Voting Behaviour in the United Kingdom – Evidence from the European Social Survey 2012

My paper Applied Econometrics, which I am taking at Auckland University of Technology whilst being on student exchange, included a major study of Voting Behaviour across European countries. The assignment brief was as follows:

Using data from the 2012 European Social Survey write a research report on the factors associated with an individual’s likelihood to vote.

Each student could pick one of the European countries. I decided to focus on the UK and was pleased to conduct empirical work in STATA as a part of university. In particular, the goal of the assignment was to become proficient in the use of econometric techniques when dealing with a categorical variable. In this case it was voter turnout where people decided to vote (Y=1) or decided to abstain (Y=0). We were given the choice of either using a Logit or a Probit model. Before defining our own model it was recommended to carry out a literature review on the determinants of voting behaviour in order to include all significant variables that are commonly used. Thereafter the study should include an overview on the chosen model and its methodology as well as a discussion of the empirical results. In the discussion the focus should be on testing the results for their trustworthiness and any bias. While I did not correct for heteroskedasticity with the use of robust standard errors (which is the main criticism in my feedback), I tested for goodness of fit, model misspecification errors, multicollinearity and influential observations. The study should conclude with a brief summary of the main findings.

Overall I am really proud of my very first own ‘study’. I put an immense amount of effort into it in order to make my work perfect and flawless. This is also why I decided to publish my work on my blog. In addition, I hope to be able to use it as writing sample when applying for Economics graduate school (besides my bachelor’s thesis).

In retrospective, I have learned a lot over the course of my Applied Econometrics paper and I am very thankful that my home university let me choose my fourth paper freely and that, in turn, Auckland University of Technology approved my choice of Applied Econometrics as elective. I knew that it would be a challenging paper but it has been a very rewarding experience throughout.

I hope that you enjoy reading my work! The abstract is included below and complete study is available from here.

Jasse


Voting Behaviour in the United Kingdom: Evidence from the European Social Survey 2012

Abstract

Voting is often taken as an indicator for the state of a country’s democratic political system. The study therefore examines voting behaviour in the United Kingdom using data from the European Social Survey 6.0 conducted in 2012. It develops a model based on rational voter theory as well as sociological theories discussed in the literature while controlling for demographic factors. Dimensions included in the sociological approach of the model are deprivation, social capital and civic voluntarism.

The study concludes that British women are significantly more likely to vote than men after controlling for other factors. Other significant demographic factors are family status and age. Age does not exhibit a curvilinear pattern due to life-cycle effects. The deprivation dimension (ethnicity and immigration status) does not have a significant influence in the study while the social capital dimension does turn out to be significant. Trade union membership, religious denomination (Roman Catholic and Anglican) and a composite trust variable measuring one’s trust in others have a significant positive effect on voter turnout in the UK. Civic voluntarism is the most influential dimension for determining participation in the British general elections. Medium and low income households are significantly less likely to vote, ceteris paribus. In the model only tertiary education is a significant positive predictor compared to respondents with primary education only. There is no significant difference between primary and secondary education. Further vocational education does become significant once controlling for influential observations. Political interest and partisanship remain two of the most significant predictors of voting behaviour at the margin. The study concludes that there is a significant relationship between voter mobilisation and a person’s wealth and non-material endowment. This is of concern to ensure representative policies and civic engagement in the future and might also explain recent turnout declines.  A limitation of the study is the low explanatory power of the overall model even if variables are significant at the margin. This is taken as evidence for rational voter theory while being more problematic for sociological approaches.


Droege, J. (2016). Voting Behaviour in the UK: Evidence from the European Social Survey 2012. Auckland University of Technology, Auckland. Retrieved from: https://theaspiringeconomist.files.wordpress.com/2016/05/voting-behaviour-in-the-united-kingdom.pdf

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The OECD Brexit Tax

While I do not have a blog post for today, I would like to point you at an informative study on BREXIT carried out by the OECD together with a speech of OECD Secretary-General Angel Gurría on the OECD’s key findings.

