No pain, no gain: market reform, unemployment, and politics in Bulgaria

No pain, no gain: market reform, unemployment, and politics in Bulgaria

Journal of Comparative Economics 32 (2004) 409–425 www.elsevier.com/locate/jce No pain, no gain: market reform, unemployment, and politics in Bulgari...

183KB Sizes 0 Downloads 21 Views

Journal of Comparative Economics 32 (2004) 409–425 www.elsevier.com/locate/jce

No pain, no gain: market reform, unemployment, and politics in Bulgaria Neven Valev Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA 30303-3084, USA Received 28 June 2003; revised 29 April 2004 Available online 2 July 2004

Valev, Neven—No pain, no gain: market reform, unemployment, and politics in Bulgaria In 1997, a new center-right government came to power in Bulgaria with a mandate to accelerate market reforms. By the time of the next elections in 2001, 75 percent of GDP was produced in the private sector, compared to 45 percent in 1996. However, the government lost the elections. This paper uses unique survey data to determine whether the high unemployment associated with market reform contributed to the election outcome. Although high unemployment did influence popular opinion, the effect was relatively small. Many people, including those unemployed, believe that high unemployment is a necessary price for future prosperity. Journal of Comparative Economics 32 (3) (2004) 409–425. Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA 30303-3084, USA.  2004 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved. JEL classification: D72; E24; E61

1. Introduction In most cases, the benefits of market reforms do not accrue instantaneously. Transition economies experienced rapid growth in unemployment at the start of reforms; in many cases the unemployment rate increased from zero to double digits within a few years. In models of transition economies, e.g., Blanchard’s (1997), the decline in output and employment is reversed gradually as labor relocates from the state sector to a new private sector with higher productivity. This U-shaped pattern has been observed in the Central and E-mail address: [email protected] 0147-5967/$ – see front matter  2004 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved. doi:10.1016/j.jce.2004.04.003

410

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

Eastern European economies where reforms were implemented relatively early. In other transition countries, the high level of unemployment has remained desperately stagnant (Boeri and Terrell, 2002). The literature devotes significant attention to the political economy of the delay in benefits; Roland (2000, 2002) provides surveys of this literature. Reforms may be resisted ex ante because of individual uncertainty about the potential winners and losers (Fernandez and Rodrik, 1991) and also due to aggregate uncertainty about the reform outcome for the entire nation. When enacted, reforms may face ex post political opposition from those who experience economic hardship. Fidrmuc (2000) shows that high unemployment is associated with less support for market reform in the transition economies. Roland (2002) discusses the importance of keeping unemployment as low as possible, of sequencing reforms to build supportive constituencies, and of providing compensatory payments to the losers of reform policies. Experiences vary substantially across transition economies but despite high unemployment, turbulent politics, and occasional policy reversals, reforms march forward in most countries (Hellman, 1998). This paper investigates the political consequences of implementing tough market reforms in Bulgaria. In 1997, after a severe financial crisis, a new center-right government, i.e., the Union of Democratic Forces or UDF, came to power with a mandate to accelerate market reforms. By the next elections in 2001, massive privatization and enterprise liquidation resulted in 75 percent of GDP produced in the private sector, compared to 45 percent in 1996. However, the immediate outcome of these policies was a sharp increase in unemployment. Although economic growth increased, a sustained improvement in employment was not achieved and UDF lost the elections. Superficially, the 2001 election outcome appears to be a backlash against the reforms due to the sharp increase in unemployment. Although intuitively plausible, this hypothesis is challenged in the literature. Using US data, Kinder and Kiewiet (1979,1981), Kiewiet (1983), MacKuen et al. (1992), and Mutz (1992) find that voting decisions are influenced primarily by national economic conditions, i.e., sociotropic voting, and much less by individual economic circumstances, i.e., egocentric or pocketbook voting. The survey data from Bulgaria provide further evidence to reject the pocketbook hypothesis. Although the unemployed were less likely to vote for UDF in 2001, the effect on the election was small. This paper extends the earlier analyses on unemployment and voting by allowing for heterogeneity among the unemployed in terms of their support for reform. We test the hypothesis that, although unemployment may spur political opposition to a reformist government in general, some of the unemployed may demand more, rather than less, reform. Rodrik (1995) argues that unemployed people consider further reform to be the long-term solution to their economic problems. The survey data from Bulgaria reveal that personal unemployment is associated with more, rather than less, support for UDF in villages and small cities where unemployment has been both very high and of long duration. Thus, the Bulgarian data reveal that the unemployed people are a heterogeneous group, not a homogeneous one as in the theoretical literature, and that Rodrik’s claim about unemployment leading to greater demand for reforms applies in certain circumstances. The Bulgarian data provide unique evidence on public beliefs about the reasons for high unemployment. The literature is vague about how voters explain high unemployment, e.g., Kinder and Kiewiet (1979). For example, do they blame national government policy,

