The African Business Review May-Jun 2014 | Page 28

covering 96 countries for the period 1975-1998, he argues that
« participatory political regimes are associated with significantly
lower levels of aggregate economic instability ». According to
him, the realization of political compromise is the channel of
influence connecting democracy to macroeconomic stability.
Democracies induce greater willingness to cooperate and
compromise in the political sphere, generating greater stability
as a result. One way in which democratic participation in politics
can generate compromise is by altering preferences. As individuals
meet and deliberate, they come to understand each other’s

Macroeconomic pathologies such as poor
management of external debt and consequent
inflation are due to political practices governed
by favouritism and rent-seeking. A democratic
institutional environment characterized by
participation, contestation and transparency
can counteract these practices, thus reduce
inflation.
viewpoints, develop empathy, recognize the value of moderation,
internalize the common interest, and de-emphasize narrow selfinterest. Liberal democracies entail constitutional rules that curtail
the power of the majority to expropriate the minority. Separation
of powers, specific minority protection clauses, and the rule of law
are some of the more relevant mechanisms. Reducing the scope
of redistributive action induces cooperative behaviour through
two channels. First, winners cannot treat the losers as they please.
Second, and less obviously, this fact in itself makes contending
groups more willing to compromise ex ante, as it reduces both the
perceived benefits of uncooperative behaviour and the perceived
costs of cooperative behaviour (Rodrik, 2000).

Lavigne (2006) has also granted to political factors
an important role in explaining macroeconomic conditions.
According to him, several countries, including emerging market
economies are now facing the major challenge to carry out
their tax adjustments policies.
According to the International
Monetary Fund (2003, b), it appears that in 2002, the public
debt of emerging countries has exceeded 70% of GDP.

Lavigne (2006) considers that the success of fiscal
adjustment plans in developed and developing countries is
closely linked to the quality of the institutional framework, and
particularly to the degree of democratization.

There is some evidence that high levels of transfers and
subsidies diminish the probability of successful adjustment in
developing countries, and that legislative majorities improve the
odds. In advanced countries, strong democratic institutions appear
to increase the likelihood of avoiding situations of fiscal distress
(Lavigne, 2006). Conflicts of interest between socioeconomic
groups and social division act significantly on redistributive
policies. These factors affect the level of subsidies and transfers
of income policies.

Havrylyshyn and Olding-Smee (2000) argue that spending
on transfers and subsidies indicates the existence of rent-seeking
vested interests and their assertion was supported by many authors
(e.g., Alesina and Perotti; 1995; and Gupta et al., 2003). On the
other hand, social division, resulting in income inequality and
ethnic fragmentation intensifies conflicts redistribution.
Under
these conditions, the State finds difficulty to establish effective

28 | The African Business Review

tax policies adjustments which latter leads to macroeconomic
imbalances and price increases.

Berg and Sachs (1988) argue in this regard that income
inequality is positively correlated with the level of public debt
and Sachs (1989) argues that Latin American countries were
unable to establish adjustment programs to control the debt crisis
because of the rigidity of public consumption.

Such rigidity was the result of the pressures exerted by
socio-political interest groups who disallowed the government to
establish tax reforms that adversely affect their economic interests.
In a democracy, the effects of social division and conflict of interest
are mixed. Democracy imposes legal constraints that facilitate the
implementation of adjustment programs benefiting all the society.
Fiscal discipline has been empirically linked to a number
of institutional factors, including budgetary centralization,
transparency, fiscal rules, and parliamentary procedures. In a
more general sense, institutional quality is often proxied in the
growth literature by an index of the rule of law, which evaluates
the system of laws, conventions, and behaviour that support
market economies, encourage investment, and protect public
goods. It seems reasonable to expect that high institutional
quality could foster a more efficient public sector and minimize
corruption, translating into a better use of revenues and increased
tax collection. It could also ensure that fiscal policy will not fall
prey to vested interests.

The quality of democratic institutions might also have a
significant impact on fiscal consolidation (Lavigne, 2006). Two
important conclusions can be derived after this literature review:

Not only there is a negative causality between democracy and
inflation but also, political participation is the deep determinant
of inflation. Many macroeconomic aggregates, traditionally used
as central variables in explaining the variability of inflation are
themselves subject to the degree of democratization.
We will demonstrate this theoretical assertion using an empirical
model that evaluates the impact of democracy on inflation. Our
model will incorporate, along with democracy index, economic
and institutional control variables that are commonly considered
as powerful determinants of inflation.

This empirical study will however be preceded by the
presentation of the democracy indicator that we will use as
variable of interest in our model.

Presentation of the Kaufmann, Kraay and
Mastruzzi (2012) democracy index

It should first be noted that the empirical literature has
expe