation Probability Government 0

0 50 100 150 200 Bargaining Days

New Party Volatility Low New Party Volatility High

Figure 3.4: The Effect of New Party Volatility on Formation Delays under Positive Parliamentarism.

3.3.1 Simulations of Political Interest

Further insights into the effects of increasing (and decreasing) uncertainty can be gained by using simulations. I view simulations as a rough way to avoid one of the conundrums of social science: the inability of analysts to manipulate individual causes while controlling for other influences in our effort to understand effects. Here, I make 1,000 draws from the estimated coefficient vector and variance-covariance matrices generated by Models 4 and 5, setting variables of interest to different empirically plausible levels. I then generate odds ratios and transform these into centile measures with estimates of uncertainty.

The first simulation involves a comparison of three scenarios involving new party volatility, each drawing from the results established by conditional approach used in Model 5.

The first scenario sets all values (include new party volatility) to their mean values. Therefore,

this scenario represents a hypothetical country holding an election with four parties, moderate

legislative polarization (.495), a requirement for an explicit investiture vote, no continuation rules and with election results that do not provide for a single party winner—a scenario that

allows for a coalition government. New party volatility in this scenario is initially set to the

mean value of the data: 6.5. I then manipulate levels of new party volatility to create two additional scenarios: one in which new party volatility is set to its lowest expressed value of 1.1:

a value displayed in Denmark’s 2005 election and a second setting it to one standard deviation

above the mean (17.6); a value displayed by the Czech Republic’s 2006 election.

Comparing the mean scenario values to those expressed by my Czech example suggest

that, ceteris paribus, the odds of a government forming should increase by approximately 38%

(17% - 60%) when new party volatility is somewhat higher than normal. Contrasting the mean

scenario to the results of the Denmark 2005 simulation suggest that when new party volatility is

extremely low, the odds of a governments formation are around 20% lower (9% - 32%) when

compared to mean values of the covariates.

Both of these results provide further support for my argument of marks—that new parties

are likely to be inexperienced and easily placated during negotiations over cabinet portfolios,

making government formations take less time. I also note that the scenarios used are not

extremes—they represent fairly typical examples of parliamentary politics. Also, if we consider

that the mean length of time it takes a government to form in a post-election setting is around 33

days, this suggests that higher levels of new party volatility in typical institutional and political

settings could trim 12 days from this figure.

The second simulation involves a contrast of three experiments involving existing party volatility, each drawing from the results established by conditional approach used in Model 4.

As with the previous exercise, I first create a setting involving mean values. Thus, existing party

volatility is set to its mean value of 10.5, there are 4 parties, a moderate level of legislative polarization (.495), positive parliamentarism is required, there are no continuation rules and the results of this imaginary election do not provide for a single party winner. I then create two additional scenarios: one in which existing party volatility is increased to one standard deviation above the mean, approximating the results of the 2007 legislative elections in Belgium, and a final scenario setting it to one standard deviation below the mean to levels displayed in the 1996

Austrian elections. I then make two comparisons: mean values to the Austrian scenario and mean values to the Belgian scenario. Comparing the values generated by the mean scenario to the Austrian example suggest that the odds of a government forming at any one time should be

61% less (30% - 90%) under these conditions. Additionally, a comparison of the mean scenario to the Belgian scenario suggests that under these conditions, a government should actually form approximately 57% faster (28% - 88%) than under mean conditions. These results do not support my arguments. I expect that increasing levels of existing party volatility, as expressed in

Belgium in 2007, should cause greater delays in the government formation process.

These results may reflect problems with the scenario itself; it might be unrealistic to expect mean values of parties, polarization, and institutional settings in combination with high levels of existing party volatility. As such, I present a final comparison of scenarios simulated using draws from Model 5: a best case composed of an unreasonably mild election with low levels of existing party volatility, exceptionally low polarization and two parties contrasted with a worst case scenario with eight parties, high polarization, and very high existing party volatility.

I must note that this comparison no long strictly controls the simulation experiment – I am not manipulating single variables while holding others constant. Yet neither scenario is completely outlandish either. They are simply drawn from the far tails of the distribution. Under such conditions, the worst case scenario would increase the amount of time it takes to form a government by around 600% (286% - 944%). This would represent an additional delay of around 198 days past the mean formation time of 33 days. Despite the extreme nature of the comparison, this sort of delay is not unheard of. In the past few decades, both Belgium and the

Netherlands have experienced post-election government formation delays exceeding 190 days.

In these cases, existing party volatility was considerably higher than new party volatility.

3.4 Conclusions

In this chapter, I examine the effect of both existing and new party electoral volatility on

delays in the government formation process. I argue that increasing levels of uncertainty in the

form of existing party volatility are the driving force behind these delays, and that complex

contexts and institutions can increase the length of time it takes a government to form when

changes in the balance of power among veteran parties are high. On the other hand, I maintain

that increasing levels of new party volatility actually reduce bargaining delays, and in this case, that complexity may serve to hasten formations that occur after new parties compete successfully at election time. I find some support for the first part of my argument, but tests for the influence of new party electoral volatility on government formation delays produce particularly robust findings, suggesting that new parties reduce delays, providing at least the potential for increasing the stability of governments.

In scholarly sense, this analysis provides support for differentiating uncertainty and complexity as theoretical concepts; the models exhibit divergent effects for measures associated

69 with each concept. The counter-intuitive results provide important insights regarding practical

applications of politics. First: new parties may not be the threat to stability and effective

governance that many suggest. Instead, veteran parties should welcome their presence as a

means to further their own agenda in government and to speed the formation process. It also suggests that experienced party leaders are more concerned with the spoils of office than policy, at least during typical formation processes. This insight contributes to debates about the motives of politicians: it supports the contention that the application of rational choice to government formation negotiations makes sense and that ascribing altruistic policy-seeking motives to political groups may be unwise. On the other hand, it may also be that tumultuous events such as the collapse of the Icelandic government in early 2009 can inspire a more policy oriented attitude amongst politicians; under such circumstances, veteran parties might be more willing to share their knowledge of the process and actually help their inexperienced cabinet partners in an effort to stave off national crises.

These results also suggest that experiments regarding group dynamics may have value for political science and the study of government formations. After all, the actors within these bargaining sessions are human beings holding a variety of political loyalties and possessing varying levels of experience. It seems likely that carefully controlled social science experiments may produce interesting insights into these otherwise opaque situations that could further develop theories of government formations.

Second, this analysis suggests that politicians or elites considering starting a new party should carefully consider the context and institutions within their countries to maximize their ability to influence the government formation process. In a normative sense, these results also suggest a need for apolitical information resource centers for parties involved in bargaining

70 sessions. Such third party centers might provide unbiased advice to neophyte parties on the functioning of institutions as well as providing a general sense of the histories of more established parties. Additionally, this work may have implications for other bargaining scenarios. One might suspect that policy bargaining within committee systems or within cabinets might share similar characteristics, and that this logic might even be extended to labor negotiations or conflict resolution bargaining.

CHAPTER 4

INSIDE THE BLACK BOX: GOVERNMENT FORMATIONS IN ISRAEL

For many decades, scholars have theorized about the nature of government formations in parliamentary democracies. A variety of explanations for the sorts of governments that emerge after votes of no confidence and elections are offered. These explanations generally involve two conditional influences: institutional arguments derived from rational choice (Mitchell and

Nyblade 2008; Golder 2010) and contextually oriented causes involving norms (Druckman and

Warwick 2006) or ideological motivations (Indridason 2010). However, few scholars have been able to gain access to direct participants in these processes. In both cases, terms like “black box” and “smoky back rooms” are used to evoke visions of a world where few political scientists tread and most only theorize about. In Chapter 3, I use quantitative evidence from European democracies to examine factors that influence the length of time it takes government to form after elections. I find that new and existing party forms of electoral volatility affect formations in

different ways; higher levels of existing party volatility tend to increase these delays while

increases in new party volatility tend to decrease them.

In this chapter, I again ask the question: “Why do some government formations in

democracies take longer than others?” but approach the topic from a different perspective. I

offer qualitative evidence to support the argument of marks presented in Chapter 3 based on field

work in the state of Israel. Recall that I argue that inexperienced bargaining partners to negotiations are likely to be easily placated by veterans, reducing uncertainty and making it easier to conclude agreements. Interviews of participants holding a variety of roles in the government formation process and insights gathered from subject matter researchers allow for a

72 qualitative test as well as a useful real world confirmation of the quantitative results presented in

Chapter 3. As in Chapter 3, I test the argument that the length of time it takes a government to form after an election is influenced by a conditional relationship between institutions and levels of existing and new party electoral volatility. Again, in this qualitative test, I argue that uncertainty is a central influence. Complex institutional settings can exacerbate delays in the government formation process, but only when existing party volatility prevents potential coalition partners from quickly assessing preferences for particular cabinet posts. I argue for an opposing effect when levels of new party volatility are high – bargaining delays should be lessened, and complex institutions should enhance this effect. I present the two general hypotheses from Chapter 3:

• Increasing uncertainty about the minimum offer of government posts and policy that is

acceptable to potential cabinet partners will make delays in government formation more

likely regardless of the level of complexity in the bargaining environment.

• While bargaining complexity should not affect the length of time it takes to form a

government when there is no uncertainty, it should lead to increasing delays in the

government formation process as uncertainty increases.

In Chapter 3, I used a variety of institutional and contextual political factors as measures of bargaining complexity while using measures of new and existing party electoral volatility as indicators of uncertainty. I examine the same factors in this qualitative analysis.

The observations offered by observers of and participants in government formations within Israel offer support for my arguments, yet also offer interesting contextual nuances that may be generalizable to other government formations in parliamentary democracies. Every participant emphasized that Israel is unique—that it cannot be compared to other states

(Anonymous Interview 2012). While this may be true for many aspects of the Israeli political experience, I find that the process of government formation in Israel is quite similar to other parliamentary democracies given the nature of the institutions that are in place. As in other democracies, actors are aware of the institutional framework they operate within and seek to maximize their party’s chances for political gain within bargaining situations they participate in.

4.1 Case Selection, Recruitment, Data and Methods

Israel is a useful case within which to examine the implications of my arguments. Recall

that the length of government formations tend to be conditioned by complexity, or factors that do

not reduce information but make coming to agreements more difficult, and uncertainty, or factors

that reduce information for participants. With regard to complexity, Israel is a parliamentary system with a multitude of parties. Coalition governance is the rule in Israel—in fact, there has never been a single party government during Israeli history (IDI 2012). These parties express a wide range of ideologies, thus polarization is often an issue in the Knesset. While Israel does not employ continuation rules (rules that allow the previous government to stay in power if a government cannot form) positive parliamentarism is employed—prospective governments must face an explicit vote of confidence in the Knesset. Thus, Israel presents the potential for high levels of complexity. Uncertainty is also an issue during government formations in Israel. First, vote share changes amongst parties in Israel elections are frequently quite high. On the other hand, new parties have experienced electoral success from time to time as well. This variance should allow for a useful test of the argument of marks I present in Chapter 3. I approach Israel as a “most-likely” critical case—a case in which the political circumstances and institutional arrangements should produce the outcomes my argument suggests (Gerring 2012, 418).

Interviews of participants and close observers of government formations in Israel provide many of the insights presented in this chapter. During the course of my fieldwork, I interviewed eight subjects. These individuals were selected by a variety of means, both by personal contacts and through web searches of Israeli government websites. Some were referrals provided after my initial round of discussions. All of the subjects have intimate ties to political parties and movements within Israel, and most have direct knowledge of the government formation process.

Some are, or were, direct participants in these processes. The remaining subjects are well- informed observers. The subjects included two prominent members of a Kibbutz with decades of experience interacting with political leaders, two current Ministers of the Knesset, two prominent legislative advisors, one senior staff member with an NGO in Israel and another former government advisor with many years of experience working with government policy experts. The individuals I selected represent a cross section of Israeli politics: the left, center- left, and center-right are represented. I do not present insights from individuals associated with the Arab parties or the Haredi movements.29 Despite attempts, I was unable to interview anyone from these groups. The individuals were contacted initially via email, with follow up emails and phone calls to clarify the time and place of each interview. These interviews were conducted either in the homes of the individuals or in their place of work. One interview was conducted by phone while another was conducted via Skype.

The interviews were conducted in the following fashion: after presenting my credentials and introducing myself, I presented and discussed the IRB waiver form.30 After obtaining their consent, I offered a series of questions and took notes as the interviews proceeded. The questions were open-ended, and I attempted to avoid leading the participants. A few examples:

29 The Haredi are also known in some circles as the “ultra-orthodox”. However, I was advised that the latter term is viewed by some as pejorative and not entirely accurate. 30 A copy of the IRB approved interview form can be found in the chapter appendix.

• “What do you think of the electoral threshold?”

• “Is it easy to start a new party in Israel?”

• “What do you think of the president’s role in the coalition formation process?

• “How often do parties in the Knesset collaborate on legislation?

• What did you think of the 2009 elections in Israel?

• “How well do Ministers of the Knesset know one another?”

I did not record these interviews but took handwritten notes on the responses of the participants as they spoke. The respondents were verbose: the shortest interview was forty-five minutes while the longest was three hours in length. I was overwhelmed with the generosity of the participants with their time and was also pleased with the depth and breadth of their

comments. IRB requirements preclude their identification by name or party affiliation in this

paper. As such, I cite quotes and anecdotes related to me during these interviews as

“Anonymous Interview 2012”.

Methodologically, my approach in this chapter represents a “hoop” test (Collier 2012).

Such tests present a variety of questions to subjects with familiarity with a particular process.

These questions incorporate concepts inherent within hypotheses. Thus, the answers either

confirm or reject the hypotheses. I interviewed actors with various roles in the different stages of

the government formation process, but my work does not meet the most rigorous definitions of

process tracing as I was unable to capture the views of actors at every level of the government

formation process (Gerring 2012). Thus, I supplement the observations gathered during the

interview process using a variety of scholarly and journalistic data. This approach meets the standard of the hoop test (Collier 2011).

4.2 Democracy in Israel

The state of Israel is a democracy established in 1948 after the expiration of the British

Mandate that allowed for a quasi-colonial role of the region by the United Kingdom after World

War I. Parliamentary elections were held eight months after the establishment of the state in

January 1949, and three weeks later, the assembly formally met for the first time (Knesset 2012).