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

411

themselves, or local business conditions? In the context of a transition economy, high unemployment can be attributed to deliberate market reform policies that are expected to produce a short-term increase in unemployment. The issue is whether voters perceive unemployment in this manner. The survey data reveal that about half of the population believes that high unemployment is a necessary short-term price that the country must pay for future prosperity. Even more striking, a large percent of unemployed people believe in the necessity of unemployment. Politically, such beliefs are important because they reduce the opposition to reforms. This paper complements earlier research on reform and voting in transition economies, which has used aggregate country or regional data, e.g., Fidrmuc (2000) and Warner (2001), by studying voting at the individual level.1 For each respondent, the survey indicates the party chosen in the 1997 election and which party the person intended to vote for after much of the reform package had been implemented and unemployment had increased. Hence, we can test whether the employment status of individuals and their views on the reforms contributed to the rapid decline in political support for UDF. Holding constant earlier voting behavior is important to capture ideological differences in the population, which tend to be strong in transition economies. We draw parallels between our results and recent work by Doyle and Fidrmuc (2003) and Hayo (2004) using survey data from several transition economies. The next section provides a brief discussion of some major economic developments in Bulgaria over the last few years. The two following sections present the data and report the implications for the political economy of market reform. Section 5 concludes with final remarks.

2. Delayed market reform in Bulgaria Bulgaria was a laggard in the transition process in Eastern Europe until 1997. According to the EBRD (1998), only 20 percent of total state enterprise assets were privatized between 1992 and 1997. Aslund (2002) argues that Bulgaria illustrates the danger of patently inconsistent policies and erratic policy reversals in which vested interests are a greater threat to economic policies than is disorder. The delay in reforms contributed to relatively large budget deficits, to a rising public debt, and to growing contingent claims on the budget from guarantees on state-firm credits. Under the government of the Bulgarian Socialist Party (BSP), these problems culminated in a crisis. By 1996, most of the banking sector credits, which had been extended under government directive in many cases, were nonperforming. Confidence in the banking system reached low levels and deposits left banks, as Dobrinsky (2000) describes. As the exchange rate depreciated and prices spiraled out of control, political unrest grew and, in early 1997, the BSP government called early parliamentary elections. The elections were won by UDF, which came into office with 1 Important differences in results occur depending on whether macro and micro data on voting are used. Using macro data, Fidrmuc (2000) explains actual election outcomes by regional and national economic conditions and finds a strong effect of unemployment. Duch et al. (2000) provide a discussion on these differences and argue in favor of micro data because the aggregation of votes may produce systematic biases in the voting data.

412

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

Table 1 Macroeconomic developments, Bulgaria 1992–2001 Year

CPI inflation (percentage change in the CPI)

Budget balance (percent of GDP, −deficit)

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

79.2 63.9 121.9 32.9 310.8 578.6 1.0 6.2 11.4 10.4

−2.9 −8.7 −3.9 −5.7 −10.4 −2.1 0.9 −0.9 −1.1 −1.5

Gross fixed capital formation (percent of GDP)

9.3 14.6 8.9 12.2 11.6 15.9 16.3 19.9

Real GDP growth (percentage change)

Unemployment rate

−7.3 −1.5 1.8 2.1 −10.1 −7.0 3.5 2.4 5.8 4.6

15.3 16.4 12.8 11.1 12.5 13.7 12.2 16.0 17.9 17.3

Sources: EBRD, various years; BNB, various years.

a mandate to accelerate structural reforms. These reforms were supported strongly by the IMF and other international institutions. According to the Bulgarian Privatization Agency, the government completed 654 privatization deals in 1998 alone whereas in the prior five years only 694 deals were consummated. After the elections, direct and implicit subsidies to enterprises were cut (Brixi et al., 2000), the government closed down 110 of 140 loss-making state firms, and many banks were privatized. The private sector share of Bulgaria’s GDP increased from 45 percent in 1996 to 75 percent in 2001, which ranks Bulgaria in line with the advanced transition economies in this regard (EBRD, 2001). A significant part of the reforms was the introduction of a currency board to achieve macroeconomic stability. The currency board provided a nominal anchor by fixing the domestic currency to the German mark, lowered inflation, and made it impossible for the government to finance budget deficits by money creation.2 The strong impetus to put public finances in order provided an incentive to the government to reduce subsidies and to liquidate or privatize firms. In essence, maintaining a credible currency board requires structural reform.3 As Table 1 shows, the introduction of the currency board led to a rapid decline in inflation into single digits. Relatively stable prices, privatization, increased competition in financial markets, and opening the economy contributed to increasing investment levels and higher growth rates. For the first time since the beginning of transition, Bulgaria experienced sustained positive economic growth after 1997. Nevertheless, the effect on 2 A currency board is a fixed exchange rate regime with a provision that the central bank maintains foreign exchange reserves that are sufficiently large to cover the monetary base. The currency board removes discretion over monetary policy, as Schwartz (1993) asserts. Valev and Carlson (2003) discuss the Bulgarian currency board. 3 Analogously, a reversal of structural reforms would have come at the high price of financial instability. Roland (2002) points out that high reversal costs may be associated with greater ex ante opposition to reform if aggregate uncertainty is high. However, once the reforms are enacted, high reversal costs may sustain them. Dewatripont and Roland (1992) is a formal treatment of the effect of reversal costs on reforms.

