The African Financial Review July-August 2014 | Page 30

Introduction

The negative effects of inflation on economic activity are widely
recognized. Inflation exerts a constraining effect on the key drivers
of growth. The price increase reduces consumption and therefore
production and employment. It exerts an inhibitory effect on
investment, due to the rise of the nominal wages and the prices
of raw materials, both in local and foreign currency.

Inflation also contributes to the deterioration of trade
balance when the prices of domestic goods and services rise
more than those of foreign competitors. To this are added its
negative effects on social activity because of the deterioration of
the purchasing power.

On the academic side, the economic literature has not
stopped searching the causes of this phenomenon and finding
its cures. It was first discussed the role of monetary and fiscal
policies, and then discuss other factors such as the degree of
central bank independence.

However, over the last decade, a new wave theory has
enriched this debate by focusing on the role of socio-political
factors such as the degree of democratization of countries,
considering these factors as the “deep determinants” of inflation
and other macroeconomic pathologies.

The thesis proposed by this new theoretical wave can
be summarized by the following proposal of Satyanah and
Subramanian (2007): If monetary or fiscal policy causes
prices, what in turn causes monetary or fiscal policy and hence
instability? Similarly, if the lack of central bank independence
causes instability, why do some countries chose to have such

30 | The African Financial Review

independence and others not? Such questions justify a search
for deeper causes for instability.

The present study falls within the framework of this
academic renewal, which gives to socio- political and institutional
factors, and more specifically, the degree of democratization, a
leading role in explaining the causes of inflation and considers
political participation a determinant tool for reducing it.

Without calling into question the importance of the ‘classic’
instruments of control of inflation, that is monetary and fiscal
policies, as well as other factors such as the degree of central
bank independence, we are attempting to make a contribution to
institutionalist theories, supporting the idea that these economic
factors are “proximate determinants”, that are themselves subject
to the effect of socio-political factors, which are the “deep
determinants”.

But it should be noted that the theoretical position that
supports the existence of negative relationship between democracy
and inflation has not made unanimity in the academic literature
and some authors support the thesis that democracy can be a
source of inflation.

The “median voter” thesis of Hotteling (1929) and Downs
(1957) is a very representative theoretical conceptualisation of this
view. In other words, this thesis is commonly used as a theoretical
underpinning of studies that supports a positive link between
political participation and the rise in inflation.

The second section of this paper provides a critical analysis
of this thesis, by relating the Tunisian case study. Such an analysis
allows presenting all aspects which turn around this debate and