The Impact of Partisan Ideology on Efficiency and Equity

The impact of partisan ideology on efficiency and equity

Carla Maria dos Santos Azevedo

Master in Economics Dissertation

Supervised by: Maria Manuel Pinho

September, 2015

Biographical note

Carla Maria dos Santos Azevedo was born in Maia, Portugal, on January 29, 1991. In 2009, she concluded her high school education, in the same city. Economics has become an area of interest to the candidate since the high school.

In that same year, the candidate started her undergraduate course in Economics, at Faculdade de Economia do Porto, Universidade do Porto. She graduated in July, 2013, and two months later has integrated a Master in Economics at the same university. This dissertation is part of the Master’s study plan.

Alongside with her academic life, the candidate has developed an interest in playing piano and guitar, while she also has specialized in cooking pastry.

Acknowledgements

The realization of this dissertation integrated in the Master in Economics was only possible due to the friendship, collaboration and willingness of many people, who directly or indirectly supported me along the entire journey, from the beginning until the finalization of this project. In this sense, I would like to express my sincere thanks to all those who contributed to it, from colleagues and teachers, to my family and friends. I want to start by thanking the supervisor of this dissertation, Maria Manuel Pinho, for always being available to clarify all the doubts that have arisen, and for her effort and dedication to this project. Her rigor and commitment was of great value to be successful in my work. I must also thank the Faculdade de Economia, Universidade do Porto and, in particular, my other lecturers for all the knowledge transmitted during my academic career. My special thanks to my brother in law Ulisses Sousa for being partly responsible for my growing interest in the economic science and for guiding me in my academic choices. I am especially thankful to my parents and siblings for all the encouragement, persistence and emotional and financial support throughout the entire journey, highlighting the technical support provided by my brother Marcos. I also want to thank my cousins Joana and Luísa for allowing me moments of happiness and fun in the most difficult and stressful times of this task. Finally, the most special thanks I want to give to my boyfriend Ulisses Seabra for always being by my side in good times and bad times, for making everything becomes easier. I want to show all my gratitude for his unconditional support and encouragement that have been essential to the realization of this dissertation.

Abstract

The aim of this dissertation is to contribute to the understanding of the relationship between the political ideology and the trade-off between efficiency and equity. The work intends to gather the main theoretical foundations regarding the ideological approach of political models, as well as their connection with the economic goals of economic growth and income equality. In this sense, it begins by presenting the partisan ideology theory and its implications on the main macroeconomic variables. Then, reference is made to the main features of the trade-off between efficiency and equity, as well as how this trade-off is reflected in the economic goals. It is found that the different political ideologies, associated with different political parties, can influence economic growth and income equality, taking into account the role of political parties in government. Thus, right-wing parties tend to favour the economic growth and left-wing parties tend to favour the income equality. So, this investigation aims to evaluate whether and how the different partisan ideologies have impact on the trade-off between efficiency and equity and, more specifically, how right-wing and left-wing ideologies influence economic growth and income equality. For this, we estimate an econometric model using panel data embracing 27 countries of the European Union (EU27) for the period between 1995 and 2012, in order to analyze the impact of ideology on growth and equality or efficiency and equity. The results suggest that this effect exists, although indirectly, meaning that the influence occurs through budgetary variables – economic tools – more specifically, through the composition of the government expenditure, rather than through economic goals, as the economic growth rate and income equality.

Keywords: Political ideology; efficiency; equity; economic growth; income equality; panel data JEL codes: C23; D60; D72; H5

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Resumo

O objetivo desta dissertação é contribuir para a compreensão da relação entre a ideologia política e o conflito entre eficiência e equidade. O trabalho pretende reunir os principais fundamentos teóricos relativamente à abordagem ideológica dos modelos políticos, assim como a sua ligação com os objetivos económicos de crescimento económico e igualdade de rendimento. Nesse sentido, começa-se por apresentar a teoria da ideologia partidária e as suas implicações nas principais variáveis macroeconómicas. De seguida, faz-se referência aos principais aspetos do conflito entre eficiência e equidade, assim como à forma como este conflito se traduz nos objetivos económicos. Constata-se que as diferentes ideologias políticas, associadas a diferentes partidos políticos, podem exercer influência sobre o crescimento económico e a igualdade de rendimento, tendo em conta a forma de atuação dos partidos políticos no governo. Assim, os partidos de direita tendem a favorecer o crescimento económico e os partidos de esquerda tendem a favorecer a igualdade de rendimento. Nesta investigação, pretende-se então avaliar se existe e como se concretiza o impacto das diferentes ideologias partidárias no conflito entre eficiência e equidade e, mais concretamente, avaliar a forma como a ideologia de direita e de esquerda influenciam o crescimento económico e a igualdade de rendimento. Para isso, procede- se à estimação de um modelo econométrico com dados em painel, abrangendo o conjunto de 27 países da União Europeia (UE27) para o período compreendido entre 1995 e 2012, com o propósito de analisar o impacto da ideologia no crescimento e na igualdade. Os resultados obtidos sugerem que esse efeito existe, embora de forma indireta, na medida em que a influência se faz sentir através de variáveis orçamentais – instrumentos de política – mais concretamente, através da composição da despesa do governo, e não através dos objetivos de política, como a taxa de crescimento económico e a igualdade na distribuição do rendimento.

Palavras-chave: Ideologia política; eficiência; equidade; crescimento económico; igualdade de rendimento; dados em painel Classificação JEL: C23; D60; D72; H5

Table of contents

Biographical note ...... i Acknowledgements ...... ii Abstract ...... iii Resumo ...... iv Table of contents ...... v List of tables ...... vii List of figures ...... vii 1. Introduction ...... 1 2. A global view of political ideology ...... 3 2.1. History and definition of ideology ...... 3 2.2. Features of different political ideologies ...... 4 2.3. Political spectrum and party systems ...... 6 3. Partisan ideology: theoretical grounds and empirical evidence ...... 10 3.1. Seminal contributions – from adaptive to rational expectations ...... 10 3.2. Contributions to the critique of the seminal works ...... 14 3.3. Augmented contributions – ideological effect on macroeconomic variables ..... 16 4. The balance between efficiency and equity ...... 20 4.1. Theoretical background – the economic functions of the state ...... 20 4.2. The link between the partisan ideology and the efficiency/equity conflict ...... 22 4.3. Empirical evidence on the conflict between efficiency and equity ...... 24 5. An empirical assessment of the impact of the partisan ideology on the efficiency/equity conflict ...... 28 5.1. A first insight – the behaviour of economic variables according to government ideology ...... 28 5.2. A more robust analysis – ideological government effect on economic growth and income equality ...... 38 6. Final considerations and future developments ...... 50 References ...... 53 Appendix 1 – Real GDP annual growth rate by country (%), 1990-2012 ...... 56 Appendix 2 – Gini coefficient by country (%), 1995-2012 ...... 58

Appendix 3 – Average of relative power position by country, by periods of alternate dominant/hegemonic ideology in government (%), 1990-2012 ...... 60 Appendix 4 – Variables and metadata ...... 62 Appendix 5 – Classification of the functions of government (COFOG): first and second levels ...... 63

List of tables

Table 1 – Classical political ideologies ...... 5 Table 2 – Values of left and right ideology ...... 7 Table 3 – Slope of GDP growth rate and Gini coefficient change and correlation coefficient, 1990-2012 ...... 34 Table 4 – Variables and descriptive statistics ...... 39 Table 5 – Hausman test: growth equation and inequality equation ...... 44 Table 6 – Estimation results: growth equation and inequality equation ...... 45 Table 7 – Hausman test: productive government expenditure equation ...... 47 Table 8 – Estimation results: productive government expenditure equation ...... 48

List of figures

Figure 1 – Features of ideology ...... 4 Figure 2 – Linear political spectrum ...... 6 Figure 3 – Horseshoe political spectrum ...... 7 Figure 4 – Two-dimensional political spectrum ...... 8 Figure 5 – The Nolan chart ...... 8 Figure 6 – Real GDP growth rate and Gini coefficient change by periods of alternate dominant/hegemonic ideology in government, 1990-2012 ...... 29 Figure 7 – Gini coefficient average by country (%), 1995-2012 ...... 38

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1. Introduction

There are two main different approaches to explain the relationship between the political system and the economic one, with regard to the preferences of decision- makers. In the first one, called opportunistic approach, the main goal of the government is to maximize the votes received in order to achieve re-election (Nordhaus, 1975). The second one, denominated ideological approach, assumes that supporters of different political parties have different preferences and that policymakers are concerned with the interests of their core constituency when they are elected and take decisions in government (Hibbs, 1977; Alesina, 1987). The motivation for the subject matter of this investigation comes from the interest in the scientific area of politics and its different ideological facets. Although politics is a popular subject in world history, it becomes urgent to deepen the ideological approach, in the context of the economic science, due to the scarce literature on the topic. Downs (1957) argues that ideology is often seen, by the political parties, as a means to an end and that end is the power, instead of considering ideology as a mere representation of the real interests of each political party. Beyond Downs’ argument, the present investigation intends to demonstrate that ideology is an important factor that may have a significant influence on decision-making and economic performance. In addition to reviewing the existing literature about the ideological issues and their impact on macroeconomic variables, this dissertation aims at combining two strands of the economic literature – the partisan ideology models and the trade-off between efficiency and equity. Thus, the ideological approach is taken in order to explain the influence of the partisan ideology in these two specific economic principles: efficiency and equity. A way to address the trade-off between efficiency and equity that arises here are the political goals with regard to public economic functions and the objectives associated to those functions: the allocation function, the redistribution function and the stabilization function. From the combination of the allocation and redistribution functions comes the conflict between efficiency and equity. This conflict between efficiency and equity can be assessed through the policy objectives, which are essentially economic growth, associated with efficiency, and income equality,

1 associated with equity, or based on different types of policy instruments such as tax policies, investment policies and social protection policies that are studied by different authors cited in this dissertation. Hence, the main objective of this dissertation is to understand whether and how different partisan ideologies can influence the trade-off between efficiency and equity. The present dissertation is structured in two parts, the first part is the literature review that involves sections 2, 3 and 4, and the second part concerns the empirical analysis. Beginning with section 2, this introductory section describes the different political ideologies and its implications in the light of political history and political science. Section 3 focuses on the behaviour of policymakers, according to the ideological approach, presenting the seminal contributions and works that study the impact of ideology on the economy. Section 4 comprises the trade-off between efficiency and equity, as well as how the partisan ideology can be related to this trade- off. Ultimately, section 5 presents a descriptive analysis of the main variables to be evaluated in this investigation, then a more robust econometric analysis is applied in order to obtain empirical evidence that supports the literature which is mentioned in the previous sections, and finally the conclusions are presented.

2. A global view of political ideology

Before focusing on the main discussion of this dissertation, it is relevant to introduce some important aspects, namely the origin and history of ideology and its features and the right/left political spectrum. These introductory concepts will help to better understand the theoretical and empirical works, presented in the following sections, which discuss the relationship between the political system and the economic system.

2.1. History and definition of ideology

The French philosopher, Antoine Destutt de Tracy was the originator of the word ideology, whose meaning is science of ideas (Love, 2006). The concept of ideology suffered several changes over time, since its origins during the French Revolution in the eighteenth century. The Marxist theory of ideology is an important contribution to the construction of the concept. Following Love (2006) and Heywood (2007), Karl Marx, back in 1846, indicates some features of ideology, such as: ideology means illusion and mystification that shows a wrong view of the world, later defined as false consciousness; ideology reflects the interests of the ruling class on society1; ideology is directly related with control and power. Despite the Marxist criticism, some developments have been made with regard to the meaning of the term. Heywood (2007) cites a few more authors, for example: Lenine in 1902 defines ideology as ideas and interests of each social class, not just the ruling one; Gramsci in 1935 argues that ideology is the hegemony of the interests of the bourgeoisie who refuses rival ideas; Mannheim in 1929 says that each group of individuals in society has its own ideas and beliefs and the ideology that defines each one is a distorted and partial view of the world. During totalitarian dictatorships in the inter-war period, the concept of ideology gains a different dimension and is then called by some authors closed system of thought,

1 Following Marx, the ruling class is the one that rules the material and also the intellectual force of society, is the one in control (Heywood, 2007).

3 adding that ideology is an instrument of social control and subordination (Heywood, 2013). More recently, ideology became a set of ideas that explain the social action and has no connection with something false or oppressive. The modern society rejects the pejorative definitions and claims that ideology is “an action-orientated belief system, an interrelated set of ideas that in some way guides or inspires political action” (Heywood, 2013: 45). Love (2006) adds that ideology is a democratic concept that helps translate ideas into actions.

2.2. Features of different political ideologies

According to Heywood (2007), all ideologies have three features: (a) they provide an opinion about the real/present world; (b) they advance a vision of the desired future world; they explain how political action can help to achieve a better society (c). In other words, these features explain the fusion of understanding and commitment (a to b) and the fusion of thought and action (b to c). Figure 1 shows the linkage between the features of ideology.

Figure 1 – Features of ideology

Critique of the existing Vision of the future society order (a) (b)

Theory of political change (c) Source: Heywood (2007).

With regard to political ideologies, the literature defines three or five classical ideologies that characterize the history of the world economy and politics, and also describes some others called modern ideologies. The classical ideologies are: socialism, liberalism and conservatism. There is controversy in the literature, but Heywood (2007)

4 admits that communism and fascism are also classical ideologies, defining communism as an extension of socialism. Table 1 summarizes the elements that characterize each of the classical ideologies. The new ideologies considered by Heywood (2007) are: feminism, ecologism or environmentalism, religious fundamentalism and multiculturalism.