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

413

employment over the initial years was small and the positive growth was not sufficient to compensate for a loss of jobs. By 2000, the official unemployment rate had increased to 17.9 percent compared to 12.5 percent in 1996. Along with enterprise liquidation, UDF adopted the Unemployment Security and Employment Incentives Act in 1998. This act reformed the unemployment benefits system reducing somewhat the generosity of benefits and strengthening incentives for re-entry into the labor market. In addition, several initiatives were introduced to facilitate job search and retraining. In general, the reform encouraged the transition of workers between jobs and discouraged generous compensatory payments. By contrast, political economy models on economic reform usually support compensatory payments to reduce individual uncertainty and to maintain the political support for reforms (Roland, 2002). However, economic reform was not the only reason for high unemployment. The World Bank (2001) points out that the adverse labor market experience in Bulgaria is linked not only to fast labor shedding but also to a chronic inability to create jobs. Contributing factors are policy uncertainty, administrative burdens, corruption, and lack of credit, which also led to lower foreign direct investment (FDI). Although FDI has been high after 1997, much of it is linked to privatization. After large-scale privatization was substantially completed by 2000, FDI inflows declined significantly. External factors, i.e. the war in Kosovo and the financial crisis in Russia in 1998, led to a decline in exports and also depressed the inflow of FDI. The political movement that defeated UDF and took office in 2001 had no clear economic agenda until late in the election campaign. The movement began only a few months before the elections when Simeon Saxe-Coburg-Gotha, the last czar of Bulgaria before socialism, announced his intention to return to Bulgaria and run for office.4 The economic team was not formed until a few weeks before the elections. The economic plan, which was put together rapidly, included a mix of proposals for lower taxes and greater government spending and promised large inflows of foreign direct investment and rapid growth in incomes. The movement did not use high unemployment as a rationale for a slow-down or reversal of economic reforms. Given this political platform, their election success suggests that Bulgarians were not poised for a backlash against reforms.

3. Description of the survey data The survey consists of personal interviews conducted by a national polling organization in August 2000, three years after the elections in April 1997 and 10 months before the elections in June 2001. The sample size of 1000 individuals, ages 16 and over, and its demographic structure are considered to be representative of the population of 8 million. Our analysis excludes respondents who were not yet 18 in 1997 because this is the voting age in Bulgaria. The survey asked respondents which party they voted for in the 1997 elections and which party they would vote for if elections were held today. The survey also probed respondents’ views on the reform process by asking them whether 4 Simeon Saxe-Coburg-Gotha acceded to the throne as a six year old child in 1943 after the sudden death of his father King Boris III. He was forced into exile two years later.

414

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

they strongly agreed, agreed, disagreed, or strongly disagreed with the statement that high unemployment is the price we have to pay for future prosperity. This question investigates whether Bulgarians believe that high unemployment is a part of the reform process as suggested by theory and the experiences of more advanced transition economies (Boeri and Terrell, 2002). In other countries, primarily the former Soviet republics, rapid growth in unemployment was avoided but output and employment levels stagnated.5 The survey also asked respondents whether they were employed, unemployed, retired, students, or fell into a category denoted “other.” In the survey, 28.9 percent of the individuals in the labor force, defined as unemployed plus employed people, report that they were unemployed, which is higher than the official unemployment rate of 17.9 percent. Hence, the survey probably includes some discouraged workers who left the labor force but consider themselves to be unemployed. Differences between registered unemployment and unemployment obtained from labor market surveys are often quite large in transition economies. The United Nations (2002) reports that, in Croatia and Slovenia, registered unemployment is higher than indicated by surveys because of a misuse of public welfare schemes. However, in Bulgaria, Estonia, and Ukraine, registered unemployment is less than indicated by surveys. That labor force survey records an unemployment rate of 18.7 percent for Bulgaria in 2000, which is higher than registered unemployment but much lower than the unemployment rate obtained from our survey. The survey also includes questions about demographic characteristics, e.g. age, education (higher education, high school or lower), gender, income (in leva), and place of residence (villages, small cities, big cities, which include the regional administrative centers such as Bourgas, Plovdiv, and Varna, or the capital Sofia). Appendix Table A presents summary statistics for all variables. To determine how closely the survey responses on voting match the actual election outcomes, election results were obtained from a database compiled by the Department of Government at the University of Essex with the help of the International Foundation for Electoral Systems and the Association of Central and East European Election Officials. The database provides detailed historic information on voting in transition economies. Before discussing the distribution of votes, we point out that voter turnout, i.e. the percent of eligible voters who did vote, reported in the survey is somewhat different from the actual turnout. In the survey, 78 percent of respondents report that they cast a vote in 1997 but, in the actual elections, only 55 percent of the people voted. Overreporting is a common problem in surveys on voting and is analyzed extensively in the political science literature.6 The difference between actual turnout and that reported in surveys is attributed to either social desirability according to which survey respondents claim they voted even 5 Several strands in the literature relate to this question. First, because the question is forward looking, it reflects to some extent prospective as opposed to retrospective attitudes of voters. MacKuen et al. (1992) find strong evidence for prospective sociotropic voting, i.e. votes are driven primarily by expectations of future national economic conditions. Second, answers to the question may provide evidence of a preferred reform strategy. Respondents who did not believe that high unemployment is a necessary cost of reforms may simply prefer a more gradual reform process with a smaller increase in unemployment. Third, answers to the question reflect beliefs about the final outcome of reforms, i.e., unemployment followed by prosperity, and thus reveal the degree of aggregate uncertainty. 6 Burden (2000) finds that the discrepancy between actual voter turnout in the 1996 presidential elections in the US and the election turnout reported in the 1996 University of Michigan National Election Study, which is

