How the 2008-09 debt crisis fueled populist politics | MIT News
The economic downturn of 2008-2009 has often been described as a crisis in the financial sector, characterized by bank failures. But it was much more than that. Many people with stagnant or declining incomes, having borrowed to maintain their standard of living, found themselves deeply in debt when the economy collapsed and unemployment rose.
In turn, these economic problems created political change: many debtors were lured into populist politics, with consequences that still reverberate around the world. Now, a study co-authored by an MIT professor connects some of these points in detail. Examining Hungary, the research reveals that the right-wing political party Jobbik largely profited from the consequences of the crisis, using the debt issue to organize a realignment of many voters.
Specifically, by plotting the pattern of political evolution against the prevalence of debt, the study suggests that around one-fifth of the total rightward political evolution in Hungary at the time can be attributed to the presence of personal indebtedness, in particular in foreign currencies. denominated debt that was owed to foreign banks.
“It was very important to a lot of people, and it was a key aspect of the crisis that hit people every month in their portfolio,” says Emil Verner, assistant professor of finance at MIT Sloan School of Management and co- author of a document detailing the results of the study. While Jobbik once had a paramilitary wing and was often accused of anti-Semitism, he notes, the aftermath of the economic crisis has allowed it to add voters who previously shunned it: “The far right… [was] able to attract a number of voters, middle class or even slightly upper middle class, who had mortgages and who otherwise probably would not have voted for the far right.
The document, “Financial Crisis, Creditor-Debtor Conflict, and Populism”, appears in advance in online form in the Finance Journal. The authors are Győző Gyöngyösi, researcher at the Leibniz Institute for Financial Research SAFE, Frankfurt, Germany; and Verner, who is the class of 1957 career development professor at MIT Sloan.
Local problems, foreign loans
The lending boom in Hungary began in 2000 and moved towards foreign currency lending: in 2008, the Swiss franc accounted for more than 60% of household debt. Between September 2008 — the key month of the global economic crisis — and the Hungarian elections in April 2010, the Hungarian national currency, the forint, depreciated by 23%. Household debt increased during this period from 4% of pre-crisis national GDP.
Meanwhile, the same period also marked a change in the Hungarian political landscape. The far right won only 2.6% of the vote in the 2006 Hungarian elections; which increased to 17% in 2010 and 20% in 2014.
To investigate the relationship between debt and politics, the researchers looked at postcode-level data across Hungary on the amount of debt and foreign debt held, as well as voting data. This allowed them to identify variations in overall political change in Hungary and to see to what extent this corresponded to debt problems. It is an application of the “differences within differences” approach often used by social scientists.
Ultimately, the data showed that between 2006 and 2010, as debt rose relative to income in Hungarian postcodes, the vote of these residents shifted to the far right. Specifically, for a given 10 percentage point increase in debt to income, the share of far-right voices in this area increased from 1.6 to 3.0 percentage points. Overall, the spikes in foreign currency debt over this period represent a 3 percentage point increase in far-right vote share nationwide, or 20% of the vote change. This change has continued today.
A key facet of this political dynamic, the researchers note, is that many households were indebted in foreign currency, often to foreign lenders. Jobbik, at the time, had a highly nationalist platform; it was also the most aggressive party in terms of campaigning on foreign debt relief measures, while the main Hungarian parties were more vague on the issue.
“Populist parties like to exploit divisions or cleavages in society between the ordinary ‘good’ people and the elites or outsiders or any sort of outside threat they [populists] Can create. Disputes between debtors and banks seem to have been a particularly successful way for them to do this,” says Verner. “I think it helps us understand why they were successful, especially after the financial crises.”
Of course, many things could influence regional and local changes in political orientations. With this in mind, Verner and Gyöngyösi examined other potentially influential factors such as historically extremist attitudes, immigration patterns, changes in local employment, financial literacy, and house price shocks. Ultimately, they found that the relationship between staying in debt and moving right was strong, even independent of other factors.
“They [voters] were potentially open to something new,” says Verner. “And that something new was a much more radical party.”
More than a debt crisis
In Hungarian politics, the rise partly due to the Jobbik debt is accompanied by a twist. The party did not take power. But his nationalist rhetoric and stances gained ground with enough voters to make them more prominent in politics; Over the past decade, Hungary’s current ruling party, Fidesz, has outflanked Jobbik on the right in many ways while also significantly consolidating its power. In this sense, the integration of certain types of policy can be an extremely important effect of an economic crisis.
“If you look at periods of major financial hardship, financial crises, they are often associated with political upheaval,” Verner explains, including “increased political polarization, loss of [support for] establishment central parties towards more fringe or non-establishment parties, and a shift in support for far-right populist parties.
This has happened in various forms throughout modern history, Verner observes. The new research suggests, he adds, that people should start viewing the effects of the 2008-09 crisis in the same way.
“One of the main legacies of the 2008 crisis was the rise of populism, and one of the most pronounced places was Hungary,” Verner said.
In this sense, what has often been narrowly described as a crisis of financial institutions was much broader and helped fuel political change. Government officials and political observers around the world should be aware, Verner thinks, that a debt crisis can become much more than a debt crisis.
“One of the implications is that how we design and regulate our financial system and the types of financial products we make available to consumers can have very significant effects,” Verner says. “Not just for the economy, but also for society at large and the way we organize ourselves, our political systems and the kinds of policies we put in place.”