Since that time, eighteen parliamentary elections have been held and a continuous record of the peaceful transfer of political power has been established. Additionally, government resignations and inter-election formations have been relatively frequent: Israel has had 32 governments during its history as a democratic state (Knesset 2012).

For many years, politics in Israel were dominated by secular parties of the Left and

Center Right (Angrist 2010; Anonymous Interview 2012). These party families were represented by Labour and parties on the Left and various incarnations of Likud on the right.

While neither of these party families were able to achieve a majority in the Knesset, the power to form governments and to pass legislation hinged on the ability of both to coordinate and compromise—a value exemplified by kibbutzniks, or the secular communal pioneer settlers that formed the backbone of Israeli society during both the struggle to form Israel and in the early years of statehood (Wilf 2008; Anonymous Interview 2012). In fact, most of the early leaders of

Israel were kibbutzniks, and the political parties failed to respect these communities at their peril.

Two prominent members of the kibbutz movement shared that the Labour Party (among others) reserved several prominent positions on their party lists at election time for kibbutzniks for many years (Anonymous Interview 2012).

However, the influence of these communities waned as Israeli developed economically and changed demographically, reducing the influence of these passionate, yet secular Zionists

(Wilf 2008; Angrist 2010). Still, the party system remained stable until the late 1970s—left leaning parties in coalition with Labour were typically tasked with forming governments.

Prolonged recessions in the 1970s followed by hyperinflation in the early 80s discredited the socialist economic policies of the Leftist governments that had dominated Israeli politics (Wilf

2008; Angrist 2010). Furthermore, the near defeat of the Israeli Defense Forces (IDF) during the

1973 Yom Kippur war and the bloody and inconclusive war in Lebanon in the 1980s shattered the equilibrium that once characterized Israeli politics (Wilf 2008). These events paved the way for the growth of right wing parties like Likud as well as nationalist parties under a variety of banners. Finally, religious parties began to emerge in the early 1990s and gained significant influence relative to more secular parties after the intifada brought the issue of Palestinian statehood to the forefront of Israeli politics. Of these parties, the Haredi Jewish parties are the most important second-tier parties (Anonymous Interview 2012). Figure 4.1 provides a sense of these shifts by examining the historical strengths of Israeli party families.

70% 60% 50%

40% 30% 20% 10% 0% 1969 1973 1977 1981 1984 1988 1992 1996 1999 2003 2006 2009 Left Right Other Religious

Figure 4.1: Vote Shares of Israeli Party Families: (1969 – 2009).

During these interview, the five largest parties in the Knesset are Kadima (28 seats),

Likud (27), Y’Israel Beitnu (15), Labour (13) and Shas (11).31 Likud and Y’Israel Beitnu are

right-wing parties, while Kadima represents the center-right and Labour the left. The remaining

26 seats are held by Shas, a variety of Haredi parties and the Arab parties. This brings the

number of parties currently in the Knesset to twelve—a number unheard of in most consolidated

democracies. This particular feature suggests that bargaining complexity should present difficulties for potential bargaining partners after elections.

4.2.1 Institutions and Bargaining Complexity in Israel

The Knesset has 120 members elected as members of party lists.32 Institutionally, Israel uses a proportional system (PR) with one nationwide constituency (Diskin and Diskin 1995).33

While Israel now utilizes an electoral threshold of 2%, this has not always been the case.

Starting from zero, the threshold has been raised incrementally in 1951, 1991, and most recently in 2004 (IDI 2012). Still, this threshold is low when compared to other democracies that use a proportional system. Most democracies using PR employ a threshold of 5% (Golder 2005).

As a result, politics in Israel are an example of Duveger’s Theory, or the argument that elections held in countries with larger electoral districts are likely to have multiple parties.

Elections involve a sometimes bewildering array of parties. Voters in Israel have never had fewer than ten parties to choose amongst (IPU 2012). These parties represent an unusual constellation of interests. For instance, there are traditional parties that might fit well into a

European party family structure based on class cleavages. Labour on the left and Likud on the right fit well into this framework. However, over the past few decades, a growing number of

31 As of January 2013. 32 This number corresponds to the members of the Great Assembly, or the gathering of Jewish leaders after the return of the Jews from exile to Jerusalem in the fifth century BCE. 33 In the 1996 and 2001 elections, Israel held direct elections for the office of prime minister. This convention was repealed in 2001 (CNN 2001).

79 nationalist, religious, and ethnic parties have competed in elections, as well as parties based on populist issues (Anonymous Interview 2012).

In terms of government formations in Israel, a variety of laws govern the process. It is worth noting that Israel does not have a formal constitution (IDI 2012). A constitution remains a serious goal of lawmakers. A constitutional committee exists and holds regular meetings

(Anonymous Interview 2012). However, the inability of the Knesset and societal actors to comprehensively address a number of serious issues related mainly to religion and its role in democracy makes a formal constitution a remote possibility (Anonymous Interview 2012).

Accordingly, Israeli politics operate under a charter known as the Basic Law (Knesset 2003). 34

The Basic Law, amended at various times since 1949, covers many common

constitutional features that are present in modern democracies such as the right to assemble, free

speech, and due process under law. It also provides a framework of institutions that govern the

government formation process. A key player in this framework is the president. In Israel, the

president holds a suite of powers that in many ways are similar to European executives—in

short, a ceremonial head of state elected by the legislature. Yet, as in many European

democracies, the president in Israel wields substantial powers with regard to the government

formation process (Glasgow, Golder and Golder 2011; Carroll and Cox 2011). He or she

accomplishes this task by interviewing candidates for the role of formateur after bargaining

among the various parties has taken place (Anonymous Interview 2012). The president is

empowered to select the party that offers the best chance of forming a workable coalition

government (Knesset 2012). As in other parliamentary systems, this role can complicate

relations between parties (Schleiter and Morgan-Jones 2009).

34 The URL for this site: http://www.knesset.gov.il/laws/special/eng/basic_14.htm

This is an important point. First, Israel has never had a single party government— coalition governance is the rule. This makes the president a pivotal decision maker regarding

what sort of parties may try to form a government after elections. Second, as a figure elected by

the Knesset, the president is making a political decision about the identity of the formateur and a

judgment call on which party is best able to concluded a coalition agreement rather than simply

making a ceremonial announcement. While one could theorize that this role might reduce

complexity and make it easier to create governments, presidential formateur selections have

inspired great controversy in recent times. For instance, in the 2009 Knesset Elections,

Benjamin Netanyahu’s Likud proposal was accepted over that of Tzipi Livni’s Kadima proposal despite the fact that Kadima had won more seats than Likud. The MKs (Ministers of the

Knesset) I interviewed characterize these interviews as politically charged (Anonymous

Interview 2012) yet an apolitical government advisor was torn as to whether this reflects a

corrupting influence or a practical way to avoid the difficulties faced by Israeli politicians

working to form governments in a fractionalized system (Anonymous Interview 2012).

A second aspect of the Basic Law that regulates the government formation process involves temporal constraints on the government formation process. The Basic Law mandates that after the president selects a formateur, that party will have 28 days to conclude a coalition

agreement. If the formateur cannot conclude an agreement within that time frame, the president

may select another MK (Minister of Knesset) to fill this role, or the Knesset can step in and name

that individual through a special vote. In either case, this individual has 14 days to conclude a

working coalition agreement (Knesset 2012). Finally, if neither the first or second choice of

formateur can conclude a working coalition that enjoys the support of a majority in the Knesset,

the Knesset is dissolved and new elections held.

Interestingly, these institutions and rules appear to be norms rather than binding legal constraints. In practice, the selection of the formateur is the final step—it is only taken after

potential formateurs have engaged in negotiations with likely bargaining partners and have

presented a variety of possible coalition agreements to the president for his or her judgment.

Thus, bargaining sessions can continue for quite some time after elections. And, while the first

formateur appears to be constrained to some degree by the 28 day requirement, in practice a

second choice is almost never required—the first formateur has only failed twice in Israeli

history to form a government (Anonymous Interview 2012).

Furthermore, any formal coalition that emerges from this process must submit to a

majority vote in the Knesset – as noted in Chapter 2, this institution (known as positive

parliamentarism) tends to make it more difficult to form a government. However, this vote only requires a majority of those present to approve the government—it does not require an absolute majority of 61 votes (Anonymous Interview 2012). This rather liberal requirement is quite practical—there are many MKs who rarely attend Knesset sessions that do not directly impact

their chosen policy platforms or their parties—even for investiture votes (Anonymous Interview

2012). As such, this institution represents a weak form of positive parliamentarism,

Finally, votes of no-confidence that occur after a government has been in office are more

strictly regulated. Israel uses the constructive votes of no confidence, or the requirement that any

party that submits a vote of no confidence must have a coalition agreement in place that will

present an absolute majority of MKs in the Knesset. This standard is so difficult to meet in Israel

that it is extremely rare occurrence (IDI 2012).

4.3 Contextual Features and Complexity

Theoretically, complexity also encompasses contextual factors that can make concluding government formations more difficult. The number of potential bargaining partners comes to mind immediately – theoretically, more parties make agreements more difficult to conclude.

Israeli political history displays a bewildering array of parties that have competed Knesset elections. Figure 4.2 provides the effective number of electoral and parliamentary parties in

Israel; these figures have risen considerably over the last three decades. Thus, prospective governments now face a more complex bargaining environment—greater number of potential bargaining partners must be considered for cabinet positions than once was the case. Many more

parties have participated in politics, yet been unable to win a seat. In this way, Israel presents the

potential for a highly complex bargaining environment after elections.

8 Effective Electoral Parties 6 Effective Parliamentary 4 Parties

0 1981 1984 1988 1992 1996 1999 2003 2006 2009

Figure 4.2: Parties in Israel: (1981-2009).

Interestingly, for a country that many view as fraught with ideological disputes, all of the

MKs suggested that ideology plays little or no role in government formations (Anonymous

Interview 2012). In fact, most lamented a lack of commitment to “principles” and noted an

83 increasing tendency for the process to produce ideologically incoherent governments that subsequently fail to achieve any substantive progress on the major issues that confront Israeli society (Anonymous Interview 2012). These issues are considerable—the status of settlements

in the West Bank, a long term solution to the Palestinian issue and the role of the Haredi in

Israeli society representing three prominent concerns (Anonymous Interview 2012). The parties

in these governments appear to avoid substantive issues, instead focusing on soft issues and

policies that involve the acquisition of power, influence, and revenues for their parties

(Anonymous Interview 2012). The participants used phrases like “horse-trading” and “a game

of power” to describe the cabinet formation process (Anonymous Interview 2012). Thus, the

government formation process is more about the distribution of spoils through the ministries

rather than about policy making. Again, Israel may not be unique in this regard: such office

seeking outcomes are considered likely under some game theoretic models of coalition

government formation (Sened 1996).

Evidence to support involves two factors: the size of Israeli cabinets and the nature of the

Israeli legislative process. First, government cabinets have grown in recent years. In the past two decades, the average number of ministers and deputy ministers in government has risen from around twenty to roughly forty (IDI 2011). A leftist MK as well as others reported that this reflects an executive branch more concerned with the distribution of spoils rather than crafting governments (Anonymous Interview 2012; IDI 2011). Figure 4.3 provides a sense of the growth of Israeli cabinet positions over time. The upward trend provides indirect evidence of this.

50 45 40 35 30 25 Cabinet Positions 20 15 10 5 0 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

Figure 4.3: Ministers and Deputies in Israeli Governments (1974 – 2012).

Second, party discipline is quite weak in Israel. In most parliamentary democracies, disciplined

parties in government hold the real legislative power—the cabinet debates and promulgates laws

that are passed by their respective parties in the parliament (Powell 2000). Opposition

lawmakers can rarely challenge this legislation and have little hope of passing their own

legislation. For example, in the United Kingdom over the last decade, 915 legislative bills were introduced by private individuals in the parliament. Less than 1% of these bills became law (IDI

2011). However, in Israel, over 12,000 bills were brought by individual lawmakers over the last ten years—a figure that represents 90% of the bills introduced to the Knesset (IDI 2011;

Anonymous Interview 2012). One highly experienced observer reported that, in many cases, the spirit of these bills ran contrary to the policy platforms of the individuals’ respective party

(Anonymous Interview 2012). This holds for government parties as well— individual MKs within government parties introduce legislative bills contrary to government platforms

(Anonymous Interview 2012). In the UK, such activities would result in stern warnings from

85 party Whips or even expulsion from ones’ party (Parliamentary Education Service 2012). In

Israel, all one has to fear is a resigned shrug.

A review of the cabinet formed after the 2009 election provides evidence of the ideological incompatibility of recent cabinets. After the election the Kadima Party under party

chair Tzipi Livni emerged as the largest seat winner and was given the opportunity to be

formateur (Diskin 2010). However, she was unable to secure a workable coalition to present to

the president, and the president selected Benjamin Netanyahu of the Likud Party as the second

formateur. Ultimately, Netanyahu was able to form a government. Yet the coalition involved

unlikely bedfellows. Table 4.1 details the coalition that was ultimately invested by the Knesset.

This cabinet, while weighted slightly towards Likud, shows the costs of coalition governance

Table 4.1: The Composition of the 32nd Government of the State of Israel.

Party Family Party Knesset Seats % Cabinet Seats % Right Y'Israel Betaynu 15 12.5% 7 14.0% Center-Right Likud 27 22.5% 22 44.0% Kadima 28 23.3% 2 4.0% Total Center Right 55 45.8% 24 48.0% Left Labor 13 10.8% 6 12.0% Religious Shas 11 9.2% 6 12.0% United Torah Judaism 5 4.2% 3 6.0% Jewish Home 3 2.5% 1 2.0% National Union 3 2.5% 3 6.0% Total Religious 22 18.3% 13 26.0%

in Israel quite clearly. The secular right-wing Y’Israel Betaynu Party is over-represented in

government by a small margin, yet the religious parties were able to secure four more cabinet

seats than a strictly proportional result should have provided them. Notably, this violates

Gamson’s Law, or the tendency that, at least in Western European government formations,

cabinet seats are allocated proportionally according to seat shares in the legislature (Gamson

1961; Carroll and Cox 2007). Apparently, this law does not apply in Israel. Also, the policy agendas of the religious parties stand in stark contrast to that of Likud in many important respects (Anonymous Interview 2012, Angrist 2010) as does that of the Labour Party. What is most interesting is that Likud and Kadima are both center right parties, sharing many policy positions on important issues. In a typical system, these parties could have easily formed a government (perhaps in alliance with Y’Israel Betaynu) that would have held a commanding majority and possessed an ideologically compatibility on most policy matters. Such a government could have left the religious parties and Labour in the cold. However, it would appear that the appeals of office were more important than policy in this case.

