European Journal of Political Research 44: 801–836, 2005
801
Economic performance of ‘weak’ governments and their
interaction with central banks and labour: Deficits, economic
growth, unemployment and inflation, 1961–1998
TAKAYUKI SAKAMOTO
Southern Methodist University, USA
Abstract. Comparative political economists have conventionally claimed that the strength
and stability of governments affect policy making and performance, and that what they call
‘weak governments’ – multiparty, minority and short-lived governments – show poorer economic performance. This article tests this and related hypotheses on deficits, economic
growth, unemployment and inflation by examining data from 17 OECD countries. I find that
there is generally little evidence to indicate that so-called ‘weak governments’, when considered independently, produce poorer performance than strong ones. However, the effects
of different government types are partly contingent on central bank independence and
labour organization. When central banks are independent, coalition governments exhibit
better inflation and economic growth performance than one-party governments, but the
opposite happens when central banks are dependent. I attempt an explanation for these
relationships. I also find that independent central banks, under certain conditions, lead to
lower growth and higher inflation. Thus, some of the benefits of central bank independence
are context-specific, depending on other political-economic factors.
The popular belief about the relationship between the effectiveness of policy
making and the attributes of governments has been that so-called ‘weak’ or
‘unstable’ governments (i.e., multiparty coalition governments, minority governments and short-lived governments) are less effective in policy making than
governments with the opposite characteristics.1 Scholars have applied this line
of argument to economic policy making (particularly fiscal deficits) and performance and have claimed that weak/unstable governments are less able to
conduct economic policy effectively than strong/stable governments (e.g.,
Roubini & Sachs 1989a, 1989b; Edin & Ohlsson 1991; Grilli et al. 1991; Blais
et al. 1993).2 The implication is that national economies governed by weak
governments do not perform as well as those under strong/stable governments.
However, some recent studies have reported that those supposedly weak institutional characteristics do not necessarily cause poor economic performance
and may even produce better economic outcomes (Crepaz 1996; Lijphart
1999).
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802
takayuki sakamoto
This article empirically examines the validity of such government attributes hypotheses by using time-series cross-sectional data from 17 OECD countries between 1961 and 1998. It investigates the effects of weak government
characteristics – majority status, number of governing parties and durability
of government tenure – on economic performance indicators – fiscal deficits,
economic growth, unemployment and inflation.3 It also examines the interactive effects of those government attributes under different institutional settings, shaped by central bank independence and the centralization of labour
institutions, to test the hypothesis that the economic performance of governments varies depending on the other political-economic institutions under
which they operate.
Previous theory, hypotheses, and findings
‘Inferior weak government’ arguments: Veto players, short tenure and
minority governments
The conventional argument about the poor performance of weak governments
centres around multiple veto players entailed by multiparty coalition governments.4 In this view, multiple veto players in government increase the difficulty
coalition parties face in agreeing on important policy changes – for example,
policy innovations entailed by the pressure for neo-liberal reforms that
emanate from economic globalization, increasing competition, the maturing of
advanced economies and slow economic growth, and the unsustainability of
the generous welfare state. The larger the number of governing parties, the
harder it becomes for them to come to agreement on necessary policy measures. The likely result is policy immobilism. The implication is that multiparty
governments are less capable of carrying out economic policy required to meet
the challenges posed by the national and global economies, but that also entails
the imposition of economic losses on societal groups constituting important
constituents for the coalition parties.
Coalition governments’ lesser capabilities for policy innovation, in the conventional view, are linked to the electoral system. The likelihood of multiparty
governments increases in countries with proportional representation (PR)
electoral systems, where it is difficult for a single party to win a majority of the
parliament and form a single-party government. This line of argument claims
further that the multiplicity of governing parties is also likely to increase the
chance that they will face difficulty agreeing on important policy issues and
collapse as a result of being unable to agree on government policy. Consequently, the average durability of the tenure of multiparty governments in
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economic performance of ‘weak’ governments and their interaction 803
office will be shorter than single-party governments. Roubini and Sachs
(1989a) explain that the rapid turnover of coalition governments reduces the
time horizon for the repeated play among the parties, and unstable governments discount their future and act more myopically. This reduces further the
effective policy-making capabilities of coalition governments and harms economic performance.5 If Roubini and Sachs’s conjecture is valid, the need for
particular economic policy changes that faces many industrialized economies
today (e.g., neoliberal adjustments that are likely to cause economic hardships
in the short run and only to bring benefits in the medium to long run) should
make it even harder for such myopic coalition parties to embark on policy
changes.
The other dimension of government characteristics hypothesized by previous studies to affect economic policy-making capabilities is the strength of
governments; specifically, the support they enjoy in the legislature and among
voters (Grilli et al. 1991). It is posited that whether a government has a majority in the legislature affects its policy-making capabilities. Minority governments cannot pursue their policy without some other parties’ support outside
the government. It is speculated that minority governments are less able to
carry out a policy likely to be opposed by parties outside government or are
more likely to make concessions to opposition parties, compromising the
integrity of their policy (Blais et al. 1993). The result would be poorer economic performance than strong majority governments.
Certainly, lack of a majority imposes constraints on a government, but theoretical justification to believe a priori that minority governments’ performance is poor is not as strong as it seems. A majority government may be
better able to carry out decisively good economic policy even in the presence
of a minority opposition. Yet it can also better pursue bad policy if it decides
to do so. Majority governments may also have difficulty carrying out unpopular policies required for the long-term health of the economy because the
immediate, negative impacts of such policies are more easily attributable to
the governments than in the case of minority governments. Further, to the
extent that minority governments are single-party governments more often
than not (Strom 1990; Woldendorp et al. 1993), it could be easier for them to
agree on policy than for coalition majority governments. Moreover, minority
governments are not necessarily significantly weaker than majority ones in
durability, government cohesion and electoral performance, particularly when
compared to multiparty majority governments (Strom 1990). The differences
in the performance of majority and minority governments are thus not so
straightforward at the theoretical level. Empirical evidence on the effect of
minority status is also mixed. Edin and Ohlsson (1991) and Roubini and Sachs
(1989a, 1989b) find that minority governments produce higher deficits, while
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Grilli et al. (1991) and Borrelli and Royed (1995) do not. I will test the independent effect of minority status in the empirical analysis.
Thus, existing studies identify three dimensions of government attributes
that can potentially affect their policy-making capabilities: multiplicity of governing parties, durability (stability as measured by the length of tenure) and
minority status (Roubini & Sachs 1989a, 1989b; Grilli et al. 1991; Edin &
Ohlsson 1991). While the three dimensions are closely linked, they are conceptually and empirically distinct from each other (Borrelli & Royed 1995;
Sakamoto 2001). Thus, their individual effects need to be separately examined.
Such is the approach I will take in the empirical analysis.
‘Superior weak governments’ arguments: Consensus democracy perspective
Some studies challenge the ‘inferior weak government hypothesis’ reviewed
above, and argue that those ‘weak’ governments may actually perform better
than ‘strong’ governments. Crepaz (1996) is one of these studies and offers an
explanation at the general level of political system in the context of Lijphart’s
consensus democracy. Crepaz (1996) explains that multiparty governments
with PR produce better macroeconomic outcomes because they enjoy wider
popular government support than strong single-party bare majority governments and this makes the former’s policies ‘more responsible’, although his
independent variable is consensus democracy – not exactly the same as what
we here call ‘weak governments’.6 He argues that coalition governments, which
show a correlation with consensus democracy, produce more stable, steady and
predictable policy than majoritarian governments. Majoritarian governments
are often in two-party systems, where government responsibility alternates
between two large parties and, in his view, the magnitude of policy change or
reversal is large. In multiparty systems, by contrast, one or two minor coalition parties are replaced by other small parties, and the scale of policy change
is smaller. Crepaz presents quantitative data indicating that multiparty governments show better records in unemployment, inflation and GDP growth.
Lijphart (1999) adds that policies based on a broader consensus are more
likely to be implemented successfully and stay on course.
Overall, the ‘inferior weak governments hypothesis’ has persuasive logic,
but it is not supported by recent empirical evidence, at least in terms of the
effects of weak government attributes on fiscal deficits (Edin & Ohlsson 1991;
Borrelli & Royed 1995; Sakamoto 2001). By contrast, while the ‘superior weak
governments argument’ has not yet thoroughly elaborated the mechanism that
produces better performance among so-called ‘weak’ governments, it appears
to be supported by data showing that ‘strong’ governments are lesser performers (Crepaz 1996).7 This article seeks to examine the validity of these
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economic performance of ‘weak’ governments and their interaction 805
hypotheses by disaggregating the features of ‘weak’ governments into clearly
testable components and inspecting the interactive effects of ‘weak’ governments under various institutional environments.
Interactions of government attributes with political-economic institutions
and other conditions
One possible reason why previous empirical evidence has been mixed may be
that government attributes have differentiating effects under different institutional settings or conditions. There are several institutions and conditions
that can conceivably have such effects.
