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THE POLITICAL ECONOMY OF STRUCTURAL REFORMS

Year 2016, Volume: 5 Issue: 1, 25 - 69, 01.01.2016

Abstract

Do economic structural reforms have electoral consequences? This paper studies whether voters reward or punish governments for introducing structural economic reforms. Drawing on data from a sample of 122 democratic countries over the 1975-2006 period, I note—at first glance—that no significant relationship can be discerned between the probability of a government’s being voted out of office and its having put in place economic reforms in the areas of international trade, product markets, and domestic finance. However, such reforms do appear to have an impact on the outcome of subsequent elections, but to varying degrees, based on the factors of macroeconomic stability, institutional development, and a wise sequencing of proposed reforms. In other words, voters will tend to reward reformist governments if macroeconomic stability is attained, a certain threshold level of institutional quality is achieved, and an optimal sequencing of structural reforms is followed.

Thanks

This paper is a modified version of the third chapter of my Ph.D dissertation at the Universit`a Luigi Bocconi, Italy. An earlier version was circulated under the title “Structural Reforms and Political Outcomes in Developing Countries.” I am indebted to my supervisor, Paolo Manasse, for his guidance and support, and to Chris Papageorgiou for kindly allowing me to use the IMF database on structural reforms. I would also like to thank Tito Boeri, Gino Gancia, Günes Gökmen, Giampaolo Lecce, Gianmarco Ottaviano, and the seminar participants at ESNIE 2014, at Marmara University and ICE-TEA 2016, for their helpful comments and suggestions. Financial support from the Fondazione Cariplo and the Universit`a Luigi Bocconi is gratefully acknowledged. The usual disclaimers apply.

