Tightening Tensions: Fiscal Policy and Civil Unrest in Eleven South American Countries, 1937-1995

Abstract

Efforts at fiscal consolidation are often limited because of concerns over potential social unrest. From German austerity measures during the 1930s to the violent demonstrations in Greece in 2010, hard times have tended to go hand in hand with antigovernment violence. In this paper, I assemble cross-country evidence from eleven South American countries for the period 1937 to 1995 about the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between austerity and instability. I examine the extent to which this relationship simply captures the fact that fiscal retrenchment and economic slumps are correlated, and conclude that this is not what is driving the effect. Finally, I test for interactions with various economic and political variables. While autocracies and democracies show a broadly similar responses to budget cuts, countries with a history of stable institutions are less likely to see unrest as a result of austerity measures.

Keywords: austerity, fiscal consolidation, unrest, Latin America, social instability, unrest

JEL Classification: H3, H50, N16