Time-variant effects: Possible effects of policy convergence under
globalization
The first possibility is that the effects of government attributes on economic
performance may be time-variant. One hypothesis would be that because of
economic globalization, governments lost latitude in choosing their economic
policy or the effectiveness of their policies was lost, and as a result, the differentiating effects of government attributes are not observable after globalization. This would suggest that weak government attributes exerted negative
effects on economic performance prior to globalization, but after globalization, all governments had little latitude in choosing economic policies and their
policies converged, thereby reducing the possibility of differences in performance (Kurzer 1993; Scharpf 1991). Such economic imperatives may have
given ‘weak’ governments no choice but to take necessary policy measures
regardless of their policy-making capabilities. The convergence criteria for
European Union countries are one such factor. If such were the case, the
effects of government attributes would not necessarily be detected in panel
analysis that pools observations not only across countries but also over time,
unless time-variant effects are estimated. If the convergence thesis is valid, we
should expect that whatever differences that existed prior to globalization
would disappear in the 1990s and maybe the 1980s. We should also be able to
observe effects of government types during the 1960s and 1970s. There is also
the related possibility that pooled analysis applied in comparative political
economy averages out time- and country-specific effects, and may conceal
the effects of government traits that actually exist (Kittel 1999). So in our
empirical analysis, we will examine possible time-variant effects of government attributes.
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Central bank independence
Political economists explain that central banks’ independence from party governments produces low inflation because independent central banks committed to low inflation can reduce the inflationary expectations wage bargainers
build into wage negotiations in anticipation of future inflation (Cukierman
1992; Grilli et al. 1991; Rogoff 1985). Independence from political control gives
credibility to central banks’ commitment to anti-inflationary monetary policy.
As a result, wage settlements will be lower than those that would be agreed
upon in the absence of independent central banks, creating less inflationary
pressure.
Some studies have also found central banks’ restraining effects on the
behaviour of labour unions (Iversen 1999). Knowing central banks’ strong
preference and determination for price stability, other actors may restrain
their behaviour that could otherwise invite contractionary monetary policy
response by central banks, subsequently producing depressed economic
growth and high unemployment. If other actors anticipate such counteracting
response by central banks and restrain their behaviour, national economies
may be able to realize improved economic outcomes, such as low inflation and
low unemployment, since central banks then do not have to run contractionary
monetary policy. If we should assume that ‘weak’ governments have a tendency to be less able to carry out discreet economic policy, such as conservative fiscal policy, there is good reason to believe that independent central banks
may be able to discipline such governments’ otherwise lax policy behaviour.
If such were the case, the possibly negative economic effects of weak governments could be restrained or contained by the presence of independent central
banks.8
We can speculate that coalition governments, anticipating such a response
from central banks, restrain their fiscal policy if they know that a conflictive
mix of fiscal and monetary policies can be detrimental to the economy. Coalition governments have an incentive to refrain from running imprudent fiscal
policy that can bring out deleterious economic outcomes. Given some evidence that independent central banks’ potential monetary response has constraining effects on such economic actors as labour unions (Iversen 1999), this
scenario is plausible. This possibility is realistic when we note that many governments’ economic policy has turned toward fiscal and monetary conservatism since the 1980s. If coalition governments can anticipate that an
incompatible fiscal-monetary policy mix leads to poor economic outcomes,
they have an incentive to make their fiscal policy consistent with monetary
policy by independent central banks. If coalition governments and central
banks can run a consistent policy mix, they may be able to produce good eco© European Consortium for Political Research 2005
economic performance of ‘weak’ governments and their interaction 807
nomic performance. If prudent fiscal policy and price stability can be achieved
by coalition governments, it will produce positive macroeconomic effects since
it mitigates market distortions and consequently enhances resource allocation
efficiencies and growth. Price stability also reduces economic uncertainty that
could depress investment and growth. On the other hand, if independent
central banks can restrain coalition governments’ fiscal policy in a beneficial
manner, the absence of independent central banks should deteriorate coalition governments’ economic performance. Without independent central
banks, they may also surrender to temptation for fiscal expansion. The result
would be high inflation. In this case, we should expect poor performance by
coalition governments.
We should note that, setting aside its price-stabilizing role, the current
literature discusses two opposing effects that are said to result from restrictive or non-accommodating central banks. One view points out a beneficial
role of price stability: price stability mitigates market distortions and consequently enhances resource allocation efficiencies and growth. Price stability is
also said to reduce economic uncertainty that could discourage investment and
inhibit growth. The other view, while admitting its beneficial role in price stability, points out that conservative central banks’ contractionary monetary
policy can depress economic growth and increase unemployment. This view
has been influenced by the experience of the German Bundesbank, which
countered party governments’ expansionary fiscal policy with contractionary
monetary policy and, as a result, induced recessions. Thus, even if we accept
that central bank independence facilitates price stability, we do not know at
this moment whether it is beneficial for economic growth and employment.
Thus, in our empirical analysis, we will inspect the effects of central banks and
their interactive effects with other government attributes on growth, unemployment and inflation.
Labour institutions
There are several strands of explanations of the influence of labour institutions, generating different expectations. First, simple neoclassical economic
thinking expects negative economic effects of strong labour, as it can distort
the price and market mechanisms, raise wages and prices beyond marketclearing levels, and make the labour market rigid, rendering economic adjustments to business cycles difficult. If the neoclassical explanation applies, we
might expect economies under ‘weak’ governments to perform less well under
strong than weak labour due to any combination of the following reasons:
weak governments may have more difficulty resisting strong labour’s demand
for higher wages or public spending or overriding its opposition to economic
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measures that are required for the health of the economy, but that impose
costs on union workers; coalition governments may have a social democratic
or labour party in government, making it difficult for them to override labour
demands; or simply countries that have strong labour also tend to have a
strong left party (Garrett 1998), again bolstering labour influence. The result
would be high deficits, high interest rates, low investments, low economic
growth and high unemployment. In our data, there is a mild positive correlation between the number of governing parties and the organization of labour
(0.16) – that is, as the number of governing parties increases, so too does labour
strength. If a left (or Christian Democratic) party that draws support from
unions is in a coalition government, the party may feel a great need to cater
to labour to improve its electoral prospects because being in a coalition government usually means that the party does not wield the majority control of
parliament, faces political and electoral uncertainties, and may feel a
need to strengthen its electoral support among core supporters for next
elections.
Another line of explanation expects generally positive effects of centralized labour. The neocorporatist model explains that economies governed by
social democratic governments with centralized labour organizations produce
better performance, particularly low unemployment with reasonably good
inflation and economic growth records (Goldthorpe 1984; Garrett 1998).9
The thesis explains that social democratic governments promote full employment and a redistributive welfare state, and centralized unions can achieve
effective wage restraint in exchange for such favourable public policy,
making it possible to sustain employment and economic growth while containing inflation.10 In such a consensus-oriented cooperative environment typically found in Nordic countries, weak governments may have an easier time
overcoming disagreement among coalition parties or with the opposition and
be able to generate good policy and good economic performance as a result.
In this case, weak governments’ potential weakness in policy making is overcome or counterbalanced by the benign economic effects of labour’s
restraint.11
If these explanations envisaging the benign role of strong labour are valid,
we should expect governments with coordinated labour to show good economic performance. However, these explanations do not necessarily eliminate
the possibility of the adverse economic effects of strong labour because governments may run an expansionary policy and increase social spending to
facilitate labour’s wage restraint, create employment (particularly in the public
service sector), or provide a safety net for the unemployed and the weak as
the social wage (Iversen 1999). This may negatively affect deficits and infla-
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economic performance of ‘weak’ governments and their interaction 809
tion. High deficits could also lead to high interest rates and, in turn, depress
investment and GDP growth and increase unemployment. If this were the
case, we might detect negative effects of strong labour.
A third strand of explanation calls attention to the interaction of central
banks’ monetary policy and labour’s wage coordination. Iversen (1999)
explains that when monetary policy is accommodating, unemployment
increases at the intermediate level of wage bargaining centralization and
becomes low toward the high level of centralization. However, when
monetary policy is non-accommodating, unemployment is low at intermediate
centralization and turns up high toward high centralization. In his view, when
the government accommodates higher nominal wages through demand expansions and higher inflation, union leaders can enforce real wage restraint that
will keep unemployment low. Yet if monetary policy is non-accommodating,
higher nominal wages will translate into higher real wages and unemployment.
In intermediately coordinated systems with non-accommodating policy, unemployment will be low because bargainers will have an incentive to restrain
wage demands for fear of high unemployment resulting from militant wage
increases. By contrast, Franzese and Hall (2000) contend that the antiinflationary effects of central bank independence hinges on the effectiveness
of a signaling process between central banks and wage negotiators, and the
effectiveness of the signaling mechanism in turn depends on the degree of
wage coordination. They argue that although central bank independence
always lowers inflation regardless of the organization of wage bargaining, it
does so only at the cost of increasing unemployment with deflationary monetary policy under uncoordinated systems.