Thus, in a theoretical sense, these institutional characteristics and contextual qualities suggest that Israel represents a system with a combination of institutions and contexts that should make the government formation process more complex. The ability of the president to influence the government formation process by selecting the formateur with the best chance of concluding a coalition agreement appears to complicate an already difficult task: not only must the prospective formateur please their potential cabinet partners, but must also satisfy the president.

On the other hand, the twenty-eight day time limit is a reasonably liberal feature on paper and in practice, especially considering that the real bargaining takes place after elections and is not temporally restricted. Still, the requirement for a formal investiture vote is a restrictive hurdle for potential governments, yet an absolute majority is not always required. In practice, these institutional standards appear to be applied haphazardly—while discussed in the Basic Law, they appear to be flexible constraints. Contextually, the number of parties that both participate in elections and play a meaningful role in cabinet bargaining sessions is certain to complicate

87 matters. The unusual combination of intractable ideological disputes and the possibility for office-seeking tradeoffs increase this complexity.

4.4 Electoral Volatility and Government Formation Delays in Israeli Politics

I argue that electoral volatility plays a major role in the government formation process—

that elections that express higher levels of changes in the balance of power among existing legislative parties create difficulties in the government formation process by creating uncertainty about the preferences of potential cabinet partners. Yet I maintain that the entrance of new parties significantly reduces this uncertainty and should reduce the length of time it takes to form a government. Figure 4.1 provides a sense of these changes in Israel—a clear swing away from left wing parties has occurred during the last three decades. At the same time, while right wing parties appear to have been the beneficiary of these changes, the rise of new parties is noticeable.

Party splits and the entrance of new parties are frequent events in Israel. Over the past four

Knesset elections, two or more new parties have participated each time (IPU 2012; Anonymous

Interview 2012 2012). This process is ongoing. During my brief stay in Israel, a formal party split was concluded and a new populist party was inaugurated (Hoffman 2012). Many of these parties exist only for an electoral cycle or two and then fade away. The Pensioner’s Party is a recent example of this phenomenon. Formed prior to the 2006 elections, the Pensioner’s Party

espoused a platform of supporting retired Israelis and kibbutzniks (Anonymous Interview 2012).

It did remarkably well in elections for a new party, winning 5.6% of the vote, seven seats in the

Knesset and two ministerial seats in government (Diskin 2007). Yet the party failed to capitalize

on its early success, and did not compete in the 2009 elections.35 The experience of the

35 Interestingly, subjects referred to this party as beneficiaries of a “protest vote”. One suggested that the parties’ real supporters were “hipsters in Tel Aviv” seeking to punish existing parties (Anonymous Interview 2012).

Pensioner’s Party is not unique—at least one new party has contested and won seats in every election over the past several election years.

Party splits are also common in Israeli politics. Kadima, a major party in recent years, split away from Likud in 2006 under the leadership of prime minister Ariel Sharon.

Furthermore, the Independence party recently formed under defense minister Ehud Barak attained legal status as a party in 2012 after five members defected from Labour. Participants

were divided on this subject—while most suggested that it was easy to create a new party or split

from an existing one, a knowledgeable source maintained that the costs associated with such

splits have often been difficult for splinter parties to overcome, requiring lengthy legal wrangling

(Anonymous Interview 2012). Yet the ease with which a splinter party can form and the lack of

serious institutional obstacles to splits are a concern for advocates of reform (IDI 2011). On

balance, the record suggests that it is easy to either start a new party or split from an existing one.

All of the subjects, including MKs from both right and left-wing parties, lamented the

rise of new parties and the propensity for splits. Most offered various institutional solutions,

from raising the electoral threshold to encourage the growth of large national parties to creative

punishments for party splits (Anonymous Interview 2012). Such reforms are prominently

featured in Israeli political debates (IDI 2011). Each of the participants suggested that the continual upheaval among political parties causes a variety of governance problems ranging from

governments that are incapable of addressing serious national issues to a general distrust of

government among the people (Anonymous Interview 2012).

A recent election in Israel provides some context. Kadima is a relatively new party, having been created as a splinter party from the Likud Party in 2006. However, its leaders were

far from inexperienced political neophytes. Kadima was created and led by Israeli political and

89 military giant Ariel Sharon and his deputy Ehud Olmert, influential figures in Israeli politics for three decades. Unfortunately, Sharon suffered a series of debilitating strokes soon after the 2006 elections (BBC 2012). Additionally, the party was rocked by turmoil in the run-up to the 2009

elections. Olmert and much of his staff were forced to resign from the party due to serious criminal charges. The new party leader and lame-duck PM Tzipi Livni won an internal party election for party leader by a scant number of votes only two months before the election itself

(Diskin 2009). In this way, a new party with veteran leadership suddenly became a new party with inexperienced leaders and dubious political credentials.

After the election on February 10th, Kadima won more votes than any other party, but, as typically occurs in Israel fell well short of a majority. Livni was selected as the first formateur

(Diskin 2010). One MK reported that Livni was “inexperienced” and “made mistakes” during negotiations with potential coalition members and was replaced as formateur within ten days of the election. Another MK familiar with the negotiations suggested that “in our system, you must have friends (to form a government). Livni forgot to make friends” (Anonymous Interview

2012). In this case, this failed attempt led to the appointment of Benjamin Netanyahu as the second formateur (Anonymous Interview 2012). Once selected, it took 40 days for Netanyahu to work through a number of potential draft coalition agreements, presenting several for presidential review and finally able to form a government and see it invested on March 31st

(Anonymous Interview 2012).36 This suggests that the status of Kadima as a relatively new party and Livni’s inexperience (and presumably that of her senior staff) led to the failure of

Kadima to craft a workable agreement—yet this part of the event took a week before the president removed Livni from her role as formateur. On the other hand, once availed of the

36 “Netanyahu Urges Broad Coalition” Fox News, http://www.foxnews.com/printer_friendly_wires/2009Feb20/0,4675,MLIsraelPolitics,00.html, (accessed Jan 2013).

90 opportunity, Netanyahu faced a more difficult challenge: working to take advantage of the institutional setting while clearly espousing a power before policy mentality—a tactic that may have been driven by a desire to gain latitude for Netanyahu’s desire for a free hand in modifying foreign policy (Stinnett 2007). The end result was a forty day delay in the creation of a

government from the time that Livni was removed from the role. Such delays are not rare in

Israel. Figure 4.4 presents a view of post-election bargaining delays in Israel since 1969, along

with corresponding levels of new, existing, and total electoral volatility.

70 60 50 40 30 20 10 0 1973 1977 1981 1984 1988 1992 1996 1999 2003 2006 2009 Total Existing New Bargaining Delays

Figure 4.4: Electoral Volatility and Formation Delays in Israel (1973-2009).

While Figure 4.4 does not display of a perfect association between the two forms of

volatility and the length of bargaining delays, a relationship does appear to exist.37 In most

election years, increases in volatility, especially total volatility, are associated with relatively

longer government formation delays. There are aberrant observations—the 2006 and 2009

elections—yet these are subject to contextual interpretation. With regard to the 2006 elections:

37 A Granger causality test suggests that the historical results of total volatility may “Granger cause” values of Bargaining Delays in these data.

Ariel Sharon, the leader of Likud, was a well-known figure in Israel.38 Thus, when Sharon broke from Likud to start Kadima, one could hardly consider this particularly party to be “new” in the sense of an inexperienced bargaining partner. Sharon was clearly a political insider and fully aware of his place in politics, as was his successor Ehud Olmert. In accordance with my arguments, it took somewhat longer to form a government in 2006 than in did in 2003 On the other hand the 2009 elections present a different view of Kadima. If one takes the total replacement of the leadership of Kadima in the month prior to elections into account, one could consider Kadima 2009 to be a new party. The inexperienced leaders of Kadima failed to craft a workable agreement and Livni was replaced as formateur in only 10 days. After the experience

Likud Party under Netanyahu took over negotiations and focused only on established potential partners, the negotiations took 39 days.

4.5 An Additional Influence: The Role of Personal Connections in Politics

During my interviews and studies of the Israeli party system, an additional factor emerged as a potential influence. Unsurprisingly, this involves individual relationships and their importance to politics. The Knesset is a relatively small legislature with only 120 seats representing Israel’s 7 million citizens. For instance, Norway and the Czech Republic, countries with similar populations, have 169 and 200 seats in their respective legislatures. This suggests that MKs within the Knesset should have regular contact with one another. If uncertainty involves the inability of negotiators to assess preferences for cabinet positions, one might argue that such connections should reduce uncertainty by encouraging familiarity with each other.

38 Additionally, his stature allowed him to cross party lines. Two long time leftists related that while they had always been Labour voters, they supported Sharon in his bid for prime minister and the Kadima party in the belief that he was the only person who could successfully withdraw settlements from Gaza and curtail those in the West Bank—a major sticking point in negotiations between the Palestinian Authority and Israel (Anonymous Interview 2012).

While touring the Knesset, I was struck by the small size of the Plenum, or the central meeting hall within the Knesset in comparison to other legislatures I have visited. The room itself is about half the size of a typical secondary school gymnasium. The government sits at a conference table in the center, with party MKs seated around them in rising tiers of seats in a horseshoe-like arrangement. The size of the space implies there must be opportunities for MKs to closely observe and interact with one another while the Knesset is in session.

Additionally, Israeli society is known for the connections made during military service.

Most Israeli citizens are required to perform at least two years of active duty military service, with many serving longer. After active duty service, all Israelis remain on reserve duty and train periodically with their units for many years afterwards. 39 These networks are important channels for success in business, politics, and in government—small groups of men and women who once formed the staff of particular military units are often found working for senior MKs or as less prominently slated members of party lists (Senor and Singer 2009). This also implies that a lack of familiarity on a personal level may not be a cause of uncertainty.

During my interviews, I posed two questions related to this topic. The first: “How well do MKs know one another?” and “How closely do MKs from different parties work together on legislation within the Knesset?” I also asked a related question: “How much turnover occurs on party lists?” Their answers were mixed. Most suggested that MKs have at least a passing

familiarity with each other. Additionally, one knowledgeable source related that the vast majority of MKs live within relatively small (and affluent) neighborhoods within Jerusalem, while the remainder live in similar neighborhoods in Tel Aviv (Anonymous Interview 2012).

However, a quick review of MKs serving in the 16th, 17th, and 18th sessions of the Knesset

39 There are exceptions: most Arabs are not allowed to serve in the Israeli Defense Forces and the Haredi are exempt from military service in most cases.

93 produces a curious insight: approximately 53% of the politicians left the Knesset after the 17th session and were replaced by others with no apparent national political experience (or at least no service in the 16th or 17th sessions of the Knesset. Moreover, in response to my query about

different parties working together, most suggested that this practice is uncommon. Furthermore,

a fair amount of apathy exists: one source stated that MKs often ignore their memberships on

legislative committees, reporting that a particularly important reform was largely crafted by the

legal advisory team with little input from MKs before being brought to the Knesset floor

(Anonymous Interview 2012). This anecdotal evidence also suggests that MKs are not close.

4.6 Conclusion

I contend that while institutions can complicate bargaining over cabinet positions after

elections, the real influence involves uncertainty introduced by increasing levels of existing party

electoral volatility. I argue that when changes amongst existing parties are high, delays in the government formation process should increase as bargaining partners seek to maximize their influence over a range of cabinet positions. In contrast, increases in new party volatility should reduce delays by making the preferences and capabilities of inexperienced negotiators clear, allowing them to be placated quickly. The evidence supports these arguments. Israel presents a moderately complex institutional environment yet a difficult contextual environment for potential cabinet partners. Nonetheless, when new parties become involved, bargaining delays may be reduced. In the 2009 election, the cycle under the first formateur only lasted ten days before the president intervened to remove Livni from this role—it become clear that she would be unable to forge an agreement as Kadima’s preferences were apparent from the beginning— and negotiations under the more experienced Netanyahu took far longer. Thus, contrary to the views of participants, it appears that Israel shares important similarities with other advanced

94 democracies. At the same time, the Israeli case raised questions about the influence of party discipline and ideological polarization that deserve further attention.

The impact of intractable issues on the tendencies of governments to distribute spoils is noteworthy in this regard. It may be that legislative polarization leads to increasing levels of such spending in an effort to placate important constituencies. These can be thought of in several ways. Geographically concentrated ethnic or religious groups may be one way while dispersed groups oriented around class cleavages such as labor unions are another. Furthermore, selectorate theory, cast in terms of graft rather than vote shares, might be a productive theoretical approach to this problem. In particular, the influence of extremist parties on pork barrel spending may inform our understanding of why such spending tends to occur and how credit for such spending is publicized by politicians and parties. This may inform us about how consolidated democracies may evolve towards less representative forms of government.

Furthermore, the impact of religious parties within democracies on cabinet portfolio distributions is intriguing. In Israel, these parties appear to obtain more portfolio positions than they otherwise might. How these parties extract cabinet concessions from larger parties may be quite interesting to investigate. Coherent, disciplined parties with clear policy objectives may be able to press larger, yet less disciplined parties for such concessions. When parties with opposing policy goals are involved, one might suspect that the costs may be high.

Finally, each of these sub-topics suggests the utility of historical institutionalism as a useful tool for examining government formations. This perspective seems underused in studies of government formations that tend to focus on the nature of the events themselves rather than trends within the history of government formations. Such analyses could reveal much about how actors within these institutional settings seek to use them to suit their own long-term objectives.

