To redistribute assets, you need 'control rights' over them. These are costly to acquire and maintain. That is why when I try to redistribute the baby's candy to myself, he beats the shit out of me and keeps the candy bar.
A regime has to defend the assets in its territory from predators- external or internal- or else it will be replaced. Defending territory may involve assigning control rights to guys who are good at fighting or who are good at producing vital goods and services.
As Graciella Chichilnisky has noted, under a 'Goldilocks' condition for endowment and preference diversity, both open markets and representative democracy can function quite well. Sadly, if such diversity becomes too large or too small, both markets and representative insitutions will disappear or become irrelevant.
Democratization occurs when conflicts as to who should rule are resolved by holding elections. We say 'democratization' increases when the suffrage is expanded and where the elected chamber holds more power. However, if the hands of the Legislature are increasingly bound by Treaty Law or a diminished Judicial 'doctrine of political question' we may say that Democracy has decreased. The regime is more judicio-bureaucratic or 'Corporatist'.
Is Democracy connected to redistribution? Revolution may be so. Democracy may appear a peaceful way to achieve Revolutionary aims. However, the devil is in the detail. An elected Chamber may be less capable of effective redistribution than an authoritarian State Agency. Equally, if only regressive taxes can finance National Security, democracy is the method of using representation to get the taxation.
Democratic movements traditionally offered support to land reform programs in agricultural countries. As the percentage of the workforce employed on the land fell, this became less urgent or attractive. Conversely, Industrialization was associated with the burgeoning of parties which supported organized labour against Employer's confederations. Finacialization, or the shift to the tertiary sector, has been associated with increased 'Identity' politics. Traits other than the economic have gained salience. Politics is more about affiliation than gaining or retaining affluence.
During certain periods, there have also been calls to 'squeeze the rich, till the pips squeak'. In particular, 'unearned income' (dividends, interest payments, rents) have been taxed at a higher rate. Employers may be subject to higher taxes and contributions for worker's health & retirement benefits. The problem here is that factors which are inelastic in the short run become elastic in the long run. Thus raising tax rates ends up lowering revenue. If industries disappear, workers- whether unionized or not- lose their jobs.
What can be redistributed is 'rent'. But factors in elastic supply earn no rent. You can't take away what isn't there. Raise the tax and businesses go elsewhere. You are left with nothing.
In some countries, the majority harbours hatred and envy of particular minorities. Such minorities may value a Monarch or Dictator because Democracy would mean their losing their property and even their lives.
It can also be the case that the vast majority in a country are too poor to pay taxes. They are also stupid and ignorant. Here, a transition to democracy may mean that the country quickly goes bankrupt as those with the means to pay taxes, run the fuck away. This is an example of a Democracy where the majority may come to regret having gained the vote.
In a paper titled 'Who values Democracy' Max Miller writes.
This paper examines the conventional view that redistribution is central to the democratization process using data from stock markets.
Miller forgets that a lot of recent 'democratizations' were about ending Communist tyranny. People where voting for greater Income and Wealth inequality.
Consistent with this view, democratizations have a large, negative impact on asset valuations driven by a rise in redistribution risk.
Is this true of any Warsaw pact country? Consider Hungary- under economic reforms known as "goulash Communism," Hungary permitted the issuance of corporate and government bonds starting in 1982–1983 to help state enterprises raise capital. A full fledged Stock Exchange was opened in 1990 after the first free and fair elections in that country. Asset valuations rose because there was no fucking redistribution risk. Hungarians were sick of the thing. The same was true of Poles & Czechs & Latvians & so forth.
Across 90 countries over 200 years, risk premia are substantially elevated— similar in magnitude to financial crises—prior to and during democratizations.
Because things could go either way. Suppose some crazy gengeral had come to power in Moscow. He might have sent troops into all the Warsaw pact countries. It had happened before. It could happen again.
A shift in Catholic church doctrine in support of democracy
occurred from the 1890s onward. The Pope told French Catholics to stop hankering for 'Divine Right' Monarchy. Instead they should seek to ally with Labour.
provides causal evidence that democratizations increase risk premia.
Greater exogenous risk may make democratization more likely but it could also put an end to it. Many countries lapse into Autocracy after a botched transition to Democracy. Arguably, this is what has happened in Russia.
Successful democratizations lead to substantial redistribution: the size of the public sector grows,
Most Warsaw Pact countries went in for Privatization. Those that didn't- e.g. Ukraine- regretted it.
income inequality falls,
It rose in ex-Commie countries
and the labor share of income rises.
The standard of living for workers may rise but the Capital stock rises faster. That's a good thing because productity has to rise & provision has to be made for the retirement benefits of existing workers.
An extended version of the canonical redistribution-based model of democratization that includes asset prices can quantitatively explain these effects.
It can explain things that don't exist. That's not a good thing.
Reductions in inequality and increased taxes explain approximately half of the results. The rest comes from greater economic competition and equality in government spending. The model also explains the negligible asset pricing response to autocratizations.
Sadly, autocrats can allow their chums to plunder private corporations. Sooner or later this affects asset prices.