The theses reviewed above generate different expectations about the economic effects of labour organization. If the neoclassical view is valid, strong
labour should have negative economic effects. If the neocorporatist explanation holds, labour should have generally favourable effects. If Iversen’s explanation holds, the combination of central bank independence and strong labour
should produce high unemployment, so we might expect weak governments’
performance to also suffer. If Franzese and Hall (2000) are correct, the same
combination would lead to low unemployment in the same situation. There is
no a priori ground to expect one thesis or another to work better at the
theoretical level, so we treat this issue as an empirical question.
Partisan effect
Government partisanship has been argued to affect economic policy and
outcome. Assuming the existence of a stable, exploitable Phillips curve, the
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traditional partisan model explains that different political parties have distinct
policy preferences due to their electoral ties to particular constituents and
produce divergent economic outcomes (Hibbs 1977). In this model, left parties
seek to achieve low unemployment and pursue an expansionary Keynesian
economic policy, even if it may mean higher inflation. Right parties, in contrast, pursue price stability at the expense of unemployment, intervene as little
as possible in the private economy and let the market decide outcomes.12 Particularly, Garrett (1998) has shown that leftist governments with encompassing labour under high capital mobility produce higher economic growth and
lower unemployment with higher inflation. If government partisanship has
effects on economic performance, we might conjecture that weak or strong
governments display different performance depending on their partisanship.
We may speculate that governments can better achieve partisan policy and
outcomes when they are strong governments, and, conversely, weak governments have difficulty achieving their objectives. To explore this possibility,
we interact weak government attributes variables with partisanship in the
regressions.
Hypotheses
Let us summarize the main basic hypotheses to be tested in the empirical
analysis. The following hypotheses are not necessarily the contentions of this
article. We are sceptical particularly of the simple versions of inferior weak
governments hypotheses, but for simplicity, hypotheses are presented in a
simplified manner:
H1: ‘Weak’ governments produce poorer economic performance than
‘strong’ governments, other things being equal. The larger the number of
governing parties, the poorer economic performance is. Minority and/or
short-tenure governments also perform worse than majority and/or
durable governments.
H2: ‘Weak’ governments show poor performance during certain time
periods (e.g., during the 1960s and 1970s, when the international economy
was not so integrated (the convergence hypothesis), or during hard economic times such as the 1970s).
H3: ‘Weak’ governments perform worse than ‘strong’ ones when they
operate under certain institutions or factors that can potentially weaken
policy-making capabilities such as dependent central banks, uncoordinated labour or (expansionary) left-party governments. (These inter© European Consortium for Political Research 2005
economic performance of ‘weak’ governments and their interaction 811
active effects vary depending on the particular dependent variable and
interacted variables. The variation will be discussed in the empirical
analysis.)
Empirical analysis
I estimate the effects of government attributes – majority status, number of
governing parties and durability of governments – on fiscal deficits, economic
growth, unemployment and inflation. I estimate the interactive effects of those
government attributes with central bank independence, centralization of
labour organizations and government partisanship to explore the possibility
that so-called ‘weak government’ characteristics negatively affect economic
performance under certain institutional settings or conditions. The data are
pooled time-series cross-national data from 17 OECD countries between 1961
and 1998.13 The estimation method used is ordinary least squares (OLS) with
panel-corrected standard errors (PCSEs) and country and period dummy variables to correct for the estimation problems prevalent in panel data of this
kind – serial correlation, panel heteroskedasticity and contemporaneous correlation of errors (Beck & Katz 1995, 1996). Where there is autocorrelation,
a first lag of the dependent variable is entered in the equations as an independent variable. All independent variables are lagged one year to allow for
the time lag between the time of policy making and implementation and policy
effects in economic outcomes. The description of the variables follows; further
details on coding are available from the author on request.
Dependent variables
Our dependent variables are fiscal deficits, economic growth, unemployment
and inflation. Dickey-Fuller tests do not reject the unit root hypothesis for our
economic time-series, except for economic growth, for most countries. After
first differencing, the deficit, unemployment and inflation data became stationary. Deficit is the first difference of general government deficit as a percentage of GDP.14 GDP is real Gross Domestic Product annual growth rate.
Unemployment is the first difference of unemployment rate as a percentage
of total labour force. Inflation is the first difference of annual change in consumer price index. These data are all from OECD (1999, 2000). Lagrange multiplier tests suggested that the GDP and unemployment models showed signs
of autocorrelation, so I included the first lag of the dependent variable as an
independent variable and it eliminated this.
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Independent variables
Minority, Coalition and Stability are political variables measuring the strength
and stability of governments. Minority is a dummy variable representing the
minority status of governments (minority = 1, majority = 0). Coalition is the
raw number of governing parties.15 Stability is the average duration of the most
recent three governments in days prior to the current year, measuring the
anticipation governments have about the stability of their governments from
their previous experience. Left is the measure of the partisan control of government. It is the average of left party cabinet portfolios as a percentage of
all cabinet portfolios, and left party seats as a percentage of all lower house
seats. The definitions of left parties are based on Castles and Mair (1984).16
Our political-institutional variables are CBI and Labour. CBI is a measure
of the degree of central banks’ independence from political control and
captures their ability to pursue anti-inflationary monetary policy without or
despite political interference. The data are Cukierman’s (Cukierman 1992,
Cukierman & Lippi 1999) index of legal central bank independence (LVAU).
Labour is Boix’s (2000) index of the organizational power of labour, which he
defines as the average of the proportion of unionized workers and the sum of
organizational unity and labour confederation power in collective bargaining.17 He derived the index from the data complied by Cameron (1984),
Golden and Wallerstein (1994), Lange et al. (1995), OECD (1993) and Traxler
(1994). I made modifications to Boix’s coding with regard to Germany, Japan
and Switzerland, following Soskice (1990) who justifiably underscores the role
of employers’ associations in wage coordination.
We also enter Capital and Exchange in the equations to control for the
effects of globalization on national governments’ economic policy and performance. Capital is Quinn’s (1997) index of financial openness, supplemented
by his more recent data.18 The larger the score, the higher capital mobility.
Exchange is a dummy variable measuring exchange rate mechanisms under
which governments operate (1 = floating, 0 = fixed), and the data are compiled
from IMF (various years).19 Globalization has been argued to constrict the
autonomy of governments’ fiscal and monetary policy (Kurzer 1993; Scharpf
1991).20 Finally, we enter Spend (total outlays of government as a percentage
of GDP) to control for the effect of government expenditure. The source is
OECD (1999, 2000). However, Spend was subsequently dropped from
the deficit models as its coefficients never achieved significance in any
specification.
To examine time-variant effects of government attributes, I also estimate
models with government attribute variables divided into four time periods
(1961–1970, 1972–1980, 1981–1989 and 1990–1998: 1971 = reference year). The
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economic performance of ‘weak’ governments and their interaction 813
first period is one in which the link between government attributes and economic policy was supposedly strong. The second is one in which the link
started to loosen after the collapse of the Bretton Woods system. The third is
one in which globalization deepened, and market pressures and competitiveness imperatives allegedly diminished room for governments’ economic
maneuvering. The fourth is one in which the influence of neoclassical economic policy became widespread and more dominant. In addition to these four
periods, I also experimented with the division of the same variables into two
periods (1961–1972 and 1973–1998),21 but these two-period models do not
change the results, so below I only report the results of the four-period models.
Results
Fiscal deficits
The results of the deficit models are reported in Table 1. In this and all other
models, economic growth, left partisanship and a floating currency reduce
deficits. However, there is almost no evidence that weak governments perform
worse than strong ones in containing fiscal deficits. Model 1 is the basic model
with no interaction. Though not significant, the signs of the coefficients suggest
that minority and multiparty governments run lower deficits. Model 2 estimates the effects of government types across four postwar periods. The only
variable to support the inferior weak government hypothesis is Stability90s;
more durable governments ran lower deficits in the 1990s. Otherwise, the
results show that minority governments in the 1980s and coalition governments in the 1980s and 1990s ran lower deficits than majority and single-party
ones, respectively, refuting the inferior weak government hypotheses.