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

415

Table 2 Matching survey responses and actual voting outcomes 1997 elections

Union of Democratic Forces (UDF) Socialist Party (BSP) Euroleft Bulgarian Business Bloc Movement for Rights and Freedom Coalition Simeon

2001 elections

Actual election results

Survey results

Actual election results

Survey results

49.15

51.94

18.18

31.80

22.40 5.57 5.27 9.44

31.73 3.08 1.20 7.10

17.53 – – 7.45

36.03 – – 7.17





42.74



Notes. 1. UDF was in office from 1997 to 2001. 2. The table includes only political parties that received votes in excess of the 4 percent threshold needed to enter Parliament. 3. Coalition Simeon did not exist in 1997 and at the time of the survey.

if they did not, to faulty memory, or to oversampling of voters. Some combination of these factors explains overreporting in the Bulgarian survey.7 Interestingly, the survey predicted a 56 percent turnout in the 2001 elections and the actual turnout was higher at 67 percent. This discrepancy may be easier to explain because the movement that won the elections was not even formed in August 2000. As the elections approached, more citizens may have decided to vote for this new party rather than not to vote. Table 2 presents the actual distributions of votes in the two elections and the percentages reported in the survey. The actual percent of votes for UDF in 1997 is very close to that reported in the survey, differing by less than three percent. However, the survey overstates the percent of votes for the socialist party BSP, which was in office until 1997, by a margin of over 9 percent. The remaining percentages for the 1997 elections are reasonably close to each other. In the 2001 elections, the percent of votes for UDF and BSP predicted by the survey are higher than the actual outcomes, which reflects the shift of votes toward Coalition Simeon once it entered the political scene.8 Before investigating the various influences on voting, we discuss public views concerning the cost of reforms in the beginning of the next section to ascertain whether or not Bulgarians believe in the tradeoff between short-term costs and long-term gains. the most widely used data on turnout in the US, was 24 percentage points. Swaddle and Heath (1989) discuss the same problem for elections survey data in the United Kingdom. 7 Validation studies from the US where survey responses are matched with actual recorded voting show some systematic patterns, e.g., a greater propensity of more educated voters to overreport (Silver et al., 1986). However, Traugott and Katosh (1979) and Singelman (1982) find that empirical results from multivariate analysis based on self-reported and validated voting do not differ substantially. 8 In 2001, the Union of Democratic Forces contained fewer small parties, e.g., an agrarian party, that were members in 1997. However, these parties received a very small fraction of the votes in 2001 so that their withdrawal had no appreciative effect on UDF. The Movement for Rights and Freedom (MRF) is associated with the Turkish ethnic minority in Bulgaria. Neither of the two smaller parties that received votes above the four percent threshold in 1997 has a distinctly pro-reform or anti-reform agenda compared to UDF.

416

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

Table 3 Cost of market reform High unemployment is the price we have to pay for future prosperity Strongly agree Agree Disagree Strongly disagree I don’t know

All respondents

Unemployed

Employed

17.71 21.15 23.33 24.69 13.13

16.22 18.38 20.54 24.32 20.54

17.98 21.86 23.93 24.84 11.38

Note. All numbers are in percent of total.

4. Unemployment, beliefs about market reforms, and support for UDF This section investigates the effect of unemployment and views about economic reform on the decline in political support for UDF between 1997 and 2001. We begin with a discussion of views regarding economic reform, which is followed by an empirical analysis of voting in the 2001 elections. Table 3 indicates that about 39 percent of the population surveyed believes, more or less strongly, that high unemployment is the price for future prosperity, whereas about 48 percent disagreed with this statement. The remaining 13 percent did not express an opinion. Although similar data are not available from other transition countries to make a comparison, a reasonable number of Bulgarians think that high unemployment is necessary for the economic reform to succeed. Furthermore, differences in beliefs among unemployed and employed people are not large. Thirtyfive percent of unemployed people believe that current unemployment is necessary for future prosperity and a remarkably high 16 percent agree strongly with this claim.9 The unimportance of employment status to beliefs about the cost of reform is corroborated below. Table 4 reports the estimates of a probit analysis of the characteristics of individuals who agreed with the statement that high unemployment is necessary for reform. Employment status is captured by a dummy variable that equals 1 if a respondent was unemployed, and 0 otherwise. The equation includes two variables for education, namely a dummy variable that equals 1 if a respondent had a high school education, and a second dummy variable that equals 1 if a respondent had higher education. The respondents’ gender, age, income, and place of residence, designated by a dummy variable equal to 1 if a respondent resided in either a village or a small city, and 0 in a big city or the capital, are also included.10 9 From a policy perspective, the formation of these beliefs is important. According to analysis by the Institute for Marketing and Social Surveys in Bulgaria (Capital, 1999, p. 16), the communication strategy of the government regarding the costs of reform could be characterized as an effort to be honest with the Bulgarian electorate and to convey the message that there are no alternatives. The study highlights the role of the media as one of the most progressively-thinking social groups. By insisting on rapid privatization and the liquidation of loss-making enterprises, the journalists were on the side of the government even when they were critical of it. 10 The models reported were also estimated with age and income squared to capture nonlinearities, which have been detected in earlier work by Hayo (2004), but the estimations did not produce statistically significant results. The models were also estimated with various variables for place of residence in terms of villages, small cities, big cities, and Sofia (the capital). The reported results provided the best fit. The models were also estimated with a