In the past two centuries, over half of the world’s nations have transitioned to democracy.
China went from being an Empire to a democratic Republic. It didn't last long- just as democracy didn't last long in Russia, Portugal, Spain etc. The same story could be told about Latin America & Africa & various Islamic countries.
The predominant view in political economy and political science argues these democratizations stem from intrinsic conflicts among different political or social classes and the owners of the means of production (Marx and Engels, 1848, Lipset, 1959, Moore, 1966, Boix, 2003, Acemoglu and Robinson, 2006, Ansell and Samuels, 2010).
All regimes, of every type, stem from intrinsic conflict and intrinsic cohesion and intrinsic cooperation and intrinsic saying catty things about each other.
Democratization is associated with Nationalism. Emperors had Princes and Dukes and Counts and Barons under them. When multi-ethnic Empires dissolved, what succeeded them was Nation States. Not all held free and fair elections or retained genuinely representative institutitions. Still, there was some pretence in this regard at some points in time.
Max writes 'Related evidence in favor of this point is that nearly all the rise in dividend yields leading into democratizations is concentrated in the period after World War I,
Sadly, there was no democratization after the Great War. The new Republics or Nation States either turned Fascist or were conquered. This had nothing to do with asset prices.
the beginning of the First Wave of Democratization.
More and more European countries adopted or expanded the franchise over the course of the nineteenth century. Even the Tzar had a Duma by 1906. Interestingly, the Ottoman Turks were agead if the Russians in that they had local elections in the 1840s and a General election in the 1870s. However, it was the 1908 election which signalled a true transfer of power.
This is in line with a narrative in the comparative politics literature about the nature of democratization before and after The Great War (Luebbert, 1991).
Such literature is retarded.
Before the war democratizations were mainly agreements between the aristocracy and the burgeoning middle class, shutting out the then nascent labor movements.
No. The landed gentry could ally with the proles against the urban industrialists.
As such, they benefited this new capital-owning class by protecting their property rights and the status quo between capital and labor. It is also consistent with the literature discussing the case of Britain after the Glorious Revolution documented in both North and Weingast (1989) and Acemoglu and Robinson (2006).
James II was a Catholic and had a son who would be raised a Catholic. He had to go. That's what the Glorious Revolution was about. Property was as secure before as after it.
After World War I, however, democratizations became more labor driven, focusing on increasing labor bargaining power and reducing inequalities.
This was a feature of industrial societies regardless of economic regime.
Transitioning to democracy thus became more costly for the capital-owning elites, bringing higher risk premia in the transition period.
National bourgeoisies gained from transitioning from Imperialism whether or not their countries were Democracies. In Spain, the wealth gained by exporters during the Great war was protected by autarkic policies which continued regardless of who was in power..
For example, prior to the reforms of William III after the Glorious Revolution, property rights were not secure enough in England to allow for the formation of stock markets (Brodhurst, 1897).
Fuck off! It was under Cromwell that you start having permanent joint stocks saleable on a secondary market. By the end of the seventeenth century there were enough jobbers for an infomal exchange to exist. 1672 marked the 'great stop' when the Crown defaulted. Goldsmiths would no longer lend to the King. Many went bankrupt. This contributed to the creation of the Bank of England in 1694
Max quotes a silly fellow who wrote a book about the Stock Exchange (formally founded in 1801)
From Brodhurst (1897): “In the time of James I, the excitements of the Stock Exchange, and the allurements of stock-brokers had not yet begun to trouble the English people. A national debt, the creation of the Venetians, was as yet unknown in England.
The Crown borrowed from the Bank of England. This meant there was a secondary market for Consols.
Loans, indeed, to satisfy the necessities of State had been raised by Henry VIII and many others of the English Sovereigns; but as they never thought of repaying money which they had borrowed, and as those who were forced to lend, probably had not any expectation of seeing their property again, there was little opportunity for speculation.
Nobody had been forced to lend since the time of Charles I whose head was chopped off. English Kings decided to get out of the forced loan racket.
It was left to William III to introduce the principle that it is the duty of a State to keep faith with its creditors, and thereby to open the door to those commercial movements which were ultimately to result in the creation of the Stock Exchange.”
Billy was Protestant. Charlie & Jamie were Catlicks. You can trust a Protestant. Catlicks will rob you blind.
It would be fair to say that widening inequality & the rise of Anarchist assassins and Communist agitators caused the 'idle rich' to begin to fear for their own future in the latter half of the nineteenth century. Could an accommodation be reached with the working class? As more working men gained the vote in the UK, the cry went up 'we must educate our masters!' But as Board Schools improved in quality, the old barriers of class were bound to breakdown.
...there is little evidence on whether, ex ante, elites consider redistribution to be the central risk they face in democratization.
Such evidence can always be found. Big landlords have warned the smaller landlords that redistribution won't just affect the big estates. Moreover, once the 'land-hunger' of the peasant is kindled, even the 'kulak' won't be safe. Jacquerie will follow Jacquerie. Men will soon sink to the condition of beasts.