Models 3, 4 and 5 estimate the interactive effects of weak governments and
central bank independence and labour organization, but we detect no significant relationship. The government and institutional variables are also not
significant in a joint F-test. I also examined their predicted estimates under
different institutional configurations, but did not detect statistically significant
relationships (results not reported). While not significant, the predicted
estimates suggest that three-party minority (‘weak’) governments run lower
deficits than single-party majority (‘strong’) governments under most institutional configurations. In sum, the data provide little evidence that weak
governments are more deficit-prone than strong ones. By contrast, there is
some weak evidence that coalition and minority governments’ deficits were
smaller than strong governments’ during the 1980s and 1990s. These periods
coincide with the time when major countries abandoned Keynesian demand
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Table 1. Determinants of fiscal deficits, 1961–1998
Model
1
2
3
4
5
Independent variables
DUnemploymentt-1
-0.042
(0.120)
-0.021
(0.112)
-0.040
(0.120)
-0.043
(0.120)
-0.039
(0.120)
GDPt-1
-0.140***
(0.045)
-0.144***
(0.042)
-0.137***
(0.045)
-0.140***
(0.045)
-0.137***
(0.045)
Leftt-1
-0.008*
(0.004)
-0.011***
(0.004)
-0.008*
(0.004)
-0.007*
(0.004)
-0.007*
(0.004)
Minorityt-1
-0.170
(0.259)
-0.197
(0.703)
-0.265
(0.343)
-1.813
(1.433)
Minorityt-1*CBIt-1
0.135
(1.894)
Minorityt-1*
Labourt-1
4.621
(4.025)
0.231
(0.728)
-7.190
(6.017)
Minorityt-1*CBIt-1*
Labourt-1
Coalitiont-1
2.527
(2.123)
-0.130
(0.102)
-0.012
(0.238)
-0.177
(0.155)
-0.408
(0.722)
Coalitiont-1*CBIt-1
Coalitiont-1*
Labourt-1
-0.178
(0.447)
-0.200
(1.397)
0.104
(0.285)
0.251
(0.563)
-0.245
(1.705)
Coalitiont-1*CBIt-1*
Labourt-1
Stabilityt-1
-0.000050
(0.000385)
-0.000032
(0.000389)
-0.000050
(0.000387)
-0.000071
(0.000393)
CBIt-1
-1.113
(2.147)
-0.606
(2.304)
-0.152
(2.708)
-1.160
(2.153)
-0.311
(2.802)
Labourt-1
-0.047
(0.856)
0.912
(0.910)
-0.114
(0.873)
-0.316
(1.166)
-0.665
(1.186)
Exchanget-1
-0.852***
(0.227)
-1.144***
(0.242)
-0.843***
(0.229)
-0.849***
(0.231)
-0.804***
(0.239)
Capitalt-1
-0.102
(0.068)
-0.138**
(0.070)
-0.100
(0.068)
-0.103
(0.068)
-0.108
(0.068)
Minority60t-1
0.005
(0.424)
Minority70t-1
0.003
(0.366)
Minority80t-1
-1.062***
(0.366)
Minority90t-1
0.368
(0.379)
Coalition60t-1
-0.101
(0.139)
Coalition70t-1
0.039
(0.119)
© European Consortium for Political Research 2005
economic performance of ‘weak’ governments and their interaction 815
Table 1. Continued.
Model
1
2
Coalition80t-1
-0.326**
(0.158)
Coalition90t-1
-0.358***
(0.143)
Stability60t-1
-0.000464
(0.000579)
Stability70t-1
0.000899
(0.000569)
Stability80t-1
0.000583
(0.000546)
Stability90t-1
-0.001237**
(0.000633)
R2
Observations
0.081
612
0.140
612
3
0.081
612
4
0.081
612
5
0.083
612
Notes: OLS estimates with panel-corrected standard errors in parentheses. Country and time dummy
variables not reported. *** significant at the 0.01 level; ** significant at the 0.05 level; * significant at the
0.10 level.
management with deficit financing in favour of neoclassical policy combined
with deficit reduction. While we do not have evidence, it may be that weak
governments were more adept at reducing deficits during the periods once the
fiscal policy objective changed. In addition to the variables reported above,
we also estimated the same equations with the interactive terms of left
partisanship and coalition and minority governments, but we did not detect
any significant or systematic patterns (results not reported).22
Economic growth
Table 2 reports the results of economic growth models. In all models, it is
shown that inflation and strong labour depress economic growth. Strong
labour particularly pushes down growth by over 2.5 per cent, compared to very
weak labour, lending support to the neoclassical view pointing to the efficiency
costs of strong labour. As for government attributes, the basic models (Models
1 and 2) turn up no evidence of better or worse performance by weak governments. The only significant effect is Stability70s, indicating that economic
growth was lower under durable governments than short-lived ones in the
1970s. In any case, simple ‘inferior weak governments’ arguments are not
supported.
In models with political-economic institution variables, however, we
observe some significant patterns. Model 3 estimates the interactive effects of
© European Consortium for Political Research 2005
takayuki sakamoto
816
Table 2. Determinants of economic growth, 1961–1998
Model
1
2
3
4
5
GDPt-1
0.306***
(0.066)
0.294***
(0.065)
0.290***
(0.066)
0.306***
(0.066)
0.286***
(0.066)
DUnemploymentt-1
0.141
(0.152)
0.143
(0.146)
0.123
(0.151)
0.145
(0.152)
0.118
(0.150)
DInflationt-1
-0.184***
(0.051)
-0.149***
(0.048)
-0.182***
(0.050)
-0.185***
(0.051)
-0.182***
(0.050)
Spendt-1
-0.027
(0.028)
-0.026
(0.030)
-0.019
(0.028)
-0.030
(0.029)
-0.022
(0.028)
Leftt-1
0.001
(0.005)
0.005
(0.005)
0.002
(0.005)
0.002
(0.005)
0.004
(0.005)
Minorityt-1
-0.194
(0.301)
-1.097
(0.805)
-0.180
(0.436)
-0.263
(1.513)
Independent variables
Minorityt-1*CBIt-1
-0.496
(4.444)
2.476
(2.290)
-0.034
(0.796)
Minorityt-1*
Labourt-1
Minorityt-1*CBIt-1*
Labourt-1
Coalitiont-1
-1.382
(2.171)
5.388
(6.546)
-0.619**
(0.275)
0.060
(0.103)
Coalitiont-1*CBIt-1
-0.017
(0.175)
2.214***
(0.784)
Coalitiont-1*
Labourt-1
-1.197**
(0.529)
3.749**
(1.646)
0.162
(0.335)
0.879
(0.681)
-2.113
(2.200)
Coalitiont-1*CBIt-1*
Labourt-1
Stabilityt-1
-0.000079
(0.000444)
-0.000172
(0.000446)
-0.000103
(0.000448)
-0.000202
(0.000456)
CBIt-1
-0.246
(2.402)
-1.010
(2.496)
-5.699*
(3.167)
-0.229
(2.422)
-6.647**
(3.342)
Labourt-1
-2.508*
(1.337)
-3.490***
(1.423)
-2.255*
(1.344)
-2.904*
(1.577)
-3.060*
(1.608)
Exchanget-1
0.118
(0.301)
0.402
(0.310)
0.107
(0.303)
0.127
(0.301)
0.063
(0.306)
Capitalt-1
0.107
(0.077)
0.137*
(0.080)
0.091
(0.078)
0.108
(0.077)
0.093
(0.078)
Minority60t-1
-0.521
(0.494)
Minority70t-1
-0.177
(0.447)
Minority80t-1
-0.079
(0.435)
Minority90t-1
-0.500
(0.468)
© European Consortium for Political Research 2005
economic performance of ‘weak’ governments and their interaction 817
Table 2. Continued.
Model
1
2
Coalition60t-1
-0.069
(0.175)
Coalition70t-1
-0.188
(0.158)
Coalition80t-1
0.269
(0.195)
Coalition90t-1
0.164
(0.194)
Stability60t-1
-0.001168
(0.000782)
Stability70t-1
-0.001228*
(0.000658)
Stability80t-1
-0.000254
(0.000624)
Stability90t-1
0.000272
(0.000750)
R2
Observations
0.772
612
0.780
612
3
0.774
612
4
0.772
612
5
0.775
612
Notes: OLS estimates with panel-corrected standard errors in parentheses. Country and time dummy
variables not reported. *** significant at the 0.01 level; ** significant at the 0.05 level; * significant at the
0.10 level.
government attributes and central banks. The results suggest that the multiplicity of governing parties depresses economic growth under dependent
central banks, but boosts it when central banks are independent. Since the
interactive terms make interpretation of the results not so straightforward, I
computed predicted values of the relevant variables (only the variables of our
concern – the number of governing parties, central bank independence, labour
and all their interactions) to see the overall impacts of the government and
institutional factors. The predicted values indicate the values of the dependent
variable with the relevant independent variables held at the specified values,
so the significance tests are joint significance tests only of the variables of our
concern.23
Figure 1 shows that when central banks are independent (CBI = 0.7), threeparty governments’ GDP growth is 1.86 per cent higher than one-party ones’,
but these estimates are not significant. In contrast, when central banks are
dependent (CBI = 0.1), three-party governments produce 0.79 per cent lower
growth than one-party ones (significant). So the effects of the number of governing parties on economic growth are partly contingent on central bank independence. By contrast, the results of Model 4 show that the interaction of
© European Consortium for Political Research 2005
takayuki sakamoto
818
government attributes and labour strength do not affect economic growth. We
also examined the predicted values of the interaction of government attributes and labour (Figure 2). We need caution in interpreting these values since
these variables, except for labour, are not significant in the original regression.