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

417

Table 4 Explanation of beliefs about the cost of market reform Variable

Coefficient

Unemployed

−0.031 (0.046) 0.146*** (0.045) 0.182*** (0.055) −0.050 (0.033) −0.001* (0.001) 0.023 (0.002) −0.019 (0.034) 0.030 940

High school education Higher education Female Age Income Villages and small cities Pseudo R 2 Number of observations

Notes. 1. The dependent variable is coded as one if an individual agrees or strongly agrees with the statement that high unemployment is the price we have to pay for future prosperity. 2. Standard errors in parentheses. * Significance at the 10% level. *** Idem., 1%.

Respondents with more education are more likely to consider unemployment as a necessary short-term cost, which may reflect a better understanding of tradeoffs between shortterm costs and long-term gains or the market advantage of more educated people during transition. The World Bank (2001) reports that the unemployment rate for individuals with higher education was around 5 percent throughout the 1990s, which is substantially lower than the unemployment rate for the entire population. Older respondents may be less likely to believe that unemployment is a necessary cost of reforms, perhaps because they experienced disproportionately more employment uncertainty with the restructuring and liquidation of state firms or because they spent a larger portion of their lives under socialism with zero unemployment. However, the statistical significance of the coefficient is low and its magnitude is small. Interestingly, personal unemployment has no statistically significant effect so that education appears to be the primarily determinant of people’s beliefs. To investigate the decline in support for UDF, we report a cross-tabulation of votes in the 1997 parliamentary elections reported in the survey and the expected distribution of votes in the 2001 elections in Table 5. Respondents were placed in three categories according to their vote in 1997, namely, those who voted for UDF, those who voted for another party, and those who did not vote. The cross-tabulation shows a large withdrawal of votes from dummy variable for retirement, which did not produce significant results. Including those variables did not change the coefficient estimates on the remaining variables in significant ways. All results are available on request from the author.

418

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

Table 5 Cross-tabulation of votes in 1997 and expected voting in 2001 In 1997:

Voted for UDF Did not vote Voted for another party Totals

Individuals who planned to: Vote for UDF

Not vote

Vote for another party

Totals

161 (41.8) 3 (1.4) 3 (0.8) 167 (17.4)

155 (40.3) 185 (86.9) 93 (25.6) 433 (45.1)

69 (17.9) 25 (11.7) 266 (73.4) 360 (37.5)

385 (100) 213 (100) 362 (100) 960 (100)

Note. The numbers in parentheses are percentages.

UDF within only three years. Only about 42 percent of the respondents who voted for UDF in 1997 intended to vote for this party again, and 40 percent of those people did not intend to vote in 2001. Only six respondents who had not voted for UDF in 1997 report an intention to vote for that party in 2001. To explore the reasons for this decline in support for UDF, we estimate a probit equation explaining the likelihood of a respondent intending to vote for UDF in 2001 depending on employment status, the beliefs about the necessity of unemployment, captured by a dummy variable that equals 1 if a respondent agreed or strongly agreed with the statement on economic reform and 0 otherwise, along with other characteristics. The pocketbook hypothesis suggests that personal unemployment would be associated with a lower likelihood of voting for UDF. Respondents who believe that current high unemployment is a necessity cost of reforms are expected to be more likely to vote for UDF because that party espouses this view. Beliefs about the necessity of unemployment in market reform may simply be partisan rationalizations. If the model does not control for unobserved respondent characteristics, which capture general political attitudes and are also correlated with views on the necessity of unemployment, the estimated effect may be upward biased. To address similar problems, Kinder and Kiewiet (1979) and Doyle and Fidrmuc (2003) include a variable on selfreported general political attitudes to control for partisanship. They find that economic variables, including people’s views on the national economy, remain statistically significant in voting equations although the size of the effects decline after controlling for partisanship. The Bulgarian survey does not offer such a control variable; as a proxy, we use voting in 1997 and also control for education, gender, age, income, and place of residence. Table 6 reports marginal effects that can be interpreted as the direct influence on the probability of voting for UDF of each variable evaluated at its mean. In the case of dummy variables, the reported coefficient estimate equals the probability of voting for UDF if that dummy variable were one minus the probability of voting for UDF if it were zero. For example, the coefficient 0.389 on voting for UDF in 1997 means that, controlling for other effects, the probability of voting for UDF in 2001 was 38.9 percentage points higher for a respondent who voted for UDF in 1997 compared to a respondent who did not vote for UDF in 1997. The first two columns in Table 6 report coefficient estimates for the entire sample. Unemployed individuals and those who do not consider unemployment to be a necessary

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

419

Table 6 Explanation of voting behavior Overall survey sample

Voted for UDF in 1997 Unemployed Agree with statement on reform High school education

(1)

(2)

0.389***

0.378***

(0.026) −0.033* (0.017) 0.065*** (0.019)