Meanwhile, in the towns, there was a 'Poujadist' movement amongst the small shopkeeper who (the Leftist intellectual said) were so crazy as to think they themselves had any wealth which the State might take away. Mrs Thatcher- a grocer's daughter- was derided by the Tory elite as being a British equivalent of Poujade.
Second, conditional on redistribution risk being central, there is little understanding of which among the various forms of political and economic redistribution that democracy might entail are most important (Acemoglu et al., 2015).
Redistribution can be done by the existing regime. Thus, the Viceroy, prior to the 1935 Act, could have scrapped the Permanent Settlement & created a loyal class of property owning 'ryots'. Indeed, a lot of the politics of the inter-war years in Bengal was about how to frustrate this. Vikram Seth's 'Suitable Boy' describes a similar retrograde type of politics in post-independence Bihar.
Democratization may increase subsidiarity which in turn affects who gets to keep what. In a segmentary society, it is likely that Democratization just means more factionalism and rent-seeking.
This paper tests whether redistribution is central to democratizations in a way that addresses both of these issues: examining stock market prices during democratizations.
Consider the Stock Market plunge after Franco's death. Did it represent 'redistribution risk' (i.e. Commies taking power)? Or was it just the horrible international climate- high oil prices etc- which was spooking people? The answer has to do with what was happening in Portugal after the 'Carnation Revolution'. Leftists had taken power and nationalised a lot of enterprises. The Stock market was shut down till 1977.
Interestingly, in Spain, because Franco made the heir to the throne his successor, this was a case of a transition to Monarchy & then to Democracy.
Since asset prices disproportionately reflect the expectations and preferences of mostly wealthy capital holders
they may be net debtors. You dare not refuse a loan to the Dictator's nephew.
—especially in autocratic countries—they are an ideal source for understanding the risk the elites perceive from the democratization process in real time. How do financial markets respond when democratization becomes more likely?
The problem here is that democratization becomes more likely at times when anarchy becomes more likely. Some may object to democracy but all suffer if anarchy prevails.
Using a panel of equity data that covers 90 countries over 200 years, I show that stock market valuations fall substantially when transitions to democracy are more likely.
or transitions to anarchy are more likely.
In the data, I document that this decline is similar in magnitude to what we observe in financial crises, suggesting that these periods are associated with increased systematic risk to investors.
Indeed. There could be redistribution from the small fish (widows & orphans) to the big fish- as in a Balzac novel.
To understand whether the risk of redistribution drives this result, however, two key empirical challenges must be addressed. First, it is essential to tackle potential endogeneity concerns by ruling out other common factors that could simultaneously affect democratizations and financial markets, and provide evidence that the ancillary effects of democratization—for example, political instability or violence—are not driving the results.
It would be fair to say that the issue of redistibution does not arise in a democracy, or during democratization, if property owners will kill to protect their possessions. Only a totalitarian dictator- like Stalin or Mao- could push redistribution through in a manner which dispossessed millions of sturdy 'kulaks'.
Second, it is necessary to show that the primary driver of the asset pricing response is redistribution risk.
It is likely that people in the market at the time said 'land prices have fallen because the new Government is expected to acquire it at a low price and redistribute it to the poor. ' That sort of evidence clinches the matter.
This requires showing that redistribution indeed follows successful democratizations, and that it is substantial enough to rationalize the observed market responses.
No. Expectations are all that matters. Still, I suppose, they can 'create Reality'.
Now for the problematic part-
The first strategy uses exogenous variation in the probability of a successful democratization emanating from a shift in Catholic church doctrine in favor of democracy from 1959 to 1963.
There were only three Catholic countries which could be said to have 'democratised' during that period. However, Betancourt, who returned to power in Venezeula in 1959-64, had previously held office from 1945-48. In Peru, Belaunde Terry held power from '63 to '68, but he had fought his first election in 1956. Interestingly, the military coup which toppled him was more left-wing than he was.
In the Dominican Republic, Juan Bosch did win an election and lasted for a few months before being toppled by the military. It would be absurd to suggest that the Catholic hierarchy shed any tears when such brief interludes of Democracy proved evanescent. In Portugal & Spain, the Church wholeheartedly supported Salazar & Franco.
This shift particularly impacted majority Catholic autocracies.
Which ones? Not Spain. Not Portugal. It must be said, both had been democracies at an earlier period.
Huntington (1991) labels the shift as one of the main reasons the third wave of democratization of the 1970s, 1980s, and early 1990s occurred and why it was concentrated in majority Catholic autocracies.
This was his 'clash of civilizations' thesis. But there was no such clash between Protestants & Catholics in Europe- save in Ultster (which English Protestants did not care about). Religion was declining as a factor in politics during that time (even in Islamic countries) and, the plain fact is, the Catholics in Latin America started losing market share to the Pentecostals etc.
Consistent with this narrative, I show that indices denoting the threat to the governing regime posed by civil society organizations and the size and frequency of democratic protests rose dramatically in majority Catholic autocracies compared to non-Catholic autocracies.
Perhaps the author is thinking of Poland's 'Solidarity'.
This indicates that the doctrinal shift materially changed political realities on the ground in majority Catholic autocracies.