CHAPTER 5

THE EFFECT OF ELECTORAL VOLATILITY

ON INFLOWS OF FDI

Comparative electoral research over the last two decades has focused on the “critical

relationship” between the electorate and political parties (Laver and Schofield, 1990). A variety

of theoretical and empirical works have centered on the causes of two potential threats to this

relationship: government formation delays, or lengthy bargaining sessions over the composition

of new governments, and electoral volatility, or changes in vote shares among political parties

over a span of elections. In this chapter, I examine how existing and new party electoral volatility and government formation delays affect a critical component of the modern democratic economy: inflows of foreign direct investment. These investments, which represent the purchase of long-term, “boots on the ground” managerial stakes within firms by foreign companies seeking a share of markets represent substantial sums of income for the countries that attract them, both in terms of tax revenues and in terms of overall economic growth. Such revenues reinforce economies at a variety of levels, strengthening the parties and governments that attract such investors. An understanding of how politics affects them is the purpose of this chapter.

Typically, studies of bargaining delays and electoral volatility tend to examine the causes of these phenomena. For example, studies of bargaining complexity and uncertainty and their influence on the length of time it takes a government to form seek to understand the circumstances that reduce or increase such delays (Diermeir and Van Roozendaal 1998; Martin

and Vanberg 2003; De Lieven and Dumont 2008; Golder 2010). Scholars interested in electoral

volatility, or changes in the balance of power between legislative parties over spans of elections,

96 also focus on causes, analyzing institutional factors, economic conditions, and voter motivations

that play a significant role in vote share changes between political parties (Rae 1967; Pedersen

1979; Powell and Whitten 1993; Mainwaring and Zoco 2007, Tavits 2008, Powell and Tucker

2013). Despite progress in understanding both bargaining delays and volatility and a sense

among scholars that both of these phenomena have deleterious effects on democratic politics,

most studies focus on factors that drive these phenomena rather than tangible effects.

Suggestive evidence, often presented in the form of concluding remarks, indirectly

connects these factors to political and economic effects. Some scholars report that protracted

bargaining delays endanger the connection between citizens and governments, citing press

accounts of outraged citizens and alarmed trade partners (Golder 2010, 4). Others echo these

concerns, finding that citizens become distrustful of government during lengthy formation delays

(Fallend, 2009). Pundits and policy practitioners share these concerns about tumultuous changes

in party politics (Zakaria 2012; Lagrande 2012). Some decry a trend of party dealignment, or a

failing connection between political parties and their traditional constituencies that set the stage

for repeated episodes of high electoral volatility (Gallagher Laver and Mair 2006, 295). Still,

these studies are not specifically concerned with consequences, instead focusing on the causes of

bargaining delays and electoral volatility or issuing vague warnings about the dangers of

polarization and grid lock to democracy. A link between politics and practical effects is needed.

In this chapter, I build on the findings established in Chapters 1, 2, and 3 by examining a

measurable consequence of these phenomena—the reaction of foreign investors to episodes of

bargaining delays and the two forms of electoral volatility. I view these political phenomena as

ideal influences on inflows of foreign direct investment—a manifestation of the ability of

outsiders to trust a country’s markets, institutions and politicians. I argue that opportunities

97 introduced by these factors plays a substantial role in such investment decisions, and that a conditional effect between episodes of volatile elections and drawn-out government formations provide investors with the chance to avoid government interference. Hence, these manifestations

of democratic political instability may serve to attract investment rather than repel it.

5.1 FDI, Electoral Volatility and Government Formations

Three contextual examples may shed some light on the effects of relatively high levels of

both electoral volatility and lengthy government formation delays. In the November 2002

parliamentary elections in Austria, the Democratic Austrian People’s Party (OVP) scored a

dramatic victory, winning over 46% of the seats in the Landtag (International Parliamentary

Union, 2002). While the OVP was not in a position to form a single party government, it

appeared to be in the driver’s seat in terms of forming a cabinet. Despite this, bitter negotiations

amongst potential coalition partners took 96 days to invest a government, one of the longest

delays in post-war Austria history (Fallend 2004). These delays halted work on critical

legislation including reforms to Austria’s healthcare system and important EU trade agreements.

Once the government finally took office, a poll revealed that 72% of those interviewed in a

national poll did not feel that the new government was “the best one” for Austria (Fallend 2004).

The 2007 and 2010 legislative election sequence in Belgium is another example of these

effects. This cycle was marked by the entrance of three new parties and the political demise of

two others. Existing parties were also rocked by vote share changes totaling over 30%

(Nordisieck 2011). These elections were sandwiched around a cabinet dissolution and

characterized by extremely long government formation delays. A brief excerpt from the Belgian

newspaper Le Soir in early 2011 illustrates the consequences of this political instability:

The current political situation frightens investors, according to Marcel Claes, chief of the American Chamber of Commerce in Belgium. The consequences of

the (world-wide financial) crisis and the political situation in Belgium have put off investors. “It frightens Americans. A country without a government is incomprehensible to them…” (LeSoir, January 11th 2011).40

Finally, a recent speech by the managing director of the International Monetary Fund (IMF)

Christine Lagarde provides a grim assessment of the impact of politics on global economies:

“A number of factors are weighing the global economy down. At the center of them is the element of uncertainty. Uncertainty about whether policy makers can and will deliver on their promises. This is having varied effects: increased divergence of economic fortunes in the Eurozone; a tepid recovery in the United States…We all hope that political clarity emerges soon…” 41

These examples suggest a relationship between bargaining delays and electoral volatility

that affects a factor of measurable consequence: inflows of foreign direct investment. Foreign

direct investment, or FDI, is a major component of the global economy. FDI inflows, or the

investments made by foreign corporations within a country’s domestic markets, represent

substantial sources of income. For example, inflows of FDI in 2010 in the Czech Republic and

Portugal totaled over 6 billion dollars, a figure representing approximately 3% of gross domestic product. In Ireland, FDI represents investments over 37 billion dollars, or approximately 17% of

GDP (World Bank 2010). These are generally extensive and long lasting investment relationships in a foreign company’s facilities, employees, and products, and are made with three goals in mind: the ownership of innovative production techniques, entrance to critical markets, or access to natural resources that would otherwise be inaccessible to foreigners (Dunning 1981).

Over the last three decades, FDI flows amongst major economies have grown tremendously. Many countries rely on these investments to spur economic growth and enhance competitive advantages (World Bank 2010). As such, they are an important consideration for policy makers and business executives around the world. For example, the website of the Irish

40 Retrieved from: http://www.lesoir.be/actualite/economie/2011-01-11/la-situation-politique-belge-inquiete-les- investisseurs-americains-814021.php. (accessed October 2012). 41 Retrieved from: http://www.imf.org/external/np/speeches/2012/092412.htm (accessed October 2012)

Fianna Fail Party prominently features policies designed to attract foreign direct investment to

Ireland and provides press releases about significant agreements (Fianna Fail, March 2010).42

Various Landers (states) in Germany also fund prominent development agencies designed specifically to attract FDI (IMG, 2012). Figure 5.1 provides a view of the variation in these inflows as a percentage of GDP within Ireland. 30 20 10 0 Inflows of FDIofGDP as % a -10 -20 1990 1995 2000 2005 2010 Year

Figure 5.1: Inflows of Foreign Direct Investment in Ireland.

Notice the extreme variance in the figure: after attracting relatively slight levels of FDI from 1990 to 1995, FDI inflows fluctuated precipitously over the next fifteen years with tremendous highs (up to nearly 30% of GDP) and lows (a withdrawal of over 10% of the value of the Irish economy in 2005). Many of the economies within my data display such trends.

Given the values of these investments as a component of the Irish economy, their importance is clear. It is also clear that they are not a given. Variation does occur even within stable economies. I argue that while systemic or cyclical economic fluctuations are important to the

42 Retrieved from http://www.fiannafail.ie/blog/entry/ida-publishes-blueprint-for-attracting-foreign-investment- michael-fitz/. (accessed October 2012).

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decisions of investors, the opportunities (and risks) introduced by host country political

conditions are also an important, yet overlooked factor. As an executive with a firm who

managed overseas operations noted, “It’s their joint and your venture.”43

5.2 A Theory of FDI Inflows within Advanced Democracies

First and foremost, investors who seek to purchase stakes within foreign markets are

motivated by a desire to obtain financial gain. Countries that provide profitable investment

opportunities should see increasing levels of investment. A growing number of scholars suggest

that democracies present the most promising environments for foreign direct investment

(Ahlquist 2006, Jensen 2008, Ali et al 2010). Foreign investors appear to be reassured by

political constraints inherent within democratic systems. In the past, the primary danger to

foreign investors was expropriation or the seizure of foreign assets by the host country

government or business partners acting in collusion with them (Henisz 2001). However, most

scholars have tempered their view of the risk of nationalization within democracies, suggesting

that it is no longer a real threat (Pinto and Pinto 2008, 5). That being said, I argue that political

risk within democracies remains a hazard, yet may also provide opportunities for investment. I

contend that these risks and opportunities are in part driven by political instability.

I characterize this instability as a record of lengthy bargaining delays and periods of high

electoral volatility during elections. A substantial literature supports this. A review of the

comparative literature suggests that volatility and bargaining delays create uncertainty for

citizens and political parties alike (Mair, Muller, and Plasser 2004, Tavits 2008, Golder 2010).

Scholars of international political economy also find that volatile political environments attract

43 I interviewed three executives during the course of this study. Two were executives with US firms who directly worked in foreign countries to transition management staff to the new US owners. The third was an industry insider with substantial experience working with firms that engaged in FDI. Several others declined to participate for legal reasons.

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the attention of foreign investors (Bernhard and Leblang 2006, 12). Such works specifically link

the uncertainty of democratic electoral outcomes to “risk premiums” for exchange rates

(Bernhard and Leblang 2002, 318).44 These rates rise appreciably during contentious or

confusing electoral periods. Country stock markets regularly underperform during such episodes

(Bernhard and Leblang 2006, pg. 72). Asset owners may shift their investments during periods

of political uncertainty (Bernhard and Leblang 2006, pg. 50). While these processes are short

lived, rarely extending beyond the time frame of an election or cabinet formation opportunity,

they confirm a direct economic effect compounded by uncertain political periods. One is

reminded of the common wisdom: buy low and sell high. Countries with chaotic democratic

politics may provide the opportunity for agreements that provide substantial benefits to investors

that less distracted governments and legislatures might not support. In this way, unsettling

democratic political processes may spur foreign investment decisions rather than hinder them.

One might argue that the ideological orientation of the legislature or government may

also play a role. Left-leaning governments can influence the activities of currency speculators

(Bernhard and Leblang, 2002) and foreign investors (Pinto and Pinto 2008). Right-wing

governments are thought to encourage foreign investment in order to support financial

companies and manufacturing concerns, while left-leaning governments support policies that discourage foreign investment in order to benefit labor based constituencies that may be negatively affected by such investments. Still, some find that conventional views of left and right-wing policies may be inaccurate, suggesting that left and right-wing governments both support foreign investment but wish to guide benefits to their own constituencies (Pandya 2010).

44 Bernhard and Leblang (2006) find ephemeral effects for bargaining delays on interest rate fluctuations. However, direct investments imply a longer time frame and a more intimate level of management for foreign investors. The decision to put boots on the ground, so to speak, suggests a longer time frame for observed effects.

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Furthermore, voters in advanced democracies appear to be drifting away from

partisanship. Electoral volatility and its concomitant bargaining delays may be a result of increasingly circumspect voters who are willing to forgo partisan allegiances and readily switch allegiances between political parties (Mair, Muller, and Plasser 2004, 266, Hansford and Gomez,

2010). Furthermore, scholars of coalition government report counter-intuitive results regarding polarization, finding that highly polarized party systems tend to emphasize the median ideological position and actually encourage government formations (Indridason, 2010).

I maintain that the influence of ideology and partisanship, while noteworthy in other ways, are not central factors for foreign investors interested in advanced democracies. For example, Germany displays a stable record of foreign investment over the last several decades despite alternations in power between the conservative Christian Democrats and the left-leaning

Social Democrats. Profits come first, then stability amongst principal negotiating partners. The ideological bent of a legislature or government should be a tertiary matter to investors in such democracies. For host-country politicians in these countries, the size of the investments and their significance in terms of revenue and employment should inspire an ideological flexibility.

However, given that these investments usually have long time horizons, stable political environments should be preferred, regardless of ideological preferences. Investors need assurances that the rules of the game aren’t going to change in the midst of an expensive and time consuming operation with limited profit margins. At the same time, a consideration of what stability means to investors is important. If governments and legislatures are weak and unable to intervene economically—to raise taxes on foreign companies, for example—the rules established during previous regimes should remain in place. The tendency of business executives to loath government intervention is well-known (Miller 2009; Benesh 2011; Forbes and Ames 2012) and

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a rich tradition in economics mirrors these concerns (Smith 1776; Hayek 1945; Friedman 2006).

Governments and legislatures unable to act decisively in the economic sphere may be preferred.

It is also worth noting the argument I test in Chapter 2: inexperienced bargaining partners

may make poor decisions and fail to maximize their positions.45 With regard to FDI, this argument suggests that new political parties may possess less information about how to manage

government negotiations with foreign firms than business leaders themselves. Such

circumstances should provide executives with a bargaining advantage, or at least keep these

parties of the way as agreements with host country firms are consummated. Other factors that

reduce the influence of government could be viewed in a similar light: if a legislature is

polarized, it is unlikely to forge a consensus against allowing a particular deal or pass new

restrictive legislation. And potential government parties deadlocked in formation negotiations

cannot take office—and are unable to change the rules.

I envision the decision making process for investors as information driven and consisting of three components: economic potential, political stability amongst the major political parties in a country, and the relative opportunities introduced by the latter. Foreign investment decisions are driven first by potential earnings; multi-national corporations can hardly be expected to invest in countries that do not present the opportunity for profits. However, the potential for these investments is conditioned by politics. In advanced democracies that present a limited or non-existent risk of expropriation, instability among important existing parties within the legislature should be of little concern. The basic rules of the game have been established under previous regimes: the status quo should hold, and business should proceed as usual.

45 Each executive that I interviewed for this work suggested that negotiating skills were critical and that bargains over details of the transitional managerial process were constant threats to their work. Furthermore, each suggested that most of the work was done between principles of the firms, yet the periodic arrival of government officials of varying levels of influence was always a concern. Such episodes often led to delays, convoluted changes, and threatened entire projects.

