Despite the strong pressures from international financial markets on governments’ abilities to choose freely among different economic and other policy options, political parties, at least nominally, continue to propose very distinct policy solutions. Parties, when running for office, claim that they will implement policies that differ significantly from those of their competitors. The proposition of distinct nominal policy positions still is an important component of democratic electoral competition, although observers often object that government parties pursue very similar actual policies once they assume office.
This study examines to what extent policies that parties implement once in power differ as much as they claim in their party manifestos. It also examines whether potential policy convergence can be traced back to pressures from international financial markets. To answer these questions, I assess the reaction of domestic stock markets to election outcomes in industrialized countries since the 1950s, and how this reaction has changed when economies have become more open to international financial flows.
Stock market behavior reflects the aggregate expectations of well-informed actors about actual (as opposed to nominal) policies. It is therefore possible to infer to what extent expected policies of governments are consistent with their nominal differences. Stock markets should respond more strongly to elections if governments’ actual policies continue to diverge in financially open economies. In contrast, stock markets reactions should decrease if governments’ actual policies have converged.
By analyzing stock market responses to elections, it is possible to draw conclusions about convergence in a broad range of policy fields. Stock reactions reflect expected decisions by the incoming government in very different policy areas that have an effect on the profitability of firms. Profitability of firms does not only depend on economic policies, but also on policies in other fields where a ‘race to the bottom’ or convergence was predicted by critics of globalization. These policies include economic policies like fiscal policy (Basinger and Hallerberg, 2004; Swank and Steinmo, 2002) or monetary and exchange rate policies (Bearce, 2007; Broz and Frieden, 2001; Frieden, 1991), but also different types of regulatory policies like environmental regulation and consumer protection (Bernauer, 2003; Vogel, 1998). The analysis therefore presents a broad picture that covers many of the most important policy tools that the elected government has at its disposal.
