Ceyhun Elgin
Professor of Economics at the AUBG
In a recent article published at Public Choice, (Yasar and Elgin, 2024) we examine how different levels of democracy influenced countries’ responses to the economic challenges triggered by the COVID-19 pandemic. In the article we focused on comparing the size of the economic relief packages each country implemented relative to their Gross Domestic Product (GDP). Emphasizing the role of democracy in shaping economic policy, we found that countries with higher levels of democracy tended to implement more extensive relief packages, and this tendency became more pronounced over the course of the pandemic from March 2020 to May 2021. Furthermore, we also analyzed the specific components of these relief packages. Our findings revealed that democratic countries prioritized measures aimed at benefiting a broader segment of their populations, rather than dispersing funds indiscriminately. Lastly, we also explored potential explanations for these observed patterns. Our analysis suggested a correlation between democracy and the presence of inclusive institutions, such as parliamentary systems, as well as lower levels of corruption. Thus, it appears that democratic governance structures may influence countries’ responses to crises such as the COVID-19 pandemic.
Background
The coronavirus disease (COVID-19) outbreak, declared a pandemic by the World Health Organization in March 2020, has posed significant challenges to global economies. With over 775 million cases and over 7 million deaths as of April 2024, the pandemic’s economic repercussions have been profound (WHO, 2024). The pandemic had severe implication for the economy and in response, governments worldwide have implemented various economic stimulus packages to mitigate the adverse effects of the crisis and sustain public welfare.
Methods and Findings
In this recently published study, we dive into the relationship between a country’s level of democracy and its fiscal-policy response to the pandemic-induced economic crisis. Using a novel cross-country panel dataset (covering 168 countries and 16 different time points in between March 2020 and May 2021), we examine the size and scope of fiscal-policy packages adopted by different countries and analyzed how democracy influenced these responses. Our findings revealed important insights into the connection between democracy and fiscal policy during times of crisis. Contrary to some expectations, we discovered that more democratic countries tended to adopt substantially larger fiscal-policy packages, expressed as a percentage of GDP, compared to less democratic nations. Moreover, this gap between democratic and autocratic countries’ fiscal responses widened over time.
But why did democratic countries exhibit a more generous fiscal-policy response? Our analysis pointed to the role of inclusive institutions and the level of corruption within a country. Democracies, with their accountable institutions and parliamentary systems, demonstrated a greater ability to mobilize resources and distribute fiscal packages that benefited the broader public. In contrast, autocratic regimes, often characterized by a concentration of power among political elites, were less inclined to provide extensive public goods and were more prone to corruption.
Contribution
Our study not only contributes to the understanding of the fiscal-policy response to the COVID-19 pandemic but also intersects with broader literature on the cyclicality of fiscal policy and the effects of democracy on government spending. We identified democracy as a crucial factor influencing governments’ ability to design and implement expansionary fiscal policies during economic downturns, such as those induced by the pandemic.
Moreover, our research offers practical implications for policymakers and practitioners. By highlighting the relationship between democracy and fiscal-policy responses, we underscore the importance of strengthening democratic institutions and combating corruption to enhance a country’s resilience to crises. Our findings suggest that promoting inclusive governance structures can facilitate more effective and equitable economic policy responses during emergencies. In conclusion, our study underscores the critical role of democracy in shaping fiscal-policy responses to the COVID-19 pandemic. By the findings of Elgin et al. (2023a, 2023b) it is also well-established that countries, which implemented more expansionary fiscal policies during the pandemic also ended up having a lesser decline in GDP growth and a lesser increase in unemployment rates. This suggests that democracy was indeed associated with better economic outcomes. However, as we continue to grapple with the long-term ramifications of the pandemic, understanding the dynamics of democracy and fiscal policy remains essential for building resilient and inclusive societies.
Actionable Recommendations:
The findings of this study underscore the critical role of democracy in shaping effective and equitable responses to global challenges. The following are the actionable recommendations:
1. Policymakers in all countries:
- Strengthen democratic institutions, such as checks and balances, to enhance crisis response capacity.
- Improve transparency and accountability in the allocation and distribution of relief funds.
2. International organizations and financial institutions:
- Facilitate knowledge-sharing on best practices in democratic governance and crisis management.
- Condition support on the implementation of democratic reforms and anti-corruption measures.
3. Civil society and media:
- Advocate for the protection of civil liberties and the inclusion of marginalized voices in decision-making.
- Educate the public on the benefits of democratic governance in promoting effective crisis response.
4. Researchers and academia:
- Conduct further research on the nuanced relationships between specific aspects of democracy and economic outcomes during crises.
- Develop interdisciplinary frameworks to analyze the long-term impacts of fiscal policies on social and political stability.
Suggested Citation: Yasar, S., & Elgin, C. (2024). Democracy and fiscal-policy response to COVID-19. Public Choice, 198(1), 25-45.
References
Elgin, C., Yalaman, A., & Yasar, S. (2023). Economic stimulus measures in the pandemic: the role of fiscal decentralisation. Cambridge Journal of Regions, Economy and Society, 16(1), 167-184.
Elgin, C., Williams, C., & Öz Yalaman, G. (2023). Evaluating the effectiveness of labor market interventions on reducing the impacts of the COVID‐19 pandemic. Review of Development Economics, 27(1), 352-374.
World Health Organization. (2024). World Health Organization 2024 data.who.int, WHO Coronavirus (COVID-19) dashboard > Cases [Dashboard]. Retrieved from https://data.who.int/dashboards/covid19/cases. Accesssed on April 15, 2024.
Yasar, S., & Elgin, C. (2024). Democracy and fiscal-policy response to COVID-19. Public Choice, 198(1), 25-45.