Doctrinal shifts didn't matter because people no longer believed the priest could get you into heaven. Women wanted the pill. So did men. Till the mid Sixties, Catholics had more babies than Protestants in Europe. But as contraception (and abortions) became easier of access, fertility rates collapsed by the mid Seventies. My point is, if you don't listen to the Pope when it comes to sex, why would you heed him when it comes to politics?
I may mention, there was a time when some Protestants claimed that Catholics were unfit for Democracy because they voted for whoever their priest told them to. Empirical evidence from 150 years ago showed there was no truth to this idea.
The second part of the paper investigates whether a rise in redistribution risk can explain the negative stock market reaction to democratizations.
In Portugal there was large scale nationalization. It would be easy enough to establish whether the guys likely to take power were talking about expropriating the rich.
Comparing successful and failed democratizations,
like that of Bolshevik Russia? China actually held a reasonably free and fair general election before Russia. It was the last that country would ever see.
I find that democratization redistributes resources in two ways. First, it increases explicit redistribution by raising the size of the public sector
Communist revolutionaries may do the same thing as may Miltarist Dictators.
and lowering income inequality. On average, government revenue-GDP ratios rise by 4.8 percentage points,
inevitable if there is high Income elasticity of demand for Government services
Gini coefficients decline by 2.3 percentage points, and the labor share of GDP rises by 6.7 percentage points in the 20 years after a successful democratization.
Sadly the labour share falls as the population ages.
Second, successful democratizations also increase tacit redistribution. For example, autocracies allocate a greater share of government spending to elites (Tullock, 1986).
Was the Tonton Macoute 'elite'? The goons loyal to the Dictator aren't refined fellows who studied at Ivy League Colleges.
They also provide more protection to incumbent firms from new entrants (Perotti and Volpin, 2006, Martinez-Bravo and Wantchekon, 2021).
This has nothing to do with 'Democratization'. It may have something to do with an IMF bailout or an international trade agreement.
I find that, during successful democratizations, bribery and corruption indices fall
in Bengal they rose so quickly that there were two big famines (in 1943 & 1974) because power had passed to elected Bengali Muslims.
while pro-competitive regulation and net entry of new firms rise.
Unless crazy Leftists have taken over. GDP fell by 15 percent in Portugal. IMF bailouts came with conditionalities which tempered the craziness. To be fair, Portugal was saddled with half a million people returning from the newly liberated colonies.
Since this also redistributes resources away from autocratic elites, it could also play an important role in the asset pricing results.
The new regime in Portugal closed the Stock Market for a couple of years.
To understand whether the redistribution in the data is quantitatively large enough to explain the asset pricing results, I calibrate a model of democratic transitions in the style of Acemoglu and Robinson (2006) embedded within a standard asset pricing framework.
Why bother? For any qualifying country or time period there is superior contemporary testimony.
Like in Acemoglu and Robinson, the economy starts in autocracy where the elites have all the political power, and try to avoid redistributing their income to the more numerous poor citizens.
No country in the history of the world has been an autocracy of this type. The autocrat may rape and kill members of the elite. His power rests on armed thugs who, at best, are semi-literate. The good news is that assassination tempers autocracy.
What about 'oligarchy' (rule by the rich)? The problem is that it may have democratic features- e.g. elected Legislatures. Oligarchies can turn into full fledged Democracies- e.g. UK between 1832 and 1919. But the UK could also impose universal suffrage on a Colony- e.g. Ceylon in 1931. There definitely was an elite in Sri Lanka. But it wasn't cohesive. Still, it has remained a democracy despite undergoing Civil War.
The citizens influence the policies of the elites by threatening to revolt.
No. If there is such a threat, the elites hire soldiers. If there isn't enough money for enough soldiers then the problem is fiscal. The country needs to change so as to be fiscally viable.
Revolution is costly: all the elites are killed and a fraction of resources are destroyed, making it undesirable for both sides.
There have been bloodless Revolutions- e.g. the British Glorious Revolution. Only 4 people died during the Portuguese Carnation Revolution.
This cost the citizens bear from revolution—which determines the revolutionary threat the elites face—varies over time.
The Portuguese didn't want their young men to die in pointless colonial wars. The cost of stupidity can be very high indeed as Trump supporters are discovering.
If the fraction of resources destroyed is low enough, though, the citizens may prefer the revolution to autocracy.
How can this be known in advance? The fact is, if countries like Germany and Japan could start wars they are bound to lose, how could 'citizens' show superior rationality? For most working people, little changes when the regime changes. Even when the shit really hits the fan- e.g. post-Chavez Venezuela- people vote with their feet or just pray for a better tomorrow.
When this happens, the elites would like to promise future redistribution. But they cannot credibly commit to future transfers where there is little or no revolutionary threat.
Sure they can. Atlee credibly committed to Clause 4 (Nationalisation of 'commanding heights) even though there was no threat of revolution in 1945. Similarly, Thatcher credibly committed to Privatization. Nehru's India had no 'revolutionary threat' after October 1951. But land reform could be done at the State level under mechanisms put in place by the British in 1935.