(0.027) −0.024 (0.019) 0.054*** (0.019) 0.053** (0.025) 0.057* (0.036) −0.031* (0.016) 0.001 (0.001) 0.005 (0.007) −0.003 (0.016) 0.366 940

Higher education Female Age Income Villages and small cities Pseudo R 2 Observations

Sample of individuals who voted for UDF in 1997

0.354 940

(3)

(4)

−0.181*** (0.060) 0.183*** (0.051)

−0.139* (0.072) 0.156*** (0.052) 0.203** (0.080) 0.192** (0.091) −0.095* (0.053) 0.003 (0.002) 0.029 (0.026) 0.017 (0.059) 0.069 380

0.046 380

Notes. 1. The dependent variable equals one if an individual intended to vote for UDF and 0 otherwise. 2. Standard errors in parentheses. * Significance at the 10% level. ** Idem., 5%. *** Idem., 1%.

cost of reforms are less likely to vote for UDF, although the effect of unemployment is less significant statistically. However, the magnitudes of the coefficients are small. Columns (3) and (4) report estimates using only the sample of respondents who voted for UDF in 1997. For this group, the likelihood that an unemployed individual will vote again for UDF is 18.1 percentage points lower compared to other individuals. In terms of a number of votes, the coefficient indicates that 15 unemployed individuals in the survey who had voted for UDF in 1997 would not vote for this party in 2001. This number amounts to only 4 percent of the electorate of UDF in 1997, which is a relatively small fraction of the votes lost. Hence, the impact of employment status on voting behavior is small. Those who believe in the necessity of unemployment for successful market reform were 18.3 percentage points more likely to vote again for UDF. Among the 385 individuals who voted for UDF in 1997, 187 believe or strongly believe that unemployment is a necessary cost of reforms, which implies that UDF received 34 more votes due to this effect.11 Interestingly, these additional votes are more than twice the votes lost because of personal 11 The number of votes is calculated as 187 times 0.183.

420

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

unemployment.12 As Fidrmuc (2000), Doyle and Fidrmuc (2003), and Hayo (2004) also find, our results indicate that support for reformist parties increases with more education.13 Consistent with this literature, we also show that each increment in education is associated with greater support for UDF. Similar to the results in Hayo (2004), we find that female voters are less likely to support the reform party, perhaps because of their labor market experiences during transition. According to the World Bank (2001), female labor force participation rates have declined rapidly in Bulgaria.14 Although the magnitude of the effect is not very large, personal experiences with unemployment in Bulgaria did contribute somewhat to the growth in political opposition, in contrast to the thesis of Rodrik (1995). However, experiences with unemployment have not been the same across either social groups or locations in the country. Unemployment has been much higher in rural areas and small cities than in the capital and other big cities (World Bank, 2001). Perhaps, unemployment contributes to, rather than diminishes, support for reform in stagnant labor markets. Moreover, unemployment among older workers has been lower than among younger workers. However, younger individuals have more recent education and are better suited to find employment in the newly expanding sectors of the economy. Hence, they may support more rather than less market reform. To explore those issues, we interact the dummy variable for unemployment with place of residence and age and include the interaction terms in a probit equation that explains voting in 2001 among UDF supporters in 1997. Although the coefficients on unemployment are negative and statistically significant in Table 7, as in Table 6, the interaction term of unemployment with location is positive and statistically significant. In addition, this coefficient is larger than the coefficient on unemployment and the difference is statistically significant. Hence, unemployment in small cities and rural areas contributed to stronger support for UDF, consistent with Rodrik’s hypothesis, while it contributed to political opposition in urban areas.15 As Table 7 indicates, the interaction term with age does not yield a statistically significant coefficient. 12 However, the data have limitations. The survey asks about unemployment in 2000 but it is conceivable that some respondents experienced unemployment after 1997 and were employed at the time of the survey. Some might have been unemployed even before 1997. Such experiences may strengthen or weaken the reported effect of personal unemployment on voting. In addition, although the data allow us to test the pocketbook hypothesis, they do not allow us to test the sociotropic hypothesis. Many employed voters might have voted against UDF because of the high national unemployment. Kinder and Kiewiet (1979) distinguish between these effects using surveys from the US, which ask voters both to report their personal employment status and to rate the health of the national economy. Hence, personal unemployment and views on the national economy can be entered independently in their empirical equations to explain voting. 13 Hayo and Seifert (2003) find that the self-reported wellbeing of citizens in transition economies increases with education, even after controlling for positive economic experiences during transition. 14 Hayo (2004) uses data from opinion surveys conducted in several transition economies, including Bulgaria, to explore factors determining support for market reform. In those estimations, unemployment has a negative effect on support for reform but the coefficient is relatively small. It is substantially smaller than the coefficient on education and roughly equal to the effect of gender. 15 Using survey data from several transition economies in the early 1990s, including Bulgaria, Hayo and Seifert (2003) conclude that reported economic wellbeing is higher in more rural locations, after controlling for income, employment, and wealth. This finding may explain why unemployment has a less negative effect on support for UDF in those areas but it would not explain the positive effect that we report.

