Vote Buying, Election Spending and Money Supply Growth

At the Library of Economics and Liberty, Ms Emily Skarbek cited an interesting study that correlates vote buying with money supply growth: (bold mine)

Traditional theories of political business cycles - Nordhaus (1975), MacRae (1977), Persson and Tabellini (1990) - predict monetary expansions in the run up to an election. Stimulating the economy, they argue, can help the incumbent politicians win elections. These theories suggest that the growth in M1 is a result of deliberate manipulation of the money supply leading up to the election as a means of gaining support.

But what if that isn't the story in countries with weak institutions? What if the increase in the monetary aggregate occurs actually as a by-product of outright vote buying, which happens concurrent with the election because of increased cash demand? This is the hypothesis for democracies outside the OECD put forward by Toke Aidt, Zareh Asatryan, Lusine Badalyan, and Friedrich Heinemann in a recent working paper.

The paper looks at month-to-month fluctuations in the growth rate of M1 in 85 low and middle-income democracies. The evidence shows a sizeable increase in the growth rate of M1 in election months. Their mechanism to explain this is vote buying in machine politics, where vote buying means outright payments or gifts in exchange for voting in a particular way or for showing up to vote.

The idea is that vote buying requires significant amounts of cash to be disbursed right before the election is held. This increases the demand for liquidity and affects M1 in several ways. First, resources to buy votes could come from converting illiquid assets into cash. This substitution from broad money into cash or deposits directly increases M1. Second, vote-buying funds may come from the shadow economy. Once this is used to buy votes, a fraction of it ends up in bank deposits. Third, incumbent governments may simply run the printing press. Each of these would result in a spike in M1 very close to the election date.

What they find is that systematic, large-scale vote buying has short-run effects on aggregate measures of the money supply. But to be an effective electoral strategy, vote buying requires weak democratic institutions, poorly monitored elections, and an electorate willing to "sell" their votes. Their pattern of evidence supports this, finding no effect of this mechanism in established OECD democracies.

I'd expand the issue as not just direct vote buying but also indirect vote buying or overall election spending; particularly campaign materials (shirts, tv ads, wrist bands etc), campaign spending (travel expenses, food lodging, etc), cost of mobilization of campaign machinery and more.

Let us see how this applies to the Philippines. Below are changes in M1* 1 year prior to national elections

* note M1--consists of currency in circulation (or currency outside depository corporations) and peso demand deposits (BSP).

2004 national elections (presidential and senatorial)

2007 senatorial elections 

2010 national elections (presidential and senatorial)

2013 senatorial elections

2016 national presidential and senatorial elections

Hmmmmm