However, the results indicate that under strong labour (labour = 1), threeparty governments’ growth is 0.29 per cent higher than one-party ones’. In
contrast, when labour is not well organized (labour = 0.05), three-party governments’ growth is slightly lower (by 0.02 per cent).
To inspect further these interactive effects, the interactive terms of all of
government types, central banks and labour are entered in Model 5, and the
their predicted estimates are shown in Figure 3. Overall, independent central
banks and strong labour slow down economic growth, regardless of government types. Both one- and three-party governments achieve higher growth
when central banks and labour are weak. As for the effects of the number of
governing parties, the performance of three-party governments depends on
central bank independence. When central banks are independent (CBI = 0.7),
three-party governments achieve higher growth than single-party ones regardless of labour organization. By contrast, when central banks are dependent
(CBI = 0.1), their growth rate is lower than that of one-party governments.
Of all the institutional configurations, three-party governments achieve the
highest growth when central banks are independent and labour is weak
(though the predicted value is not significant). One-party governments, meanwhile, achieve the highest growth when both central banks and labour are
weak.24
1-party governments
3-party governments
Dependent central bank
(CBI = 0.1)
–0.97**
(0.47)
–1.76**
(–0.84)
Independent central bank
(CBI = 0.7)
–3.06
(2.04)
–1.20
(1.81)
Figure 1. Predicted values of economic growth contingent on the number of parties and
central banks (predicted values with their standard errors in parentheses; **p < 0.05).
1-party governments
3-party governments
Weak labour
(Labour = 0.05)
–0.15
(0.20)
–0.17
(0.51)
Strong labour
(Labour = 1)
–2.76*
(1.47)
–2.47*
(1.34)
Figure 2. Predicted values of economic growth contingent on the number of parties and
labour (predicted values with their standard errors in parentheses; *p < 0.10).
© European Consortium for Political Research 2005
economic performance of ‘weak’ governments and their interaction 819
Independent central bank
(CBI = 0.7)
Dependent central bank
(CBI = 0.1)
Strong labour
(Labour = 1)
3-party governments
–5.21*
(2.79)
1-party governments
–6.88***
(2.60)
3-party governments
–4.19***
(1.42)
1-party governments
–3.88***
(1.49)
Weak labour
(Labour = 0.1)
3-party governments
–0.84
(1.99)
1-party governments
–3.58*
(2.05)
3-party governments
–3.23***
(1.27)
1-party governments
–1.72***
(0.62)
Figure 3. Predicted values of economic growth contingent on the number of parties, central
banks and labour (predicted values with their standard errors in parentheses; ***p < 0.01,
*p < 0.10).
Unemployment
Table 3 shows the results of unemployment regressions. The basic model shows
that economic growth reduces and inflation increases unemployment (Model
1), consistent with our conventional understanding of movements of economic
indicators. No political-economic variable is significant, though the directions
of the signs suggest that unemployment is higher under minority and left governments, and lower under coalition and unstable governments, independent
central banks and strong labour. There is no evidence supporting either superior or inferior performance of so-called ‘weak governments’.
Model 2 estimates government effects during the four periods and returns
some partial evidence for government attribute effects. Minority governments
produced higher unemployment in the 1990s, coalition governments lower
unemployment in the 1980s, and durable governments higher unemployment
in the 1970s. However, the effects of government types on unemployment are
generally weak and insignificant in all equations, when compared to those of
the other economic indicators. Models 3, 4 and 5 estimate the interactive
effects of weak governments with central banks and labour, but we observe
no significant relationship. We have to conclude that minority status and the
number of governing parties do not affect unemployment. (While not statistically significant, coalition governments have slightly lower unemployment
under independent central banks than single-party governments, and slightly
higher unemployment when central banks are dependent, following the
© European Consortium for Political Research 2005
takayuki sakamoto
820
Table 3. Determinants of unemployment, 1961–1998
Model
1
2
3
4
5
Independent variables
DUnemploymentt-1
0.237***
(0.072)
0.229***
(0.067)
0.237***
(0.072)
0.233***
(0.072)
0.231***
(0.072)
GDPt-1
-0.142***
(0.022)
-0.143***
(0.021)
-0.141***
(0.022)
-0.142***
(0.022)
-0.142***
(0.022)
DInflationt-1
0.072***
(0.019)
0.056***
(0.018)
0.072***
(0.019)
0.073***
(0.019)
0.072***
(0.019)
Spendt-1
-0.002
(0.011)
-0.009
(0.012)
-0.002
(0.011)
-0.0004
(0.011)
-0.0003
(0.0117)
Leftt-1
0.0004
(0.0021)
-0.001
(0.002)
0.0004
(0.0021)
-0.00007
(0.00204)
-0.0001
(0.0020)
Minorityt-1
0.135
(0.128)
0.090
(0.267)
0.087
(0.187)
-0.144
(0.629)
Minorityt-1*CBIt-1
0.149
(0.853)
Minorityt-1*
Labourt-1
0.660
(1.865)
0.117
(0.303)
-0.634
(2.505)
Minorityt-1*CBIt-1*
Labourt-1
Coalitiont-1
0.338
(0.819)
-0.001
(0.044)
0.027
(0.099)
0.052
(0.079)
-0.099
(0.346)
Coalitiont-1*CBIt-1
0.329
(0.700)
-0.108
(0.130)
Coalitiont-1*
Labourt-1
-0.050
(0.230)
0.097
(0.271)
-0.740
(0.822)
Coalitiont-1*CBIt-1*
Labourt-1
Stabilityt-1
-0.000118
(0.000164)
-0.000122
(0.000165)
-0.000138
(0.000165)
-0.000138
(0.000168)
CBIt-1
-0.080
(0.795)
-0.483
(0.927)
0.150
(1.162)
-0.102
(0.788)
0.095
(1.238)
Labourt-1
-0.309
(0.454)
0.306
(0.491)
-0.328
(0.465)
-0.046
(0.464)
-0.138
(0.479)
Exchanget-1
-0.221**
(0.100)
-0.330***
(0.103)
-0.218**
(0.100)
-0.229**
(0.099)
-0.231**
(0.101)
Capitalt-1
-0.038
(0.031)
-0.073**
(0.033)
-0.037
(0.030)
-0.039
(0.030)
-0.040
(0.030)
Minority60t-1
-0.130
(0.201)
Minority70t-1
0.161
(0.177)
Minority80t-1
-0.130
(0.202)
Minority90t-1
0.439**
(0.195)
© European Consortium for Political Research 2005
economic performance of ‘weak’ governments and their interaction 821
Table 3. Continued.
Model
1
2
Coalition60t-1
-0.053
(0.060)
Coalition70t-1
0.020
(0.053)
Coalition80t-1
-0.144**
(0.063)
Coalition90t-1
-0.054
(0.064)
Stability60t-1
0.000023
(0.000286)
Stability70t-1
0.000491*
(0.000277)
Stability80t-1
-0.000024
(0.000258)
Stability90t-1
-0.000127
(0.000308)
R2
Observations
0.303
612
0.336
612
3
0.303
612
4
0.304
612
5
0.305
612
Notes: OLS estimates with panel-corrected standard errors in parentheses. Country and time dummy
variables not reported. *** significant at the 0.01 level; ** significant at the 0.05 level; * significant at the
0.10 level.
pattern observed in economic growth and inflation where central bank independence has favourable effects on coalition governments’ performance.)
Inflation
The basic inflation equation (Model 1 in Table 4) shows a familiar pattern;
high economic growth is inflationary, and unemployment lowers inflation.