The key conclusions of Angel Gurría (2016) are:

  • the United Kingdom’s current EU membership is mutually beneficial
  • there is no upside for the UK in BREXIT
  • there are only costs involved in leaving the EU, both in the short-run due to increased uncertainty and in the long-run from a weakening in the UK’s international position
  • the future advantages for the UK stem from remaining in the EU

The OECD coins this bundle of negative economic outcomes, which the UK would buy itself into , the BREXIT Tax. It would weigh on the UK’s economy essentially for an unlimited time period, which is the worst case scenario for the still fragile economy after its sluggish recovery from the GFC. The UK would essentially kick itself out of the world race for the highest standards of living, making itself only worse off. What is more, Gurría points out that there are already real costs today. Firstly, the Pound has depreciated against the Euro and also business confidence has taken a hit in the weeks or even months leading up to the referendum. Secondly, the uncertainty regarding the outcome of the vote has also stifled economic growth.

It is more than worth reading or – alternatively – listening to!

Jasse


Gurría, A. (2016, 27 April). To Brexit or not to Brexit: A Taxing Decision [transcript]. OECD. Retrieved from: http://www.oecd.org/economy/to-brexit-or-not-to-brexit-a-taxing-decision.htm

OECD (2016). OECD study finds Britons will be paying a heavy “Brexit tax” for many years if UK leaves EU. Retrieved from: http://www.oecd.org/economy/oecd-study-finds-britons-will-be-paying-a-heavy-brexit-tax-for-many-years-if-uk-leaves-eu.htm

Could BREXIT cause a Currency Crisis & Recession?

Today I found some time to read the section The Speculator’s Ball in Paul Krugman’s The Accidental Theorist (1997). The section is about financial speculation with the example of the world copper market in 1995, the currency crises of the 1990s such as the run on the Mexican peso in December 1994, and poisoned Asian currency markets due to unsustainable government policies. In particular the essay Making the World Safe for George Soros was interesting because his name came up in last week’s Macroeconomics class on exchange rates and arbitrage. So I decided to dedicate today’s post to the concept of exchange rates and currency crises. Firstly, I want to briefly look at the concept of a currency crisis and then in the remainder of the post I want to discuss whether BREXIT triggered a speculative attack on the Pound Sterling by looking at the GBP/EUR exchange market and potential implications for the British economy in case of a currency crisis.

What are currency crises? These crises are normally associated with fixed exchange rate regimes and they can occur when there is the expectation that a country’s reserve bank does not have enough foreign exchange reserves to maintain its target exchange rate. This is of concern because if the reserve bank runs out of foreign reserves it is forced to devalue its currency.

This is the starting point for speculative attacks which trigger the devaluation even earlier. The central bank has to deplete its foreign reserves faster and faster to satisfy the skyrocketing demand for foreign currency once a speculative attack has started. This is because the expectation of a devaluation induces investors to borrow large sums of the vulnerable currency to invest the money abroad. The twist is the following: After the expected devaluation the investors’ debt in the vulnerable currency will be worth less but the matching assets in investments abroad will be as valuable as before. Due to this arbitrage investors can make large sums of money like George Soros if I get it right here. However, one should note that such opportunities are rare. In general, a good sign for the beginning of a currency crisis are large temporary capital outflows. These create a mismatch in the foreign exchange market and force this devaluation if the run on the currency is sufficiently large and if the foreign exchange reserves of the reserve bank are below a certain threshold (Krugman, 1998). In principle, currency crises should be more or less limited to fixed exchange rate regimes because floating exchange rates tend to be market determined. For this reason exchange rates come closer to reflecting the true value of the currency. However, this is only true if foreign exchange markets are reliable (e.g. herding and irrational investors). If a floating currency – for whatever reasons – is expected to be overvalued, it can likewise experience a currency crisis (Glick & Hutchison, 2011).

So what do currency crises have to do with BREXIT? Probably a lot. The UK’s exchange rate has plummeted since November 2015 from more than 1.40 GBP/EUR to levels below 1.25 GBP/EUR in April (XE.com, 2016). With the referendum becoming more and more serious investors seem to postpone foreign direct investment (FDI) and if the BREXIT goes ahead inward investment from emerging markets could recede dramatically threatening its status as one of the world’s top FDI destinations (Fingar, 2016). This effect can be shown in the diagram below:

Currency crisis (1)

Firstly, the supply of Pound Sterling shifts to the right as investors pull capital out of the UK in search for stability. This leads to an initial depreciation of the Pound against the Euro in this example. Second, foreign investors allocate investment to countries other than the UK. This results in a shift in the demand for Pound Sterling to the left so that there is a further depreciation of the Pound against the Euro. As explained earlier, this is exactly the setting for a major currency crisis. The UK’s currency is threatened by an explosive mix of foreign capital already in the country and the potential to loose out on future FDI if the exit goes ahead in sum reducing the demand for Pound Sterling. This might set off a vicious cycle of speculative attacks. In fact the run on the currency might already have started as indicated by the plummeting exchange rate making borrowing of large sums of GBP attractive to invest abroad in the expectation of further depreciation.