The fact is, some leaders are credible. Others are not.
Here, only conceding democracy can keep the revolution off the equilibrium path, as democracy acts as a mechanism for the elites to credibly commit to future redistribution.
Where? When? The answer is- nowhere. Never. Russia and China probably can't be ruled as Democracies. They can have Revolutions and top-down redistribution. India turned out to be capable of being ruled as a Democracy (probably because the Army was too narrowly recruited) whereas Pakistan went in the opposite direction. Why? The Army is mainly recruited from the most populous and dominant province.
While democracy is a much better state for the elites than the revolution, the redistribution it brings is costly, making it, nonetheless, a deleterious state for them.
Some members of the landed gentry can gain political clout and thus the ability to extract rents. Similarly, a labour aristocracy working in the unionized formal sector can gain much higher wages and benefits than the vast majority stuck in small sweat shops in the informal sector. Democracy and rent seeking go hand in hand. That is why the old 'anti-Browder' Communist line was that gaining power through the ballot box was counter-revolutionary. No matter how pure your Communist ideals, you would be rendered a eunuch, or else get corrupted by the system. The odd thing was that, in 1967, a Communist Land Revenue Minister in Bengal- Hare Krishna Konar- discovered that British era rules allowed him to transfer 'surplus' land to his Party's supporters. Hilariously, he took 13 acres away from Charu Mazumdar, the head of the extreme Maoists!
To make the model relevant to study asset prices, I add four main ingredients. First, I allow for incomplete financial markets, meaning that the elites can trade with one another in financial markets but not with the citizens.
There have been countries which restricted ownership of shares or property to people of a particular religion or ethnicity. There may also be insider trading or 'ethnic monopoly' (e.g. non-African mercantile communities monopolizing the financial sector in some African countries). However, nothing prevents ordinary people buying stocks and shares even if they are illiterate and have to do so through an intermediary.
Second, to achieve realistic asset pricing dynamics, I allow for preferences in the style of Epstein and Zin (1989).
this seaparates risk aversion from elasticity of intertemporal substitution. This explains why functions are less smooth than our theory would predict.
Third, I allow for multiple potential forms of redistribution that align with what we see in the data, namely, reduced inequality,
which may be the result of the leisured propertied elite being lazy and profligate, thus falling behind the productive classes. There could be a racial element to this- e.g. the revolution in Zanzibar, when blacks raped Arab or Asian women thus avenging the crime of Slavery.
increased taxes,
sadly, you can't tax what is elastic in supply or demand. If the rich are smarter and have more options, they are likely to have more elasticity. Thus, the government has to fall back on regressive taxes.
reduced ability for the elites to skim rents from government spending,
Which can turn those elites from a class of parasites into a class of entrepreneurs.
and increased economic competition.
Which creates losers and winners within every class of society. The kulak prospers. The subsistence farmer has to sell up and move to a shanty town. The two may be closely related by blood.In India, there was a rash of kidnappings of the kids of the noveau riche. In almost every case, it was a cousin who lured the kid away and then killed him in panic.
I also allow for the redistribution elites face in democracy to be uncertain. Fourth, I modify the cost of revolution process to allow for three states: autocracy, democratization, and democracy. The new state, democratization, is one where a permanent transition to democracy becomes more likely.
This is probably exogenous. India had too much diversity to be anything but a Democracy. Pakistan had too little to be anything but a Military dictatorship with some Civilian window-dressing.
Since the elites price assets, uncertainty over whether a democratization will succeed—ushering in democracy and redistribution— or fail—keeping society in autocracy—increases the risk to the elites’ future consumption, causing risk premia to rise.
Unless they can be hedged against quite cheaply. This depends on the possibility of global mobility. This was increasing in the post-war world. It was thus possible to diversify portfolios in various ways. It is a characteristic of power elites in autocratic countries, that they have family members with different passports and valuable property holdings in affluent Rule-of-Law Democracies.
Very often they are net debtors in their own country. Thus when they fly the coop, they have 'stranded liabilities' not assets.
In this way, the consolidation of democracy and the redistribution of income and political power it brings, acts as a “rare disaster” for the elites, explaining the increased risk premia observed during democratizations in the data (Rietz, 1988, Barro, 2006, Gabaix, 2012, Wachter, 2013).
Different members of the elite, even within the same family, have different risk premia related to their portfolios, primary citizenship, domicile, and whether their assets are protected by international treaty. Thus, in India, one member of a business family has Indian citizenship & is the Company promoter. But his control rights are based on pyramiding. His relatives have other passports and have routed their investments through third countries- e.g. Mauritius- so as to gain protection under Treaty law.
My point is that 'rare disaster' has to be hedged outside the market by doing things like getting foreign passports for family members, setting up family offices abroad, etc, etc. Moreover, Revolutionary parties- Communist, Islamic, or whatever- have their own 'bag men' who enable mutually beneficial deals to be struck such that risk is reduced. But this is an opaque process.
When calibrated to reasonable preference parameters and the redistribution observed in the data, the model explains nearly all the rise in dividend yields observed during democratizations.