Table 1 – Classical political ideologies

Political ideology Characteristics

• Historical materialism and fundamentalism • Absolute equality and classless society Communism • Alienation (labour is a mere commodity) • Proletarian revolution (revolutionary class consciousness) • Proletarian state (dictatorship of proletariat) • Community (social interaction) • Fraternity (cooperation and collectivism) • Social equality (relative equality) Socialism • Need (satisfaction of basic needs) • Social class (redistribution between social classes) • Liberal-democratic state • Individualism • Freedom or liberty • Reason (world with a rational structure) Liberalism • Equality of opportunity • Toleration (moral, cultural and political diversity) • Consent (representation and democracy) • Constitutionalism (limited government) • Tradition (conserve accumulated wisdom of the past) • Pragmatism (practical goals) • Human imperfection (humans are limited, dependent and morally corrupt) Conservatism • Organicism (maintenance of the community and social cohesion) • Hierarchy (social position and status are natural) • Authority (leadership, guidance and support) • Property ownership (measure of independence from government) • Anti-rationalism • Leadership, power and elitism Fascism • Organically unified national community (national greatness) • Corporatism and modernization/futurism Source: Adapted from Heywood (2007 and 2013).

Throughout history, each of the main classical ideologies has been associated to a social class. Thus, socialism is the ideology of the working class, liberalism is connected to the rising middle class, and conservatism belongs to the aristocracy and nobility. Thereby political parties play an important role in defending the interests of each social class. This leads to an interesting question that is to understand the position that each party or each ideology occupies in the political spectrum.

2.3. Political spectrum and party systems

The political spectrum is the framework of ideologies and parties or, in other words, political spectrum is a method of describing how ideologies and parties are positioned relative to each other. The linear political spectrum brings us to the dichotomy left/right. The terms left and right are characterized politics since the French Revolution in the eighteenth century. Initially, left and right were not associated with the political ideology, but rather to how the members of the French National Assembly were standing on the right and left of the president: supporters of the king sat on the right and supporters of the revolution sat to the left (Knapp and Wright, 2001). Over time, this division has revealed the preference of different groups for different ideologies. Thereby, left-wing ideologies favour intervention and collectivism, while right-wing ideologies prefer market and individualism (Heywood, 2013). Figure 2 shows the position of political ideologies in the linear political spectrum.

Figure 2 – Linear political spectrum

Left Right

Communism Socialism Liberalism Conservatism Fascism

Source: Heywood (2013).

In addition it should be noted that the linear political spectrum reveals different values that are associated with left-wing ideologies and right-wing ideologies. Table 2 shows the values that distinguish left from right.

Table 2 – Values of left and right ideology

Left Right Liberty ↔ Authority Equality ↔ Hierarchy Fraternity ↔ Order Rights ↔ Duties Progress ↔ Tradition Reform ↔ Reaction Internationalism ↔ Nationalism Source: Heywood (2013).

However, the linear spectrum is not the only theoretical model. Another implication of ideologies defines a different political spectrum. In the literature, communism and fascism are similar in some aspects, and thus they do not stand in opposite sides of the spectrum, because both regimes are seen as totalitarian and repressive and have authoritarian forms of political rule (Heywood, 2007). Thus, the linear spectrum no longer makes sense while the horseshoe political spectrum demonstrates that the extreme of left and the extreme of right tend to converge, distinguishing them from the democratic ideologies as socialism, liberalism and conservatism. Figure 3 shows the horseshoe political spectrum.

Figure 3 – Horseshoe political spectrum

Communism Fascism

Socialism Conservatism

Liberalism

Source: Heywood (2013).

Heywood (2013) adds another form of political spectrum – the two-dimensional political spectrum. This is an alternative to the horseshoe political spectrum, since it includes not only the left/right linear dimension, but also the dimension that opposes

7 authority to liberty. In this sense, it stands as a combination of the linear and horseshoe political spectrums. Figure 4 shows the two-dimensional political spectrum.

Figure 4 – Two-dimensional political spectrum

Authority

Left Right

Liberty Source: Heywood (2013).

Bell (2013) shows a different approach by considering that liberalism transcend the typical left-right or linear political spectrum. The author indicates the Nolan chart as an explanation to distinguish liberalism from the other ideologies. The Nolan chart distinguishes two types of rights: social rights such as religion, freedom of expression and personal autonomy, and economic rights as freedom to own and exchange property. Bell (2013) separates totalitarians, who neglect all rights but their own, from libertarians, who have respect for both social and economic rights. Figure 5 shows the Nolan chart.

Figure 5 – The Nolan chart

+ Libertarian + Left Right

Social rights Social rights

Economic rights Totalitarian

− − Source: Bell (2013).

It is important to note that political parties are essential elements for the functioning of the entire political system. Modern politics encompasses four existing party systems: one-party systems, two-party systems, dominant-party systems and multiparty systems. The one-party system is the system in which the monopoly of power belongs to only one party, and countries with this system have a permanent government. Heywood (2013) distinguishes two different types of one-party system: the socialist regimes ruled by communist parties that control the state, the economy and all institutions of society (People’s Republic of China and Russian Federation are examples of this party system); and the anticolonial nations and state consolidations in the developing world, like some countries in Africa and Asia. The two-party system is characterized by the dominance of two major parties, which typically alternate in government, even if there are some minor parties. In this case, both major parties are able to govern alone, and while one has the power, the other is the opposition (Heywood, 2013). The most common examples of this party system are the United Kingdom (the labour party and the conservative party) and the United States of America (the democratic party and the republican party). Heywood (2013) defines the dominant-party system as the one in which a number of parties compete for power in elections but it is consequently dominated by the same party that remains long periods in government. A typical example of this system is Japan. Finally, the multiparty system comprises more than two parties, with the main feature being the high probability of coalitions. This system is characterized by the formation of coalitions including smaller parties in order to prevent the existence of a single party in government (Heywood, 2013). This type of system was common in France in the decade of fifty. For the main objective of this investigation and to simplify the analysis, this dissertation is based on the existence of only two political ideologies: the right-wing ideology and the left-wing ideology. In other words, this work is based on a two-party political system, one representative of the left-wing ideology and one representative of the right-wing ideology.

3. Partisan ideology: theoretical grounds and empirical evidence

It is widely recognised that the interests of policymakers are important determinants of macroeconomic policies, and through the policies that they pursue, their interests have an influence on economic outcomes. But there is no consensus on the nature of the actual behaviour of policymakers (Krause and Méndez, 2005). There are two main theoretical explanations in the political-economic literature for the behaviour of policymakers, regarding the interaction between the political system and the economic one. The first explanation is based on the opportunistic approach that initially formalized the political business cycle through the argument that opportunistic policymakers choose macroeconomic policies to please voters, by promoting high income levels and low unemployment rates before the elections, in order to get more votes and remain in office (Nordhaus, 1975). The other approach explaining the behaviour of policymakers is the ideological one, which is the core of this investigation. In this approach, political business cycles exist because there are ideological differences between political parties that alternate in power. On the one hand, left-wing parties prefer high employment and promote expansionary policies; on the other hand, right-wing parties are concerned with low inflation (Hibbs, 1977; Alesina, 1987). This section introduces a review of the main contributions concerning the different ideologies within the political sphere and their economic impact.

3.1. Seminal contributions – from adaptive to rational expectations

The theory behind the ideological approach is the partisan theory. The seminal contribution belongs to Hibbs which, in his work (1977), proposes that each party chooses a position on the Phillips curve, facing the trade-off between unemployment and inflation. The author argues that left-wing governments are more concerned about unemployment because their core constituency are essentially human capital holders,

10 whereas the right-wing governments are more concerned about inflation because their core constituency are typically financial capital holders. It is argued that the core constituency of left-wing parties usually belongs to lower income and lower occupational status groups, while the core constituency of right-wing parties usually belongs to upper income and upper occupational status groups (Hibbs, 1977 and 1986). Hibbs’ (1977) work is associated with adaptive expectations because he assumes that the electorate’s decisions are based upon the past economic performance. In this context, the literature assumes that voters are myopic and backward discounting, which means that they only remember the recent past (Nordhaus, 1975; Neck, 1991). Hibbs (1977) builds a Phillips curve with 12 west European and American nations and finds that nations governed by left-wing governments have high inflation and low unemployment rates for much of the period, and countries where centre and right-wing parties have dominated show low inflation and high unemployment rates. This conclusion also suggests that centre parties are more related to right-wing ideologies than left-wing ideologies. Furthermore, the author develops a model to explain unemployment rates in the United States of America and Great Britain where it is shown that during periods of democratic and labour (left-wing) administrations the unemployment rate has decreased and during periods of republican and conservative (right-wing) governments unemployment rate has increased. Hibbs (1986) presents a different analysis arguing that policymakers control macroeconomic policies, as monetary policy, and do not control macroeconomic outcomes. So the author analyses the growth rate of money supply (that indicates the inflation behaviour) and the results show that right-wing parties are more likely to control the money supply than left-wing parties, putting in evidence the differences in the economic goals of political parties through the different use of political tools. Hibbs shows an evolution from 1977’s work to 1986’s work, by considering not only the political goals, but also the political instruments. Alesina (1987) is another important reference in this matter and his work represents an evolution in this theme due to the transition from adaptive expectations (Hibbs, 1977 and 1986) to rational/forward-looking expectations. It is a significant contribution because he assumes that voters are rational and they take into account all the available and relevant information and they know that different parties ascribe

11 different weights to unemployment and inflation. The author analyzes the volatility of the political cycle in relation with the economic cycle, considering the deviations in real macroeconomic variables, through the interaction of two parties with different policy goals and concludes that if the parties agree to follow similar policies, the economic cycle is attenuated. This leads to another Alesina’s (1987) crucial contribution that is the role of reputational mechanisms in attenuating the economic cycle. The author explains that a commitment to a cooperative policy rule is beneficial for both parties because it improves welfare for both of them in the long run. Even if binding commitments are not available, the author admits that reputational considerations are taken into account because the parties understand that their interaction is repeated over time and thus today’s action influences the tomorrow’s actions of the other parties and also has influence on voters' choices. The author admits that this happens in a balanced system of two parties, because in a system in which a party is clearly stronger than the other, the former has more incentive to deviate from the cooperation agreement than the latter. So, reputational forces due to the repeated interaction of the two parties and voters can create an incentive for both to converge to more similar policies and reduce the excess volatility of real macroeconomic variables when occurs a change of government (Alesina, 1987). As shown before, the partisan theory is based on the hypothesis that the political parties have different objectives and incentives to pursue the macroeconomic policies. Swank (1993: 340) considers four assumptions for this theory:

“First, political parties promote the interests of their core constituencies. Secondly, the core constituency of a left-wing party consists of low and middle income groups, whereas the core constituency of a right-wing party consists of high income groups. Thirdly, different unemployment/inflation outcomes have effects on the income distribution. Fourthly, low income groups suffer more from unemployment and high income groups suffer more from inflation.”

Considering the partisan voter model developed by Swank (1993), it is assumed that voters formulate expectations of economic outcomes and make rational choices by voting for the party with whom they associate the highest utility. The voters are able to

12 predict the economic outcomes under a leftist and rightist administration because the author assumes that they know the preferences of the different political parties. According to the partisan voter model, voters concerned with reducing unemployment will vote for the democratic (left-wing) party, and voters concerned with inflation stabilization will vote for the republican (right-wing) party. From this, it follows that the left-wing parties take advantage of rising unemployment, while the right-wing parties take advantage of rising inflation (Swank, 1993). The author adds that administrations of right-wing parties are more averse to government intervention than administrations of left-wing parties. This means that the parties use the political instruments differently to achieve their goals and to meet the expectations of their constituents. Another important study is the effect of trade unions in the political business cycles and their negotiations with the government. The trade unions are assumed to negotiate wages, and they are interested in high wages and employment. Detken and Gartner (1992) assume that trade unions possess the monopoly power in that negotiation, which means they possess the power to raise the real wage, so that employment is determined by labour demand of companies and transformed into output through the macroeconomic production function. In other words, trade unions manipulate labour supply in order to promote their own political interests and thus manipulate aggregate output (Detken and Gartner, 1992). The authors assume that governmental actions are closer to the goals of trade unions if those actions are taken by leftist governments instead of rightist governments. In their analysis, Detken and Gartner (1992) find that trade unions can induce political business cycle, because they may maximize utility by manipulating labour supply in order to stimulate aggregate output under a left-wing government and to reduce aggregate output under a right-wing government. A different approach to this subject is made by Krause and Méndez (2005) because, instead of looking at macroeconomic variables and their relation to political variables, they focus on how to measure the revealed preferences of policymakers with respect to inflation and output growth. The authors try to explore how preferences related to the main macroeconomic variables, specially inflation and output, change as the party in power and its ideology changes. The empirical findings of this work support

13 the presence of a partisan cycle regarding the preferences of policymakers, as Hibbs (1977 and 1986) and Alesina (1987) propose, because Krause and Méndez (2005) also conclude that left-wing political parties have more preference for output growth than inflation, in order to reduce unemployment, while political parties with a right-wing ideology, are more concerned with inflation stability. At this point, we can conclude that the authors mentioned above analyze the issue of the behaviour of policymakers from different point of views: Alesina (1987) emphasises the reputation of the political parties, Swank (1993) underlines the behaviour of the voters in elections, Detken and Gartner (1992) stress the interaction between trade unions and the government, Krause and Méndez (2005) focus on the revealed preferences of policymakers. All these authors contributed to build a solid and coherent theory of the partisan ideology. However, some of these initial contributions are criticized by other authors.

3.2. Contributions to the critique of the seminal works

The contributions of Swank (1993), Heckelman (2001), Tavits and Letki (2009) and Brauninger (2005) also add consistent knowledge to the theory of the partisan ideology, but somehow, they criticize the initial works, each one from a different perspective. Swank (1993) remarks three aspects of Hibbs’ (1977) contribution. The first one is that one of the concerns of the partisan theory is the trade-off between unemployment and inflation, but Hibbs (1977) only develops a model to explain unemployment. Secondly, some external conditions may affect unemployment and inflation and not considering them may create a bias in the estimates of these variables. Swank (1993) gives the example of the oil crises in the seventies that have drastically affected unemployment and inflation rates, undermining the stability of the trade-off between unemployment and inflation; it was a period of stagflation. Finally, the partisan theory takes into account the preferences of political parties, but the empirical evidence from Hibbs (1977) only provides information about unemployment rates and not about the preferences of political parties.