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On the other hand, the effect of the entrance of new parties to the legislature or in government should have similar effects to those expressed in the government formation process analyzed in Chapter 2; experienced and self-interested partners (this time in the form of foreign business executives) should welcome their presence as a means to press for more than they might otherwise obtain. In sum, such parties could be marginalized under such circumstances and the ability of legislatures and governments to interfere in business may be reduced.

Finally, countries that tend to display lengthy government formations could represent

another opportunity for investment analysts. As noted in Chapter 2, such episodes are likely to

represent protracted conflicts among important and influential parties. Until these conflicts are

resolved and a government is invested, the previous regime stays in office (albeit in a lame duck

status) and the ministerial bureaucracy will follow the rules established under the previous

regime (Golder 2010). Given that the conflicts are presumably amongst the existing

constellation of parties during such delays, investors should be, at least in a rough sense,

reasonably sure of who their ministerial bargaining partners will be moving forward. Yet it may

be valuable to conclude agreements while the new government remains in limbo. In this manner,

lengthy bargaining delays should have a slight positive effect on FDI.

5.3 Hypotheses

My theory suggests that, ceteris paribus, high levels of electoral volatility between

existing parties and protracted bargaining delays should have little effect on levels of foreign

direct investment inflows. I argue that, in advanced capitalist democracies, such episodes are of

little consequence to foreign investors—the rules of the game, the political players, and the

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bureaucracies in place are likely to remain the same regardless of such unsettled periods.46 On

the other hand, I argue that the entrance of new political parties should tend to increase

investments as such parties are more likely to be inexperienced in managing the committees and

cabinets in charge of overseeing negotiations with influential foreign business firms.

The first five hypotheses involve political conditions that should influence the decisions

of potential foreign investors. The first three represent factors that may affect opportunities for

investors to conclude FDI agreements: bargaining delays, electoral volatility introduced by

existing party competition, and electoral volatility caused by new parties entering the polity.

In democracies:

H1: Increases in the length of time it takes a government to form should increase levels of

foreign investment modestly.

Hypothesis one presents a rather simple contention: extended delays in forming governments in

either inter-election or post-election environments should, by themselves, have a slight, positive

effect on the ability of foreign investors to conclude agreements by allowing partners to finish

negotiations initiated under the previous government. In sum, the longer it takes a government

to form, the longer the status quo situation remains in effect.

Hypotheses two and three examine the effect of both existing and new party electoral

volatility on inflows of investments. I argue that in advanced capitalist democracies, changes

amongst existing parties do not truly affect the opportunity for investors, and thus should have

little effect on FDI. However, I argue that increasing levels of new party volatility should

46 There are two ways to conceive of the effect of these political processes on direct investment: as a comparison of levels, or as a test of variance or change. Given that I seek to understand the long term effects of unstable political environments rather than to uncover temporary fluctuations, I use variables measuring levels rather than change.

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increase levels of FDI by introducing inexperienced politicians into the legislature and

government, creating the potential for the conclusion of agreements more favorable to investors.

H2: Increasing levels of electoral volatility introduced by existing political parties should have

no effect on foreign direct investment.

H3: Increasing levels of electoral volatility introduce by new parties should increase foreign direct investment moderately.

Hypotheses four and five examine the conditional impact of high levels of existing and new party volatility on inflows of foreign direct investment. My arguments do not imply that increases in levels of existing party volatility should affect FDI under most circumstances.

However, I do expect that as bargaining delays increase, higher levels of new party volatility should tend to increase observed levels of foreign direct investment more than other scenarios by

simultaneously introducing inexperienced negotiators and keeping government out of the way of

business. Ceteris paribus, the latter situation may represent a best case scenario for executives.

Thus, in advanced capitalist democracies:

H4: As levels of existing party volatility increase, levels of foreign direct investment should

remain unchanged regardless of the length of time it takes a government to form.

H5: As levels of new party electoral volatility increase, levels of foreign direct investment should

increase substantially as the length of time it takes a government to form also increases.

The final two political hypotheses represent controls: the level of ideological polarization

within the legislature and the ideological orientation of the government. Polarized legislatures

may be unable to act on important legislation or administrative matters may be impeded by

political gridlock, allowing foreign investors to act freely to conclude agreement with domestic

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firms. On the other hand, left leaning prime ministers may cause investors to fear higher

corporate taxes or new regulations that could cut into profits.

A final series of control hypotheses capture the economic rewards that foreign investors

hope to reap when analyzing an investment opportunity. These factors represent market size, the

quality of the country’s work force, the relative size of government budgets, and the reputation

of domestic financial markets. The logic behind these hypotheses is straightforward. Investors

should be attracted to large productive economies—such countries often possess a variety of

industries and services, typically enjoy a track record of economic growth and have a ready-

made base of consumers. It should be noted that investors may also seek countries with ready

stores of natural resources or inexpensive labor. Investors should also look for countries that

have an educated and experienced work force, reducing the likelihood that extensive training programs would be required before a company would be ready to compete. Investors also prefer low tax environments and should, all else being equal, avoid countries with large government budgets relative to market size. Finally, principals should look for countries that have a track record of economic stability and sound financial management. These factors are common to a variety of economic analyses (Ahlquist 2006, Choi and Samy 2008, Pandya 2010).

5.4 Data and Models

In order to test these hypotheses, I draw on a range of economic and political variables.

Bargaining delay data are largely drawn from the Parliamentary Democracy Data Archive (2010) but also include data from Ryals-Conrad and Golder’s (2010) study of government formations in

Central Europe. I expand these data slightly, obtaining data for some of the missing observations and updating some country observations. The EU area focus of these data provides a wide range of consolidated and transitional democracies with varied economic, political, and social systems.

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Data on both existing and new party volatility are drawn from the data used in Chapters 1 and 2.

Legislative polarization scores are largely taken from Indridason (2010), while economic and human capital data are drawn from World Bank and UN sources. As I am interested in year-to- year effects and want to control for the potential that non-political causes may influence inflows of direct investment, my unit of analysis is country year.

5.4.1 The Dependent Variable

The dependent variable, FDI Inflows, measures inflows of foreign direct investment as a percentage of host country GDP. This variable is measured for each year.47 I follow Ahlquist

(2006) and Choi and Samy (2008) who contend that operationalizing inflows as a gross measure of revenues is not wise for a project like this one. Doing so could mask cross national effects by dragging estimates towards the largest economies. Using a ratio standardizes each country’s economic power (Choi and Samy 2008, 90). Given that I use a measure of market size, I argue that the percentage calculation is applicable here. I also note that outflows of investment are not a part of this measurement. In this way, my design focuses purely on the investments of foreign corporations in the host country. To clarify my logic: firms within certain countries might make large investments in foreign markets, but also attract such investments as well. Using a net calculation could wash out the measure of interest in this case. Data come from the World

Bank’s World Development Indicators (2010) and classify investment as FDI when it represents at least a 10% stake in a host country business.

5.4.2 Political Independent Variables

I again use a measure of government formation delays and the existing and new party measures of electoral volatility referring to them as Bargaining Days, Existing Party Volatility and New Party Volatility. As is the case in previous chapters, the government formation delay

47 For a review of the range of these data, please refer to appendix Tables 1 and 5.

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variable captures how many days it takes to form a government after an election or a cabinet

dissolution while the existing and new party volatility measures capture change amongst parties that have contested two or more consecutive elections and the entrance of entirely new parties to elections respectively.

I also use two political control variables: the first is the ideological polarization of the legislature in the country. These data are drawn from Indridason (2010) and utilize the same calculation introduced in Chapter 2. This provides a clever way to control for situations in which two ideologically opposing parties dominate a legislature, possibly hindering work on legislation critical to investors or blocking bureaucracies from implementing policy (Indridason 2010). In simpler terms the larger the score, the greater the effective level of ideological polarization between parties in the legislature. I refer to this variable as Polarization.

However, it may be that the Indridason calculation is too convoluted for the principals of

corporations; it may be that party ideology is more important. The final political control variable

involves the party family associated with the executive (Gallagher, Laver and Mair 2005, 230). I

code these executives (typically prime ministers in these data) according to their party families,

producing a variable coded 1 for left, 2 for centrist, and 3 for right leaning executives. I refer to

it as PM Party Family.

5.4.3 Control Variables Related to Economic Rewards

Multinational corporations and their executives contemplating investments in foreign

countries should be concerned with political and economic risk factors. The following variables

involve factors that relate to economic risk, or the potential for making a profit given certain

economic conditions. The data for these variables are primarily drawn from the World Bank’s

Development Indicators Database (2010). These include gross domestic production (GDP), a

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measure of market size. I use a log specification for this variable to preclude the impact of larger

economies that might obscure effects and refer to it as Log GDP.

Human capital is a measure of education, and captures levels of worker skill within a

country (Jensen, 2003). A foreign corporation considering investment should desire a well-

educated work force. I use the percentage of eligible citizens enrolled in college and refer to it as

College Participation. I expect that higher levels of college enrollment should attract FDI.48

Government Consumption captures the level of government spending as a percentage of

total GDP. The logic here suggests that higher levels of government spending must be sustained

by taxes. Such spending also suggests that economic problems requiring government economic

intervention are present. Foreign corporations should wish to avoid such entanglements.49 I

expect that high levels of government consumption should correlate with lower levels of FDI.

My final variable is a measure of contract intensive money or CIM.50 This ratio compares

the amount of money within a country’s economy invested within banks or financial instruments

to funds outside of these institutions. In countries that enforce property rights, this ratio should

be higher, as citizens and business owners trust and invest in domestic financial institutions

(Clague, Keefer, Knack, and Olsen 2010). This logic should extend to foreign investors. I

expect that higher CIM scores will result in greater levels of foreign direct investment.

48 One might consider that education may not be the best measure of human capital in all environments. For instance, it may be that if investors are simply seeking inexpensive labor for industrial or natural resource extraction, education may not be important. However, given that advanced democracies tend to have moved beyond this sort of economic focus, I argue that education is a better proxy and as noted, I control for the size of the economy and transitional democracies that might display more labor intensive operations. Finally, I also tested a model using the percentage of eligible high school students. This model, although slightly weaker, provided similar results to the main models presented in this analysis. 49 In a new article, Jensen (2011) finds no relationship between relative changes in corporate tax rates and foreign investment in a subset of OECD countries. While corporate tax rates play a part in Government Consumption, this measure also captures additional influences. 50 Thanks to Mark Souva for providing these data.

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5.4.4 Estimation Strategy

I present a series of models using ordinary least square with panel corrected standard

errors and first order, autoregressive correction. My logic: tests for serial correlation suggest that

it is present within these data—a conclusion that makes sense: countries with strong records of

attracting FDI should, all else being equal, continue to do so. Additionally, unit root tests do not

detect multiple unit roots with the FDI data.51 Panel corrected standard errors and the inclusion

of a lagged value of FDI seems the most appropriate way to address this.

With respect to the political environment, my theory implies a conditional effect: As

such, the four models use this general empirical model:

= ( ) + ( )

��+ �� (�� ) ��

+ �� (�� ) +∗ �� ( �� ) + +

I present four models:�� the�� first pair�� studies the effect�� of�� increasing�� levels of bargaining�� delays

across levels of existing and new party volatility in consolidated democracies while the second

examines these effects within transitional democracies. I split the sample into these two types

for three reasons: to address the possibility that less advanced democracies might present a less attractive environment for investors in terms of stability, to control for the possibility that such countries might have more resource or labor intensive business concerns, and due to the fact that there are fewer observations of transitional democracies—I did not want the results from the

consolidated democracies to overwhelm the results. Marginal effects plots and discussions of context are presented. Simulations are also presented to clarify substantive effects.

51 The results of both tests are available in appendix tables 3 and 4 of this chapter.

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5.5 Results

Table 5.1 displays the results of the four models I use as the basis of this analysis. First,

I focus on the results within consolidated democracies: Models 1-1 and 1-2. Model 1-1 examines the interaction between new party volatility and bargaining delays while Model 1-2

examines the interaction between existing party volatility and bargaining delays in the presence

of mean levels of the remaining variables. As the interpretation of the interactive and constituent

terms is not readily analyzed using tables of results, I turn to the political control variables first.

In Model 1-1, Polarization presents a significant and positive result, suggesting that increasing levels of legislative polarization tend to increase levels of foreign direct investment. This result is interesting, and implies that legislatures that are unable to act decisively due to polarization may serve to attract foreign investments. This result is consistent with the results of Model 1-2.

Additionally, the party family of the executive does not appear to matter to investors in consolidated democracies, again implying a flexible approach to ideology among executives.

Among the economic controls used in Model 1-1, it appears that larger government budgets appear to deter FDI—this makes sense in that larger budgets are likely to be sustained by

higher taxes. Yet it does not appear that large economies attract FDI. This latter result suggests that less advanced economies are more attractive to investors due to lower costs College

Participation displays a positive and significant result: A college-educated workforce appears to

attract investments—a result in keeping with other studies. Interestingly, the CIM measure of

bank confidence is not significant in any of the models.

Model 1-2, an examination of the results of an interaction between existing party

volatility and bargaining delays presents a similar pattern of results for the control variables:

113 polarized legislatures and the presence of an educated workforce appear to attract investments while higher taxes and (oddly enough) larger economies deter it.

Table 5.1: The Determinants of Foreign Direct Investment in Democracies.

Consolidated Democracies Transitional Democracies Model 1-1 Model 1-2 Model 2-1 Model 2-2 Bargaining Days .015 * .017 * -.001 .002 (.004) (.004) (.011) (.011) New Party Volatility -.042 * -.019 * .069 * .057 * (.014) (.009) (.036) (.030) Days x New .001 * - -.001 - (.000) - (.000) - Existing Party Volatility -.033 -.046 -.093 * -.063 (.033) (.036) (.049) (.041) Days x Existing - .001 - -.001 - (.001) - (.001) Polarization -.579 * .593 * -.779 -.756 (.265) (.266) (.666) (.649) PM Party Family (Center) -.442 -.421 3.23 * 3.22 * (.299) (.299) (1.76) (1.85) PM Party Family (Right) -.311 -.307 2.79 * 2.75 (.219) (.221) (1.81) (1.90) Gov. Consumption -.124 * -.122 * .012 .013 (.061) (.061) (.089) (.088) Log GDP -.189 * -.193 * -.156 -.165 (.064) (.065) (.200) (.201) College Participation .162 * .163 * .019 .018 (.021) (.021) (.028) (.490) CIM -.804 -.965 -.542 -.351 (3.01) (3.05) (2.26) (2.33) Lag FDI .509 * .504 * .642 * .644 * (.021) (.021) (.128) (.127) Constant 6.800 6.96 2.53 2.53 (4.42) (4.51) (5.59) (.127) R Squared .37 .36 .40 .40 N 494 494 320 320 p<=.05, one tailed. Panel corrected standard errors in parentheses.

