Summary

Over the past several years, party financing scandals have shaken countries in every region of the world. This has led to increased contempt for and public disillusionment with parties and politicians, and undermined the public confidence in the political process. However, for the near future there will be no democracy without political parties. Parties compete for political power, generate democratic governments and shape public policies. To be able to perform the tasks expected of them parties need to generate income. The reality is that it is often the lack of financial resources which prevents certain groups and leaders from achieving political participation through representation. Even the gender imbalance in parliaments across the world can partly be explained by the inequalities in access to funds. (See Gender Equality in Political Party Funding)

The IDEA Handbook on Funding of Political Parties and Election Campaigns aims to increase the knowledge about the law and practice of political finance around the world. The focus is on the financing of political parties during and between election campaigns, that is, all funds raised and spent in order to influence the outcome of elections as well as the parties’ routine operations. Three main questions stand out: How free should political parties be to raise and spend funds as they like? How much information about party finance should the voter be entitled to have? And how far should public resources be used to support and develop political parties?

Different countries have chosen different strategies of how to deal with the problems surrounding party funding. Karl-Heinz Nassmacher, one of the main authors of the Handbook, identifies three broad options: The autonomy option which treats political parties as voluntary associations entitled to the unregulated privacy of their internal organization and financial transactions. The regulation is minimized and party competition relies largely on self-regulation and self-correcting mechanisms. The transparency option is based on the right of the voters to know how parties are funded in order to make an informed choice, and gives no importance to bans and limits on party funding. The advocacy option argues for the creation of a public agency that can monitor, control and enforce a detailed set of rules and function as a public watchdog, but aims too high and risks ending up creating a political finance regime that is too complicated to enforce.

Instead of going for one of these options, countries may opt for the diversified regulation option that combines what Karl-Heinz Nassmacher, calls “benign neglect, precise regulation, public incentives and occasional sanctions”. (See Introduction: Political Parties, Funding and Democracy)

Who should pay for parties?

The two main sources of funding of political parties are public funding and private funding, and most democracies today acknowledge that they are both needed for political parties to have enough money to carry out their democratic tasks. There are many reasons why countries have chosen to provide public funding to political parties. One of them is that countries have seen the financing of political parties as a necessary cost of democracy – a cost that should therefore be borne by the public purse. Another is that countries have tried to bridge the gaps between the voluntary donations and the necessary spending of political parties, thereby hoping to avoid that parties seek funds from sources that may compromise their independence and democratic functioning. A strive to level the playing field and making sure that all parties stand a chance to get elected is a force that has led countries to adopt public funding laws. Where countries have chosen not to introduce public funding laws, the reasons have often been one of the following: fear that political parties would become organs of the state rather than independent organizations; difficulty in reaching agreement on the allocation of funds; and the fact that public funding of political parties often has been extremely unpopular with the general public, not least in developing countries where competing demands for scarce state resources is often acute. (See Introduction: Political Parties, Funding and Democracy)

Direct and indirect public funding

Public funding can be both direct and indirect. The most common forms of indirect public funding are free media time and special taxation status, while the provision of free use of public buildings, free or subsidized postage and free transportation are less common. It is especially important to ensure that the legal provisions do not allow state resources to be misused by the party in power.

A healthy mix of public and private funding

A lot of countries have found that even though they provide public funding, this only covers part of the expenses that parties have for campaigning and for their routine operations. The heading of private funding covers both the incomes from membership subscriptions and local fundraising; and the donations from businesses corporations, trade unions and large interest groups. One of the arguments for not banning private funding, and even for introducing incentives in the public funding (“matching grants”) for the search for private funding, is that there is a risk that political parties will lose contact with their constituencies if they do not need them for financial support. The regulations surrounding these donations are centered on the principles of ensuring transparency in the sources of income, setting limits between “participating financially” and “buying access or influence”, and prohibiting sources of funding that might compromise the democratic functioning of political parties. (See Introduction: Political Parties, Funding and Democracy)

The Regulatory Framework

Types of laws and regulations

Many countries have decided to introduce a system of regulation of political party funding. The most common features of such laws and regulations are bans (mainly on sources of funding), limits (mainly on expenditure) and disclosure (to provide transparency). The laws have often been spurred by a felt need to address the public opinion stemming from separate political finance scandals, and this has often led to a patchwork of different laws and regulations with numerous loopholes and poor possibilities of enforcement. Enacting political finance laws has also often proven to be a constitutional balance act where the freedoms of association and expression have conflicted with the will to regulate.

Prohibitions

Bans relate mainly to the sources of funding, and there are several different types. The most common bans are those on funds originating from anonymous donations, foreign donations, donations from government contractors, corporate donations and trade union donations. The fear is that the influence of especially multinational corporations may undermine the democratic principle of self-determination. Instead of prohibiting a specific source of donations to political parties, countries may choose to introduce ceilings on how much a donor can contribute per year or election cycle. By introducing ceilings, countries draw a line between what they see as benign participation in politics, and dangerous contributions aimed at corruption and buying influence. Bans and ceilings are two ways of limiting the impact of donations from big, and potentially dangerous, interest groups. Another way is to encourage the use of grass-root financing (thereby limiting the need for donations from unwanted sources), is the use of tax benefits on small donations or “matching grants” where parties get public funding on the basis of how much they have been able to raise from membership dues and other grass-roots donations.