Another author criticizes the models followed by two of the seminal authors. The nomination that Heckelman (2001) gives to the Hibbs’ (1977) contribution is traditional partisan theory, to Alesina’s (1987) is rational partisan theory, and to his own contribution is variable rational partisan theory. The author argues that Alesina’s model shows that partisan differences will only influence and generate deviations in real macroeconomic variables when there is uncertainty over which party will win the next elections. Recalling Alesina (1987), the interaction between two parties with different policy goals causes volatility in real macroeconomic variables, so there is uncertainty over which party will be in government in the next period and over the behaviour of macroeconomic variables. The variable rational partisan theory by Heckelman (2001) says that there is uncertainty over which party will govern and control the policy tools after the elections, but also considers that uncertainty over when there will be elections, that is, over the election date, will as well influence and generate fluctuations in the business cycle, and so, in real macroeconomic variables. Heckelman (2001: 273) admits the existence of a limitation in his model:

“When elections are fixed by constitution however, there is no uncertainty over election timing and the VRPT (variable rational partisan theory) model collapses into a standard RPT (rational partisan theory) type model. This implies fixed elections would lead to less variation in the business cycle than for variable elections.”

Despite the Heckelman’s (2001) criticism, the author also highlights the important evolution from adaptive expectations to rational expectations – from Hibbs (1977) to Alesina (1987). Tavits and Letki (2009: 555) argue that, in the context of the dual transition to democracy and market economy, experienced in the post-Communist period in Europe, the traditional partisan theory, which predicts that “Because the Left prefers more government control of the economy (...) leftist governments are expected to produce a bigger government in general and increased welfare (including health and education) spending in particular than rightist parties”, might not apply. The argument of the authors is based on the necessity of the leftist parties to disassociate from socialism.

Therefore they had a strong incentive to pursue rightist economic policies and implement fiscal austerity. Furthermore, leftist parties had a more stable and loyal electorate than the rightist parties because leftist parties in post-Communist Europe were well organized and they were much less fragmented than the rightist parties. Unexpectedly, the authors find evidence showing that the leftist parties have succeeded in implementing rightist policies and fiscal austerity in post-Communist period. Thereby, this context is an example that the traditional partisan theory might not apply in different contexts. Brauninger (2005) does not criticize directly the partisan theory but he takes a different position on this matter by making the distinction between the ideological identity of the policymakers and their programmatic policy and spending preferences. The question explored in this work is whether the parties pursue their macroeconomics policies following their substantial preferences as stated in their election manifestos or if the parties pursue their macroeconomics policies because of what the author calls “the supposed differences which are derived from their ideological identity” (Brauninger, 2005: 423). The author studies the fiscal policy, specifically the level of the government expenditure, and in his empirical investigation finds that it is not the left-wing or right-wing ideology of the parties that has a significant impact on the level of government expenditure but the programmatic preferences of policymakers as stated in their election manifestos.

3.3. Augmented contributions – ideological effect on macroeconomic variables

So far, we presented the theory behind the partisan political-economic approach, as well as some criticism of the seminal works. Now, the impact of the partisan ideology on macroeconomic variables will be the main focus of this section. In order to do so, some works that highlight the impact of political ideology on economic outcomes will be discussed. Imbeau et al. (2001) analyze the relationship between the left-right composition of the government and the policy outputs through a meta-analysis technique. In this study,

16 two different arguments are considered: convergence school and politics matters school. The defenders of the first one, convergence school (Imbeau et al., 2001: 1):

“(...) argue that industrialized societies of the twentieth century have become increasingly similar, facing the same kind of problems and applying the same kind of solutions. Consequently, the argument goes, political, institutional and cultural differences do not matter much when it comes to explaining variations in policy outputs.”

The second school argues that partisan ideology and political variables are correlated with policy results. The results obtained in the 43 empirical studies that the authors analyze vary and some works that use the same variables and their relation reach different conclusions. To summarize the results obtained by Imbeau et al. (2001), 22% of 693 estimates of the 43 empirical studies support the left-right party economic impact hypothesis, 7% contradict the hypothesis and 71% fail to support the hypothesis. We can conclude that in most studies is not possible to perceive the ideological impact on economic results. Ellis and Thoma (1995) study the partisan effects in some variables. They show that, according to the model developed in their work, there is evidence for their theoretical predictions. Beginning with the current account on the balance of payments, it moves in opposite directions with the election of a left-wing party or a right-wing party, in the sense that if the current account improves after a right-wing party victory, it will worsen after a left-wing party victory, but the opposite is also valid. The real exchange rate also moves in opposite directions, as the current account, with the victory of left-wing party and the victory of right-wing party. Regarding the terms of trade, they improve after a right-wing party victory and worsen after a left-wing party victory. The authors remark that when limited to the period of flexible exchange rates, these effects are slightly larger and have greater significance. One important aspect of these subjects that Dutt and Mitra (2005 and 2006) study is the importance of ideology as a determinant of trade policy. In their work, based on a partisan ideology model, they find that left-wing governments adopt more protectionist trade policies than right-wing parties in capital-rich countries, but adopt more pro-trade

17 policies in labour-rich economies. The authors explain that an increase in leftist orientation results in redistributive policies that benefit labour. This means that in a labour-abundant country, the labour-intensive good is the exportable one, so an increase in leftist orientation will result in trade policies that favour labour and therefore a decline in protection will occur. The authors conclude that “Left-wing government that is generally more interventionist and believes in state control of the economy may surprisingly have a preference for free trade” (Dutt and Mitra, 2005: 61). As Tavits and Letki (2009), Dutt and Mitra (2005) also agree that left-wing parties have greater preference for government control than right-wing parties. Another study shows that in the short-term there are no stronger political cycles: considering 21 OECD countries over the 1951-2006 period, political ideology and electorate motives did not permanently influence short-term economic outcomes (Potrafke, 2012). According to the author, this might happen for three reasons: the fiscal and monetary policies implemented by left-wing and right-wing governments might be similar and this may result in similar short-term economic outcomes; fiscal and monetary policies may not have influenced short-term economic outcomes, at least during the studied period; finally, left-wing and right-wing governments still have different views of economic policy, but budgetary and monetary issues do not appear to be related to the question of ideology. Potrafke (2012) argues that a more elaborate theory is required to explain how political ideology affects the conduction of economic policy and the economic outcomes. This question seems to be important not only in the short-term economy but also in the long-term economy. In contrast to the contribution of Potrafke (2012) that investigates the influence of political ideology in the short-term economic performance, Facchini and Melki (2013) explore the ideological effects in the long-term economic outcomes. More precisely, they explore whether and how variations in the political ideology of the voters can explain economic growth, which in their analysis it is seen as a long-term indicator. The authors also have the purpose of investigating the channels of policy transmission through which ideology affects economic growth. So, they focus on the size of government as a possible transmission mechanism between ideology and economic growth, and they analyze the size of government by the total public spending as a percentage of GDP (gross domestic product). The investigation uses a time-series data

18 on the French democracy for the 1871-2004 period, because 1871 was the beginning of its stable democratic experience. This investigation of Facchini and Melki (2013), covering a period of more than a century, finds evidence supporting the relationship between political ideology and economic growth but only for recent periods: government intervention in the economy, approximated by government size, is the transmission channel through which ideology affects growth for the post World War II period, but not for the pre-war period. The results of the study show that right-wing ideology decreases government size only for the post-war period and more generally as voters become richer, because, following the authors: “as the median voter gets richer, a move of its political ideology to the right of the average will lead him to demand smaller government size” (Facchini and Melki, 2013: 28). This explains the positive influence of right-wing ideology on economic growth in the post-war period. In other words, the authors explain that, after World War II, the more the ideology of the party in government tends to the right-wing, the greater the positive impact of ideology on economic growth, only when this movement implies a decrease in the share on public spending (Facchini and Melki, 2013). Ending this section of the dissertation, we can summarize different forms of identifying the impact of political ideology on the different macroeconomic variables. Imbeau et al. (2001) provide an institutional framework for this issue, Ellis and Thoma (1995) and Dutt and Mitra (2005 and 2006) highlight the external relations by studying the behaviour of the current account, the real exchange rate, the terms of trade and the conduction of trade policy, Potrafke (2012) emphasizes the fiscal and monetary policies and Facchini and Melki (2013) underline the importance of the size of government as a factor that can distinguish partisan ideologies. The issues of ideology are directly connected with the macroeconomic problems that the economy face and also with the preferences of policymakers with regard to economic policy goals, as are the economic growth, associated with the efficiency principle, and the income equality, associated with the equity principle. The literature argues that each party has higher preference for achieving a goal instead of the other. The conflict between efficiency and equity, in the perspective of policy goals, will be the object of study in the next section.

4. The balance between efficiency and equity

Before mentioning the conflict between efficiency and equity and its implications in the context of this dissertation, it is important to mention the classical economic functions of the state – the allocation function, the redistribution function and the stabilization function – stressing the first two functions because therein lies the conflict between efficiency and equity within the public sector. The common supposition in the literature about this subject is that the main goal of the government is the maximization of social welfare (Downs, 1957). It is understood that this main goal is best defined by the economic functions of the State, each with specific goals that together contribute to the objective of maximizing social welfare.

4.1. Theoretical background – the economic functions of the state

It is recognized that the existence of market failures requires government intervention and this intervention has the purpose of increasing social welfare. Market failures, like imperfect competition, imperfect information, externalities and the existence of public goods, make the state of the economy inefficient. The rule of government is to intervene, through the resource allocation function, in order to address market failures and achieve Pareto optimality, which is the main objective of this function. The principle associated with the allocation function is efficiency. A particular state of the economy is Pareto optimal if a reallocation of resources increases the utility of one individual without decreasing the utility of any other (Cullis and Jones, 2009). In other words, a change in economic conditions is efficient if and only if the position of some person, in terms of welfare, is improved without that of anyone else being worsened, so overall, the welfare of society is improved (Musgrave and Musgrave, 1973). The first fundamental theorem of welfare economics says that if the market is perfectly competitive, the allocation of resources is Pareto efficient and this involves no government intervention (Just et al., 2004). The economic growth is an important dimension of the efficiency principle because it depends on the degree of efficiency in the use of resources and is associated with investment in fixed and human capital. So, besides addressing market failures,

20 policymakers can alter the allocation of resources between current consumption and capital formation and influence the future consumption of private and public goods (Davie and Duncombe, 1972). In reality, it is impossible to achieve efficiency without addressing the question of equity. From another perspective, it is also important to consider not only the deliberate policies of government regarding the redistribution of income to achieve equity, but also that these policies can have a significant, usually negative, impact on efficiency (Cullis and Jones, 2009) and from there arises the conflict between efficiency and equity. Policymakers adopt policies to complement the primary distribution of income dictated by the market in order to improve social welfare. The principle associated with the redistribution function is equity (Davie and Duncombe, 1972). In this case, the criterion that explains how to achieve efficiency does not apply to the redistribution measure because the improvement of the position of a person worsens the position of others (Musgrave and Musgrave, 1973). The traditional tool to promote equity is the incidence of taxes. Typically, equity is pursued by using progressive taxes because it is assumed that a reduction in the welfare of an individual with a high income decreases his own welfare less than the same reduction in the welfare of an individual with a low income. Another important concept of this principle are the groups of individuals that are considered. The most common is to refer to the distribution of income among income classes because the individuals are grouped according to their income. Although there are other ways to consider questions of equity: sex, age, race, geographical distinction and other demographic groups, the most typical, from the economic perspective, are the groups of individuals classified according to the amount of income (Davie and Duncombe, 1972). With respect to the stabilization function, the goal is to use instruments of macroeconomic policy to achieve macroeconomic objectives, such as high employment, price stability, economic growth and the balance of public accounts. The existence of public policy guidance is important for this economic function because, without it, the economy may suffer from sustained periods of unemployment or inflation (Musgrave and Musgrave, 1973). This is consistent with the ideologies and concerns of political parties according to the partisan theory and reported in the first section of this investigation.

Generally, the policy objectives are not fully achieved all at the same time. Regarding the conflicts among stabilization policy, the great difficulty is to achieve full employment and price level stability at the same time (Davie and Duncombe, 1972). According to the partisan theory, this is the main distinction between left-wing parties and right-wing parties. The next section will address the conflict between the principles of efficiency and equity, that is, between the allocation and redistribution functions.

4.2. The link between the partisan ideology and the efficiency/equity conflict

It is widely accepted that measures taken to reallocate resources in order to deal with market failures may conflict with the promotion of equity through the redistribution of income (Davie and Duncombe, 1972). In fact, it is important to consider not only the social gains from improving the distribution of income, but also the possible negative effects that this improvement may have on the efficiency of the economy. This means that some redistribution measures may adversely affect economic growth by reducing incentives to work and restricting investment in innovation, since redistribution measures are essentially directed to education and health issues, social problems and programs to improve labour mobility (Musgrave and Musgrave, 1973). But, as it is shown in the next point of this section, some equity measures can, according to Mericková and Halásková (2014), attenuate the trade-off between efficiency and equity. Back to the authors who essentially study the behaviour of policymakers according to their partisan ideology, Dutt and Mitra (2006) argue that an increase in leftist orientation of government results in strongest redistributive policies that bring benefits to labour owners. This means that left-wing parties are more associated with equity issues while right-wing parties are more associated with efficiency issues. However, the authors add that any government, due to the unequal nature of asset and income distribution, will have a tendency to redistribute income from those who are capital owners to those who are labour owners, as inequality increases. Taking into account the ideological differences, this transfer, may be more intense during periods of leftist parties in government, even though there is always measures of social protection.