References

  • Abiad, A., E. Detragiache, and T. Tressel, (2009), “A New Database of Financial Reforms”, IMF Staff Papers, 57(2), pp. 281-302.
  • Abiad, A. and A. Mody, (2005), “Financial Reform: What Shakes it? What Shapes it?”, The American Economic Review 95 (1), pp. 66-88.
  • Aksoy, T., (2014), “Structural Reforms and Growth in Developing Countries”, Unpublished manuscript.
  • Alesina, A. and A. Drazen, (1991), “Why are Stabilizations Delayed?”, The American Economic Review 81 (5), pp. 1170-1188.
  • Alesina, A., R. Perotti, J. Tavares, M. Obstfeld, and B. Eichengreen, (1998), “The Political Economy of Fiscal Adjustments”, Brookings Papers on Economic Activity 1998 (1), pp. 197-266.
  • Alesina, A., D. Carloni, and G. Lecce, (2012), “The Electoral Consequences of Large Fiscal Adjustments”, in Alberto Alesina and Francesco Giavazzi, Eds., Fiscal Policy After the Financial Crisis, NBER Books, pp. 531-570.
  • Balassa, B., (1982), Development Strategies in Semi-industrial Economies. Oxford University Press.
  • Bekaert, G., C. R. Harvey, and C. Lundblad, (2005), “Does G growth?”, Journal of Financial Economics 77 (1), pp. 3-55.
  • Berument, M. H., N. N. Dincer, and Z. Mustafaoğlu, (2012), “Effects of Growth Volatility on Economic Performance–Empirical Evidence from Turkey”, European Journal of Operational Research 217 (2), pp. 351-356.
  • Brender, A. and A. Drazen, (2008), “How do Budget Deficits and Economic Growth Affect Re-election Prospects? Evidence from a Large Panel of Countries”, The American Economic Review 98 (5), 2203-2220.
  • Bussiere, M. and M. Fratzscher, (2008), “Financial Openness and Growth: Short-run Gain, long-run Pain?”, Review of International Economics 16 (1), pp. 69-95.
  • Buti, M., A. Turrini, P. Van den Noord, and P. Biroli, (2009), “Defying the Juncker Curse: Can Reformist Governments be Re-elected?”, Empirica 36 (1), pp. 65-100.
  • Buti, M., A. Turrini, P. Van den Noord, and P. Biroli, (2010), “Reforms and Reelections in OECD Countries”, Economic Policy 25 (61), pp. 61-116.
  • Campos, N. F. and F. Coricelli, (2012), “Financial Liberalization and Reversals: Political and Economic Determinants”, Economic Policy 27 (71), pp. 483-513.
  • Chappell Jr, H. W. and L. G. Veiga, (2000), “Economics and Elections in Western Europe: 1960-97”, Electoral Studies 19 (2), pp. 183-197.
  • Christiansen, L., M. Schindler, and T. Tressel, (2013), “Growth and Structural Reforms: A New Assessment”, Journal of International Economics 89 (2), pp. 347-356.
  • Chwieroth, J. M. and A. Walter, (2010), Financial Crises and Political Turnover: A Long- run Panoramic View. Paper presented at the International Political Economy Society Conference, Harvard University, Cambridge, MA.
  • Clemens, M. A. and J. G. Williamson, (2004), “Why Did the Tariff–Growth Correlation Change After 1950?”, Journal of Economic Growth 9 (1), pp. 5-46.
  • Crespo-Tenorio, A., N. M. Jensen, and G. Rosas, (2014), “Political Liabilities Surviving Banking Crises”, Comparative Political Studies 47 (7), pp. 1047-1074.
  • De Haan, J. and J.-E. Sturm, (2003), “Does More Democracy Lead to Greater Economic Freedom? New Evidence for Developing Countries”, European Journal of Political Economy 19 (3), pp. 547-563.
  • Drazen, A. and W. Easterly, (2001), “Do Crises Induce Reform? Simple Empirical Tests of Conventional Wisdom”, Economics & Politics 13 (2), pp. 129-157.
  • Duval, R., (2008), “Is There a Role for Macroeconomic Policy in Fostering Structural Reforms? Panel Evidence from OECD Countries Over the Past two Decades”, European Journal of Political Economy 24 (2), pp. 491-502.
  • Edwards, S., (1984), The Order of Liberalization of the External Sector in Developing Countries. International Finance Section, Department of Economics, Princeton University, Princeton, New Jersey.
  • Edwards, S., (1989), “On the Sequencing of Structural Reforms”, NBER Working Paper No. 3138.
  • Edwards, S., (2009), “Sequencing of Reforms, Financial Globalization, and Macroeconomic Vulnerability”, Journal of the Japanese and International Economies 23 (2), pp. 131-148.
  • Edwards, S. and S. Van Wijnbergen, (1986), “The Welfare Effects of Trade and Capital Market Liberalization”, International Economic Review 27 (1), pp. 141-148.
  • Fernandez, R. and D. Rodrik, (1991), “Resistance to Reform: Status Quo Bias in the Presence of Individual-specific Uncertainty”, The American Economic Review 81 (5), pp. 1146-1155.