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

421

Table 7 Employment status and voting behavior by region and age Variable Unemployed Unemployed ∗ (Villages and small cities) Unemployed ∗ Age Agree with statement on reform High school education Higher education Female Age Income Villages and small cities Pseudo R 2 Number of observations

(1) −0.407*** (0.084) 0.487***

0.162*** (0.052) 0.194** (0.081) 0.168* (0.094) −0.090* (0.053) 0.003 (0.002) 0.028 (0.026) −0.075 (0.059) 0.090 380

(2) −0.414** (0.141) 0.009 (0.006) 0.153 (0.052) 0.189** (0.081) 0.166* (0.095) −0.091* (0.053) 0.002 (0.002) 0.024 (0.026) −0.011 (0.055) 0.074 380

Notes. 1. The dependent variable equals one if an individual intended to vote for UDF and 0 otherwise. 2. The sample is respondents who voted for UDF in 1997. 3. Standard errors in parentheses. * Significance at the 10% level. ** Idem., 5%. *** Idem., 1%.

In summary, the effect of unemployment on voting is not one-dimensional. Although high unemployment reduces somewhat the support for market reforms, unemployed people demand more, rather than less, reform in locations with a stagnant labor market. This result suggests that a significant deterioration of economic conditions may reduce the opposition to reforms. Furthermore, recognizing that high unemployment is a necessary part of economic reforms also reduces the opposition to the reforms. Thus, convincing the population that short-term hardship is unavoidable to achieve long-term economic gains is an important part of a market reform policy.

5. Conclusion In this paper we investigate the loss of political support for a reformist party, i.e., UDF, in the 2001 Bulgarian elections using data from a national survey to determine whether its election defeat can be explained by the increase in unemployment produced by market reforms. Similar to results in earlier literature, unemployed people

422

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

did not vote their pocketbooks and become political opponents to UDF in large numbers. Moreover, many voters among the unemployed believe that high unemployment is a necessary short-term cost of market reforms and voted for UDF. Thus, the expected growth in political opposition to reform produced by personal experiences with unemployment at the micro level can be ameliorated to some extent by appealing to voters’ recognition that high unemployment is necessary for market reform to succeed. Furthermore, we find some support for Rodrik’s hypothesis that unemployment may strengthen rather than weaken support for reforms in locations experiencing very high unemployment. Our results have important implications for the debate on the optimal speed of transition (Roland, 2002). They support a rapid rather than gradual reform in circumstances similar to those in Bulgaria. The effect of high unemployment in generating opposition to reforms may be small, at least in the first years of reform when the population believes that unemployment is a necessary but temporary part of the transition to a market economy. However, as Blanchard (1997) points out, reforms may be reversed if economic gains do not accrue soon enough. Doyle and Fidrmuc (2003) show that unemployment began to have an effect on voting in the Czech Republic during the later stages of transition when the winners and losers of the reforms were identified more clearly. If there isn’t opposition to the reform, what explains UDF’s loss of the 2001 elections? Ivan Kostov, the leader of UDF explained the 2001 election defeat in the following way: “We have taken a lot of unpopular decisions and also made mistakes.” (CNN, June 17th 2001). The mistakes to which Mr. Kostov refers are his governments inability to fight corruption and criminal activity. The widespread perceptions of unfairness and the slow pace of some reforms may go a long way toward explaining the defeat of UDF. Although the new government continued on a similar path of reforms, they promised a substantial improvement in incomes within 800 days. As economic conditions failed to improve significantly, support for Coalition Simeon declined. A follow-up survey in June 2002 revealed that only about 10 percent of Bulgarians intended to vote for the new government if elections were held on that day. Just as had UDF before it, the government lost support rapidly. Is this evidence that Bulgarians oppose market reform? Perhaps they think that reforms should be designed better and that six years is too long to be considered a short-term period of high transition costs. If unemployment remains high in Bulgaria, opposition to reforms may grow.

Acknowledgments I thank Jamie Boex, Franziska Bieri, Bogdana Dimitrova, Jan Fidrmuc, two anonymous referees, and the editor for valuable comments and suggestions, and Valentin Zhechev from Fact AD for providing the survey data. I also acknowledge the financial support of the National Science Foundation Grant SEC 0234664.

Appendix Table A Descriptive statistics

Mean Standard deviation Minimum Maximum Correlations UDF vote 2001 UDF vote 1997 Unemployed Agree on reform High school Higher education Female Age Income Residence

1 if would vote for UDF in 2001, 0 otherwise

1 if voted for UDF in 1997, 0 otherwise

1 if unemployed, 0 otherwise

1 if agrees with statement on reform, 0 otherwise

1 if high school education, 0 otherwise

1 if higher education, 0 otherwise

1 if female, 0 if male

Age

Income (hundreds of leva)