This preference of policymakers for the principles of efficiency or equity also meets the assumptions of Hibbs (1977) and Swank (1993) about the partisan theory. These authors assume that the core constituency of right-wing parties are high income groups who essentially are capital owners and therefore these parties are more concerned with inflation, economic growth and efficiency issues. On the other hand, the core constituency of left-wing parties are low and middle income groups who essentially are labour owners and so these parties tend to be more concerned with items such as labour and employment and with income distribution issues. Looking at this conflict between efficiency and equity through economic tools instead of economic goals, Tavits and Letki (2009) refer that leftist governments are expected to increase welfare spending, including health and education, and produce bigger governments than rightist parties. This position is consistent with the argument that left-wing parties are more concerned with equity and favour public spending on social problems, health, education and labour issues. Like Facchini and Melki (2013), that analyze the size of government by the total public spending as a percentage of GDP, Tavits and Letki (2009) also consider the size of the government through the level of public spending as the factor that distinguishes the preferences of each party for efficiency or equity. Swank (1993) addresses this question by saying that right-wing governments are more reluctant to government intervention than left-wing governments, from which it follows that more governmental intervention, under left-wing governments, means more public spending, which means more equity. Facchini and Melki (2013) add that the more the ideology of the party in government tends to the right-wing, the greater the positive impact of ideology on economic growth, but only when this movement implies a decrease in the share on public spending. This argument is in accordance with the theory which supports the argument that right-wing parties are associated with the efficiency principle through economic growth, and is also in line with the argument that right-wing parties prefer less governmental intervention and so less public spending than left-wing parties.

4.3. Empirical evidence on the conflict between efficiency and equity

This section begins with an empirical contribution on the conflict between efficiency and equity that studies the trade-off between economic growth, measured by the growth rate of real GDP, and income inequality, evaluated by the Gini coefficient (Scully, 2003). The author uses a sample for the United States, from 1960 to 1990, and finds evidence supporting the trade-off between economic growth and equality in income distribution. The estimates reveal the existence of a trade-off, although with a small relation between economic growth and inequality income (the results show that one point increase in the economic growth rate adds 0.00075 points to the Gini inequality coefficient2). Some authors as Barro (1990) and Scully (2003) that emphasize the contribution of public expenditure to economic growth distinguish productive expenditure from non- productive expenditure (Scully, 2003: 299):

“(...) certain types of government consumption and investment expenditure may raise the marginal productivity of factors of production, thereby raising the growth rate. Expenditures on national defence, infrastructure, public health, schooling, protection of property and contract fall into this category. Much beyond these activities, increases in the size of the fiscal state are related mainly to income redistribution.”

This means that activities related to income redistribution lower the economic growth rate, so they are considered non-productive government expenditure (Scully, 2003). The author employs a model developed by Barro (1990) based on the distinction between productive spending and non-productive spending and finds that non- productive public spending has a negative and significant impact on the economic growth rate, while productive public spending has a positive but insignificant impact on economic growth. This means that measures which are considered as promoters of

2 The Gini coefficient is an indicator of inequality in the distribution of income, bounded in the unit interval, where 0 represents perfect equality and 1 represents perfect inequality (Scully, 2003).

24 equity have a negative effect on economic growth, whereas policies that are seen as promoters of efficiency have a positive but not significant effect on economic growth. The main argument for the existence of a conflict between economic growth and income equality is the negative impact that the measures aiming the reduction of income disparities can have on the economy. The issue of the compromise between efficiency and equity is defined as the relation between economic development and social protection (Mericková and Halásková, 2014). These authors observe that in developed countries expenditures related to the redistribution function represent on average one half of total public expenditures and that this share is increasing. They develop a study based on the impact that three specific areas of social policy have on the reached level of economic development through the United Nations’ HDI (Human Development Index): social expenditure with family, with old age and with employment. Mericková and Halásková (2014) select 15 countries of the global economy with different levels of economic development (different levels of HDI) and find that in most countries the impact of social protection, in the areas of family policy and pension policy, on the level of economic development is positive (because it provides minimum living and working conditions), but in the area of employment policy this impact is negative (because it reduces the incentives for labour supply). Those results show that different social protection policies have different effects on the economic development of countries. This means that certain measures aiming to achieve equity can have a positive impact on economic growth. Thus, under certain circumstances and depending on the policy measures considered, the trade-off between efficiency and equity can be broken. Another example that shows that the trade-off between efficiency and equity can be contained is the contribution of Muinelo-Gallo and Roca-Sagalés (2011). These authors consider 43 upper-middle and high income countries over the 1972-2006 period with the intention of studying how the dimension and the composition of the fiscal policy impacts economic growth and economic inequality. The results they obtain confirm the existence of a significant effect of fiscal policies on economic growth and inequality. The authors find that increasing the size of government, through increases in public current expenditures and increases in direct taxes, accentuates the conflict between efficiency and equity, because it reduces income inequality, which is positive, but also reduces the GDP, which is negative. The authors also find that indirect taxes do

25 not have a significant effect on economic growth neither on inequality. The big surprise is that public investment has a positive effect on both economic growth and income equality. This item increases economic growth and reduces income inequality. Muinelo- Gallo and Roca-Sagalés (2011) suggest that it is possible to implement fiscal policies that increase economic growth and reduce income inequality at the same time, using indirect taxes to finance public investment and thus increasing the size of government. Still regarding this topic, García-Penalosa and Turnovsky (2007) also analyze the impact of fiscal policy on the trade-off between economic growth and income equality. The authors distinguish two forms of income inequality: pre-tax income inequality and post-tax income inequality. The results suggest that policies that favour economic growth are associated with greater pre-tax income inequality. García-Penalosa and Turnovsky (2007: 371) explain that:

“This is because growth is fostered by policies that increase the return to capital, and since capital is more unequally distributed than is labour, higher returns to capital translate into greater income inequality.”

This conclusion confirms the positive correlation between economic growth and income inequality. On the contrary, the authors find that the same policies that increase the economic growth rate also reduce the post-tax income inequality, and in this case there is no trade-off. Pontusson and Rueda (2008) explore why some countries have larger redistributive welfare states than others, so they study this question from the perspective of how income inequality affects government policies. They argue that the common assumption in the existing literature of this subject is to consider that the preferences of the median voter determine party policy, and the common conclusion is that inequality generates a more redistributive government. The authors formulate a model that opposes what is generally assumed in the literature. From another perspective, their model predicts that the core constituency of left-wing parties wants more redistribution as inequality rises and the core constituency of right-wing parties wants less redistribution as inequality rises. In their work, the authors distinguish between the effects of wage inequality among full-time employees and the effects of household

26 income inequality. The main conclusion of this investigation is that different forms of inequality have different political effects. Pontusson and Rueda (2008) use a mobilization variable to describe the movements of the parties on the left-right dimension. According to them, an increase in wage inequality causes left-wing parties invest more in redistribution measures and the right-wing parties take less rightist measures in response to growing household income inequality. The authors conclude that higher levels of wage inequality influence left-wing parties and have no significant effect on right-wing parties, while higher levels of household income inequality influence right-wing parties and have no significant effect on left-wing parties. Pontusson and Rueda (2008) make an important remark by saying that their theoretical model implies that changes in income distribution cause changes in party positions through the policy preferences of core constituencies. The authors admit that causality may also run in the opposite direction, meaning that changes in the political sphere can cause changes in income distribution. This is the direction that this dissertation aims to study – the impact of the partisan ideology on efficiency and equity, through the impact on economic growth and income equality.

5. An empirical assessment of the impact of the partisan ideology on the efficiency/equity conflict

“(...) a more encompassing theory is required to explain how government ideology affects economic policy (...). Such a theory should (...) rely on the mechanisms and policy channels that translate government ideology into real outcomes.” (Potrafke, 2012: 174)

The present investigation explores the existing limitation in the literature about the impact of the political ideology on economic policy and outcomes. This work aims at contributing to the literature through an empirical analysis that tests the influence of political ideologies on different economic outcomes. We first present a descriptive analysis of the available information in order to strengthen the following assessment with a model that seeks to evaluate whether the partisan ideology has impacts on the economic growth and equality in income distribution. As mentioned before, these policy objectives are commonly associated with the principles of efficiency and equity, respectively.

5.1. A first insight – the behaviour of economic variables according to government ideology

For an exploratory analysis, data are selected for a set of 27 countries of the European Union (EU27) for the 1990-2012 period3. This group of developed countries is relatively homogeneous because all countries belong to a political-economic union, which makes the data more comparable and the analysis more robust and conclusive4. As the analysis extends to 2012, Croatia is not included because it only joined the EU in 2013.

3 The sample only includes data till 2012 because political data are only available until that year. 4 All these countries are considered high income economies by the World Bank classification. The information is taken from the World Bank website (http://data.worldbank.org/about/country-and-lending- groups, accessed on 17.04.2015).

In order to show the relation between the different ideologies of the parties in government and the policy goals studied in the previous section, Figure 5 shows a graphical analysis of the real GDP annual growth rate and the Gini coefficient annual change for different periods in which parties, classified according to the right-wing or left-wing dominance/hegemony, alternate in power.

Figure 6 – Real GDP growth rate and Gini coefficient change by periods of alternate dominant/hegemonic ideology in government, 1990-2012

Austria Belgium

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 -10 -5 (pp) change coefficient Gini

1992 2009 1992 2009 1990 1991 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2012 1990 1991 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2012 DLP DRP DLP DLP DRP DLP

Economic growth Income inequality Economic growth Income inequality

Bulgaria Cyprus

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 (pp) change coefficient Gini -10 -5

1992 2009 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1990 1991 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2012 DLP DRP TG HLP DRP DRP DRP DLP

Economic growth Income inequality Economic growth Income inequality

Czech Republic Denmark

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 (pp) change coefficient Gini -10 -5

Economic growth Income inequality Economic growth Income inequality

Estonia Finland

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 (pp) change coefficient Gini -10 -5

Economic growth Income inequality Economic growth Income inequality

France Germany

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 -10 -5 (pp) change coefficient Gini

Economic growth Income inequality Economic growth Income inequality

Greece Hungary

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 -10 -5 (pp) change coefficient Gini

Economic growth Income inequality Economic growth Income inequality

Ireland Italy

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 -10 -5 (pp) change coefficient Gini

Economic growth Income inequality Economic growth Income inequality

Latvia Lithuania

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 -10 -5 (pp) change coefficient Gini

Economic growth Income inequality Economic growth Income inequality

Luxembourg Malta

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 (pp) change coefficient Gini -10 -5

Economic growth Income inequality Economic growth Income inequality

Netherlands Poland

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 (pp) change coefficient Gini -10 -5

Economic growth Income inequality Economic growth Income inequality

Portugal Romania

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 -10 -5 (pp) change coefficient Gini

1992 2009 2003 1990 1991 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2012 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 HRP HLP DRP HLP DRP DLP DRP HLP DRP

Economic growth Income inequality Economic growth Income inequality

Slovak Republic Slovenia

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP

GDP growth rate (%) rate growth GDP -8 -4 -8 -4 Gini coefficient change (pp) change coefficient Gini

-10 -5 -10 -5 (pp) change coefficient Gini

2008 2012 1996 2000 2004 2008 2012 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 1990 1991 1992 1993 1994 1995 1997 1998 1999 2001 2002 2003 2005 2006 2007 2009 2010 2011 DRP DLP DRP DLP na DRP DLP DRP DLP

Economic growth Income inequality Economic growth Income inequality

Spain Sweden

12 6 12 6

10 5 10 5 8 4 8 4 6 3 6 3 4 2 4 2 2 1 2 1 0 0 0 0 -2 -1 -2 -1 -4 -2 -4 -2

-6 -3 -6 -3 GDP growth rate (%) rate growth GDP GDP growth rate (%) rate growth GDP -8 -4 -8 -4

-10 -5 (pp) change coefficient Gini -10 -5

Gini coefficient change (pp) change coefficient Gini

Economic growth Income inequality Economic growth Income inequality

United Kingdom 12 6

10 5 8 4 6 3 4 2 2 1 0 0 -2 -1 -4 -2 -6 -3

GDP growth rate (%) rate growth GDP -8 -4

-10 -5 (pp) change coefficient Gini

2008 2012 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 HRP HLP HRP

Economic growth Income inequality

Legend: Hegemony of leftist parties (HLP) if the relative power position of left-wing parties is 100%; Dominance of leftist parties (DLP) if the relative power position of left-wing parties is more than 50% and less than 100%; Hegemony of centre parties (HCP) if the relative power position of centre parties is 100%; Dominance of rightist parties (DRP) if the relative power position of right-wing parties is more than 50% and less than 100%; Hegemony of rightist parties (HRP) if the relative power position of right-wing parties is 100% (measured in percentage of the total parliamentary seat share of all governing parties). TG – technocratic government; na – information not available (undemocratic governments).

Source: Own formulation with GDP growth rate from World Bank (http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG, accessed on 6.04.2015); Gini coefficient from Eurostat (http://ec.europa.eu/eurostat/web/products-datasets/-/tessi190, accessed on 6.04.2015); political data from Armingeon et al. (2015).