  • Fidrmuc, J. and E. Karaja, (2013), “Uncertainty, Informational Spillovers, and Policy Reform: A Gravity-Model Approach”, European Journal of Political Economy 32, pp. 182-192.
  • Gassebner, M., N. Gaston, and M. J. Lamla, (2011), “The Inverse Domino Effect: Are Economic Reforms Contagious?”, International Economic Review, 52 (1), pp. 183-200.
  • Giuliano, P., P. Mishra, and A. Spilimbergo, (2013), “Democracy and Reforms: Evidence from a New Dataset”, American Economic Journal: Macroeconomics 5 (4), pp. 179-204.
  • Hnatkovska, V. and N. Loayza, (2003), “Volatility and Growth”, World Bank Working Papers.
  • Huang, Ho-Chuan, Wen Shwo Fang, Stephen M. Miller, and Chih-Chuan Yeh, (2015), “The Effect of Growth Volatility on Income Inequality”, Economic Modelling, 45, pp. 212-222.
  • Imai, M., C. A. Shelton, and R. Hayes, (2014), “Attribution Error in Economic Voting: Evidence from Trade Shocks”, Economic Inquiry 53 (1), 285-275.
  • Kaminsky, G. L. and S. L. Schmukler, (2008), “Short-run Pain, Long-run Gain: Financial Liberalization and Stock-market Cycles”, Review of Finance 12 (2), pp. 253-292.
  • Keefer, P., (2012), Dpi2012 Database of Political Institutions: Changes and Variable Definitions. Development Research Group, The World Bank.
  • Kose, M. A., J. Di Giovanni, A. Faria, G. Dell’Ariccia, P. Mauro, M. Schindler, J. D. Ostry, and M. Terrones, (2008). Reaping the Benefits of Financial Globalization. International Monetary Fund.
  • Leigh, A., (2009), “Does the World Economy Swing National Elections?”, Oxford Bulletin of Economics and Statistics 71 (2), pp. 163-181.
  • Lewis-Beck, M. S. and M. C. Ratto (2013), “Economic Voting in Latin America: A General Model”, Electoral Studies 32 (3), pp. 489-493.
  • Loayza, N. V., R. Ranciere, L. Servén, and J. Ventura, (2007), “Macroeconomic Volatility and Welfare in Developing Countries: An Introduction”, The World Bank Economic Review 21 (3), pp. 343-357.
  • Lora, E. and M. Olivera, (2004), “What Makes Reforms Likely: Political Economy Determinants of Reforms in Latin America”, Journal of Applied Economics 7 (1), pp. 99-135. Lora, E., M. Olivera, S. Galiani, and E. D. Bo (2005), “The Electoral Consequences of the Washington Consensus [with comments]”, Economia 5 (2), pp. 1-61.
  • Meseguer, C., (2006), “Learning and Economic Policy Choices”, European Journal of Political Economy 22 (1), pp. 156-178.
  • Nsouli, S. M., N. Funke, and M. Rached, (2002), The Speed of Adjustment and the Sequencing of Economic Reforms: Issues and Guidelines for Policymakers. International Monetary Fund.
  • Prati, A., M. G. Onorato, and C. Papageorgiou, (2013), “Which Reforms Work and Under What Institutional Environment? Evidence from a New Data Set on Structural Reforms”, Review of Economics and Statistics 95 (3), pp. 946-968.
  • Quinn, D., (1997), “The Correlates of Change in International Financial Regulation”, American Political Science Review 91 (03), pp. 531-551.
  • Quinn, D. P. and A. M. Toyoda, (2007), “Ideology and Voter Preferences as Determinants of Financial Globalization”, American Journal of Political Science 51 (2), pp. 344-363.
  • Quinn, D. P. and A. M. Toyoda, (2008), “Does Capital-Account Liberalization Lead to Growth?”, Review of Financial Studies 21 (3), pp. 1403-1449.
  • Rajan, R. G. and A. Subramanian, (2005), “What Undermines Aid’s Impact on Growth? Technical Report, National Bureau of Economic Research.
  • Rivers, D. and Q. H. Vuong, (1988), “Limited Information Estimators and Exogeneity Tests for Simultaneous Probit Models”, Journal of Econometrics 39 (3), pp. 347-366.
  • Spilimbergo, A., A. Prati, and J. D. Ostry, (2009), “Structural Reforms and Economic Performance in Advanced and Developing Countries”, Technical Report, International Monetary Fund.
  • Teorell, J., N. Charron, M. Samanni, S. Holmberg, and B. Rothstein, (2011). The Quality of Government Datasets, Version 6apr11. The University of Gothenburg: The Quality of Government Institute.
  • Tressel, T. and E. Detragiache, (2008), “Do Fnancial-sector Reforms Lead to Financial Development? Evidence from a new dataset”, IMF Working Papers, 1-42. Tressel, T., M. Schindler, and L. E. Christiansen, (2009), “Growth and Structural Reforms: A New Assessment”, IMF Working Papers, 1-52.
  • World Bank, (2011), World Development Indicators 2011. World Bank Publications.
  • Wooldridge, J. M., (2010), Econometric Analysis of Cross-section and Panel Data. MIT Press.