Which countries does the author think had 'democratizations'?
nearly all the rise in dividend yields leading into democratizations is concentrated in the period after World War I, the beginning of the First Wave of Democratization.
Which was associated with the demise of multi-ethnic Empires & the rise of Nation States which might have to introduce conscription to defend or extend their borders. Thus War was no longer 'the sport of Kings' or the natural occupation of the aristocracy. Sadly, this 'First Wave' foundered in places where Kings had made decisions- e.g. Germany or Italy (where the King appointed Mussolini and later dismissed him)- and Legislatures were too factionalized to act cohesively. In other words, places which had no long-standing tradition of Parliamentary sovereignty tended to fall off the wagon.
As for 'dividend yield'- it was affected by exogenous factors.
This is in line with a narrative in the comparative politics literature about the nature of democratization before and after The Great War (Luebbert, 1991). Before the war democratizations were mainly agreements between the aristocracy and the burgeoning middle class, shutting out the then nascent labor movements.
No. The Aristocracy could outflank the bourgeoisie by appealing to the better off peasant & skilled worker. Either the Liberals dug their own graves by supporting Organized Labour or they could only survive by taking up regional issues (e.g. the Celtic fringe in British politics).
As such, they benefited this new capital-owning class by protecting their property rights and the status quo between capital and labor. It is also consistent with the literature discussing the case of Britain after the Glorious Revolution documented in both North and Weingast (1989) and Acemoglu and Robinson (2006).2 After World War I, however, democratizations became more labor driven,
if women were getting the vote, the unskilled male worker (many of whom had died in the trenches) had to get it to. Alternatively, you could reverse the proposition. If your man-servant gets the vote why not let your wife have it too?
focusing on increasing labor bargaining power and reducing inequalities.
Sadly, labour lost bargaining power after the War. Real wages for UK coal miners peaked in 1913-14. By 1925, wages had often been slashed by fifty percent in nominal terms.
Transitioning to democracy thus became more costly for the capital-owning elites, bringing higher risk premia in the transition period.
Democracy worked as a safety valve. Left wing parties tended to split over the course of the Twenties & Thirties often on 'guns or butter' issues. The Conservative forces found they didn't really need any ideology or, if they did have some such thing, that it was better not to talk too much about it though, obivously, muttering darkly about yids, kikes, niggers, homos, etc. was perfectly all righ.
The model also allows me to understand which forms of redistribution have the largest effect on asset prices. The predominant effect comes from increased economic competition and displacement risk for incumbent firms post-democratization (Garleanu, Kogan and Panageas ˆ , 2012).
This has to do with abandoning autarkic 'import substitution' for 'export led growth'. It happened in both democratic and authoritarian countries regardless of ideology.
This channel drives 41.9% of the rise in dividend yields, providing support to a theoretical literature that argues increased creative destruction and structural transformation are the primary driving forces behind higher growth after successful democratizations (
Or successful consolidation of the power of the Chinese Communist Party. Xi now has more power than Mao. He doesn't need no stinkin' 'Cultural Revolution' as an excuse to get rid of his rivals in the Politburo.
The remaining 58.1% of the rise in dividend yields comes from the more traditional channels of higher taxes and reduced inequality and corruption. A redistribution-based framework also explains the negligible stock market effect observed in autocratizations.
In other words, purely economic forces or improved governance explain everything. 'Democritization' explains nothing.
To do this, I modify the model and allow for democracy to be reversible provided the elites are willing to risk a transition. If they succeed, society becomes an autocracy, but if they fail, they face a permanent loss of a fraction of their consumption. The key insight is that while democratization is a risk imposed on the elites, autocratiza tion is a risk they take.
Wherever there has been a Conservative counter-coup, some elements of the elite have stood against it precisely because of the likely humanitarian cost. Spain saw a mass exodus, known as La Retirada, which included business owners, bankers, and industrialists.
Consider the Spanish Civil War- which was itself a horrible disaster. The plain fact is, Franco- once firmly in the saddle- made things worse. It is estimated that 200,000 starved to death between 1939 and the early 1950s, during the años de hambre (years of hunger).
Some of Franco's crony capitalists- e.g. Juan March Ordinas & Pedro Barrié de la Maza- had genuine ability but most entrepreneurs suffocated under the corrupt, incompetent, Falangist bureaucracy. Opus Dei technocrats & the Mondragon cooperative helped create a Spanish miracle in the Fifties and Sixties but there is no reason to think that Franco himself contributed anything to their achievements.
I may mention, Portugal- under the economist, Salazar- though avoiding a famine, had poor outcomes in the post-war years.
Because who decides to transition differs in each case, there is an asymmetric effect on asset prices. The elites optimally choose when to attempt autocratization,
Only a General can deliver this. What if the fellow is crazy or incompetent?
so it always improves the expected present value of their consumption.
I suppose elites can panic & believe they will be slaughtered in their beds unless they back a strongman. The problem with a strongman is that he may want to start a war which he is bound to lose. The good thing about Franco was that he was so utterly shit that Hitler didn't want his help.