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Turning to the conditional effects, I present marginal effects plots drawn from the results of Models 1-1 and 1-2 to examine the conditional relationships implied by my arguments.

Figure 5.2 (drawn from Model 1-1) examines the effect of increases in existing party volatility on inflows of foreign direct investment across levels of government formation delays in consolidated democracies. A “rug” across the bottom of the plot provides a sense of the density of the observations of government formation delays. This plot displays a null relationship

Figure 5.2: The Marginal Effect of Existing Party Volatility on Foreign Direct Investment across Levels of Government Formation Delays in Consolidated Democracies.

between these two factors: increasing changes in the balance of power amongst existing political parties across a range of government formation delays (both inter and post-election) do not appear to have any effect on inflows of foreign direct investment. This result supports my argument that investors should not pay much attention to such periods as the rules of the

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bargaining situation are unlikely to change before or after the election is completed or the

government invested.52

Figure 5.3, drawn from Model 1-2, displays the relationship between increasing levels of new party volatility on inflows of foreign investments across levels of government formation delays within consolidated democracies. These results are quite different and also match my theoretical expectations. Interestingly, as new party volatility increases across a range of government formation delays, executives seem to invest readily. This effect represents an increase of around 3/10ths of a percent in FDI inflows before becoming statistically insignificant at 68 days. While such effects may seem slight, such an increase could represent tens of millions

of dollars of investment even in a small economy. I again present a rug along the

Figure 5.3: The Marginal Effect of Increases in New Party Volatility on Foreign Direct Investment across Levels of Government Formation Delays in Consolidated Democracies.

52 A difference of means test suggests that FDI tends to decline in years that display an inter-election government formation.

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bottom of the plot to provide the density of the bargaining delay data; approximately 85% of the

observations fall beneath 68 days. As such, we can be fairly confident that this effect is

substantively impactful, at least in consolidated democracies. Investors seem to welcome inexperienced new parties as easily satisfied legislative bargaining partners and delays in such circumstances appear to keep government out of the way of business or maintain the status quo.

Models 2-1 and 2-2 examine the conditional effect of new and existing party electoral volatility on FDI at various levels of government formation delays within the transitional democracies of Eastern and Southern Europe. The result of these models suggests that different forces are at work within these regions. Again I focus on the results of the other political and economic control variables first before turning to marginal effects plots to examine the

conditional relationships among existing and new party volatility and bargaining delays. In

consolidated democracies, polarization, government consumption, levels of GDP and college

participation appear to play a role in influencing FDI. However, none of these factors present a

statistically significant result in Models 2-1 and 2-2. Instead, the party family of the prime minister appears to be a significant influence: center party PMs appear to attract 3% more FDI than left-wing PMs and countries while right-wing PMs appear to draw approximately 5% more.

This may suggest that the emerging party systems in transitional democracies may be confusing to investors and that established relationships with important political figures may be more useful to their information gathering efforts. The null results from the economic control variables are also interesting; they may suggest that economies in transitional countries are more labor or resource intensive; FDI may be made in business concerns involving extractive operations involving the harvesting of natural resources or labor intensive manufacturing rather than in firms producing technical or consumer driven products.

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Regarding the conditional influence of electoral volatility and bargaining delays on FDI in transitional democracies: I again present a series of marginal effects plots. Figure 5.4 examines the impact of increases in existing party electoral volatility on FDI across a range of government formation delays, drawing from the results of Model 2-1. This result suggests that increasing levels of existing party volatility tend to depress levels of foreign direct investment as bargaining delays increase—at least within transitional democracies. This effect is rather substantial, suggesting declines of as much as 7% in FDI inflows under these circumstances.

This suggests a fundamental difference between consolidated and transitional democracies: my arguments suggest that these changes should not matter to investors. It may be that investors are already predisposed to wariness in such environments and changes in the balance of power amongst existing political parties creates the perception of undue risk to investments.53

Figure 5.4: The Marginal Effect of Increases in Existing Party Volatility on Foreign Direct Investment across Levels of Government Formation Delays in Transitional Democracies.

53 One American executive suggested that French executives have more experience and are more effective in crafting agreements in such countries.

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Figure 5.5 presents a similar finding, examining the impact of increases in new party

volatility on FDI across various levels of government formation delays. This suggests that

increases in new party volatility tend to decrease FDI inflows by 2-3% as bargaining delays increase. This effect is statistically significant until delays exceed 28 days. Note that this plot is similar to the effect of increases in existing party volatility in consolidated democracies. This

may suggest that higher levels of new party volatility in transitional democracies confuse

investors, leading them to rely on the party of the prime minister as a cue.54

Figure 5.5: The Marginal Effect of Increases in New Party Volatility on Foreign Direct Investment across Levels of Government Formation Delays in Transitional Democracies.

5.5.1 Simulations of Political Interest

In order to provide information about the substantive effects of my variables of interest, I construct several scenarios setting independent variables to a variety of levels found in the cases in the dataset, and then take 1,000 random draws from the estimated coefficient vector and

54 A difference of means test suggests that FDI higher within consolidated democracies.

119 variance-covariance matrix to gain further insights into the practical effects of some of the significant variables from the interaction models displayed in Table 5.1. I present effects along and estimates of uncertainty for each simulation.

First, I examine the conditional effect of toggling bargaining delays to various interesting levels in consolidated democracies. I initially create a mean scenario which sets all variables to their average levels: this creates a simulated country with about 12% of its GDP represented by

FDI, a typical formation delay of between 12 and 27 days, moderate levels of existing and new party volatility during election time, moderate polarization, a prime minister from a center-right party family, a reasonable number of eligible students in university, and moderate economic strength and relatively high trust in banks. I then create an alternative scenario in which bargaining delays are increased to about one standard deviation above the mean, or about 60 days. This situation mirrors the formation delay that occurred after the 2011 legislative elections in Finland. In this scenario, inflows of FDI are approximately ¾ of a percent higher when bargaining delays increase and new party volatility remains at mean levels (.4% - 1.2%). One might question the substantive nature of this result. This upswing in FDI, under mean values, would inject roughly 1.6 billion US dollars into the economy of the simulated country.

Another interesting political scenario is drawn from a comparison of mean values to a model under which legislative polarization is increased to one standard deviation above the mean. This model mimics levels of legislative polarization expressed in the Austrian legislature in 1980. This scenario again suggests that increasing levels of legislative polarization may serve to attract investment rather than deter it: the simulation finds that FDI is about 2/10ths of a percent higher under such circumstances (.04% - .33%). Again, while this effect appears small, the revenues it represents are quite substantial: almost 400 million US dollars.

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Finally, I present a scenario from the transitional democracies of Southern and Eastern

Europe. Again, I first create a mean category then compare it to others in which existing party volatility is increased to one standard deviation above the mean, a result exemplified by the

2006-2010 election cycle in Hungary. In this case, increases in existing party volatility depress levels of FDI by approximately 8/10th of a percent (.01 % - 1.5%). However, this result is only significant at the .10 level, hence is not as robust as the findings in consolidated democracies.

These simulations provide reinforcement for my arguments—at least in consolidated democracies. Delays in the government formation process and increased levels of legislative polarization appear to attract investors rather than deter them. They also confirm the substantive difference of the investment environments presented by transitional democracies—other factors appear to influence investor decisions within such countries.

5.6 Conclusion

Democratic countries appear to be more attractive to international investors than autocratic or hybrid regimes (Jensen 2003, Ahlquist 2006, Jensen 2008). Despite these findings, considerable variation in levels of FDI exists with democracy. In this Chapter, I examine the role of factors thought to be deleterious to investment: increases in electoral volatility of both new and existing party forms and lengthy government formation delays. I maintain that such tumultuous political conditions might serve to increase FDI rather than deter investors by either introducing inexperienced bargaining partners to the legislature or government or, in the case of lengthy government formation delays, simply keeping the status quo in place. I find support for this argument, particularly in consolidated democracies.

These results are important in several ways. First, they provide a link between democratic politics and a tangible real-world effect of substantive importance. Inflows of

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foreign direct investment are a critical source of income for advanced and developing countries

alike. Connections between democratic politics and economics are hard to find or short lived, and this result suggests many interesting research opportunities in examining the effects of democratic political change. Second, the counter-intuitive results have fascinating implications at a conceptual level. Messy and inconclusive elections, legislative polarization, and other forms

of democratic political turmoil, at least in consolidated democracies, actually may serve a

positive purpose in some circumstances, planting the seeds for diverse economic growth.

This result also suggests that firms seeking to do business are intently aware of politics,

carefully assessing the timing of such investments to take advantage of political conditions. This

speaks to a level of political sophistication among business executives (or at least their analysts)

that is not always apparent to scholars of politics and economics. Finally, the differentiated

results in transitional democracies also suggest that these countries may not yet be as far along

the road to consolidation as we might believe. It may be that concerns about rent-seeking or

even expropriation remain pertinent in these countries, or that efforts towards diversifying such

economies may be useful strategies to political actors seeking to attract investments.

Nonetheless, economic and political risks remain, at least in the eyes of investors.

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CHAPTER 6

CONCLUSIONS AND IMPLICATIONS

In this dissertation, I have examined the causes and consequences of a fundamental tenant

of democracy: the ability of citizens to select the political parties that represent them and to

change them according to their preferences. In Chapter 1, I find that the failure of government to

address the policy concerns of citizens can lead to changes in the balance of power among

political parties—yet find that the expression of these changes is nuanced: institutions can affect

the strategies of voters and the leaders of political parties, producing two forms of change:

existing party volatility and new party volatility. As noted, mixed electoral systems appear to

create opportunities for new parties that other systems do not and directly elected presidents play

a significant role in the fortunes of incumbent parties at election time. These findings are

fascinating reflections of the ability of citizens and elites to assess the chances of successfully

making political change a reality under complex circumstances and institutions. Partisanship

appears to have a limited role in many of these decisions, suggesting that voters are making

informed decisions about these possibilities and that, given that institutions permit, parties are

responding to these preferences. I find this evidence heartening; it appears that these actors are

far more circumspect and calculating that they are generally given credit for.

Many interesting directions emerge from these findings for future research. At the conceptual level, the relationship of social cleavages such as labor unions, ethnic, religious, and linguistic groups to political parties in democracies is interesting. As noted, the influence of labor unions appears to be declining within modern industrialized democracies, but their impact

123 remains important. Additionally, the theoretical foundations of how other social groups influence political parties are another potentially useful direction for future work.

Another intriguing direction involves the impact of theories of path dependency. While this research tentatively indicates that new party volatility tends to decline as democracies become consolidated, a more detailed examination of this process could produce interesting insights. Although the statistical diagnostics did not reveal trends within these data, a further study of the possibility of such tendencies could be productive. Furthermore, this analysis largely skims over the endogenous nature of the relationship between parties and institutions.

The manner in which political actors make changes to electoral institutions within low volatility and high volatility regimes could produce interesting findings.

Finally, the manner in which demographics influences changes in the balance of power among parties is another potentially interesting course. For example, the enfranchisement of new immigrants is sure to create such changes as parties seek to shift their positions to capture these new voters. Furthermore, the rise of anti-immigrant parties could be an expression of this.

How much immigration is required for such effects? On the other hand, negative population growth is another potential influence over longer periods of time. Could stable party systems be a reflection of aging and shrinking pools of voters? Future work could address these questions.

In Chapter 3, I examine the impact of these changes on the length of time it takes to form a government in a parliamentary system. Paradoxically, I find that new parties with limited information about how to bargain actually decrease delays in the bargaining process, leading to faster government formations. The evidence here reinforces the role of the individual actor in politics and to reaffirm rational choice principles—experienced actors in the political world have little incentive to help newcomers who may ultimately turn the tables on them—either in

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government or via votes of no confidence. While the contexts that give rise to these harsh office

seeking behaviors do not always arise, they are more common than some might like to believe.

It also suggests that parliamentary systems of representation create collective action

problems that many would suggest it eases inherently—it should be in the best interests of the

nation to form a government as rapidly as possible after an election. Under less utopian

motivations, the same principle should hold true for prospective coalition partners—a

government in office can address policy concerns and, if successful, be re-elected. Yet the

participants, concerned with their own spoils, are incapable of generating this outcome under

many circumstances. The manner in which these behaviors are incentivized by institutions

should be investigated further. In a normative sense, it may be that the role of apolitical advisory groups should be enhanced, especially during trying political or economic times. Such third parties, acting much as arbitrators in labor disputes may be able to resolve differences in a manner that is not possible under current constraints. Empirically, we may view the inclusion of apolitical technocrats within governments at such times as a manifestation of this.

Furthermore, the influence of experience is an important factor to consider in government formations. What happens when voters throw the bums out? Tentative evidence suggests that turnover within legislatures may be higher than we might suspect. Such episodes seem likely to create the potential for inefficient legislatures, but might also allow for impactful reforms. How these periodic injections of inexperienced politicians impact the government formation process

(and other legislative tasks) may be interesting. Additionally, my approach and results tend to homogenize new parties. How inexperienced are the actors within new parties? Again, tentative evidence suggests that some are more inexperienced than others. Does inexperience necessarily

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make one a “mark”? Further parsing of this subject, perhaps through the use of small scale

experiments could reveal interesting micro-foundations for continuing work.

Chapter 4 provides further evidence of these problems in my examination of government

formations in Israel. While many of the circumstances and problems presented in this case are

typical of many democracies, the pressures of conflict, exacerbated by intractable internal

disputes, appear to have created a worst case scenario for the reinforcement of these behaviors.

