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Louis XV might not have said Après moi, le deluge, but the phrase befits the current presidential transition in Argentina. Because power is transferred within the family, absolute monarchs are typically interested in the well-being of their successors. The defining characteristic of democracies, on the other hand, is alternation of political leaders. When the presidential incumbent has to relinquish power in the hands of a successor, tensions are likely to arise. The project of keeping political power within the family as long as possible, launched by Néstor and Cristina Kirchner twelve years ago, has now come to an end. The outgoing president, Cristina Kirchner, has behaved towards the President-elect, Mauricio Macri, in a way that has been characterized by the press as “vindictive and spiteful” (Joaquín Morales Solá 2015).
Indeed, the presidential transition in Argentina has been complicated by last-minute decisions of Cristina Kirchner that condition the incoming administration’s fiscal position. For instance, giving all the provinces, through a presidential decree that exceeds her constitutional powers, the tax revenues that the national government had been withholding to finance the national pension system. Another questioned policy has been the sale by the Central Bank of dollar futures contracts for over 15 billion of dollars, which are deliverable in early 2016 at a price that is 1/3 below the expected market price. This leads the future administration to face extraordinary losses in the foreign exchange market. Though the current administration is promising to deliver huge amounts of dollars in the future at below-market prices, at present the government is not selling any dollars at the official rate for a simple reason: no liquid international reserves are left at all. Cristina Kirchner, patently unhappy with having to relinquish presidential power, decided not to participate in the traditional ceremony in the Presidential House where the outgoing president hands over the symbols of presidential power to the incoming president.
While the specifics of each presidential transition are idiosyncratic, some general patterns are observable in all political transitions. The figure shows the behavior of the budget deficit around democratic transitions in Latin America (Pablo Garofalo 2015).
Notes: Taken form Garofalo (2015). Countries in the sample are Argentina, Brazil, Colombia, Costa Rica, Dominican Republic, Ecuador, Honduras, Mexico, Nicaragua, Panama, Peru, Uruguay, and Venezuela. Monthly data 1980-2005, International Financial Statistics, IMF. Non-democratic periods were excluded based on Polity IV Project.
The budget deficit increases during the nine months before elections, and recovers in the nine months after the new administration steps in. There is a clear reason why a government may be interested in increasing the budget deficit before elections: because a government that is sure that it will lose the elections can condition the policies of the successor government, using debt to tie the hands of the incoming president. This is the issue of the strategic use of debt pointed out by Torsten Persson and Lars Svensson (1989), Alberto Alesina and Guido Tabellini (1990), and Guido Tabellini and Alberto Alesina (1990).
The interpretation of the behavior before elections is complicated by an issue of reverse causality, because the budget deficit may affect the probability of reelection. The literature on political budget cycles, that springs from the work of Edward Tufte (1978) and Kenneth Rogoff and Anne Sibert (1988), points out that incumbents have incentives to increase spending and reduce taxes before elections if that helps to boost the chances of reelection. However, there is a narrow window that allows us to elucidate the possible effect of leaving office on the budget deficit, the period between elections and the inauguration of the new administration.
The incumbent’s probability of staying in office is exogenously given in the transition period between elections and transfer of power, which in Latin America lasts on average two months: the incumbent finds out for sure whether the probability of staying in office is either one (if a candidate of the incumbent party is reelected) or zero (if not). That is new information for the incumbent, since before elections the probability is typically around one half.
The figure shows that the surprise, or new information, that the incumbent receives has a sizeable impact. The budget deficit decreases sharply, by 2 percentage points, when the incumbent party is reelected, and rises by 2 percentage points when not. Since reelection chances are exogenous in the interlude between elections and inauguration of the new administration, causality goes from change in probability of reelection to change in budget deficit. Hence, part of the behavior of Cristina F. Kirchner is not eccentric, at least by Latin-American standards: outgoing incumbents whose party loses elections increase the budget deficit before going home.
Alesina, Alberto, and Guido Tabellini. 1990. A positive theory of fiscal deficits and government debt. Review of Economic Studies 57: 403-414.
Garofalo, Pablo. 2015. Horizon effects in government deficit: Evidence form presidential interludes in Latin America. Working paper. Cleveland State University.
Morales Sola, Joaquín. 2015. Rencorosa y vengativa. La Nación. December 2.
Persson, Torsten, and Lars E. O. Svensson. 1989. Why a stubborn conservative would run a deficit: Policy with time-inconsistent preferences. Quarterly Journal of Economics 104: 325-345.
Rogoff, Kenneth, and Anne Sibert. 1988. Elections and marcoeconomic policy cycles. Review of Economic Studies 55: 1-16.
Tabellini, Guido and Alberto Alesina. 1990. Voting on the budget deficit. American Economic Review 80: 37-49
Tufte, Edward. 1978. Political Control of the Economy. Princeton, NJ: Princeton University Press