However, levered claims to this consumption— for example, the dividend claim—can still be adversely affected. In the model, dividend yields still rise because the increased risk in the event of a failed autocratization matters more than the higher payoff upon success to a risk averse investor.
The Stock Market would be shut down if there is a coup or counter-coup. We don't have figures for the grey market during such periods but it is likely that asset prices fall dramatically.
This also leads autocratizations with higher potential payoffs to come with larger rises in dividend yields, as the elites accept a higher penalty in the event of failure to achieve autocracy. Taken together, these results provide powerful support for redistribution-based models of democratization.
The author thinks Democracy is about the Left coming to power & taxing the rich. But, it could also be about Civilians coming to power & cutting taxes. The Generals grumble that without tax-money, they can't fulfill their dream of conquest. The Civilians say 'you've lost every fucking war you started. Shut the fuck up.'
Sadly, if your country is named Pakistan, you will end up in jail if you say this. Meanwhile Field Marshal Munir will boast of nuking half the world after receiving a rapturous welcome at the White House.
It would be fair to say that the fall of one leader or the rise of another can affect share valuations in companies owned by 'cronies'.
Fisman (2001) finds strong negative returns for politically connected firms in Indonesia as a result of the fall of the Suharto regime.
Precipitated by IMF 'tough love'. In other words, this isn't a story about 'Democratization'. It is a story about fiscal viability. India was pushed down the road of reform by its currency crisis in 1991 when it had to ship its gold reserves to the UK. Perhaps, if Rajiv hadn't been assassinated, Companies owned by his Doon School buddies would have been given a soft landing.
Similarly, Acemoglu, Hassan and Tahoun (2017) find that more intense protests in Egypt after the fall of the Mubarak regime relate to lower stock market valuations for firms connected to the group currently in power.
Actually, all firms were affected. The index fell by 16 percent in two days which is why the authorities shut down the Stock Exchange. Consider the fate of Naguib Sawaris- a Coptic Christian and critic of the Muslim brotherhood. He was seen as close to Mubarak's son and so his companies took a hit. But people felt that he wasn't political and so he avoided prosecution. I suppose his attacks on the Ikhwan (he had to leave the country under Morsi) endeared him to El Sisi. But, ultimately, he is good at his job which is why he has survived.
Dube, Kaplan and Naidu (2011) find that US companies that stood to benefit from US-backed coups see high returns after the coup.
Those who stood to benefit, benefited. That's a fucking tautology mate.
My paper builds on this body of research by providing the longest time series and widest panel of equity data used to date to study the stock market impact of democratizations.
Though stock markets are often shut down during such periods.
First, there is substantial heterogeneity around the average effects I document. For example, some democratizations may come with a reduction in risk premia as securing property rights dominates other channels.
In which case, 'Democratization' means 'stronger rule of law. The crazy dictator and his homicidal chums were chased away'.
Second, the results above are strongest for countries transitioning to democracy with an active stock market.
Only such countries could show up in his survey. If you do a survey in a brothel, your results will be strongest for women who work as prostitutes.
This means that countries where property rights were not secure enough to foster open financial markets are scoped out of the analysis when examining valuations. One example of this is transitions from left-wing authoritarian states, like the disintegration of the Soviet Union. Since regimes of this style were not fond of capital markets, their data on asset prices do not generally exist.
Most democratizations over the last four decades have involved countries giving up Communism or getting rid of crazy dirigiste Dictators or Dynasties. I suppose one could say 'In India, Assassination tempered Dynastic Autocracy. This permitted the Indian Stock Exchange to rise by leaps and bounds'. But this does not change the fact that India was and remains a Democracy.
My analysis, therefore, helps us to better understand transitions from relatively more right-wing autocracies, where the threat of redistribution likely played a greater role.
The problem here is that some right-wing autocracies 'go for growth'. True, you may say 'actually, the Dictator is Socialist and, in the case of Korea's Park or Singapore's Lee, there's some truth in it. The plain fact is, keeping a lid on Trade Union activism is good for the working class.
The author relies on V-Dem's 'Episodes of Regime Transformation' (ERT) dataset. Sadly, it is nonsense. V-Dem’s Electoral Democracy Index (EDI) shows India today as at its lowest since 1975 when all the principal opposition leaders were in jail. Yet, India now is vastly less Dynastic and much more Democratic. There is a coalition government at the center and long-standing Chief Ministers- e.g. Patnaik, Mamta, Stalin, etc- are getting kicked to the curb. New parties- e.g. AAP- have risen. The next election will see seat redistribution (frozen for 50 years) and thus all votes will have equal value regardless of where they are cast. It appears that one third women's reservations, too, will go through.
It must be said, the US has fallen a lot according to this score. The UK too has been down rated. Why? Nobody knows. Nobody cares.
Research involving 'democritization' is now worthless verbiage based on fantasies- e.g. that Vatican II had any political effect separate from the steep decline in the auctoritas of the Pope. However, the cruelty, corruption and crapulous coprophagy of the Church made this outcome inevitable.
Evidence from equity markets
which may not exist in a democracy while functioning well in an autocracy
provides resounding support for redistribution-based models of democratization.