Office seeking and the distribution of spoils appear to be overwhelming the ideologies of

compromise and social democracy that once formed the core values of the pioneering founders

of this state. As with any applied case, solutions are not neat and simple. Certainly, the role of

institutions is of proximal importance; reforming them to allow greater clarity and government

responsiveness. At the same time, the fundamental issues of identity (which lie well outside the

scope of this dissertation) that plague Israeli society must be addressed—incrementally or

comprehensively—to clear the way for optimism. The leaders of other democracies torn by such disputes may be wise to seek strategies involving reciprocity and compromise.

This field work also suggests a variety of interesting directions for future research. First,

Israel presents what seems like an unusual trend: the rise of a strong and seemingly disciplined religious movement with political aspirations in a modern democracy. How disciplined this movement actually is remains a matter of debate but it was apparent that most of those I interviewed saw this as a worrisome development. A study of how religious movements make the leap from social to political action within democracies could be quite interesting. The role of changes in demographics within Israel is also interesting and suggestive of principles that may be

generalizable to other democracies. Interestingly, Israel has transitioned from governments that

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actively and enthusiastically sought immigration to those that seeks to reduce such inflows.55

Why and how such trends occur is certainly a widely applicable topic and should be investigated

across a broader range of democracies.

Chapter 5 also provides interesting evidence of the impact of politics on self-interested

behaviors among the principals of corporations. Again, I find counter-intuitive results: tumultuous politics, at least within consolidated democracies, appear to create the opportunity for additional infusions of investment. While no government or polity is likely to seek such times as a means to ultimately produce economic growth, it is interesting to consider how such oft- criticized episodes may actually serve to plant the seeds for economic diversity and strength. Yet the results also suggest that transitional democracies have much to prove to such investors. As noted, it may be that the economies of these countries are not yet diverse enough to provide the stability investors seek. On the other hand, corruption and the degradation of the rule of law in some of these states may be at work. In either case, attention to institutions that reinforce the legal rights of property owners, whether foreign or domestic, may be a path worth considering for government agencies and the designers of political platforms in such countries.

One of the interesting aspects of this work involves the study of the decisions of the principles of corporations. This work infers a political sophistication and an awareness of on the ground developments in elections and in government that are somewhat surprising.

Unfortunately, I was unable to interview many actors in this field due to the interference of ubiquitous hand-wringers within the legal departments of many firms. A more concerted effort on the part of researchers (and a greater willingness on the part of such firms to participate) to study these often disparaged capitalists should be pursued.

55 See “Does Israel Have an Immigrant Problem?”

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Another interesting implication of this study speaks to a broader agenda of international political economy: how might sectors of national economies campaign for or against investments, and how do actors within these sectors engage with political representatives to further their ambitions? Access points theory may provide some leverage on how to examine institutional influences of politics on investment (Ehrlich 2011).

Finally, further work regarding the impact of politics on economics is certain to produce interesting insights. Long term trends in investment seem to exist for certain countries within these data. This suggests that political parties in some countries may systematize their efforts to attract investment. Perhaps more importantly, learning when they seek such investments and how they take credit for them should be quite useful to scholars of comparative politics. This of course suggests another possibly fruitful direction: how and why political parties or domestic groups lobby for or against such foreign investments.

In sum, the process of writing this dissertation has produced an array of insights regarding the politics of voting, the relationship of parties to citizens, the nature of bargaining over governments, and the impact of politics on economies. At the same time, these inquiries have raised a number of fascinating questions about each of these topics and have stimulated my thinking on several related topics. The possibilities are exciting and I intend to give each of these the attention they deserve. At the same time, I welcome the input of any who find these questions as captivating as I do.

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APPENDIX A

CHAPTER 2: CODING, DIAGNOSTICS AND DATA

A.1: Coding Existing and New Party Electoral Volatility

Previous studies of electoral volatility have used the Pedersen Index. This is formally written as:

n ∑ Pit − Pit−1 V = i=1 2

Where Volatility, or V, is calculated by taking the sum of the absolute difference between each party’s vote share i at election time t and t-1, then dividing the result by two (Pedersen 1979;

Taagepera, 2007). Note that this measure captures all volatility within an election cycle. It includes any party or independent candidate that participates in an election, regardless of size or whether or not it participated in both elections or not. This aggregation of all volatility may not be useful in some circumstances. As such, I introduce a measure that captures only the contestations of parties that have just entered political competition at the national level, parties that have merged under new leadership, or parties that have left the political scene. The authors refer to it as Type A volatility (Powell and Tucker, 2013, pg. 6). It is formally expressed here:

n n ∑Pot + ∑ P tow + )1( V = i=1w = 1 2

In this calculation, o represents old parties that contested an election only at time t. W

represents new parties that contested an election only at time t+1. It should be noted that independents, and parties that receive less than 2% of the vote are not included in this calculation. As such, this measure captures party entries, exits, mergers, and splits in a more

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nuanced fashion that the Pedersen measure can. I refer to it as New Party Volatility throughout

this work. The second measure captures intra-party volatility and is referred to as Existing

Party Volatility in this dissertation or Type B volatility by its authors (Powell and Tucker,

2013). The equation generating Type B volatility scores is identical in form to the Pedersen index, but coding rules create the difference (Powell and Tucker, 2013, pg. 7). The Type B

measure excludes the new, splinter and merged parties captured by the Type A measure, and

excludes existing parties that receive less than 2% of the vote (Powell and Tucker, 2013, pg. 7).

A.2: Diagnostics for Models in Chapter 2

Table A.1: Variable Inflation Factor Test.

System Type 1.96 Log of District Magnitude 1.81 Union Density 1.21 Threshold 1.17 Log Years Democracy 1.15 Directly Elected President 1.10 Unemployment Change 1.08 GDP Change 1.07 Voter Turnout Change 1.02

Table A.2: Unit Root Test.

Inverse Chi-Square P Type B Measure of Electoral Volatility 161.15 .000 Type A Measure of Electoral Volatility 229.14 .000 Test of H0: Panels are not stationary. Results suggest that at least one panel is stationary

Table A.3: Hausman Test Between Fixed and Random Effects.

Chi2 P Type B Model 8.40 .12 Type A Model 14.31 .49

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Table A.4: Countries, Years and Election Cycles.

Countries Years # of Elections Albania 1992 - 2009 6 Andorra 1997 - 2011 5 Austria 1970 - 2008 13 Belgium 1971 - 2010 13 Bulgaria 1991 - 2009 6 Croatia 1992 - 2011 6 Cyprus 1976 - 2011 8 Czech Republic 1992 - 2010 6 Denmark 1971 - 2011 16 Estonia 1995 - 2011 5 Finland 1972 - 2011 11 France 1973 - 2012 10 Germany 1972 - 2009 11 Greece 1981 - 2012 13 Hungary 1994 - 2010 5 Iceland 1974 - 2009 11 Ireland 1977 - 2011 11 Italy 1976 - 2008 10 Latvia 1995 - 2011 6 Liechtenstein 1993 - 2009 6 Lithuania 1996 - 2008 4 Luxembourg 1979 - 2009 7 Macedonia 1994 - 2011 6 Malta 1992 - 2008 5 Moldova 1998 - 2010 6 Netherlands 1972 - 2012 13 Norway 1977 - 2009 9 Poland 1993 - 2011 6 Portugal 1976 - 2011 13 Romania 1992 - 2008 5 San Marino 1998 - 2008 4 Slovak Republic 1992 - 2012 8 Slovenia 1992 - 2011 6 Spain 1979 - 2011 10 Sweden 1973 - 2010 12 Switzerland 1975 - 2011 10 United Kingdom 1973 - 2010 10

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APPENDIX B

CHAPTER 3: DATA AND DIAGNOSTICS

Table B.1: Countries and Elections.

No. of Country Years Elections Austria 1970-2008 13 Belgium 1972-2010 12 Denmark 1971-2011 17 Finland 1972-2011 11 France 1968-2012 11 Germany 1972-2009 11 Greece 1981-2012 13 Iceland 1974-2009 11 Ireland 1977-2011 11 Italy 1976-2008 10 Luxembourg 1979-2009 7 Netherlands 1973-2012 13 Norway 1977-2009 9 Portugal 1979-2011 12 Spain 1979-2011 10 Sweden 1973-2010 12 UK 1974-2010 10 Bulgaria 1991-2009 6 Croatia 1992-2011 6 Czech Republic 1990-2010 7 Estonia 1992-2011 6 Hungary 1990-2010 6 Latvia 1993-2011 7 Lithuania 1992-2008 5 Poland 1989-2011 8 Romania 1990-2008 6 Slovenia 1992-2011 6 Slovakia 1992-2012 7

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Table B.2: Descriptive Statistics.

Mean or Observations Mode SD Min Max Bargaining Delays 262 33.50 35.04 .1 208 Legislative Parties 263 4.04 1.44 2.09 10.26 Polarization 263 .49 .31 .13 2.03 Positive Parliamentarism 263 1 - 0 1 Continuation Rules 263 0 - 0 1 Single Party Majority 263 0 - 0 1 Existing Party Volatility 263 10.5 7.12 0 36.9 New Party Volatility 263 6.5 11.15 0 79.6

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APPENDIX C

CHAPTER 4: ISRAELI CASE STUDY

C.1: IRB Approved Informed Consent Letter

Interview Consent Form

Thank you for agreeing to meet with my regarding this subject matter. I appreciate your time and

look forward to a productive meeting.

Purpose of This Research

I am xxxxxxxxxxxxxxx, a Ph.D. candidate in the political science department at Florida State

University in the United States. I am currently working on my doctoral dissertation in political science. This research is part of my dissertation, a study of the causes and effects of changes in

the balance of power between political parties in democracies over time. As a part of this

research, I am in Israel to interview political party officials, researchers, and academics about the

nature of the political party system in Israel. This interview is an important part of this study.

It will help me to trace the theory that I believe explains some of these causes and effects.

Primarily, I hope to discuss two processes with you today:

1) Your views on the causes of changes in the balance of power between political parties in

the Knesset.

2) Learn your views on how these changes might affect negotiations after elections

regarding cabinet positions in government.

I hope to use some of what I learn today to help build and test a theory about why these changes occur in democracies and how they affect governments. This interview should take approximately 45 minutes to one hour. Of course, you are free to participate for as long as your

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schedule allows. With your permission, I will ask you a series of questions about these two

processes. You may respond however you wish, and can ask for clarifications at any time. If you

do not wish to answer a particular question, wish to stop the interview, or decide at any point

during the interview that you do not wish for us to use any part or the entire interview as a part of

our research, you are free to do so. If you decide not to participate, I will hand you any notes

that I have made to that point of your interview and leave your offices with no questions asked. I

will not be recording this interview using audio or video tape; my handwritten notes and a copy

of your signed consent form will be the only record of our meeting that I will take with me today.

Description of Potential Risks

I do not see this interview as holding any personal risks for you other than using some of your

valuable time. This is an interview about open and public political activities in Israel. You are of course free to share anything you wish regarding these topics. I welcome your opinion and knowledge. I will not identify you personally, your political party or faction or any other individuals you may name during our discussions, by proper name is my dissertation or any published article or interview about this subject henceforth. However, I do plan to use anecdotes, and is some cases, direct quotes from this interview within my dissertation. It may be that these quotes could be identified by political opponents or supporters that know you well.

Description of Potential Benefits

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In terms of indirect benefits, the study of democracy in Israel is rather understudied, especially in the United States. At the individual level, the contacts I make while in Israel should enable me to encourage others to view Israel as a case of successful democratic politics, perhaps encouraging other scholars to conduct research in Israel on such matters. As an academic, I will also share with my students about the nature of Israeli politics and society, potentially increasing understanding and encouraging further contacts between our two countries in a small way.

Finally, as I plan to expand this dissertation into a series of articles and possibly a book project, the study of democracy in Israel may be publicized to a greater degree that the subject displays.

The Questions

I have provided a list of the questions I hope to ask you today. Should you choose to proceed, you may choose to answer as many, or as few, of these questions as you wish.

1. Does your party often negotiate with other parties?

2. If so, how often does your party work with these parties?

3. Does your party ever coordinate with other parties during campaigns, even informally?

4. Are their certain parties that won’t negotiate with your party? You do not need to name them.

5. What policies are most important to your party’s constituents?

6. Do you think that your party’s officials are willing to compromise on policies in order to get

something achieved for your party’s constituents in the Knesset?

7. Do you think negotiations over ministerial posts are ever complicated? Why or why not?

8. Do you think that the overall economic conditions in Israel plays a role in which parties end up

winning more seats in elections? If not, what factors do you think are most important?

9. In the 2009 Knesset elections, quite a few voters switched their votes to other parties. Why do

you think this occurred? Was this election unusual for Israel?

10. Why do you think new parties enter competition in Israel?

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11. Have you known any politicians who, after having been in one party, left to start a new party? If

so, why do you think they decided to do this?

12. Do you think that officials in your party use the electoral system in Israel to the best advantage of

your party? Why or why not?

13. Has your party ever been in government?

14. If not, do you think your party will be in government in the future?

15. What kind of strategies might help a small or new party become involved in government

formation negotiations?

16. Does this knowledge about what it takes to be a government party affect the strategies your party

uses during campaigns?

17. Do you think that particularly close elections cause problems for the economy in Israel?

18. Do you think that particularly close elections are good for democracy in Israel? Why or why not?

19. If your party has ever negotiated over cabinet positions, were your negotiating partners in the

other parties well known to the representatives from your party?

20. If your party was involved in cabinet negotiations, were any new parties involved in the

negotiations?

21. If so, would you consider their representatives in negotiations to be well informed and

professional?

22. Do you believe that having several parties involved in cabinet negotiation process might make

negotiations more difficult? Why or why not?

23. If there were delays in the negotiations that your party was involved in, why do you think these

delays occurred?

24. Do you think that these delays caused any political or economic problems for the country as a

whole?

25. If your party was in government, did your party’s relationships with other parties change while

your party was in government? If so, how did these relationships change?

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26. What do you think causes governments to resign?

27. If your party was in government, did you find the Prime Minister easy to work with? Why or why

not?

28. Do you think that economic problems in the country as a whole create problems for government

parties that would otherwise be more manageable?

Privacy and Confidentiality

If you agree to proceed with the interview and the information you provide is useful in testing this theory, I will in most cases paraphrase your words within my dissertation – I will not, in most cases, use your words directly. However, there may be instances where a direct quote from may be more useful, and by signing this document you are confirming that I have your permission to use both paraphrased and directly quoted information in my dissertation research.