Disclosure

Public disclosure of the sources of political party funds can be used both as the basis of enforcement of bans on the sources of party income, and as an alternative to bans. The idea is that transparency will stimulate public debate and thereby public pressure on political parties to voluntarily abstain from the kind of sources that would otherwise have to be banned. By making the sources of income visible to the public, voters are able to make better decisions about which party or candidate they want to support. Carried to an extreme, the provisions for disclosure of income would mean that even the smallest amount would have to be disclosed. This would, however, both make the rules almost impossible to enforce, and make the information useless to the public due to the large amounts of information a person would have to go through to get a picture of the sources of political money. To avoid this, many of the countries with provisions for public disclosure of contributions to political parties have thresholds for disclosure of donations. (See Monitoring, Control and Enforcement of Political Finance Regulations)

Regional Trends in Political Party Finance

Continental Western Europe

There is no simple answer to how political finance should be organized, but there is much to be learnt from the current experience in different parts of the world. The Western European democracies have emphasized distributive measures, especially cash subsidies to political parties and several countries in the region support fund-raising from individuals by tax incentives. The public money is provided almost without any obligations. Some countries have been very dependent on public funds which now have become the dominant source of income in for example Sweden. Monitoring and control of political finance have been introduced in some but not in all countries. Where regulations are limited it is because the privacy of parties and donors is emphasized. (See Party Funding in Continental Western Europe)

“Anglo-Saxon orbit”

The regulations in Western Europe are less strict than for example in the Anglo-Saxon countries – Australia, United Kingdom, Canada and the United States – where the rules focus on limiting campaign expenses and individual contributions to political parties and candidates. American and Australian parties are relatively weak organizations and the financing of politics is concentrated on campaigns and individual candidates and not on political parties. In none of the Anglo-Saxon countries have party members been very important for the generating of income. Like everywhere else in the Western world public funding has increased and only the United Kingdom has been reluctant to provide cash subsidies to political parties. In the United States disclosure rules is an important feature of the legal framework. Canada stands out among the established democracies for its successful effort to curtail financial scandals by means of a political finance regime which combines state resources and regulations in an effective way. (See The Funding of Political Parties in The Anglo-Saxon Orbit)

Central and Eastern Europe

The current dissatisfaction in Central and Eastern Europe is to a large degree the result of perceived problems relating to political finance. Political corruption is a prominent issue and illegal funding of political parties undermines the democratic system as a whole. Parties receive large donation from a few wealthy donors while the income from membership subscriptions are insignificant. Marcin Walecki, the chapter author, argues that the lack of diverse sources of funds is more problematic than the level of expenditure. Public subsidies are now an almost common feature in Central and Eastern Europe, but still less important than private donations. The parties have been subject to detailed regulations but these rules have proved to be a legal fiction and illegal spending is significant. (See Money and Politics in Central and Eastern Europe)

Latin America

The emphasis in Latin America is on public cash subsidies which are expected to prevent parties raising funds from undesired sources. Public funding has served as a supplement to private funding and although it is important the impact has been limited and has varied from country to country. The regulations surrounding party finance are well developed in the region and the significant degree of corruption in the way parties finance themselves has led to prohibitions and restrictions on private contributions. However the impact of these regulations varies in the different countries. The majority of the private contributions goes directly to the candidate and not to the formal party which becomes difficult when almost all countries focus their regulations and enforcement on parties. There is a current trend in many Latin American countries to strengthen oversight procedures and mechanisms. (See The Legal and Practical Characteristics of the Funding of Political Parties and Election Campaigns in Latin America)

East Asia

The issue of money and its effects on politics is increasingly gaining attention in Asia as in other parts of the world. The countries in South Asia have responded less comprehensively to the party financing issue and many of them lack a system of regulations, and public funding is almost non-existent in the region. In the eastern parts of Asia the elected representatives are expected to be linked to their constituencies by financial obligations. This increased enormously the cost of being a representative. From an early date this led to that the practice of condoning some forms of “illegal” money was established, since everyone understood that it was impossible to make the rules work and at the same time satisfy all expectations. More recently the problems of “money politics” have fueled public debate and support for greater state regulations and also for public support to political parties. (See Party Funding and Political Corruption in East Asia: The Cases of Japan, South Korea and Taiwan)

Africa

Political financing is relatively under-regulated in Africa and in general the raising of funds is a matter of unregulated self-help. If there are strict regulations these are often not enforced. The phenomenon of a candidate owning a party as a businessman is fairly frequent and the differences in getting financial resources between governing and opposition parties seems to be greater than elsewhere in the world. One major reason for the relative absence of public funding is the partisan interest of the ruling parties. The opposition which stands to benefit the most from the adoption of regulations that enhance transparency and limit funding and spending has usually been too divided and to weak to influence these provisions strongly. A significant source of income for political parties in Africa comes from private donations, and all parties depend on it to varying degree. Donations from citizens living abroad are particularly important for opposition parties. (See The Funding of Political Parties and Election Campaigns in Africa)

Political Parties as Pillars of Democracy

Clearly, the issues of political finance laws and regulations are complex and still evolving. Political finance is moving onto the political agenda in several countries. It is absolutely clear that there are no perfect solutions and that no one model of regulation can be applied to fit all circumstances. Many countries are only beginning to address these issues while those who have been seized with them for some time are working on revising their regulations based on years of experience. Most countries seek to regulate the income-generating activities of political parties but there are tremendous variations, both in intent and in effectiveness. The motives and focus of the regulation vary to a large extent but at least four distinct reasons can be identified for the introduction or amendment of laws: A will to prevent abuse and the buying of political influence; enhancing fair competition among all parties; empowering voters and strengthening political parties as effective democratic actors.

As this handbook shows, democracy under multiparty system requires investment not only in elections and representative institutions, but also in sustainable and functioning political parties. However, party funding laws and associated regulations cannot be fully understood outside the broad framework that governs political party operation in each country. Since IDEA deems political parties as vital for a democracy, the organization is committed to investigating the environment in which they function to be able to provide options to facilitate their work. This means both looking at the legal environment (registration requirements, party laws etc), the political environment (the relation between ruling and opposition parties), and the internal functioning of political parties. (See Conclusion)

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