THE POLITICAL ECONOMY OF STRUCTURAL REFORMS

Year 2016, Volume: 5 Issue: 1, 25 - 69, 01.01.2016

Abstract

Do economic structural reforms have electoral consequences? This paper studies whether voters reward or punish governments for introducing structural economic reforms. Drawing on data from a sample of 122 democratic countries over the 1975-2006 period, I note—at first glance—that no significant relationship can be discerned between the probability of a government’s being voted out of office and its having put in place economic reforms in the areas of international trade, product markets, and domestic finance. However, such reforms do appear to have an impact on the outcome of subsequent elections, but to varying degrees, based on the factors of macroeconomic stability, institutional development, and a wise sequencing of proposed reforms. In other words, voters will tend to reward reformist governments if macroeconomic stability is attained, a certain threshold level of institutional quality is achieved, and an optimal sequencing of structural reforms is followed.

References

  • Abiad, A., E. Detragiache, and T. Tressel, (2009), “A New Database of Financial Reforms”, IMF Staff Papers, 57(2), pp. 281-302.
  • Abiad, A. and A. Mody, (2005), “Financial Reform: What Shakes it? What Shapes it?”, The American Economic Review 95 (1), pp. 66-88.
  • Aksoy, T., (2014), “Structural Reforms and Growth in Developing Countries”, Unpublished manuscript.
  • Alesina, A. and A. Drazen, (1991), “Why are Stabilizations Delayed?”, The American Economic Review 81 (5), pp. 1170-1188.
  • Alesina, A., R. Perotti, J. Tavares, M. Obstfeld, and B. Eichengreen, (1998), “The Political Economy of Fiscal Adjustments”, Brookings Papers on Economic Activity 1998 (1), pp. 197-266.
  • Alesina, A., D. Carloni, and G. Lecce, (2012), “The Electoral Consequences of Large Fiscal Adjustments”, in Alberto Alesina and Francesco Giavazzi, Eds., Fiscal Policy After the Financial Crisis, NBER Books, pp. 531-570.
  • Balassa, B., (1982), Development Strategies in Semi-industrial Economies. Oxford University Press.
  • Bekaert, G., C. R. Harvey, and C. Lundblad, (2005), “Does G growth?”, Journal of Financial Economics 77 (1), pp. 3-55.
  • Berument, M. H., N. N. Dincer, and Z. Mustafaoğlu, (2012), “Effects of Growth Volatility on Economic Performance–Empirical Evidence from Turkey”, European Journal of Operational Research 217 (2), pp. 351-356.
  • Brender, A. and A. Drazen, (2008), “How do Budget Deficits and Economic Growth Affect Re-election Prospects? Evidence from a Large Panel of Countries”, The American Economic Review 98 (5), 2203-2220.
  • Bussiere, M. and M. Fratzscher, (2008), “Financial Openness and Growth: Short-run Gain, long-run Pain?”, Review of International Economics 16 (1), pp. 69-95.
  • Buti, M., A. Turrini, P. Van den Noord, and P. Biroli, (2009), “Defying the Juncker Curse: Can Reformist Governments be Re-elected?”, Empirica 36 (1), pp. 65-100.
  • Buti, M., A. Turrini, P. Van den Noord, and P. Biroli, (2010), “Reforms and Reelections in OECD Countries”, Economic Policy 25 (61), pp. 61-116.
  • Campos, N. F. and F. Coricelli, (2012), “Financial Liberalization and Reversals: Political and Economic Determinants”, Economic Policy 27 (71), pp. 483-513.
  • Chappell Jr, H. W. and L. G. Veiga, (2000), “Economics and Elections in Western Europe: 1960-97”, Electoral Studies 19 (2), pp. 183-197.