Before analyzing the graphical information, it should be noted that if the trade-off between efficiency and equity or between economic growth and equality in income distribution described in the literature arises, the GDP growth rate and the Gini inequality coefficient change must evolve in the same direction. In other words, under a right-wing government the GDP growth rate and the Gini coefficient are expected to increase, while under a left-wing government the GDP growth rate and the Gini coefficient tend to decrease. But under a left-wing government it is not necessary that the GDP growth rate decrease, it may increase but less than under a right-wing government; the same logic should apply to the Gini coefficient. Another remark must be made with regard to the Gini coefficient, because it would be more interesting to analyze the difference of the values of the Gini coefficient before and after the intervention of the government, but the available statistical information is very limited in this regard, so we use the annual change of the Gini coefficient after the government intervention. So, this variable is consistent with the real GDP annual growth rate variable which also contemplates government intervention within its allocation function. According to the graphical observation, there is some evidence for the theoretical assumption regarding the link between the partisan ideology and the efficiency/equity conflict. Beginning with the observation of the evolution of GDP growth rate, the tendency of most countries, Austria, Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, France, Latvia (dominated by right-wing parties during all period), Netherlands, Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom, is that the GDP growth rate decreases or increases less during periods of left-wing parties in power and increases more during periods of right-wing parties in power, in accordance with the literature assumptions. Obviously, this tendency is not observed in the economic and financial crisis period (last years of the period under analysis), as the GDP growth rate decreases in all countries, regardless of which party is in power. The GDP growth rate of Cyprus, Germany, Hungary, Italy, Lithuania, Malta, Poland, Portugal and Romania does not have a defined tendency, not being possible to draw any conclusions about these countries. Curiously, in Greece and Luxembourg, the GDP growth rate increases during periods of left-wing parties in power and decreases during periods of right-wing parties in power, in contrast with the tendency in most countries

33 and the assumptions of literature. In Ireland the tendency is always decreasing, whether under a left-wing government or a right-wing government. With respect to the Gini coefficient, it is more difficult to analyze because this indicator is available on Eurostat only from 1995 onwards and has a lack of data for several years in most countries. For the majority of countries – Austria, Belgium, Finland, France, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Sweden and the United Kingdom – it is not possible to observe a defined tendency. As the Gini coefficient is an indicator of inequality, the income inequality decreases when the indicator decrease. In Czech Republic, Denmark, Estonia, Hungary and Poland, the trend of the Gini coefficient is decreasing for periods of left-wing parties in power and the trend is growing for periods of right-wing parties in power, as it is assumed in literature. For Bulgaria, Cyprus, Germany, Latvia, Lithuania, Romania, Slovak Republic and Spain, the observed tendency is reversed, since during periods of left-wing parties in power the Gini coefficient increases or, in others words, the income inequality increases, while during periods of right-wing parties in power, the income inequality decreases. Table 3 shows the behaviour of the real GDP annual growth rate and the Gini coefficient annual change for each period in which political ideology alternate in government, as well as the linear correlation coefficients between the two variables for each country (the existence of an efficiency/equity trade-off implies a positive correlation coefficient).

Table 3 – Slope of GDP growth rate and Gini coefficient change and correlation coefficient, 1990-2012 GDP growth Gini coefficient Government Correlation slope slope 1990-1999 L 0,003 ▲ 0,90 ▲ Austria 2000-2006 R 0,092 ▲ 0,12 ▲ -0,103 2007-2012 L -0,098 ▼ -0,28 ▼ 1990-2003 L -0,006 ▼ 0,09 ▲ Belgium 2004-2011 R -0,325 ▼ 0,06 ▲ 0,140 2012 L na na 1990 L na na 1991-1992 R 1,173 ▲ na Bulgaria 1993-1994 TG na na 0,571 1995-1996 L -1,260 ▼ na 1997-2012 R 0,004 ▲ -0,06 ▼

GDP growth Gini coefficient Government Correlation slope slope 1990 R na na 1991-1992 L 8,661 ▲ na Cyprus -0,329 1993-2002 R 0,035 ▲ na 2003-2012 L -0,592 ▼ 0,10 ▲ 1990-1998 R 1,122 ▲ na Czech 1999-2006 L 0,672 ▲ na -0,594 Republic 2007-2012 R -0,766 ▼ 0,02 ▲ 1990-1992 R 0,184 ▲ na 1993-2001 L -0,043 ▼ na Denmark -0,679 2002-2011 R -0,220* ▼ 0,20 ▲ 2012 L na na 1990-1991 na na na 1992-1994 R na na Estonia -0,023 1995-1998 L 0,460 ▲ na 1999-2012 R -0,417* ▼ 0,06 ▲ 1990-1994 R 1,171 ▲ na 1995-2006 L -0,190 ▼ -0,08 ▼ Finland 0,164 2007-2011 R -0,296 ▼ -0,04 ▼ 2012 L na na 1990-1992 L -0,657 ▼ na 1993-1996 R 0,574 ▲ na France 1997-2001 L -0,045 ▼ -0,20 ▼ -0,243 2002-2011 R -0,098 ▼ -0,10 ▼ 2012 L na na 1990-1997 R -0,511 ▼ na Germany 1998-2009 L -0,266 ▼ 0,05 ▲ 0,425 2010-2012 R -1,857 ▼ -0,45 ▼ 1990-1993 R -0,720 ▼ na 1994-2003 L 0,307 ▲ -0,06 ▼ Greece -0,239 2004-2009 R -1,515 ▼ 0,07 ▲ 2010-2012 L -0,562 ▼ 0,50 ▲ 1990-1994 R 3,006 ▲ na 1995-1997 L 0,941 ▲ na Hungary 1998-2001 R -0,042 ▼ na 0,272 2002-2009 L -1,249 ▼ -0,39 ▼ 2010-2012 R -1,134 ▼ 0,35 ▲ 1990-1994 R -0,466 ▼ na 1995-1996 L -0,550 ▼ na Ireland -0,051 1997-2010 R -0,996 ▼ 0,06 ▲ 2011-2012 L -3,086 ▼ 1,00 ▲ 1990-1993 L -0,922 ▼ na 1994-1995 R 0,736 ▲ na 1996-2000 L 0,457 ▲ 0,00 ═ Italy 2001-2005 R -0,031 ▼ na -0,437 2006-2007 L -0,532 ▼ 0,80 ▲ 2008-2011 R 1,210 ▲ 0,49 ▲ 2012 TG na na 1990-1992 na na na Latvia -0,082 1993-2012 R -0,036* ▼ -0,16 ▼

GDP growth Gini coefficient Government Correlation slope slope 1990-1991 na na na 1992-1996 L 7,240 ▲ na Lithuania 1997-2000 R -2,136 ▼ na -0,652 2001-2008 L -0,221 ▼ 0,75 ▲ 2009-2012 R 5,999 ▲ -1,38 ▼ 1990-1999 L 0,139 ▲ 1,00 ▲ Luxembourg 2000-2004 R -0,784 ▼ -0,18 ▼ -0,360 2005-2012 L -0,609 ▼ -0,07 ▼ 1990-1995 C na na Malta 1996-1998 L 0,674 ▲ na 0,501 1999-2012 C na na 1990-2001 L 0,097 ▲ 0,29 ▲ 2002-2006 R 0,970 ▲ -0,13 ▼ Netherlands 0,184 2007-2009 L -3,749 ▼ -0,80 ▼ 2010-2012 R -1,328 ▼ 0,65 ▲ 1990 na na na 1991-1993 R 5,377 ▲ na 1994-1997 L 0,467 ▲ na Poland -0,664 1998-2001 R -1,159 ▼ na 2002-2005 L 0,788 ▲ na 2006-2012 R -0,657 ▼ 0,30 ▲ 1990-1995 R -0,334 ▼ na 1996-2001 L -0,302 ▼ 0,23 ▲ Portugal 2002-2004 R 0,521 ▲ na -0,087 2005-2010 L -0,292 ▼ -0,29 ▼ 2011-2012 R -1,489 ▼ -0,20 ▼ 1990-1996 L 2,920 ▲ na 1997-2000 R 2,820 ▲ na Romania 0,452 2001-2004 L 1,046 ▲ 0,00 ═ 2005-2012 R -1,141 ▼ -0,35 ▼ 1990-2006 R 0,141 ▲ na Slovak 2007-2009 L 7,986 ▲ 2,35 ▲ -0,449 Republic 2010-2011 R -2,123 ▼ -1,30 ▼ 2012 L na na 1990-1992 na na na 1993-1999 R 0,345 ▲ na Slovenia 2000 L na na 0,213 2001-2004 R 0,321 ▲ 0,00 ═ 2005-2012 L -1,190 ▼ 0,07 ▲ 1990-1996 L -0,052 ▼ na 1997-2003 C na na Spain -0,390 2004-2011 L -0,844 ▼ 0,05 ▲ 2012 C na na 1990-1991 L -1,901 ▼ na 1992-1994 R 2,623 ▲ na Sweden -0,538 1995-2006 L 0,032 ▲ 0,42 ▲ 2007-2012 R 0,068 ▲ 0,07 ▲

GDP growth Gini coefficient Government Correlation slope slope 1990-1996 R 0,625 ▲ na United 1997-2009 L -0,355 ▼ -0,07 ▼ 0,190 Kingdom 2010-2012 R -0,626 ▼ -1,10 ▼ Legend: L – left-wing dominance/hegemony in government during the period; R – right-wing dominance/hegemony in government during the period; C – centre dominance/hegemony in government during the period; TG – technocratic government; na – information not available. * In the last period for Denmark, Estonia and Latvia the value of the slope of GDP growth rate is negative because the period includes the years of economic and financial crisis, but if the crisis period (2008-2012) was excluded, the value would be positive.

Source: Own calculation with GDP growth information from World Bank (http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG, accessed on 6.04.2015); Gini coefficient information from Eurostat (http://ec.europa.eu/eurostat/web/products-datasets/-/tessi190, accessed on 6.04.2015); political information from Armingeon et al. (2015).

Considering a global and gross observation of the available data, we can conclude that only two countries meet the literature assumptions about the relation between the efficiency/equity conflict and political ideology. Only Denmark and Estonia have a decreasing tendency for the GDP growth rate and a decreasing tendency for the Gini coefficient during periods of left-wing parties in government, and have an increasing tendency for the GDP growth rate and an increasing tendency for the Gini coefficient during right-wing parties in government. Furthermore, a positive correlation coefficient means that there is a trade-off between economic growth and equality in income distribution, in other words, when the two indicators move in the same direction, the trade-off arises. So, in general, in Belgium, Bulgaria, Finland, Germany, Hungary, Malta, Netherlands, Romania, Slovenia and the United Kingdom we can conclude that there is a trade-off between efficiency and equity, during the period under analysis. It is readily observed that the values of the Gini coefficient do not vary much among years and also among countries, because these are all developed countries, although it is notable that the countries considered PIIGS (Portugal, Italy, Ireland, Greece and Spain), Estonia, Latvia, Lithuania, Poland, Romania and the United Kingdom have higher values of Gini coefficient, which means that income inequality in these countries is higher than in other countries. As opposed to the countries with higher values for the Gini coefficient, the Nordic countries (Finland, Denmark and Sweden)

37 and Slovenia have lower values for the Gini coefficient, which means that these countries have a more equal income distribution. Figure 6 shows this dichotomy between the countries with higher average of the Gini coefficient and the countries with lower average of the Gini coefficient in the 1995-2012 period.

Figure 7 – Gini coefficient average by country (%), 1995-2012 40

35 30 25 20 15 10

Gini coefficient average (%) average coefficient Gini 5

Italy

Spain

Malta

Latvia

France

Poland

Greece

Ireland

Cyprus

Austria

Estonia

Finland

Sweden

Portugal

Belgium

Bulgaria

Hungary

Slovenia

Romania

Germany

Denmark

Lithuania

Netherlands

Luxembourg

Czech Republic Czech Slovak Republic Slovak United Kingdom United

Source: Own formulation with information from Eurostat (http://ec.europa.eu/eurostat/web/products- datasets/-/tessi190, accessed on 6.04.2015).

The literature review in the previous section suggests that left-wing parties are more associated with equity issues, favouring the fight against income inequality, while right-wing parties are more associated with efficiency issues, favouring economic growth. In this preliminary descriptive analysis, we can conclude that this difference is not so clear within the European context. A more robust analysis is required in order to obtain more assertive conclusions.

5.2. A more robust analysis – ideological government effect on economic growth and income equality

The following econometric analysis incorporates a set of statistical information that is used to assess the relationship between partisan ideology and the two economic goals at stake – economic growth and equality in income distribution. We use a panel

38 data with a selection of 27 countries for a period of 18 years, from 1995 to 2012. As explained previously, the 27 countries are the current European Union members, excluding Croatia which joined the EU only in 2013. The statistical information for most of the variables used in the estimations is only available since 1995; moreover, the period under analysis ends in 2012 because the political information is only available until that year. Overall, the panel contains 486 observations. The use of panel data is important in this type of empirical analysis because it enables the consideration of both cross-sectional and temporal dimensions, comprising more information and variability. Brooks (2008) admits that with panel data it is possible to address a wider range of issues and solve more complex questions. The author adds that panel data allows more meaningful hypothesis tests – by introducing a dynamic behaviour, a panel database increases the number of degrees of freedom and thus the power of the test. Furthermore, combining both cross-sectional and time series information also helps to reduce the collinearity and allows for greater efficiency. Overall, the use of panel data allows for a higher quality in the estimated results. The aim of this investigation is to evaluate the significance of the effect of the partisan ideology on economic growth and equality in income distribution. Following Muinelo-Gallo and Roca-Sagalés (2011), we use two dependent variables: the real GDP annual growth rate (GDP_GROWTH), which is commonly used to analyze the economic growth, and the Gini coefficient (GINI_COEF), which is usually used to analyze the inequality in income distribution5. Table 4 describes the dependent variables and the explanatory variables used in the estimation of the equations, as well as its descriptive statistics.

Table 4 – Variables and descriptive statistics Standard Missing Variable Description Minimum Mean Maximum deviation values Real GDP annual growth -17,95 12,23 GDP_GROWTH 2,71 3,60 2 rate (%) Latvia, 2009 Latvia, 2006 20,00 38,90 GINI_COEF Gini coefficient (%) Denmark, 1995 29,30 4,09 112 Latvia, 2006 and 1997

5 An alternative variable (Gini coefficient change) was tested but the model was not statistically significant, so the Gini coefficient was adopted as the dependent variable.