Currency crisis (4)

Currency crisis (5)

Let’s look at the potential implications for the UK economy. A depreciation of a currency is normally associated with an increase in net exports and inflationary pressure on the currency. However, in the case of a currency crisis the picture is somewhat different. This is because not only does the currency fall in its value but also investment spending plummets. The fall in investment spending (I) is shown by the leftward shift in the aggregate demand curve to AD’ in diagram (ii). This can be derived from the Income-Expenditure Model in diagram (iii). Also government spending could take a hit because the burden of the UK’s sovereign debt increases sharply with every depreciation of the Pound (FT.com, 2016). Intuitively depreciation pushes up the costs of repaying outstanding debt and as the UK runs a current account deficit this is of major concern (Tradingeconomics, 2016). Hence, government spending might also be crowded out because more of the government budget has to be allocated to ensure it is not defaulting on its sovereign debt. The overall result is a recessionary gap at least in the very short run. This new threat could turn out to be extremely harmful because the UK already needed until the second quarter of 2013 to recover from the Global Financial Crisis. BREXIT could defeat hopes for accelerated economic growth after finally having surpassed its pre-downturn peak (Ping Chan, 2015).

In the medium run, the depreciation of the Pound Sterling could push the aggregate demand curve back up. This is because of the standard effects of depreciation, i.e. exports are likely to increase while imports fall and more domestic demand falls on domestic goods as they become cheaper relative to foreign goods. This shifts aggregate expenditure, as shown in diagram (iii), back up. It likely cushions the investment shortfall inducing the economy to recover in the medium run. In the long run, once the referendum has gone through and business confidence increases, FDI could recover to its initial level shifting the AD curve back up if everything goes well.

In sum, the referendum seems to be a textbook case of financial speculation (and probably a lesson in the standard law of unintended consequences). It somehow looks like a self-made currency crisis as government’s policies and the announcement of the referendum date have induced uncertainty and scope for speculation over a depreciation of the Pound. If the plummeting exchange rate can be taken as an indicator for a beginning currency crisis the standard economic model would predict a fall in aggregate demand due to capital outflows and postponed FDI. This would threaten the economy’s regained strength after a sluggish recovery from the GFC. Hence – aside of whether one is pro or contra BREXIT – merely the refendum debate seems to have negative impacts on the UK economy. So there are interesting weeks to come until 23 June.

Please note that I blog to learn Economics. I do not intend to make predictions about BREXIT consequences with this post. Many thanks for reading!

Jasse


Fingar, C. (2016). Is Brexit a threat to foreign direct investment? [online] Available at: http://www.ft.com/intl/cms/s/3/6df1db7a-e159-11e5-8d9b-e88a2a889797.html#axzz46G0dodNc [Accessed 20/04/2016].

FT.com (2016). How Brexit will put extra pressure on the pound. [online] http://www.ft.com/intl/cms/s/0/7ee78420-c5b6-11e5-b3b1-7b2481276e45.html#axzz46G0dodNc [Accessed 20/04/2016].

Glick, R., and Hutchison, M. (2011). Currency Crises (Working Paper 2011-22). Available from Federal Reserve Bank of San Francisco website: http://www.frbsf.org/economic-research/files/wp11-22bk.pdf [Accessed 20/04/2016].

Krugman, P. (1998). The Accidential Theorist: And other Dispatches from the Dismal Science. New York, N.Y.: W.W. Norton & Company.

Ping Chan, S. (2015). Britain on top: recovery from Great Recession was faster than thought. [online] Available at: http://www.telegraph.co.uk/finance/economics/11900934/UK-GDP-growth-stronger-previously-though-recovery-ONS.html [Accessed 20/04/2016].

Tradingeconomics, 2016. United Kingdom Current Account. [online] Available at: http://www.tradingeconomics.com/united-kingdom/current-account [Accessed 20/04/2016].

XE.com (2016). XE Currency Charts (GBP/EUR). [online] Available at: http://www.xe.com/currencycharts/?from=GBP&to=EUR&view=1Y [Accessed 20/04/2016].