  • Christiansen, L., M. Schindler, and T. Tressel, (2013), “Growth and Structural Reforms: A New Assessment”, Journal of International Economics 89 (2), pp. 347-356.
  • Chwieroth, J. M. and A. Walter, (2010), Financial Crises and Political Turnover: A Long- run Panoramic View. Paper presented at the International Political Economy Society Conference, Harvard University, Cambridge, MA.
  • Clemens, M. A. and J. G. Williamson, (2004), “Why Did the Tariff–Growth Correlation Change After 1950?”, Journal of Economic Growth 9 (1), pp. 5-46.
  • Crespo-Tenorio, A., N. M. Jensen, and G. Rosas, (2014), “Political Liabilities Surviving Banking Crises”, Comparative Political Studies 47 (7), pp. 1047-1074.
  • De Haan, J. and J.-E. Sturm, (2003), “Does More Democracy Lead to Greater Economic Freedom? New Evidence for Developing Countries”, European Journal of Political Economy 19 (3), pp. 547-563.
  • Drazen, A. and W. Easterly, (2001), “Do Crises Induce Reform? Simple Empirical Tests of Conventional Wisdom”, Economics & Politics 13 (2), pp. 129-157.
  • Duval, R., (2008), “Is There a Role for Macroeconomic Policy in Fostering Structural Reforms? Panel Evidence from OECD Countries Over the Past two Decades”, European Journal of Political Economy 24 (2), pp. 491-502.
  • Edwards, S., (1984), The Order of Liberalization of the External Sector in Developing Countries. International Finance Section, Department of Economics, Princeton University, Princeton, New Jersey.
  • Edwards, S., (1989), “On the Sequencing of Structural Reforms”, NBER Working Paper No. 3138.
  • Edwards, S., (2009), “Sequencing of Reforms, Financial Globalization, and Macroeconomic Vulnerability”, Journal of the Japanese and International Economies 23 (2), pp. 131-148.
  • Edwards, S. and S. Van Wijnbergen, (1986), “The Welfare Effects of Trade and Capital Market Liberalization”, International Economic Review 27 (1), pp. 141-148.
  • Fernandez, R. and D. Rodrik, (1991), “Resistance to Reform: Status Quo Bias in the Presence of Individual-specific Uncertainty”, The American Economic Review 81 (5), pp. 1146-1155.
  • Fidrmuc, J. and E. Karaja, (2013), “Uncertainty, Informational Spillovers, and Policy Reform: A Gravity-Model Approach”, European Journal of Political Economy 32, pp. 182-192.
  • Gassebner, M., N. Gaston, and M. J. Lamla, (2011), “The Inverse Domino Effect: Are Economic Reforms Contagious?”, International Economic Review, 52 (1), pp. 183-200.
  • Giuliano, P., P. Mishra, and A. Spilimbergo, (2013), “Democracy and Reforms: Evidence from a New Dataset”, American Economic Journal: Macroeconomics 5 (4), pp. 179-204.
  • Hnatkovska, V. and N. Loayza, (2003), “Volatility and Growth”, World Bank Working Papers.
  • Huang, Ho-Chuan, Wen Shwo Fang, Stephen M. Miller, and Chih-Chuan Yeh, (2015), “The Effect of Growth Volatility on Income Inequality”, Economic Modelling, 45, pp. 212-222.
  • Imai, M., C. A. Shelton, and R. Hayes, (2014), “Attribution Error in Economic Voting: Evidence from Trade Shocks”, Economic Inquiry 53 (1), 285-275.
  • Kaminsky, G. L. and S. L. Schmukler, (2008), “Short-run Pain, Long-run Gain: Financial Liberalization and Stock-market Cycles”, Review of Finance 12 (2), pp. 253-292.
  • Keefer, P., (2012), Dpi2012 Database of Political Institutions: Changes and Variable Definitions. Development Research Group, The World Bank.