Standard Missing Variable Description Minimum Mean Maximum deviation values Dummy: 1 for left-wing IDEOLOGY1 0,00 0,47 1,00 0,50 1 governments, 0 otherwise Dummy: 1 for left-wing and IDEOLOGY2 centre governments, 0 0,00 0,52 1,00 0,50 1 otherwise GDP per capita (thousands of 1,21 113,73 GDP_PC 24,89 Luxembourg, 18,37 9 Bulgaria, 1996 current USD) 2011 POP_GROW Population growth (%) -2,26 0,23 2,89 0,77 2 Lithuania, 2011 Ireland, 2007 Gross government debt (% of 6,60 179,87 DEBT 57,79 32,14 2 GDP) Romania, 1995 Greece, 2011 Gross capital formation (% of 0,30 40,05 GCF 22,75 4,69 10 GDP) Bulgaria, 1996 Latvia, 2007 Degree of openness to trade 37,03 352,9 OPEN 102,80 Luxembourg, 51,91 10 Greece,1995 (% of GDP) 2012 Total government 30,50 66,10 GOV_EXP 44,87 6,60 25 expenditure (% of GDP) Bulgaria, 1997 Ireland, 2010 Government expenditure in 0,45 0,68 productive activities (% of PROD_EXP 0,53 0,04 52 total government Germany, 2000 Ireland, 2010 expenditure) Dummy: 1 for election year, ELECT1 0,00 0,26 1,00 0,44 0 0 otherwise Dummy: 1 if elections are held in the 2nd half of the year ELECT2 0,00 0,26 1,00 0,44 0 or in the 1st half of the next year, 0 otherwise Dummy: 1 for crisis years CRISIS07 0,00 0,33 1,00 0,47 0 2007-2012, 0 otherwise Dummy: 1 for crisis years CRISIS08 0,00 0,28 1,00 0,45 0 2008-2012, 0 otherwise Dummy: 1 for crisis years CRISIS09 0,00 0,22 1,00 0,42 0 2009-2012, 0 otherwise

As it is shown in table 4, the panel data is unbalanced. There is a large number of missing values, primarily in data on the Gini coefficient. This limited available statistical information may affect the robustness of econometric analysis as it did with the previous descriptive analysis. The estimation applied here includes a breakdown of the total government expenditure in two aggregate measures: productive government expenditure and non- productive government expenditure. As mentioned in section 4 of the dissertation, Scully (2003) distinguishes these two types of government expenditure and argues that productive expenditure improves economic growth, while non-productive expenditure is not beneficial for economic growth. Scully (2003) indicates as types of productive

40 expenditure the expenditure on defence, infrastructures, health and education. The European Commission (2012) also indicates several items as productive expenditure or more growth friendly: public infrastructure investments (transports and communications), education, R&D and health. Based on the classification of the functions of government (COFOG) defined by the United Nations Statistics Division, that classifies government expenditure into ten functional groups of expenditure (COFOG’s first-level6), the estimation applied here considers these ten functional groups of expenditure aggregated into two types of government expenditure, measured as shares of the total government expenditure, taking into account how the literature tends to differentiate them. According to the European Commission (2012), this investigation admits that non-productive government expenditure embraces expenditure on: defence; housing and community amenities; public order and safety; recreation, culture and religion; social protection. On the other hand, productive government expenditure includes expenditure on: economic affairs; education; environmental protection; general public services; health. As mentioned previously, we estimate two equations – the economic growth equation and the income inequality equation. The estimations of GDP growth rate and Gini coefficient include the following explanatory variables: − IDEOLOGY1 (dummy variable: 1 if the government is dominated by the left- wing ideology and 0 otherwise) evaluates the ideological impact on economic growth and income inequality. It is expected that under left-wing governments the level of economic growth and income inequality are lower than under right-wing or centre governments; − IDEOLOGY2 (dummy variable: 1 if the government is dominated by the left- wing or centre ideologies and 0 otherwise) evaluates the ideological impact on economic growth and income inequality. It is expected that under left-wing and centre governments the level of economic growth and income inequality are lower than under right-wing governments;

6 Appendix 5 shows the COFOG’s second level, where investments in infrastructure for transports and communications are sub-items of economic affairs.

− GDP_PC (GDP per capita in thousands of current USD) is a control variable included in order to evaluate how the level of development of a country affects economic growth and income inequality; − POP_GROW (population growth in %) is a control variable included in order to assess if the demographic dynamics of a country have an effect mainly on the inequality in income distribution, but also on economic growth. This variable is also used by Muinelo-Gallo and Roca-Sagalés (2011); − DEBT (gross government debt in % of GDP) is a control variable included to assess whether the public financial constraint of a country affects economic growth and income inequality; − GCF (gross capital formation in % of GDP) is a control variable included in order to account for a possible impact of investment primarily on economic growth but also on income inequality; − OPEN (degree of openness to trade in % of GDP) is a control variable that determines if the intensity of the international trade of a country influences economic growth and income inequality; − GOV_EXP (total government expenditure in % of GDP) is a control variable included in order to evaluate the impact of government expenditure on economic growth and income inequality. It is also an indicator of the size of government as Facchini and Melki (2013) have considered; − PROD_EXP (productive expenditure in % of total government expenditure), taking into account the classification of the European Commission (2012), is the sum of government expenditure on economic affairs, education, environmental protection, general public services and health, as a share of the total government expenditure. This variable intends to show the influence of productive government expenditure on economic growth and income inequality, in order to confirm the argument of Scully (2003) that expenditure in productive activities may increase the economic growth rate and income inequality; − NONPROD_EXP (non-productive expenditure in % of total government expenditure), considering the European Commission (2012), is the sum of government expenditure on defence, housing and community amenities, public order and safety, recreation, culture and religion and social protection, as a share

of the total government expenditure. This variable intends to show the influence of non-productive government expenditure on economic growth and income inequality, in order to confirm the argument of Scully (2003) that expenditure in non-productive activities may decrease the economic growth rate and increase income equality. As the variables PROD_EXP and NONPROD_EXP are complementary, table 6 only presents the estimation results just for PROD_EXP; − ELECT1 (dummy variable: 1 for election years and 0 otherwise) and ELECT2 (dummy variable: 1 if elections are held in the 2nd half of the year or in the 1st half of the next year, 0 otherwise) are intended to assess whether the proximity of elections have impact on economic growth and income inequality. As the alternative specifications present similar results, table 6 only present the estimation results with ELECT1; − CRISIS07, CRISIS08 and CRISIS09 (dummy variables: 1 for crisis years since 2007, 2008 or 2009 till 2012, 0 otherwise) are included to address the impact of the recent economic and financial crisis on economic growth and income inequality. It is expected that in the crisis years economic growth is lower and income inequality is greater. As the specifications admitting these three alternative periods present similar results, table 6 only presents the results for the 2008-2012 crisis period, since 2008 was the year in which the GDP growth rate turned negative in most countries.

Before proceeding with the estimation, it is necessary to examine whether it should be done with fixed effects or random effects and whether specific effects are cross-sectional, period or both. The estimation with fixed or random effects is much discussed in the literature. Johnston and Dinardo (2001) argue that, generally, the estimation with fixed effects is preferable to the estimation with random effects because random effects are suitable for a random sample from a population and fixed effects are applicable to study a specific group of individuals and the analysis is restricted to the behaviour of these individuals, in this case the EU27 members. The main difference between fixed or random effects is whether specific effects (cross-sectional or period) are correlated or not with explanatory variables. The Hausman test is used to assess whether the effects should be estimated as fixed or random. The null hypothesis admits

43 no correlation with the explained variable, so, the estimation with random effects is valid. If the null hypothesis is rejected, the estimation with fixed effects is valid. The Hausman test confirms the choice of the estimation with fixed effects, as it can be seen in table 5. For a 1% significance level, the null hypothesis is rejected for all specifications.

Table 5 – Hausman test: growth equation and inequality equation

Dependent variable Specification Statistic P-value 1 73,174 0,0000 GDP_GROWTH 2 73,379 0,0000 1 31,686 0,0005 GINI_COEF 2 31,350 0,0005

With the existence of a temporal dummy variable – the variable that defines the crisis period – the fixed effects can only be cross-sectional7. So, estimations are done with fixed cross-sectional effects. Table 6 shows the estimation results for the economic growth equation and the income inequality equation. It is important to note that, as an inequality indicator, an increase in the Gini coefficient means a negative impact on equity. Through the observation of the estimation results, we can see that investment (GCF) and trade (OPEN) control variables are statistically significant in explaining economic growth and their effect is positive, which means that more investment and international integration have a positive influence on economic growth. The OPEN variable is also statistically significant in inequality specifications and has a negative effect on income inequality (positive effect on income equality). Government expenditure (GOV_EXP) is statistically significant in explaining economic growth and income inequality and it affects negatively economic growth and positively income equality. This conclusion is consistent with the argument of Tavits and Letki (2009) and Facchini and Melki (2013) that bigger governments and more governmental intervention are associated with equity concerns. With respect to POP_GROW, this variable is only statistically significant in inequality specifications and it is important to

7 EViews 8 software does not allow to test what effects to consider (if cross-sectional or period) through redundant fixed effects test due to the existence of a temporal dummy variable.

44 note that it has a negative impact on income inequality, which means that population growth has a positive impact on equity. GDP_PC and DEBT are only statistically significant in the inequality specifications, suggesting a negative effect on income equality.

Table 6 – Estimation results: growth equation and inequality equation

GDP_GROWTH GINI_COEF (1) (2) (1) (2) 0,202 -0,172 IDEOLOGY1 (0,850) (-0,512) 0,373 -0,257 IDEOLOGY2 (1,465) (-0,742) 0,009 0,010 0,065 0,065 GDP_PC (0,667) (0,751) (3,810)*** (3,775)*** -0,382 -0,417 -1,174 -1,151 POP_ GROW (-1,336) (-1,455) (-3,571)*** (-3,517)*** 0,014 0,014 0,025 0,025 DEBT (1,651)* (1,632) (3,038)*** (3,065)*** 0,280 0,286 -0,035 -0,039 GCF (5,994)*** (6,009)*** (-0,608) (-0,668) 0,015 0,015 -0,036 -0,036 OPEN (4,563)*** (4,569)*** (-7,889)*** (-7,879)*** -0,136 -0,137 -0,474 -0,474 GOV_EXP (-4,812)*** (-4,816)*** (-12,177)*** (-12,237)*** -10,121 -10,292 25,443 25,637 PROD_EXP (-2,046)** (-2,057)** (3,387)*** (3,417)*** 0,357 0,364 0,109 0,104 ELECT1 (1,284) (1,307) (0,283) (0,269) -3,561 -3,527 1,392 1,375 CRISIS08 (-9,612)*** (-9,516)*** (3,709)*** (3,661)*** Estimation cross-sectional fixed effects cross-sectional fixed effects Adjusted R2 0,432 0,434 0,433 0,433 Observations 430 430 349 349 Individuals 27 27 27 27 F-statistic 33,672 33,895 27,578 27,629 Prob (F-statistic) 0,000 0,000 0,000 0,000 Note: In all regressions, White corrections (heteroskedasticity) to standard deviations estimates were adopted. T-student statistics are reported between parentheses. *, ** and *** indicate the significance level of 10%, 5% and 1%, respectively.

Source: Own formulation with EViews 8 software.

The budgetary variable that indicates the distribution of government expenditure by productive and non-productive activities, PROD_EXP shows statistical significance in explaining both economic growth and income inequality. It has a negative impact on

45 economic growth, which is not consistent with the literature assumptions of Scully (2003) that expenditure in productive activities favour economic growth, but it has a positive impact on income inequality, meaning that non-productive government expenditure has a positive influence on equity, in accordance with the literature assumptions of Scully (2003) that expenditure in non-productive activities favour income equality. Overall, this result suggests that some expenditure items may increase simultaneously economic growth and income equality. The election variable is not statistically significant, suggesting that the proximity of elections does not have any impact on economic growth and income inequality. Regarding the crisis variable, the results are as expected; the variable is statistically significant and shows that the economic and financial crisis had a negative effect on both economic growth and income equality. Finally, IDEOLOGY1 and IDEOLOGY2, being the main variables of the analysis, are not statistically significant, which means that it is not possible to conclude for a political ideological impact on economic growth and income equality or, in other words, on the trade-off between efficiency and equity. We can conclude that this specification of the model does not confirm the existence of a relationship the political ideology and the efficiency/equity trade-off. As the results do not support the literature in regard to the political ideological effect on the trade-off, an alternative model is needed to understand if there is any influence of political ideology on economic growth and income equality. As it is assumed by Scully (2003), productive government expenditure increases the economic growth rate and income inequality, and non-productive government expenditure decreases economic growth and income inequality, although the previous empirical results do not support this assumption. In order to estimate an alternative specification, rather than focusing on economic goals, we turn the attention to economic tools, as these are directly manipulated by policymakers. The next specifications, take the share of productive government expenditure (PROD_EXP) as the dependent variable, in order to assess if political ideology has any effect on the composition of public expenditure. As explanatory variables, we include most of the control variables used in the previous estimation, considering now the effect of the ideology (through IDEOLOGY1 or IDEOLOGY2) on

46 the composition of government expenditure. As the two variables, PROD_EXP AND NONPROD_EXP are complementary, we only present the estimation results for PROD_EXP. Again, it is necessary to examine whether the estimation should be done with fixed effects or random effects and whether specific effects are cross-sectional, period or both. In this case, the Hausman test confirms the choice of estimation with fixed effects, as it can be seen in table 7. Under the null hypothesis, the estimation with random effects is valid and therefore its rejection admits the validity of fixed effects. For a 1% significance level, the null hypothesis is rejected for all specifications.

