Domestic Financial Intermediaries, Dictatorship, and Social Spending

Authoritarian rulers have—unlike incumbents in democracies—frequently, but not always, reduced public expenditure on social services while curtailing welfare programs for the poor and disadvantaged groups, risking civilian discontent. Why and when do autocrats curtail public social spending and broad-based welfare programs that benefit vulnerable societal groups? We suggest here that social spending and welfare program outcomes in autocracies are influenced by the interaction between dictators and the financial elite in the ruling coalition who operate banks and finance companies. Specifically, when the financial-asset size of banks and finance companies is sufficiently high, dictators will be critically dependent on them to fund private and club goods to both buy off other elites and fund patronage for societal groups who support their rule. Since autocrats depend on such funding to survive in office, they have political incentives to cut public social expenditures and broad-based welfare programs to appease the financial elites who favor retrenchment of public social spending and welfare programs to protect their arbitrage opportunities. Our hypotheses find strong statistical support in a global pooled sample of 148 countries (1972–2015). The results hold for several specifications and econometric robustness checks.