  • Kose, M. A., J. Di Giovanni, A. Faria, G. Dell’Ariccia, P. Mauro, M. Schindler, J. D. Ostry, and M. Terrones, (2008). Reaping the Benefits of Financial Globalization. International Monetary Fund.
  • Leigh, A., (2009), “Does the World Economy Swing National Elections?”, Oxford Bulletin of Economics and Statistics 71 (2), pp. 163-181.
  • Lewis-Beck, M. S. and M. C. Ratto (2013), “Economic Voting in Latin America: A General Model”, Electoral Studies 32 (3), pp. 489-493.
  • Loayza, N. V., R. Ranciere, L. Servén, and J. Ventura, (2007), “Macroeconomic Volatility and Welfare in Developing Countries: An Introduction”, The World Bank Economic Review 21 (3), pp. 343-357.
  • Lora, E. and M. Olivera, (2004), “What Makes Reforms Likely: Political Economy Determinants of Reforms in Latin America”, Journal of Applied Economics 7 (1), pp. 99-135. Lora, E., M. Olivera, S. Galiani, and E. D. Bo (2005), “The Electoral Consequences of the Washington Consensus [with comments]”, Economia 5 (2), pp. 1-61.
  • Meseguer, C., (2006), “Learning and Economic Policy Choices”, European Journal of Political Economy 22 (1), pp. 156-178.
  • Nsouli, S. M., N. Funke, and M. Rached, (2002), The Speed of Adjustment and the Sequencing of Economic Reforms: Issues and Guidelines for Policymakers. International Monetary Fund.
  • Prati, A., M. G. Onorato, and C. Papageorgiou, (2013), “Which Reforms Work and Under What Institutional Environment? Evidence from a New Data Set on Structural Reforms”, Review of Economics and Statistics 95 (3), pp. 946-968.
  • Quinn, D., (1997), “The Correlates of Change in International Financial Regulation”, American Political Science Review 91 (03), pp. 531-551.
  • Quinn, D. P. and A. M. Toyoda, (2007), “Ideology and Voter Preferences as Determinants of Financial Globalization”, American Journal of Political Science 51 (2), pp. 344-363.
  • Quinn, D. P. and A. M. Toyoda, (2008), “Does Capital-Account Liberalization Lead to Growth?”, Review of Financial Studies 21 (3), pp. 1403-1449.
  • Rajan, R. G. and A. Subramanian, (2005), “What Undermines Aid’s Impact on Growth? Technical Report, National Bureau of Economic Research.
  • Rivers, D. and Q. H. Vuong, (1988), “Limited Information Estimators and Exogeneity Tests for Simultaneous Probit Models”, Journal of Econometrics 39 (3), pp. 347-366.
  • Spilimbergo, A., A. Prati, and J. D. Ostry, (2009), “Structural Reforms and Economic Performance in Advanced and Developing Countries”, Technical Report, International Monetary Fund.
  • Teorell, J., N. Charron, M. Samanni, S. Holmberg, and B. Rothstein, (2011). The Quality of Government Datasets, Version 6apr11. The University of Gothenburg: The Quality of Government Institute.
  • Tressel, T. and E. Detragiache, (2008), “Do Fnancial-sector Reforms Lead to Financial Development? Evidence from a new dataset”, IMF Working Papers, 1-42. Tressel, T., M. Schindler, and L. E. Christiansen, (2009), “Growth and Structural Reforms: A New Assessment”, IMF Working Papers, 1-52.
  • World Bank, (2011), World Development Indicators 2011. World Bank Publications.
  • Wooldridge, J. M., (2010), Econometric Analysis of Cross-section and Panel Data. MIT Press.
There are 53 citations in total.

Details

Primary Language English
Subjects Economics
Journal Section Research Articles
Authors

Tolga Aksoy

Publication Date January 1, 2016
Published in Issue Year 2016 Volume: 5 Issue: 1

Cite

APA Aksoy, T. (2016). THE POLITICAL ECONOMY OF STRUCTURAL REFORMS. Ekonomi-Tek, 5(1), 25-69.