Table 7 – Hausman test: productive government expenditure equation

Dependent variable Specification Statistic P-value 1 38,854 0,0000 PROD_EXP 2 40,239 0,0000

In order to assess whether the specific effects are cross-sectional, period or both, we ran redundant fixed effects test. The results of the test suggest that there is statistical significance for the use of both cross-sectional and period fixed effects. So, the estimations are done with fixed cross-sectional and period effects. Table 8 presents the estimation results for productive government expenditure. It is important to note that it is assumed that productive government expenditure is beneficial to economic growth and non-productive government expenditure favour income equality. It is expected that, in accordance with the theoretical assumptions, under left-wing governments the share of productive government expenditure is lower than under right-wing governments, and so the share of non-productive government expenditure is greater than under right-wing governments. The first conclusion reached with the observation of the estimation results is the fact that the proximity of elections does not have any impact on the composition of government expenditure since the dummy variable ELECT1 is not statistically significant. Second, the GDP per capita variable is statistically significant and it has a negative impact on productive expenditure, meaning that the higher the GDP per capita (the more developed is the country), the lower the expenditure on productive activities, which means that GDP per capita impacts positively non-productive expenditure, and so

47 the more developed the country is, the higher the government's efforts to adopt equity enhancing measures. Regarding the other control variables, they are all statistically significant (POP_GROW, DEBT, GCF and OPEN) and they all influence positively productive government expenditure and negatively non-productive government expenditure.

Table 8 – Estimation results: productive government expenditure equation

PROD_EXP (1) (2) -0,0057 IDEOLOGY1 (-1,966)** -0,0019 IDEOLOGY2 (0,649) -0,0013 -0,0014 GDP_PC (-13,888)*** (-13,693)*** 0,0133 0,0132 POP_ GROW (4,853)*** (4,741)*** 0,0005 0,0005 DEBT (11,316)*** (11,184)*** 0,0023 0,0023 GCF (5,645)*** (5,519)*** 0,0004 0,0004 OPEN (13,100)*** (12,908)*** 0,0012 0,0012 ELECT1 (0,395) (0,368) Estimation cross-sectional and period fixed effects Adjusted R2 0,429 0,425 Observations 430 430 Individuals 27 27 F-statistic 47,110 46,291 Prob (F-statistic) 0,000 0,000 Note: In all regressions, White corrections (heteroskedasticity) to standard deviations estimates were adopted. T-student statistics are reported between parentheses. *, ** and *** indicate the significance level of 10%, 5% and 1%, respectively.

Source: Own formulation with EViews 8 software.

The focus of the analysis is now to assess the impact of political ideology on these variables: PROD_EXP associated with economic growth and efficiency, and NONPROD_EXP associated with income equality and equity. Through the estimation results, we can see that IDEOLOGY1 (which distinguishes left-wing governments from centre and right-wing governments) is statistically significant, while IDEOLOGY2 (which distinguishes left-wing and centre governments from right-wing governments) is

48 not statistically significant. This means that, as suggested by Hibbs (1977), centre parties are more related to right-wing ideologies than to left-wing ideologies. It follows also that IDEOLOGY1 has a negative influence on productive government expenditure and a positive influence on non-productive government expenditure. These results are consistent with the literature assumptions about the impact of political ideology on economic growth and income equality, because the negative coefficient associated with the ideological variable in productive government expenditure specification shows that right-wing and centre governments spend more on productive activities than left-wing governments, suggesting that right-wing and centre parties favour more economic growth and efficiency, as it was expected. On the contrary, left-wing governments spend more in non-productive activities than right-wing and centre governments, confirming the assumption of the literature that left-wing parties are more concerned about income equality and equity issues. Concluding, the first estimation results do not support the literature, to the extent that there is no direct influence of political ideology on the trade-off between efficiency and equity, through economic goals like the GDP growth rate and the Gini coefficient, but the second estimation results suggest that there is an influence, even if through economic tools, of political ideology on the efficiency/equity trade-off, through the budgetary variables like the productive and non-productive government expenditure. Hence, the empirical evidence of this dissertation supports the literature assumptions in regard to the relation between the political ideology and the trade-off between efficiency and equity.

6. Final considerations and future developments

The relationship between the political system and the economic one considering the opportunistic behaviour of policymakers is quite debated in the literature but, with regard to the ideological approach of the partisan models, the literature is scarce. In this sense, it becomes of extreme relevance to deepen the study of the ideological approach in the context of the economic science, in particular as it concerns the achievement of economic goals. Thus, this dissertation combines two strands of the economic literature – the partisan ideology models and the trade-off between efficiency and equity. The main objective of the first part of the work consisted in the analysis of the main theoretical contributions of literature, primarily about the partisan ideology and its influence on the main macroeconomic variables, and then about the conflict between efficiency and equity, associating each of the economic principles to the economic objective of growth and equality, respectively. The research also focused in trying to assess how the literature relates the political ideology with the trade-off between efficiency and equity. The theoretical assumptions set out in the literature review suggest that the right- wing and left-wing parties reveal different features, preferences and interests: left-wing parties have a preference for tackling unemployment, while right-wing parties prefer to control inflation; the core constituency of left-wing parties are labour owners, whereas the core constituency of right-wing parties are capital owners; left-wing parties prefer more government control, produce bigger governments and create more expenditure than right-wing parties, which means that the latter are more averse to public intervention than the former; left-wing parties tend to favour more income equality, while right-wing parties tend to favour more economic growth. The last statement suggests that left-wing parties are more concerned with equity issues while right-wing parties are more concerned with efficiency issues. With regard to theories about the trade-off between efficiency and equity, the literature suggests that the variable that best describes the objective of economic growth, associated with the efficiency principle, is the GDP growth rate, while the variable that suits the purpose of equality in income distribution, associated with the equity principle, is the Gini coefficient, an inequality indicator. Nevertheless, it emerges that there is still a necessity of extend the study of

50 these subjects aiming the assessment of the relationship between the political system and the economic one, particularly regarding the impact on economic goals, in order to obtain a more robust theoretical background about the ideological approach of political models. The empirical results of the econometric analysis of the dissertation suggest the existence of a political ideological impact, however indirect, on the conflict between efficiency and equity, within the 27 countries of the European Union (EU27) for the 1995-2012 period. The results meet the theories and assumptions of the literature, reported and analyzed in the first part of the dissertation, if one considers to be valid the assumption that government expenditure on productive activities promotes economic growth, while government expenditure on non-productive activities favours income equality. Even though the empirical evidence does not support the theory of direct influence of political ideology in the growth rate of GDP and the Gini coefficient, it is found that budgetary variables like the productive government expenditure and the non- productive government expenditure are affected by political ideology, meaning that there is an indirect influence of ideology on economic growth and income inequality. More specifically, we conclude that centre and right-wing ideology favours more economic growth (the focus is on efficiency issues), spending more in productive activities than left-wing governments, and left-wing governments favour more income equality (the focus is on equity issues), spending more in non-productive activities than centre and right-wing governments, as it was expected. Hence, this dissertation has succeeded in combining two important strands of the economic literature – the ideological approach of political models and the trade-off between efficiency and equity. The results and findings of the investigation could have been more accurate and robust if we had not found some limitations in the investigation process, such as: the existing literature on the ideological models, when compared with the opportunistic models, is rather scarce; the literature that relates the political ideology with efficiency/equity conflict is also limited, particularly with regard to empirical evidence; the availability of limited statistical information affects the robustness of descriptive and econometric analysis, especially concerning the indicators of income and poverty, the so-called Laeken indicators. More data available within this domain would allow the

51 use of more robust measures of welfare equality. An interesting indicator that could be included in this analysis, as an explanatory variable, is the output gap, but the statistical information about this indicator was not available for all the countries included here. The present dissertation raises the possibility of developing closer analysis on those subjects in the future. For this, it would be relevant to implement the analysis using more sophisticated econometric and statistical techniques for more robust empirical results. The availability of more statistical information would also be an asset to the improvement of the implemented analysis. A more complete and specific alternative of this study would also include in the analysis the government's composition, which means considering if there is hegemony or dominance of the parties, and also include the type of government – if the government is a single party majority government, a coalition government, a single party minority government, or a multi party minority government. It also must be taken into account that the classification of parties between right and left-wing presented in this dissertation may be seen as subjective, because in most countries the parties that alternate in government are not from extreme right-wing and extreme left-wing, they are considered more central parties, so it is necessary more accurate measurements of party classification to achieve more precise and robust empirical results.

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Appendix 1 – Real GDP annual growth rate by country (%), 1990-2012

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Austria 4,3 3,4 2,1 0,5 2,4 2,7 2,4 2,2 3,6 3,6 3,4 1,4

Belgium 3,1 1,8 1,5 -1,0 3,2 2,4 1,6 3,7 2,0 3,7 3,6 0,9

Bulgaria -9,1 -8,4 -7,3 -1,5 1,8 2,9 1,6 -1,1 3,5 -5,6 6,0 3,8

Cyprus 7,4 0,7 9,4 0,7 5,9 6,1 1,8 2,3 5,0 4,8 5,0 4,0

Czech Republic -11,6 -0,5 0,1 2,9 6,2 4,3 -0,7 -0,3 1,4 4,3 3,1

Denmark 1,6 1,3 2,0 -0,1 5,5 3,1 2,9 3,3 2,2 2,9 3,7 0,8

Estonia 5,9 11,7 6,8 -0,3 9,7 6,2

Finland 0,7 -5,9 -3,3 -0,7 3,9 4,2 3,7 6,3 5,4 4,4 5,6 2,6

France 2,9 1,0 1,6 -0,6 2,3 2,1 1,4 2,3 3,6 3,4 3,9 2,0

Germany 5,3 5,1 1,9 -1,0 2,5 1,7 0,8 1,8 2,0 2,0 3,0 1,7

Greece 0,0 3,1 0,7 -1,6 2,0 2,1 3,0 4,5 4,1 3,1 4,0 3,7

Hungary -3,1 -0,6 2,9 1,5 0,0 3,4 4,2 3,2 4,2 3,7

Ireland 8,5 1,9 3,3 2,7 5,8 9,6 9,1 10,8 8,5 10,2 9,5 5,3

Italy 2,0 1,5 0,8 -0,9 2,2 2,9 1,3 1,8 1,6 1,6 3,7 1,8

Latvia -7,9 -12,6 -32,1 -5,0 2,2 -0,9 3,8 8,3 4,7 4,7 6,9 8,0

Lithuania -5,7 -21,3 -16,2 -9,8 3,3 5,2 7,5 7,6 -1,1 3,3 6,7

Luxembourg 5,3 8,6 1,8 4,2 3,8 1,4 1,5 5,9 6,5 8,4 8,4 2,0

Malta 6,3 6,3 4,7 4,5 5,7 6,3 3,8 5,3 5,1 4,7 6,8 -1,5

Netherlands 4,2 2,4 1,7 1,3 3,0 3,1 3,1 4,0 4,4 4,5 4,4 1,6

Poland -7,0 2,5 3,7 5,3 7,0 6,2 7,1 5,0 4,5 4,3 1,2

Portugal 4,0 4,4 1,1 -2,0 1,0 4,3 3,5 4,4 4,8 3,9 3,8 1,9

Romania -5,6 -12,9 -8,8 1,5 4,0 7,2 4,0 -6,1 -4,8 -1,2 2,1 5,7

Slovak Republic 1,9 6,2 5,8 6,8 6,1 4,0 -0,2 1,2 3,3

Slovenia 3,5 5,1 3,3 5,3 4,2 2,9

Spain 3,8 2,5 0,9 -1,0 2,4 2,8 2,7 3,7 4,3 4,5 5,3 4,0

Sweden 0,8 -1,1 -1,2 -2,1 4,1 4,0 1,5 2,9 4,2 4,5 4,7 1,6

United Kingdom 0,5 -1,2 0,4 2,6 4,0 2,5 2,7 2,6 3,5 3,2 3,8 2,7

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Mean

Austria 1,7 0,8 2,7 2,1 3,4 3,6 1,5 -3,8 1,9 3,1 0,9 2,2

Belgium 1,6 0,9 3,4 1,9 2,6 3,0 1,0 -2,6 2,5 1,6 0,1 1,9

Bulgaria 4,5 5,4 6,6 6,0 6,5 6,9 5,8 -5,0 0,7 2,0 0,5 1,1

Cyprus 2,1 1,9 4,2 3,9 4,1 5,1 3,6 -1,7 1,3 0,4 -2,4 3,3

Czech Republic 1,6 3,6 4,9 6,4 6,9 5,5 2,7 -4,8 2,3 2,0 -0,8 1,8

Denmark 0,5 0,4 2,6 2,4 3,8 0,8 -0,7 -5,1 1,6 1,2 -0,7 1,6

Estonia 6,1 7,5 6,5 9,5 10,4 7,9 -5,3 -14,7 2,5 8,3 4,7 4,9

Finland 1,7 2,0 3,9 2,8 4,1 5,2 0,7 -8,3 3,0 2,6 -1,5 1,9

France 1,1 0,8 2,8 1,6 2,4 2,4 0,2 -2,9 2,0 2,1 0,3 1,7

Germany 0,0 -0,7 1,2 0,7 3,7 3,3 1,1 -5,6 4,1 3,6 0,4 1,7

Greece 3,2 6,6 5,0 0,9 5,8 3,5 -0,4 -4,4 -5,4 -8,9 -6,6 1,2

Hungary 4,5 3,8 4,8 4,3 4,0 0,5 0,9 -6,6 0,8 1,8 -1,5 1,8

Ireland 5,8 3,0 4,6 5,7 5,5 4,9 -2,6 -6,4 -0,3 2,8 -0,3 4,7

Italy 0,3 0,2 1,6 0,9 2,0 1,5 -1,0 -5,5 1,7 0,6 -2,3 0,9

Latvia 6,5 7,2 8,7 10,6 12,2 10,0 -4,2 -18,0 -0,3 5,3 5,0 1,0

Lithuania 6,9 10,2 7,4 7,8 7,8 9,8 2,9 -14,7 1,3 6,0 3,7 1,3

Luxembourg 3,3 1,2 4,9 4,1 4,9 6,5 0,5 -5,3 5,1 2,6 -0,2 3,7

Malta 2,8 0,1 -0,5 3,7 2,2 4,3 3,9 -2,8 4,3 1,4 1,1 3,4

Netherlands 0,0 0,3 1,9 2,3 3,8 4,2 2,1 -3,3 1,1 1,7 -1,6 2,2

Poland 1,4 3,6 5,1 3,5 6,2 7,2 3,9 2,6 3,7 4,8 1,8 3,8

Portugal 0,8 -0,9 1,8 0,8 1,6 2,5 0,2 -3,0 1,9 -1,8 -3,3 1,5

Romania 5,0 5,2 9,1 4,3 8,7 6,3 7,9 -6,8 -0,9 2,3 0,4 1,1

Slovak Republic 4,7 5,4 5,2 6,5 8,3 10,7 5,4 -5,3 4,8 2,7 1,6 4,3

Slovenia 3,8 2,8 4,4 4,0 5,7 6,9 3,3 -7,8 1,2 0,6 -2,6 2,7

Spain 2,9 3,2 3,2 3,7 4,2 3,8 1,1 -3,6 0,0 -0,6 -2,1 2,2

Sweden 2,1 2,4 4,3 2,8 4,7 3,4 -0,6 -5,2 6,0 2,7 -0,3 2,0

United Kingdom 2,5 4,3 2,5 2,8 3,0 2,6 -0,3 -4,3 1,9 1,6 0,7 1,9

Source: World Bank (http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG, accessed on 6.04.2015).