1 if resident of a village or a small city, 0 otherwise

0.17 0.38 0 1

0.40 0.49 0 1

0.19 0.39 0 1

0.39 0.48 0 1

0.52 0.49 0 1

0.25 0.43 0 1

0.51 0.50 0 1

46.11 15.94 22 86

1.21 1.05 0.00 10.00

0.58 0.49 0 1

1.00 0.52** −0.07** 0.19** 0.04 0.08** −0.05 −0.03 0.12** −0.08**

1.00 0.01 0.15** 0.02 0.10** 0.01 −0.09** 0.08** −0.10

1.00 −0.04 0.08** −0.17** 0.01 −0.24** −0.40** 0.14**

1.00 0.06 0.08** −0.06 −0.09** 0.11** −0.06**

1.00 −0.60** −0.07** −0.23** −0.02 0.06

1.00 0.07** −0.05 0.26** −0.30**

1.00 −0.03 −0.18** −0.02

1.00 −0.10** 0.01

1.00 −0.19**

1.00

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

Variable

** Significance at the 5% level.

423

424

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

References Aslund, Anders, 2002. Building Capitalism. Cambridge Univ. Press, New York, NY. Blanchard, Oliver, 1997. The Economics of Post-Communist Transition. In: Clarendon Lectures in Economics. Oxford Univ. Press, New York, NY. BNB, various years. Annual Report. Bulgarian National Bank. Boeri, Tito, Terrell, Katherine, 2002. Institutional determinants of labor reallocation in transition. Journal of Economic Perspectives 16 (1), 51–77. Brixi, Hana, Shatalov, Sergei, Zlaoui, Leila, 2000. Managing fiscal risk in Bulgaria. Mimeo. The World Bank. Burden, Barry, 2000. Voter turnout and the national election studies. Political Analysis 8 (4), 389–398. Capital, 1999. The public insists on faster privatization, sixteenth ed. Available at http://www.capital.bg. Dewatripont, Mathias, Roland, Gerard, 1992. The virtues of gradualism and legitimacy in the transition to a market economy. Economic Journal 102 (441), 291–300. Dobrinsky, Rumen, 2000. The transition crisis in Bulgaria. Cambridge Journal of Economics 24, 581–602. Doyle, Orla, Fidrmuc, Jan, 2003. Anatomy of voting behavior and attitudes during post-communist transition: Czech Republic 1990–98. In: Campos, Nauro, Fidrmuc, Jan (Eds.), Political Economy of Transition and Development: Institutions, Politics and Policies. In: ZEI Studies in European Economics and Law. Kluwer Academic, Boston, pp. 139–164. Duch, Raymond, Palmer, Harvey, Anderson, Christopher, 2000. Heterogeneity in perceptions of national economic conditions. American Journal of Political Science 44 (4), 635–652. EBRD, Transition Report, various years. European Bank for Reconstruction and Development, 2001. Fernandez, Raquel, Rodrik, Dani, 1991. Resistance to reform: status quo in the presence of individual-specific uncertainty. American Economic Review 81 (5), 1146–1155. Fidrmuc, Jan, 2000. Political support for reforms: economics of voting in transition countries. European Economic Review 44, 1491–1513. Hayo, Bernd, Seifert, Wolfgang, 2003. Subjective economic wellbeing in Eastern Europe. Journal of Economic Psychology 24, 329–348. Hayo, Bernd, 2004. Public support for the market economy in Eastern Europe. Journal of Comparative Economics. In press. Hellman, Joel, 1998. The politics of partial reform. World Politics 50 (2), 203–234. Kiewiet, Roderick, 1983. Macroeconomics and Micropolitics. Univ. of Chicago Press, Chicago. Kinder, Donald, Kiewiet, Roderick, 1979. Economic discontent and political behavior: The role of personal grievances and collective economic judgments in congressional voting. American Journal of Political Science 23 (3), 495–527. Kinder, Donald, Kiewiet, Roderick, 1981. Sociotropic politics: the American case. British Journal of Political Science 11 (2), 129–161. MacKuen, Michael, Erikson, Robert, Stimson, James, 1992. Peasants or bankers? The American electorate and the American economy. American Political Science Review 86 (3), 597–611. Mutz, Diana, 1992. Mass media and the depoliticization of personal experiences. American Journal of Political Science 36 (2), 483–508. Rodrik, Dani, 1995. The dynamics of political support for reform in economies in transition. Journal of the Japanese and International Economies 9, 403–425. Roland, Gérard, 2000. Transition and Economics. Politics, Markets, and Firms. MIT Press, Cambridge, MA. Roland, Gérard, 2002. The political economy of transition. Journal of Economic Perspectives 16 (1), 29–51. Schwartz, Anna J., 1993. Currency boards: their past, present and possible future role. Carnegie–Rochester Conference Series on Public Policy 39, 147–187. Silver, Brian, Anderson, Barbara, Abramson, Paul, 1986. Who overreports voting? American Political Science Review 80 (2), 613–624. Singelman, Lee, 1982. The nonvoting voter in voting research. American Journal of Political Science 26, 47–56. Swaddle, Kevin, Heath, Anthony, 1989. Official and reported turnout in the British general election of 1987. British Journal of Political Science 19 (4), 537–551. Traugott, Michael, Katosh, John, 1979. Response validity in surveys of voting behavior. Public Opinion Quarterly 43, 359–377.

N. Valev / Journal of Comparative Economics 32 (2004) 409–425

425

United Nations, 2002. Economic Survey of Europe in 2001–2002. Economic Commission for Europe, New York, USA. Valev, Neven, Carlson, John, 2003. Tenuous financial stability. Working paper series # 540. William Davidson Institute. Warner, Andrew, 2001. Is economic reform popular at the polls? Journal of Comparative Economics 29, 448–465. World Bank, 2001. Bulgaria: The Dual Challenge of Transition and Accession. In: A World Bank Country Study. World Bank.