Eastern Europe now has equity markets but they have pursued the opposite of redistribution- even, in some cases, inviting back the aristocracy to take back estates expropriated after the Communists seized power.
Democratizations lower stock valuations and raise risk premia substantially across several proxies in data covering 90 countries over 200 years.
The reverse happened in the UK. Each time the franchise was extended equities went up till the Great War loomed large and the Stock Exchange was shut down in July 1914 (because of a run on gold). The Government had to bailout the Merchant Banks to the tune of 40 percent of total public expenditure. When the Stock Market was reopened in 1915, there was a 60 year decline in total stock market capitalization. It fell from roughly 150% of the UK's GDP in 1914 down to just 30% by 1974. But this is a story about the end of the golden age of Classical Liberalism and the rise of National Security State perpetually under the cloud of total war. It has nothing to do with redistribution. The fact is, the Government may have to bail out the rich to help the poor. But the opposite is even better if the poor rise in productivity and affluence creating a virtuous circle of expanding prosperity.
These results cannot be explained by increased macroeconomic risk nor do other periods of high political or regime transition risk have the same effect.
Max's 'results' are nonsense. Redistribution risk in agricultural countries has to do with the breakup of large estates. The Stock Market scarcely matters. Total Wars create losers and winners amongs Corporations. Those with 'cost plus' contracts may be undervalued but their promoters live high on the hog. The same is true of dirigiste regimes- Socialist or Catholic or Gandhian or whatever.
Exogenous variation coming from a change in Catholic church doctrine confirms that risk premia rise with the probability of a successful democratization
Catholicism declined. It became irrelevant. It wasn't the case that Franco or Salazar started to hold elections because the Pope told them to.
Redistribution risk can explain these results.
Did the Catholic Church want to give up its property? No. But where that property was already lost, there was no point praying for a King or Dictator who would restore it.
In the data, redistribution follows successful democratizations:
Autocracies could do land-reform even more effectively. Look at Taiwan. Still, there can be no doubt that it was the Commies who were best at taking stuff away from the aristocrats and giving it to the peasants before taking it away and laughing heartily as the peasants starved to death.
the size of the public sector and measures of economic competition rise,
because both are income elastic. If real income is falling even the public sector goes to the wall.
and income inequality and measures of corruption fall.
If it can be measured, it isn't the sort of corruption which really matters.
Moreover, democratizations with higher redistribution risk see a substantially larger rise in risk premia than other democratizations.
A tautology. Cats with higher risk have higher risk.
A redistribution-based model of democratic transitions with asset prices and incomplete markets can fully explain the results.
It can also explain why cats say bow-wow. That's how ex falso quodlibet works.
It can also explain the lack of an asset pricing effect observed in autocratizations.
Though autocracies can kill and eat the rich and take all their cool, shiny, stuff.
The analysis highlights several potential channels of redistribution that generate the asset pricing results.
Why stick with saying 'cats say bow-wow'? Why not highlight the potential channels by which they can become Actuaries in Afghanistan?
That said, in standard macroeconomic models, more redistribution would generally lower growth. This is at odds with empirical evidence that suggests democracy causes higher growth (Acemoglu et al., 2019).
This is Grainger causality at best.
Reconciling this disparity would be a natural path for future research. The paper also highlights a potential resolution to this apparent contradiction. While much work has focused on declines in inequality or increasing taxation, this paper shows that increased competition and a loss of government consumption for the elites can also play a role in transitions.
This is what happens when a big war ends. Generals who had been used to living like Lords, have to retire to the suburbs.
Indeed, while taxes and inequality are certainly important, they may not play a central role in all democratizations, in particular transitions from left-wing autocracies that are not captured when examining stock market data.
In other words, this guys study is useless.
Finally, this paper shows that any financial history of the last 200 years that excludes democratizations is incomplete.
I know the financial history of the UK and India. Democratization had zero effect on either. War mattered. Economic policy mattered. But, above all else, productivity mattered. If it fell, there had to be transfers which endangered fiscal viability and spurred reforms (or backtracking from reforms).
In doing this, it provides new avenues of study in consumptionbased models by focusing on political institutions and how they interact with the distribution of resources.
This is fully anticipated.
In a model with incomplete markets, redistribution shocks can have large consequences on asset prices.
D'uh!
This means that neither an increase in the probability of a large drop in aggregate consumption nor an increase in the volatility of aggregate consumption is necessary for an increase in risk premia.
If policy becomes more arbitrary, it is less predictable. We may say Knightian Uncertainty has increased.
The consumption risk faced by relatively wealthy investors need only be affected.
As Keynes pointed out, it is their Investment decisions which have a multiplier effect.
This paves the road for the risk of redistribution to be a primary historical driver of asset prices.
Politicians are increasingly tempted to increase property taxes on the wealthy. This dampens property prices at the top end of the market. Are higher taxes on 'unearned income' likely? Are we on the cusp of a bear market which will run on into the 2040s?
If so, it is likely that some of the shibboleths V-Dem associates with Democratization will fall by the wayside. We may come to think of 'proper' Democracies as ones which deports people of a different colour or faith.
