Altered correlation between elections and economic growth

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Tetsushi Takahashi was head of the Nikkei China bureau from April 2017 to March 2021 and editor of the Beijing Diary column.

TOKYO – Japan’s Liberal Democrat-led government was due to announce stimulus packages for this summer and a lower house election for the fall, but little is being talked about these days.

Prime Minister Yoshihide Suga likely had the following game plan in mind: pushing COVID-19 vaccinations and gradually easing restrictions; deploy a set of stimulus measures to support the economy; and dissolve the lower house as long as there is some momentum left.

But Suga’s plan has been destroyed by the rapid spread of the highly infectious delta variant of COVID-19, and the push has made it impossible for the government to lift mobility restrictions.

The devastating defeat of Hachiro Okonogi, a former national public security chief who enjoyed Suga’s full backing, in the Yokohama mayoral race on Sunday showed how uncertain the political outlook has become. The lower house election is approaching with the Liberal Democratic Party’s own presidential election. Faced with so many grim prospects, the government simply has no more time to formulate effective stimulus packages – not that many market players have never had high hopes for them.

The national budget for fiscal 2020 increased to 175 trillion yen ($ 1.59 trillion) in total as a result of three supplementary budgets, and the government ultimately carried over unspent 30 trillion yen to the current year.

Stimulus packages that can only be interpreted as an electoral ploy are useless for now, “ said Atsushi Takeda, chief economist at the Itochu Economic Research Institute.

The theory of political economic cycles was posed, among others, by William Nordhaus, the American Nobel laureate in economics. The main premise is that as the elections approach, the ruling party will look for ways to support the economy. These include more aggressive fiscal policies and pressure on central banks to adopt more accommodating monetary policies.

The reverse follows the elections. The government has no choice but to tighten fiscal and monetary policies to prevent the economy from overheating. As a result, the economy rises as elections approach, and then falls – and this is how a political economic cycle manifests itself.

The theory originated in the United States to explain the correlation between the presidential election every four years and business activity. It has been widely observed that the US economy peaks during election years and slows down thereafter. The idea that elections – which are fundamental to democracy – affect business cycles was compelling in its own way.

But the theory has failed in recent times due to the COVID-19 pandemic. Democratic nations have been so concerned about the fight against COVID-19 that they have not been able to adjust economic policies according to the election calendar.

In the United States, President Joe Biden’s administration rolled out the $ 2 trillion US jobs plan upon taking office, with a focus on massive investments in infrastructure. Further stimulus may be needed if the Delta variant continues to rage, but the next presidential election is still more than three years away, and the administration may well run out of ideas for new measures during that time.

Ironically, the country that best illustrates a political business cycle might be China, which is ruled by communists and has no democratic credentials.

Organized only once every five years, the National Congress of the Communist Party of China is an opportunity to select the country’s top leaders. China’s growth rate tends to increase over the years of congresses. Indeed, when the congress was last held in 2017, China’s annual growth rate of 6.95% was the first increase in seven years. It has since fallen to 2.3% in 2020.

The next Chinese party congress, its 20th, will take place in the fall of 2022. This is an important moment for President Xi Jinping, who will seek an unprecedented third term. Beijing could very well make economic stimulus a top priority in the outlook.

As the delta variant of COVID-19 darkens the economic outlook for Europe, Japan and the United States – even with high vaccination rates – China may well be on track for new high growth in the United States. approach of the quinquennial congress.


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