I will be taking handwritten notes today. However, this is the only record of our meeting. I am not audio or video taping this meeting, either openly or secretly. In these handwritten notes, I will identify you by name, and will identify your party by name so that I can organize my research at a later date. However, neither I nor my advisor, will identify you personally, your political party by name, or any third party individuals you may refer to during the interview in my formal dissertation or in any other published article, book, or interview on this subject. My notes on these cases will be kept in absolute confidence by my advisor and I, to the extent allowed by law. If this is acceptable to you, please sign this form for both of our records. I have countersigned it and provided contact information for myself below, as well as a copy for you to keep after our meeting today. Again, I will keep these forms confidentially for my records to assure that I am in compliance with Florida State University’s human subject policies for interviews. They will not be published or shared publically in any way.

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C.2: Human Subjects Committee Approval Letter

Office of the Vice President For Research

Human Subjects Committee

Tallahassee, Florida 32306-2742

(850) 644-8673 · FAX (850) 644-4392

APPROVAL MEMORANDUM

Date: 5/4/2012

To: James R. Martin Jr.

Address: Political Science Dept., 531 Bellamy Bldg, Tallahassee, FL 32306

Dept.: POLITICAL SCIENCE

From: Thomas L. Jacobson, Chair

Re: Use of Human Subjects in Research

Rising Tides of Fortune: The Causes and Consequences of Democratic Political Instability

The application that you submitted to this office in regard to the use of human subjects in the

proposal referenced above have been reviewed by the Secretary, the Chair, and one member of

the Human Subjects Committee. Your project is determined to be Expedited per per 45 CFR §

46.110(7) and has been approved by an expedited review process. The Human Subjects

Committee has not evaluated your proposal for scientific merit, except to weigh the risk to the

human participants and the aspects of the proposal related to potential risk and benefit. This

approval does not replace any departmental or other approvals, which may be required.

If you submitted a proposed consent form with your application, the approved stamped consent

form is attached to this approval notice. Only the stamped version of the consent form may be

used in recruiting research subjects. If the project has not been completed by 5/3/2013 you must

139

request a renewal of approval for continuation of the project. As a courtesy, a renewal notice will be sent to you prior to your expiration date; however, it is your responsibility as the Principal

Investigator to timely request renewal of your approval from the Committee.

You are advised that any change in protocol for this project must be reviewed and approved by the Committee prior to implementation of the proposed change in the protocol. A protocol change/amendment form is required to be submitted for approval by the Committee. In addition, federal regulations require that the Principal Investigator promptly report, in writing any unanticipated problems or adverse events involving risks to research subjects or others.

By copy of this memorandum, the Chair of your department and/or your major professor is reminded that he/she is responsible for being informed concerning research projects involving human subjects in the department, and should review protocols as often as needed to insure that the project is being conducted in compliance with our institution and with DHHS regulations.

This institution has an Assurance on file with the Office for Human Research Protection. The

Assurance Number is FWA00000168/IRB number IRB00000446.

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APPENDIX D

CHAPTER 5: DATA AND DIAGNOSTICS

D.1 The Polarization Variable

The Polarization variable combines several pieces of information. It incorporates the number of parties in the legislature as a weighting factor, but is focused on relative size and ideological

distance from one party to another. The equation used is listed in Chapter 3. These data are drawn from Indridason’s data base through 1998 in a selection of European countries (2010), but are updated to 2010 and expanded to include additional countries using my own calculations. A robustness check between these and Indridason’s data confirmed the efficacy of my approach.

D.2 The College Participation Variable

This variable measures the percentage of eligible citizens who are enrolled in post-secondary universities. It is drawn from World Bank and IMF sources. These data generally present this information in five year intervals. As such, I created a rolling average to estimate the levels in between each interval to avoid substantial missing-ness issues.

D.3 Contract Intensive Money

The CIM scores used in this analysis were calculated using methods presented by Clague,

Keefer, Knack, and Olsen 2010. CIM is the ratio of funds held by financial institutions to the total money supply, or (M2 – C)/M2, where M2 is the money supply and C is currency held outside banks by individuals. These data are drawn from line items within the database of the

International Monetary Fund’s International Financial statistics.

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D.4 The Party Family of the Prime Minister

These score the party family of the executive (the president or prime minister) using

typologies suggested by Laver, Gallagher and Mair (2006). These are drawn from family

typologies used by Nordisieck (2012).

Table D.1: Descriptive Statistics.

Mean or Mode SD Min Max N FDI Inflows 9.05 44.72 -32.64 564.92 882 Bargaining Days 12.87 25.64 0 208 890 New Party Volatility 1.91 7.11 0 79.60 890 Existing Volatility 3.00 6.10 0 36.90 890 Polarization .49 .29 .13 1.57 890 PM Party Family 2.00 .73 0 3 890 Log GDP 25.42 1.58 22.11 29.17 887 Gov. Consumption 20.06 3.72 5.69 29.64 887 College Enrollment 18.19 9.14 1.80 46 890 CIM .89 .07 .59 .99 877

Table D.2: VIF Scores.

Existing Party Volatility 1.45 New Party Volatility 1.32 CIM 1.24 Log GDP 1.23 Bargaining Days 1.23 College Participation 1.20 Government Consumption 1.16 Polarization 1.13 PM Party Family 1.11

Table D.3: Test for Serial Correlation.

F (1, 27) 67.9 Prob > F .000

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Table D.4: Unit Root Test.

Statistic P Inverse Chi-Squared 77.4 .03 Inverse Normal -3.1 .001 Inverse Logit -2.9 .002 Modified Inv. Chi-Squared 2.1 .022 Number of Panels 28 Average # of Time Periods 31

Table D.5: Countries and Years.

Austria (1970 - 2010) Belgium (1975 - 2010) Denmark (1971 - 2011) Finland (1972 - 2011) France (1972 - 2011) Germany (1972 - 2010) Greece (1981 - 2011) Iceland (1974 - 2010) Ireland (1974 - 2010) Italy (1976 - 2010) Luxembourg (1979 - 2010) Netherlands (1973 - 2010) Norway (1977 - 2010) Portugal (1976 - 2011) Spain (1979 - 2011) Sweden (1973 - 2010) United Kingdom (1974 - 2010) Bulgaria (1991 - 2010) Croatia (1992 - 2010) Czech Republic (1993 - 2010) Estonia (1994 - 2011) Hungary (1993 - 2010) Latvia (1994 - 2011) Lithuania (1993 - 2011) Poland (1992 - 2011) Romania (1992 - 2010) Slovak Republic (1993 - 2011) Slovenia (1993 - 2011)

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D.5: IRB Approved Informed Consent Letter

Description of Interview and Rationale for Your Consent

Thank you for agreeing to meet with my regarding this subject matter. I appreciate your time and look forward to a productive meeting.

Purpose of This Research

I am ______, a candidate in the political science department at Florida State University in the United States. I am currently working on my doctoral dissertation in political science. This interview will inform my dissertation research, a study of the effects of changes in the balance of power between political parties in democracies over time. As a part of this research, I am interviewing decision makers in firms that engage in purchasing and managing business operations in foreign markets. This interview is an important part of this study. It will help me to trace the theory that I believe explains some of these causes and effects. Primarily, I hope to discuss how you and the principals of your company view politics (both governmental and legislative) within the countries you invest in. I hope to use some of what I learn today to help build and test a theory about why these changes occur in democracies and how they affect governments. This interview should take approximately 45 minutes to one hour. Of course, you are free to participate for as long as your schedule allows. With your permission, I will ask you a series of questions about these two processes. You may respond however you wish, and can ask for clarifications at any time. If you do not wish to answer a particular question, wish to stop the interview, or decide during the interview that you do not wish for me to use any part or the entire interview as a part of our research, you are free to do so. If you decide not to participate, I will hand you any notes that I have made to that point of your interview and leave your offices with

no questions asked. I will not be recording this interview using audio or video tape; my

144 handwritten notes and a copy of your signed consent form will be the only record of our meeting that I will take with me today.

Description of Potential Risks

Of course, this interview has the potential for some financial risk; you will be asked questions about proprietary company activities and strategies. Thus, you may wish to review this form and the possibility of engaging in an interview with your superiors and legal department. You are of course free to share as much or as little as you wish regarding these topics. I welcome your opinion and knowledge. I will not identify you, your company, nor any other individuals or companies that you may name during our discussions by proper name in my dissertation or any published article or interview about this subject. However, I do plan to use anecdotes, and in some cases, direct quotes from this interview within my dissertation. It may be that these quotes could be identified by competitors that know you well.

Description of Potential Benefits

This study has few direct benefits beyond the pursuit of academic knowledge regarding democratic politics. However, when my dissertation is completed, I will, if you wish, send you a copy of my completed research for your records. This research may provide you with valuable insights into the strategies and concerns of political party officials and voters within democracies. This research may be of some interest to you and your company, and could be profitable to your efforts as well. In terms of indirect benefits, the analysis of what affects foreign investments within democracy is understudied, especially in the United States. This work should benefit scholars of economics and politics and expand our understanding of these topics.

Finally, as I plan to expand this dissertation into a series of articles and possibly a book project,

145 the study of the effects of politics on foreign direct investment may be investigated to a greater degree that the subject currently displays.

The Questions

I have provided a list of the questions I hope to ask you today. Should you choose to proceed, you may choose to answer as many, or as few, of these questions as you wish.

1. Is it important to your company to invest in democratic countries as opposed to those that

use another form of government?

2. How long have you been working in foreign investment?

3. Within Europe, do you interact with EU governing bodies? If so, which ones?

4. Outside of Europe, what sort of interaction do you have with the governments of the

countries in which you invest?

5. Within the countries your company invests in, how much interaction do you have with

the governments of these countries?

6. If so, is there a particular ministry that you typically must work with?

7. Does your company interact with cabinet members in the countries that you are

considering investing in?

8. Does your company interact within the leaders of political parties within the countries

you invest in?

9. Have you ever met a prime minister within a country that you work within?

10. Have you ever met or worked with one of the prime minister’s staff within a country that

you work within?

11. Have you ever had to work with or satisfy the concerns of a Green party or movement? A

National party or movement? A religious party or movement?

146

12. What is it like to deal with left leaning governments? Right leaning?

13. What challenges do small markets present to your company? Large markets?

14. What are the education systems like in the countries you invest in?

15. When you start a new venture in a country that you have worked in before, do you deal

with the same people or institutions each time?

16. Many countries have 3 or 4 larger political parties along with 2-4 smaller parties. Do

small parties ever cause problems for your business?

17. Do you typically consider local governments when purchasing a managerial stake in a

foreign business?

Privacy and Confidentiality

If you agree to proceed with the interview and the information you provide is useful, I will in

most cases paraphrase your words within my dissertation – I will not, in most cases, use your

words directly. However, there may be instances where a direct quote may be more useful. By

signing this document you are confirming that I have your permission to use both paraphrased

and directly quoted information in my dissertation research.

I will be taking handwritten notes today. These notes will be the only record of our meeting. I am

not audio or video taping this meeting, either openly or secretly. In these handwritten notes, I

will identify you and your company by name so that I can organize my research at a later date.

However I, nor my advisor, will identify by name, nor any third party individuals or companies that you may refer to during the interview in my formal dissertation or in any other published article, book, or interview on this subject. My notes on these cases will be kept by my advisor

(xxxxxxxxxxxxxx) and I. They will remain private to the extent allowed by law. If this is acceptable to you, please sign below. I have provided contact information for myself, my

147 advisor, and the Office of Research. You will note that I require two signatures: the first form is for your records, while the second will be kept with my notes. My copy and notes are for my records and to ensure compliance with Florida State University’s human subject policies for interviews. My physical notes and these forms will not be published or shared publically in any way.

148

D.6: Human Subjects Committee Approval Letter

The Florida State University

Office of the Vice President For Research

Human Subjects Committee

Tallahassee, Florida 32306-2742

(850) 644-8673 · FAX (850) 644-4392

APPROVAL MEMORANDUM

Date: 9/13/2012

To: James R. Martin Jr.

Address: Political Science Dept., 531 Bellamy Bldg, Tallahassee, FL 32306

Dept.: POLITICAL SCIENCE

From: Thomas L. Jacobson, Chair

Re: Use of Human Subjects in Research

Uncertain Rewards: The Impact of Political Uncertainty On Direct Investment Inflows

The application that you submitted to this office in regard to the use of human subjects in the proposal referenced above have been reviewed by the Secretary, the Chair, and one member of the Human Subjects Committee. Your project is determined to be Expedited per per 45 CFR §

46.110(7) and has been approved by an expedited review process. The Human Subjects

Committee has not evaluated your proposal for scientific merit, except to weigh the risk to the human participants and the aspects of the proposal related to potential risk and benefit. This approval does not replace any departmental or other approvals, which may be required.

If you submitted a proposed consent form with your application, the approved stamped consent

149 form is attached to this approval notice. Only the stamped version of the consent form may be used in recruiting research subjects. If the project has not been completed by 9/12/2013 you must request a renewal of approval for continuation of the project. As a courtesy, a renewal notice will be sent to you prior to your expiration date; however, it is your responsibility as the

Principal Investigator to timely request renewal of your approval from the Committee.

This institution has an Assurance on file with the Office for Human Research Protection. The

Assurance Number is FWA00000168/IRB number IRB00000446.

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BIOGRAPHICAL SKETCH

James R. Martin Jr.

James Martin holds a BA in History and Political Science and is a graduate of Creighton

University’s MA program in International Relations. He defended his PhD dissertation in comparative politics in March of 2013 at Florida State University. His research agenda involves the study of the connection between citizens and the political parties that represent them and the manner in which institutions condition these relationships in democracies around the world.

While primarily interested in theoretically driven quantitative analyses, he is also experienced in field work, completing participant interviews of executives and politicians in the United States and Israel. Martin is a resident instructor at Creighton University, teaching full-time in the EdD Program in Interdisciplinary Leadership. At Creighton, he holds several service

positions, including Course Director for several online courses, admissions committee member,

and is a member of the Virtual Center for Teaching Excellence committee. Professionally,

Martin worked in the audio and video production industry for twenty years and part time as an

open source researcher for USSTRATCOM before turning to academic pursuits. Personally, Jim

is married to his wife Mia and has two children.

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