Coalition governments produce lower inflation than single-party ones, and
durable (stable) governments lead to higher inflation than short-lived (unstable) ones. Both findings run counter to the hypotheses predicting poor performance of weak governments. Though not significant, the sign of Minority
is also negative (lower inflation). The positive sign (higher inflation) of CBI is
somewhat surprising (though not significant), since previous studies have produced results showing the anti-inflationary effects of central bank independence. The lack of evidence for the anti-inflationary benefits of central bank
independence, however, is consistent with Franzese’s (1999) observation that
the anti-inflationary effect of central bank independence has declined since
the early 1980s, because the political-economic regimes among OECD
© European Consortium for Political Research 2005
takayuki sakamoto
822
Table 4. Determinants of inflation, 1961–1998
Model
1
2
3
4
5
DUnemploymentt-1
-0.408***
(0.149)
-0.392***
(0.145)
-0.396***
(0.147)
-0.401***
(0.149)
-0.377***
(0.147)
GDPt-1
0.353***
(0.062)
0.358***
(0.061)
0.363***
(0.062)
0.353***
(0.062)
0.367***
(0.061)
Spendt-1
0.014
(0.029)
0.012
(0.030)
0.010
(0.029)
0.007
(0.030)
0.002
(0.030)
Leftt-1
-0.008
(0.006)
-0.009
(0.006)
-0.009
(0.006)
-0.007
(0.006)
-0.008
(0.006)
Minorityt-1
-0.121
(0.341)
0.191
(0.992)
-0.290
(0.461)
0.601
(1.781)
Independent variables
-0.764
(2.463)
Minorityt-1*CBIt-1
Minorityt-1*
Labourt-1
-2.139
(4.617)
0.403
(0.872)
Minorityt-1*CBIt-1*
Labourt-1
Coalitiont-1
-0.482
(2.524)
2.215
(6.673)
-0.212*
(0.122)
0.239
(0.304)
-0.388*
(0.208)
-1.504*
(0.871)
Coalitiont-1*CBIt-1
Coalitiont-1*
Labourt-1
0.873
(0.571)
-3.984**
(1.681)
0.382
(0.384)
Coalitiont-1*CBIt-1*
Labourt-1
-0.909
(0.724)
4.064**
(2.096)
Stabilityt-1
0.000727*
(0.000420)
0.000790*
(0.000425)
0.000692*
(0.000424)
0.000800*
(0.000432)
CBIt-1
3.517
(2.581)
3.103
(2.781)
7.168**
(3.723)
3.498
(2.575)
7.624**
(3.820)
Labourt-1
1.111
(1.476)
0.560
(1.587)
0.914
(1.481)
0.174
(1.832)
0.729
(1.890)
Exchanget-1
-0.287
(0.304)
-0.372
(0.336)
-0.270
(0.302)
-0.271
(0.308)
-0.218
(0.309)
Capitalt-1
-0.042
(0.094)
-0.026
(0.100)
-0.031
(0.094)
-0.040
(0.094)
-0.021
(0.094)
Minority60t-1
-0.044
(0.603)
Minority70t-1
0.435
(0.539)
Minority80t-1
-0.441
(0.518)
Minority90t-1
-0.484
(0.568)
Coalition60t-1
-0.106
(0.173)
© European Consortium for Political Research 2005
economic performance of ‘weak’ governments and their interaction 823
Table 4. Continued.
Model
1
2
Coalition70t-1
-0.180
(0.148)
Coalition80t-1
-0.253
(0.206)
Coalition90t-1
-0.079
(0.202)
Stability60t-1
0.001190
(0.000768)
Stability70t-1
0.001159*
(0.000711)
Stability80t-1
-0.000734
(0.000659)
Stability90t-1
-0.000039
(0.000832)
R2
Observations
0.236
612
0.247
612
3
0.239
612
4
0.237
612
5
0.243
612
Notes: OLS estimates with panel-corrected standard errors in parentheses. Country and time dummy
variables not reported. *** significant at the 0.01 level; ** significant at the 0.05 level; * significant at the
0.10 level.
countries have been increasingly anti-inflationary with or without independent
central banks. (I ran the same regression using the simple level of inflation, as
opposed to its first difference, as the dependent variable, but the results did
not change, and I was unable to detect the anti-inflationary effects of central
bank independence or organized labour.)
Model 2 estimates the effects of the three government variables for the
four periods. Of the 12 variables, only Stability70s is significant, indicating
higher inflation for stable governments in the 1970s. We find no evidence of
higher inflation records for so-called ‘weak governments’. Though not significant, all government variables, except one, have the opposite signs of the
expectations of the inferior weak government hypotheses.
Model 3 estimates the interactive effect of government types and central
banks, and their predicted estimates are reported in Figure 4 (note that the
dependent variable is the first difference of inflation). The predicted values
are computed in the same way as those for economic growth models. Though
the estimates for three-party governments are not significant, their inflation is
lower than one-party governments whether central banks are dependent or
independent. When central banks are independent (CBI = 0.7), three-party
governments’ inflation is 1.6 per cent lower than one-party ones.’ Under
dependent central banks, three-party governments’ inflation is 0.12 per cent
© European Consortium for Political Research 2005
takayuki sakamoto
824
1-party governments
2-party governments
3-party governments
Dependent central bank
(CBI = 0.2)
1.37*
(0.84)
1.31
(0.95)
1.25
(1.08)
Independent central bank
(CBI = 0.7)
4.20*
(2.38)
3.39
(2.19)
2.58
(2.05)
Figure 4. Predicted values of inflation contingent on the number of parties and central banks
(predicted values with their standard errors in parentheses; *p < 0.10).
1-party governments
2-party governments
3-party governments
Weak labour
(Labour = 0.05)
–0.36
(0.24)
–0.73*
(0.43)
–1.10*
(0.62)
Strong labour
(Labour = 0.9)
0.11
(1.53)
0.07
(1.44)
0.02
(1.38)
Figure 5. Predicted values of inflation contingent on the number of parties and labour (predicted values with their standard errors in parentheses; *p < 0.10).
lower. For both types of governments, independent central banks generally
lead to higher inflation, though the evidence for this observation is not strong.
Model 4 estimates the interactive effects of government types and labour,
and their predicted estimates are shown in Figure 5. First, the increasing
number of governing parties has a favourable effect on inflation. When labour
is weak (labour = 0.05), inflation for three-party governments is 0.74 per cent
lower than for single-party ones (though the latter’s estimate is not significant). When labour is strong (labour = 0.9), the impact of coalition governments is small and not significant. Second, labour has an undesirable effect on
inflation; the stronger labour is, the higher inflation. We estimated these parameters at higher levels of labour, but they were not significant.
Model 5 is a full model, and the predicted values of the government and
institutional factors are reported in Figure 6. Not all of the estimates in Figure
6 are significant, so the results should be taken only as suggestive. The predicted values indicate that inflation is higher under coalition governments
when central banks and labour are either both weak or both strong, but the
presence of only independent central banks or strong labour pushes down
coalition governments’ inflation lower than that for single-party governments.
When labour is strong, the difference between three- and one-party governments’ inflation is small, but when labour is weak and central banks are independent, inflation for three-party governments is 3.4 per cent lower than for
single-party ones, and is 0.8 per cent higher when both are weak. As with economic growth, the inflation performance of different governments is partly
contingent upon the political-economic institutional settings under which they
operate.
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economic performance of ‘weak’ governments and their interaction 825
Independent central bank
(CBI = 0.7)
Dependent central bank
(CBI = 0.1)
Strong labour
(Labour = 1)
3-party governments
6.12**
(2.91)
1-party governments
6.08**
(2.98)
3-party governments
1.41
(1.67)
1-party governments
1.46
(1.77)
Weak labour
(Labour = 0.1)
3-party governments
0.24
(2.22)
1-party governments
3.69
(2.37)
3-party governments
2.11
(1.44)
1-party governments
1.26*
(0.72)
Figure 6. Predicted values of inflation contingent on the number of parties, central banks
and labour (predicted values with their standard errors in parentheses; **p < 0.05; *p < 0.10).
Interpretation and implications
We interpret our empirical findings in this section and conjecture their theoretical explanations and implications. We found almost no evidence that
so-called ‘weak governments’ (coalition, minority or unstable) perform worse
than strong governments (single-party, majority or stable) in deficits, economic
growth, unemployment or inflation, when considered independent of other
institutional settings. To the contrary, we found some evidence that weak governments perform better than strong ones during some time periods: minority governments in the 1980s and coalition governments in the 1980s and 1990s
ran lower deficits than majority and single-party governments, respectively;
coalition governments had lower unemployment than single-party ones in the
1980s, and short-lived governments produced lower unemployment in the
1970s than durable ones; and coalition and short-lived governments also seem
to have produced lower inflation, though the evidence is not strong. Meanwhile, the only support we found for the inferior weak governments argument
is short-lived governments in the 1990s, which ran higher deficits than durable
ones, and minority governments in the 1990s, which produced higher unemployment than majority ones.
In any event, simple arguments pointing out the poor performance of weak
governments cannot be sustained. Lack of evidence showing the poor performance of weak governments is not due to the effect of policy convergence
caused by global integration. We examined our four economic indicators
across four periods (as well as two periods). If policy convergence diminished
differences in policy or performance, we should observe negative effects of
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weak governments before integration, say, in the 1960s and 1970s, but none of
the three government attribute variables had a negative effect on any of the
four economic indicators during these periods.
When we inspect the interactive effects of weak government attributes and
political-economic institutions, we find some significant patterns including the
finding that the economic performance of different government types are
partly contingent upon central bank independence and labour organization.
The pattern is consistent for coalition governments and central banks in economic growth. When central banks are independent, coalition governments
yield higher economic growth than one-party governments. Coalition governments, conversely, produce lower growth when faced with dependent central
banks. Thus, independent central banks have favourable effects on coalition
governments’ growth.25 The simulations also suggest a favourable effect of
independent central banks on coalition governments’ unemployment, while
these estimates for unemployment are not statistically significant.
