The Political Costs of Reforms

Abstract

Many countries are experiencing persistent, weak medium-term growth and limited fiscal space. Against this background, economic policy agendas—in both advanced and developing economies—are focusing increasingly on structural reforms. While there is broad agreement on the economic benefits of structural reforms, the political-economy of reform is less settled. This is because reforms may generate gains only in the longer term while distributional effects may be sizable in the short run, and because governments may lack political capital to confront vocal interest groups. In these circumstances, politicians may hold back on reforms, fearing they will be penalized at the ballot box. The aim of this Staff Discussion Note is to examine whether the fear of a political cost associated with structural reforms is justified by the available evidence, and whether there are lessons from the data about how reform strategies might be designed to mitigate potential political costs. It provides a major addition to recent IMF analysis examining the output and employment effect of reforms

Are governments paying a price for austerity? Fiscal consolidations reduce government approval

“…Since expenditure-based consolidations are better for the economy, they may also be better for governments: if voters engage in retrospective economic voting, they should be more supportive of governments that minimize the economic damages of consolidation. Vice versa, tax-based consolidations would be particularly detrimental to government’s re-election prospects, because they are more harmful to the economy (Chen et al , 2019; Ciminelli et al , 2019).…”

The Political Economy of Inclusive Growth: A Review

“…Political feasibility continues to be the biggest obstacle to reforms. In the short run, their distributional consequences can dwarf the expected gains, making them politically costly (Ciminelli et al, 2019;Chen et al, 2019). Thus, in practice, politicians often implement reforms strategically: using crises as 'windows of opportunity to push through reforms; sequencing reforms to identify winners and losers and implement the easiest ones first; or using divide-and-rule tactics that involve building coalitions with the winners (Roland, 2002).…”

“…Subsequent research, however, suggests that there is no systematic evidence on the catalyzing effect of crises: history abounds with examples of crises that spurred reforms and those which did not. 30 Much depends on the effect of the crises on the political equilibrium (Robinson, 2009) and the type of reform (Ciminelli et al, 2019). Long-lasting tax reforms, for example, are mostly observed in 'good times' (IMF, 2013b;Chen et al, 2019), and weak macroeconomic conditions, especially low growth and high inflation, are frequent barriers to energy subsidy reforms (Clements et al, 2013).…”

“…Thus, focusing on delivering only key interventions in periods of low public support and government commitment while laying the groundwork for further reforms and waiting for windows of opportunities can be viable strategies. Elections can create such windows as reforms tend to be less costly early in an incumbent's term (Ciminelli et al, 2019). In the Philippines, for example, the World Bank (2015) notes that the aftermath of the 2010 Presidential elections opened the way for greater focus on poverty and the successful expansion of a pilot conditional cash transfer program.…”

The Political Economy of Inclusive Growth

“…Political feasibility continues to be the biggest obstacle to reforms. In the short run, their distributional consequences can dwarf the expected gains, making them politically costly (Ciminelli et. al 2019;Chen et al 2019).…”