Appendix 2 – Gini coefficient by country (%), 1995-2012

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Austria 27 26 25 24 26 24 24 27,4 25,8

Belgium 29 28 27 27 29 30 28 28,3 26,1

Bulgaria 25 26 26 24,0 26,0

Cyprus 29 27,0

Czech Republic 25

Denmark 20 20 21 22 24,8 23,9

Estonia 36 35 35 34,0 37,4

Finland 22 22 22 24 24 27 26 26,0 25,5

France 29 29 29 28 29 28 27 27 27,0 28,2

Germany 29 27 25 25 25 25 25

Greece 35 34 35 35 34 33 33 34,7 33,0

Hungary 26 25 24 27,0

Ireland 33 33 33 34 32 30 29 30,6 31,5

Italy 33 32 31 31 30 29 29 33,2

Latvia 34

Lithuania 31 31

Luxembourg 29 28 25 26 27 26 27 27,6 26,5

Malta 30

Netherlands 29 29 26 25 26 29 27 27 27,0

Poland 30 30

Portugal 37 36 36 37 36 36 37 37,8

Romania 29 30 30 30,0 31,0

Slovak Republic

Slovenia 22 22 22 22,0

Spain 34 34 35 34 33 32 33 31 31,0 31,0

Sweden 21 22 24 23 23,0

United Kingdom 32 32 30 32 32 32 35 35 34,0

2005 2006 2007 2008 2009 2010 2011 2012 Mean

Austria 26,3 25,3 26,2 27,7 27,5 28,3 27,4 27,6 26,2

Belgium 28,0 27,8 26,3 27,5 26,4 26,6 26,3 26,5 27,5

Bulgaria 25,0 31,2 35,3 35,9 33,4 33,2 35,0 33,6 30,0

Cyprus 28,7 28,8 29,8 29,0 29,5 30,1 29,2 31,0 29,2

Czech Republic 26,0 25,3 25,3 24,7 25,1 24,9 25,2 24,9 25,2

Denmark 23,9 23,7 25,2 25,1 26,9 26,9 27,8 28,1 24,2

Estonia 34,1 33,1 33,4 30,9 31,4 31,3 31,9 32,5 33,5

Finland 26,0 25,9 26,2 26,3 25,9 25,4 25,8 25,9 25,1

France 27,7 27,3 26,6 29,8 29,9 29,8 30,8 30,5 28,5

Germany 26,1 26,8 30,4 30,2 29,1 29,3 29,0 28,3 27,3

Greece 33,2 34,3 34,3 33,4 33,1 32,9 33,5 34,3 33,9

Hungary 27,6 33,3 25,6 25,2 24,7 24,1 26,8 26,9 26,4

Ireland 31,9 31,9 31,3 29,9 28,8 30,7 29,8 29,9 31,2

Italy 32,8 32,1 32,2 31,0 31,5 31,2 31,9 31,9 31,4

Latvia 36,2 38,9 35,4 37,5 37,5 35,9 35,1 35,7 36,2

Lithuania 36,3 35,0 33,8 34,0 35,9 37,0 33,0 32,0 33,9

Luxembourg 26,5 27,8 27,4 27,7 29,2 27,9 27,2 28,0 27,3

Malta 27,0 27,1 26,3 28,1 27,4 28,6 27,2 27,1 27,6

Netherlands 26,9 26,4 27,6 27,6 27,2 25,5 25,8 25,4 26,9

Poland 35,6 33,3 32,2 32,0 31,4 31,1 31,1 30,9 31,8

Portugal 38,1 37,7 36,8 35,8 35,4 33,7 34,2 34,5 36,2

Romania 31,0 33,0 37,8 36,0 34,9 33,3 33,2 33,2 32,5

Slovak Republic 26,2 28,1 24,5 23,7 24,8 25,9 25,7 25,3 25,5

Slovenia 23,8 23,7 23,2 23,4 22,7 23,8 23,8 23,7 23,0

Spain 32,2 31,9 31,9 31,9 32,9 33,5 34,0 34,2 32,8

Sweden 23,4 24,0 23,4 24,0 24,8 24,1 24,4 24,8 23,5

United Kingdom 34,6 32,5 32,6 33,9 32,4 32,9 33,0 31,3 32,8

Source: Eurostat (http://ec.europa.eu/eurostat/web/products-datasets/-/tessi190, accessed on 6.04.2015).

Appendix 3 – Average of relative power position by country, by periods of alternate dominant/hegemonic ideology in government (%), 1990-2012

Right Left Right Left

1990-1999 21,7 78,3 1990-1992 0 100

Austria 2000-2006 65,6 34,4 1993-1996 64,6 35,4

2007-2012 24,1 75,9 France 1997-2001 0 100

1990-2003 31,0 69,0 2002-2011 93,4 6,6

Belgium 2004-2011 54,0 46,0 2012 37,2 62,8

2012 45,9 54,2 1990-1997 58,6 41,4

1990 10,5 89,5 Germany 1998-2009 13,1 86,9

1991-1992 75,5 24,5 2010-2012 64,1 36,0

Bulgaria 1993-1994 TG 1990-1993 91,9 8,1

1995-1996 0 100 1994-2003 0 100 Greece 1997-2012 80,8 19,2 2004-2009 92,9 7,1

1990 51,6 48,4 2010-2012 21,1 78,9

1991-1992 40,5 59,5 1990-1994 71,4 28,6 Cyprus 1993-2002 97,9 2,1 1995-1997 24,9 75,1

2003-2012 30,2 69,8 Hungary 1998-2001 70,8 29,2

1990-1998 87,2 12,8 2002-2009 11,3 88,7

Czech 1999-2006 14,3 85,7 2010-2012 86,5 13,5 Republic 2007-2012 85,3 14,7 1990-1994 86,8 13,3

1990-1992 100 0 1995-1996 27,4 72,6 Ireland 1993-2001 13,8 86,2 1997-2010 95,7 4,3 Denmark 2002-2011 100 0 2011-2012 39,5 60,5

2012 22,1 77,9 1990-1993 36,3 63,7

1990-1991 na na 1994-1995 63,3 36,7

1992-1994 76,4 23,6 1996-2000 20,1 79,9 Estonia 1995-1998 18,3 81,7 Italy 2001-2005 87,5 12,5

1999-2012 83,4 16,6 2006-2007 18,8 81,2

1990-1994 67,9 32,1 2008-2011 89,9 10,1

1995-2006 37,2 62,8 2012 TG Finland 2007-2011 63,3 36,7 1990-1992 na na Latvia 2012 45,2 54,8 1993-2012 81,7 18,3

Right Left Right Left

1990-1991 na na 1990-1996 7,9 92,1

1992-1996 0,0 100,0 1997-2000 62,6 37,4 Romania Lithuania 1997-2000 91,2 8,8 2001-2004 0,0 100,0

2001-2008 23,0 77,0 2005-2012 70,4 29,6

2009-2012 100,0 0,0 1990-2006 73,5 26,5

1990-1999 29,0 71,0 2007-2009 41,2 58,8 Slovak Luxembourg 2000-2004 68,6 31,4 Republic 2010-2011 64,6 35,4

2005-2012 32,3 67,7 2012 18,7 81,3

1990-1995 0,0 0,0 1990-1992 na na

Malta 1996-1998 19,0 81,0 1993-1999 56,8 43,2

1999-2012 0,0 0,0 Slovenia 2000 32,9 67,1

1990-2001 38,7 61,3 2001-2004 61,5 38,5

2002-2006 66,1 33,9 2005-2012 16,8 83,2 Netherlands 2007-2009 31,3 68,7 1990-1996 0,0 100,0

2010-2012 69,7 30,4 1997-2003 0,0 0,0 Spain 1990 na na 2004-2011 0,0 100,0

1991-1993 100,0 0,0 2012 0,0 0,0

1994-1997 0,0 100,0 1990-1991 10,3 89,7 Poland 1998-2001 100,0 0,0 1992-1994 76,7 23,4 Sweden 2002-2005 0,0 100,0 1995-2006 0,0 100,0

2006-2012 86,6 13,4 2007-2012 86,2 13,8

1990-1995 100,0 0,0 1990-1996 100,0 0,0

United 1996-2001 0,0 100,0 1997-2009 0,0 100,0 Kingdom Portugal 2002-2004 91,1 8,9 2010-2012 100,0 0,0

2005-2010 0,0 100,0

2011-2012 76,6 23,4

Legend: Right – average of relative power position of right-wing parties (measured in percentage of the total parliamentary seat share of all governing parties); Left – average of relative power position of left- wing parties (measured in percentage of the total parliamentary seat share of all governing parties); TG – technocratic government; na – value not available. In Malta and Spain, the zero in both R and L means that the relative power position of centre parties is 100% in that period.

Source: Own formulation from Armingeon et al. (2015).

Appendix 4 – Variables and metadata

Variable Description Unit Source

GDP_GROWTH Real GDP annual growth rate % World Bank

GINI_COEF Gini coefficient % Eurostat Armingeon IDEOLOGY1 Dummy: 1 for left-wing governments, 0 otherwise Dummy et al. (2015) Dummy: 1 for left-wing and centre governments, 0 Armingeon IDEOLOGY2 Dummy otherwise et al. (2015) Current GDP_PC GDP per capita World Bank USD POP_GROW Population growth % World Bank Armingeon DEBT Gross government debt % of GDP et al. (2015) GCF Gross capital formation % of GDP World Bank

OPEN Degree of openness to trade % of GDP World Bank

GOV_EXP Total government expenditure % of GDP Eurostat % of total PROD_EXP Government expenditure in productive activities government Eurostat expenditure Armingeon ELECT1 Dummy: 1 for election year, 0 otherwise Dummy et al. (2015) Dummy: 1 if elections are held in the 2nd half of the Armingeon ELECT2 Dummy year or in the 1st half of the next year, 0 otherwise et al. (2015) CRISIS07 Dummy: 1 for crisis years 2007-2012, 0 otherwise Dummy −

CRISIS08 Dummy: 1 for crisis years 2008-2012, 0 otherwise Dummy −

CRISIS09 Dummy: 1 for crisis years 2009-2012, 0 otherwise Dummy −

World Bank, http://data.worldbank.org/indicator, accessed on 22.06.2015, and Eurostat, http://ec.europa.eu/eurostat/data/database, accessed on 22.06.2015.

Appendix 5 – Classification of the functions of government (COFOG): first and second levels

First level Second level Military defence Civil defence Defence Foreign military aid R&D defence Defence n.e.c. General economic, commercial and labour affairs Agriculture, forestry, fishing and hunting Fuel and energy Mining, manufacturing and construction Economic affairs Transport Communication Other industries R&D economic affairs Economic affairs n.e.c. Pre-primary and primary education Secondary education Post-secondary non-tertiary education Tertiary education Education Education not definable by level Subsidiary services to education R&D education Education n.e.c. Waste management Waste water management Environmental Pollution abatement protection Protection of biodiversity and landscape R&D environmental protection Environmental protection n.e.c. Executive and legislative organs, financial and fiscal affairs, external affairs Foreign economic aid General services Basic research General public services R&D general public services General public services n.e.c. Public debt transactions Transfers of a general character between different levels of government Medical products, appliances and equipment Outpatient services Hospital services Health Public health services R&D health Health n.e.c.

First level Second level Housing development Community development Housing and community Water supply amenities Street lighting R&D housing and community amenities Housing and community amenities n.e.c. Police services Fire-protection services Law courts Public order and safety Prisons R&D public order and safety Public order and safety n.e.c. Recreational and sporting services Cultural services Recreation, culture and Broadcasting and publishing services religion Religious and other community services R&D recreation, culture and religion Recreation, culture and religion n.e.c. Sickness and disability Old age Survivors Family and children Social protection Unemployment Housing Social exclusion n.e.c. R&D social protection Social protection n.e.c. Legend: n.e.c. – not elsewhere classified. Source: United Nations Statistics Division (http://unstats.un.org/unsd/cr/registry/regcst.asp?Cl=4, accessed on 31.03.2015).