Of all combinations of central banks and labour, coalition governments
show the best performance in both economic growth and inflation when they
face independent central banks and weak labour. By contrast, single-party
governments perform best in the same two indicators, when both central banks
and labour are weak. The concurrence of the best institutional configuration
between economic growth and inflation accords with economists’ view that
price stability promotes growth or that price distortions and market inefficiencies brought about by inflation impair economic growth. Inflation not only
puts upward pressure on wages, but also increases economic uncertainty. Inflation and economic uncertainty can cause resource allocation inefficiencies, and
discourage investment and consequently retard growth. Inflation enters significantly and negatively in all our economic growth equations (inflation
depresses growth, or price stability promotes growth).
By contrast, the worst performance (the lowest growth and the highest
inflation) occurs for both single-party and coalition governments when central
banks are independent and labour is well organized. The reason may be that
when both central banks and labour are strong, their policies clash – that is,
labour tries to achieve high wage increases, and central banks counter it by
deflationary monetary policy, thereby slowing down growth. Alternatively,
wage-push inflation itself depresses growth. The presence of a similar pattern
is reported for the relationships between the two actors (Iversen 1999) regarding inflation and unemployment, as well as between left governments and
central banks (Way 2000). The existence of this common pattern between
central bank-labour and central bank-left governments relationships fits well
with the existing literature since labour and left governments supposedly hold
similar policy preferences about unemployment-inflation trade-offs.
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economic performance of ‘weak’ governments and their interaction 827
Why are independent central banks beneficial for coalition governments’
growth? We conceive of two possibilities. The first is that the conduct of disciplined economic policy along the lines of conservative central banks’ policy
orientation is some coalition governments’ solution to their possible collective
action problem or suboptimal policy making. Put simply, some coalition governments may somewhat defer to central banks’ policy prescriptions in order
to avoid otherwise deleterious economic consequences of the difficulty of
coalition policy making. The presence of multiple veto players in government,
other things being equal, makes difficult or delays effective or restrained policy
making, but coalition parties do not wish to cause poor economic performance,
be it out of their electoral concerns or their sense of responsibility as policy
makers. In such a case, one solution may be for them to manage the economy
along the lines of the prescriptions by a credible and competent third-party
policy-making body – central banks. When facing a conflict of interests, it may
not be easy for coalition parties to agree to any single party’s proposal because
they do not want to give one particular party advantages, but it may be easier
for them to settle conflict by letting economic policy be guided by the prescriptions by a third party since no single party then would gain disproportionately from the solution.26
We are not suggesting that coalition parties consciously or explicitly seek
central banks’ advice and adopt a policy that, in tandem with central bank
policy, is efficiency enhancing.27 They do not necessarily have to consciously
do so. All it needs is that coalition governments happen to end up with a policy
(even by chance) that, in combination with given central bank monetary policy,
is economically efficient. Furthermore, while party governments and central
banks are separate policy-making bodies with different interests, they share
the common goal of good economic management. So while it is not customary to speak of cooperation between party government and central banks in
the current literature in comparative political economy, there is no reason to
dismiss a priori the possibility of their cooperation. Rather, it is reasonable to
assume that those two actors communicate and coordinate, especially if a conflicting mix of party government’s fiscal policy and central banks’ monetary
policy can be detrimental to the economy. To put this hypothesis differently,
independent central banks discipline or restrain coalition governments’ potentially lax policy or helps improve on otherwise undesirable economic outcomes, regardless of whether they are willing to defer to the advice of central
banks.
There is some evidence that the combination of coalition governments and
independent central banks tends to produce a consistent macroeconomic
policy mix that may be conducive to good economic performance. I elsewhere
show empirically that independent central banks restrain fiscal policy as well
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as monetary policy (Sakamoto 2003). This effect is particularly strong on
centre governments (consisting of Christian Democratic and Catholic parties
and other centrists). Centre governments use tighter fiscal and monetary policies than the right or left when central banks are independent, but their economic policy mix becomes much looser than the other governments when
central banks are dependent. Centre governments also have a slightly higher
average number of governing parties (the centre, 2.27 parties; the left, 1.81;
the right, 1.86). Independent central banks also restrain coalition governments’ fiscal and monetary policies tighter than they do for single-party governments’. The data also show that governments and central banks use
monetary policy – more than fiscal policy – as a countercyclical policy instrument to counter recessions, regardless of whether central banks are independent or dependent. Moreover, when central banks are independent, they do
not have to run contractionary monetary policy because fiscal policy pursued
by party governments is tight. Thus, conservative fiscal policy releases monetary policy for use as a countercyclical tool rather than as a tool to contain
inflation, and independent central banks and party governments can use
monetary policy more actively and flexibly to counter recessions.
Thus, independent central banks do not have to run contractionary monetary policies, which could otherwise produce recessionary pressure, and governments do not have to create high deficits that could lead to high interests,
low investment and low growth. Conservative fiscal policy also helps prevent
inflation, which could otherwise increase economic uncertainties, cause
resource allocation inefficiencies, discourage investment and retard growth.
The data (Sakamoto 2003) also show that both centre and coalition governments’ policies benefit from central bank independence more than other governments. Central banks are concerned as much with economic growth as with
inflation, and actively join governments’ efforts to mitigate or end recessions.
However, these observations are tentative, and the relationships between economic policy and performance need to be further probed.
Single-party majority governments, on the other hand, are often referred
to as ‘strong governments’. They are comprised of members of the same party
who supposedly encompass less diverse policy preferences than coalition government politicians; thus, they have higher policy cohesion. They can also carry
out their own policy more decisively because they do not have to yield to other
parties’ demands to implement their policy. Their strength and decisiveness
may be carried into their relationship with central banks or may bring out a
tendency not to heed the advice of other policy makers. Should there be such
a tendency, the combination of independent central banks and decisive singleparty majority governments may result in a conflicting policy mix and, as a
result, poor economic performance. Our hypothesizing about the interplay of
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economic performance of ‘weak’ governments and their interaction 829
coalition governments and central banks is not based on any qualitative assessment of their relationships in the real world; therefore, further empirical investigation is necessary to inspect its plausibility.
The second possibility (which we believe is less likely than the first hypothesis) is that governments consisting of a fewer number of governing parties
(such as single-party governments) are more likely to be left-leaning (emphasizing unemployment over inflation) and their policy comes into conflict with
central banks’ preferences (preferring price stability), resulting in poor economic performance. There is a modest correlation between the number of
parties and left cabinet portfolio (-0.15). By contrast, coalition governments
may be likely to be more right-leaning, reducing the magnitude or frequency
of a conflicting policy mix with central bank policy and enhancing economic
performance. While all our equations controlled for left partisanship and
almost no interactive term of the left and the number of coalition parties was
significant, further empirical analysis is necessary before we can say anything
conclusive about this.28 These explanations are highly speculative, so further
theorizing and testing is required.
In contrast to the number of governing parties, the economic effects of
majority status are not strong. Minority governments may potentially perform
less well than majority governments in unemployment under many conditions,
but the evidence is not very strong since this result is not statistically significant. Our empirical results also reject the hypothesis that partisan governments can better achieve their partisan economic goals when they are strong
governments, as the interactions of partisanship and strong government
attributes do not exercise any statistically significant effects on economic
performance.
Another finding is that, as with strong labour, independent central banks
have negative effects on economic growth. Furthermore, the widely claimed
price stability benefits of central bank independence are also not detected. If
anything, central bank independence may even increase inflation under some
institutional configurations, as shown in Figure 6, although not all those effects
are statistically significant. The reason for the failure to detect the price
stability benefits of central banks may be that the anti-inflationary effects of
central bank independence have declined since the early 1980s because the
political economic regimes among OECD countries have been increasingly
anti-inflationary with or without independent central banks (Franzese 1999).
Another possibility is that the effects of central bank independence are
context-specific, as this article has partly shown. Since we have only examined
the interaction of central banks with government strength and labour, a more
systematic analysis of its possible interactive effects with other institutions and
conditions should be pursued.
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Labour does not affect economic performance as much as central banks.
When considered independently, strong labour has a negative effect on economic growth, which gives support to the neoclassical view pointing out the
efficiency costs of strong labour. Positive employment and anti-inflationary
effects of organized labour envisaged by the neocorporatist model are also not
detected. Thus, while the evidence is not conclusive, the neoclassical explanation seems to be better supported than the neocorporatist thesis. Note,
however, that the neocorporatist model claims the positive effect of the combination of leftist governments and organized labour. The effect of this particular interaction is not reported here, but our preliminary research does not
detect any beneficial effect of left governments combined with organized
labour in any of growth, inflation and unemployment. If anything, left governments’ growth decreases as labour becomes more organized.
