The African Financial Review July-August 2014 | Page 33

ensure that these policies can be implemented in a peaceful social
environment.
We refer in this regard to the austerity policies
established in the United States in 2013, which provide higher
taxes on the middle class to absorb the government debt, and
limiting the increase in public-expenditure in order to neutralize
the effects of economic decline.

We can also mention the case of budget austerity measures
undertaken by the French government. According to a recent
case study conduced by OXFAM[5] organism, « since 2010,
France has been through five rounds of austerity measures. In
November 2011, the then-government, led by François Fillon,
announced measures intended to raise €65bn by 2016 through
a combination of reduction in public spending and increases in
taxes, including €7bn in 2012 and €11.6bn in 2013. For 2013,
the plan foresees €7.9bn of tax increases of which 86 per cent
(€6.8bn) will fall on households. Since the change of government
in 2012, more austerity measures have been announced for the
2013 budget with the aim of saving an additional €37bn. This
new austerity plan will include an unprecedented amount of
new taxes and spending cuts. It includes President Hollande’s
well-known electoral promise to impose a 75 per cent tax on
earnings above €1m per year. Additional measures include the
abolition of fiscal incentives for large companies and €10bn of
cuts in public spending (focusing mainly on the ministries of
Environment/Ecology, Economy, Agriculture, Foreign Affairs and
Culture). Despite an attempt to raise taxes among the wealthiest
people in the country, the new austerity measures are likely to
affect the entire population. Indeed, the French Parliament, as
part of a package to save an additional €20bn in 2014 (including
€5bn in direct cuts from ministerial budgets), voted for a general
hike in VAT, from 19.6 to 20 per cent, from next year. On one

In a democracy, power elites may be
influenced by economic and social interest
groups, such as capital owners, who may
oppose inflationary policies that cause local
currency value to deteriorate.
hand, the French government claims to be putting the burden
of the tax increase on the richest, but on the other, it agrees an
increase in VAT, known to be a regressive tax that impacts all
social categories, especially the most vulnerable.

Being of democracies did not prevent these countries to
make economic policies, although socially undesirable, but who
aspire stabilizing economic indicators in the long term.

Literature review

Our theoretical position is supported by several contemporary
studies, among which we quote those of Satyanah and
Subramanian (2007), Lavigne (2006), Desei et al. (2002) and
Rodrik (2000). These authors share the view that electoral
competition causes price stability and ensure macroeconomic
stability.

According to Satyanah and Subramanian (2007), there
is a strong causal relationship between societal divisions and
5

democratic political institutions and long-term inflation. (...)
Democracy robustly serves to reduce inflation over the long term.
For example, a one standard deviation increase in inequality
(roughly the move from France to the Dominican Republic)
leads to a more than two fold increase in inflation. Similarly, a
one standard deviation increase in democracy (roughly the move
from Uganda to Chile) leads to a 3.6-fold decline in inflation.
The t-values for the coefficient on inequality and democracy are
consistently significant at the 1 percent level and the relationship
is robust to alternative measures of democracy, samples, covariates,
and definitions of inflation.

Furthermore, we find that a wide range of macroeconomic
policies and pathologies are themselves causally affected by
inequality and democracy.

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