Our findings that weak governments are not necessarily lesser performers
are somewhat consistent with some studies conducted from the consensus
democracy perspective. As reviewed earlier, Crepaz (1996) explains that
multiparty governments (more specifically, consensus democracies) perform
better because their broader electoral support and the relative stability of their
policies make their policy more responsible, steady and predictable. To see the
validity of this explanation, we estimated all the equations for deficits, economic growth, unemployment and inflation with Lijphart’s (1999) index of
consensus democracy.29 However, we were unable to detect any significant
effects of consensus democracy in any of the four economic indicators (results
not reported). The sign of the coefficient for consensus democracy was even
in the wrong direction for all the economic indicators but unemployment. This
finding is also inconsistent with Anderson (2001), who argues that consensus
democracy has positive effects when central bank independence and labour
organization are excluded from equations, but when they were included, consensus democracy has negative effects on performance. Therefore, the lack of
evidence for the inferior performance of weak governments in this article or
some data indicating their possibly better performance does not automatically
lead to support for the consensus democracy perspective by Crepaz (1996) and
Lijphart (1999).
Finally, the main findings of this article are clear: so-called ‘weak governments’ do not necessarily perform worse than strong governments. To increase
confidence in these findings, we should also examine the economic effects of
other dimensions of government strength than those we have tested here, such
as federal versus unitary systems, state capacity, and autonomous versus weak
bureaucracy in the future. Furthermore, this article is also admittedly heavily
empirical, but when data betray compelling theories such as the ‘inferior weak
government explanation’ no matter how logical, parsimonious and attractive
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economic performance of ‘weak’ governments and their interaction 831
it may be, we should stick to data. Our next task is to investigate theoretical
explanations for observed data.
Acknowledgments
An earlier version of this article was presented at the 2002 annual meeting of
the American Political Science Association, Boston. The author would like to
thank Matt Wilson and the anonymous reviewers for very helpful comments.
Notes
1. Throughout this article, I use the term ‘weak governments’ in referring to multiparty,
minority or short-lived governments to follow the tradition in existing studies. However,
I do not mean that they are weak in terms of their policy-making capabilities and
economic performance.
2. These scholars look mainly at fiscal deficits and find that different aspects of ‘weak’ goverments negatively affect their ability to reduce deficits (see Sakamoto 2001).
3. There are other ways of conceptualizing government strength, such as fused versus
divided executive-legislative relations, unitary versus federal systems and state capacity,
but an investigation of their economic effects is beyond the scope of this article.
4. None of these studies is simplistic enough to conclude that multiple veto players generate disadvantages under any circumstances. The contributors in Weaver and Rockman
(1993) agree that the multiplicity of veto players generally decreases government capabilities of policy innovation, but note that it is only one of many factors and its effect is
contingent on other factors. In Tsebelis’s (1995, 1999) thesis, not only the number of
veto players, but also their ideological distance and configuration matter jointly.
5. A majority of empirical studies have been done on the relationship between government types and fiscal policy (Borrelli & Royed 1995; Clark & Hallerberg 2000; Edin &
Ohlsson 1991; Grill et al. 1991; Hallerberg & Basinger 1998; Poterba & Hagen 1999;
Roubini & Sachs 1989a, 1989b; Sakamoto 2001; Steinmo & Tolbert 1998), but there are
some recent sudies that investigate the effects of government attributes on unemployment, inflation and economic growth (Crepaz 1996; Lijphart 1999).
6. Crepaz applies Olson’s (1982) encompassing organizations.
7. Not many studies exist that test the effects of government attributes on unemployment,
inflation and GDP growth. However, numerous studies exist on the relationships
between economic performance and labour institutions (Calmfors & Driffill 1988;
Soskice 1990), government partisanship and labour (Boix 1998; Scharpf 1991; Garrett
1998), monetary policy and labour (Franzese & Hall 2000; Iversen 1999), and partisanship and central bank independence (Way 2000).
8. Studies show that the effects of central banks are in turn conditional upon wage coordination (Franzese & Hall 2000; Iversen 1999) and government partisanship (Way 2000).
9. Note that Garrett’s (1998) theory predicts that the combination of right party rule and
weak labour also leads to coherent economic policy and good economic performance.
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10. The testing of the interactive effects of social democracy and weak governments requires
the inclusion of the interactive terms of all left partisanship, labour and weak governments variables in regressions. These effects are not considered in this article because
possible multicollinearity and the multitude of interactive terms complicate the
regression analyses.
11. In a different vein, Calmfors and Driffill (1988) explain that in countries where wage
negotiations take place at the firm or national level, inflation and unemployment performance is better than in countries where wages are determined at the industry level
because nationally coordinated union leaders take into account the inflationary and
unemployment effects of their militant wage behaviour and restrain their wage
demands. However, this thesis is not well supported by empirical evidence (OECD
1997).
12. The rational partisan model explains that distinct partisan outcomes exist only in
the short run because rational agents adjust to new conditions (Alesina et al.
1997).
13. The countries included in the data are: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Sweden,
Switzerland, the United Kingdom and the United States. Greece, Iceland, Luxembourg,
New Zealand, Portugal and Spain are excluded because of the paucity of data.
14. Some (e.g., Borrelli & Royed 1995) correctly argue that one should use central
government deficits, since the effects of the goverment attributes pertain to central
governments, not general governments, but I decided to present only general government deficit results partly because the results did not change between central and
general government data in my previous study (Sakamoto 2001), and partly because
Cusack (1999) points out that the most often used data from IMF statistics for central
government deficit are not cross-nationally comparable.
15. The sources for the political variables are Woldendorp et al. (1993, 1998) and Keesing’s
Rocord of World Events (various years). In coding Minority, if two or more governments
of different categories existed in a given year, the category of the government that stayed
in office longer in that year was chosen for the value of the year. In the case of
Coalition, if the number of governing parties changed during the course of a year, these
scores were weighted by quarter and annual averages were computed. In coding the
minority/coalition status of American governments, I judged that divided government
should not be treated as minority government. Thus, following Borrelli and Royed
(1995), I coded split control of the executive and legislative branches in the United
States as an instance of coalition majority governments (0 for Minority, 2 for Coalition)
where the President and Congress jointly make decisions. Democratic control of
both branches was coded as a single-party majority government (0 for Minority, 1 for
Coalition).
16. The sources for Left are Keesing’s Record of World Events (various years) and Mackie
and Rose (1991, 1997). If the cabinet changed or elections took place during the course
of a year, the scores for cabinet portfolios and legislative seats were weighted by quarter
and annual averages were computed.
17. Ideally, we should also examine the effect of labour using different operationalizations
of labour coordination or centralization, but given the already complex and many interactions we need to estimate, this option was not prusued.
18. I thank Quinn for generously sharing his data.
19. I thank Carles Boix for his suggestions on the measurement of this variable.
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economic performance of ‘weak’ governments and their interaction 833
20. Boix (2000) and Oatley (1999) show that under perfect capital mobility, fiscal policy is
effective with a fixed exchange rate, but monetary policy is not, and that with a floating
exchange rate, monetary policy is effective, but fiscal policy is not.
21. I thank the anonymous reviewers for this suggestion.
22. I also computed the predicted estimates of unemployment and weak governments to
examine if business cycles negatively affect weak governments’ performance (results not
reported). The data indicate that minority governments run significantly lower deficits
than majority ones when unemployment declines form the previous year. Also, in such
favourable economic conditions, as the number of parties in minority governments
increases, deficits become smaller. The implication of this result would be that during
economic downturns, minority governments run larger deficits, but this result was not
statistically significant. I more thoroughly examine elsewhere the effects of economic
shocks (low growth, high unemployment and high deficits) on governments’ deficit performance, but detect almost no evidence that ‘weak’ governments are more deficit-prone
than ‘strong’ ones during poor economic conditions (see Sakamoto 2001).
23. The results do not tell us whether the differences among the values of different cells are
significant. Therefore, the simulated results (reported with predicted estimates and their
standard errors) should be viewed with that caveat in mind. While strictly speaking not
demonstrative in a statistical sense, the patterns shown in the results still aid us in identifying the patterns that may exist.
24. We observed no significant interactive effect between government types on the one
hand, and unemployment and left partisanship on the other.
25. I also estimated all the regression models using error-correction models (Beck 1992).
Their results do not change the findings of this article. If anything, they reinforce the
reported findings.
26. Bernhard (2002) makes a similar argument about coalition governments’ delegation of
monetary policy-making to central banks.
27. It is not the case that countries that tend to have coalition governments grant greater
power to central banks to ensure that coalition policy making would not result in inefficient policy. There is no correlation between the number of governing parties and
central bank independence (-0.05).
28. There is, of course, the third possibility that coalition governments’ good growth
performance under independent central banks is nothing more than a statistical
correlation.
29. We used his first (executives-parties) dimension index.
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