The political economy of policy reform

The political economy of policy reform

Author’s Accepted Manuscript The political economy of policy reform George Economides Arye L. Hillman Apostolis Philippopoulos PII: ...

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Author’s Accepted Manuscript The political economy of policy reform George Economides Arye L. Hillman Apostolis Philippopoulos

PII: DOI: Reference:

S0176-2680(16)30203-8 POLECO1597

To appear in: European Journal of Political Economy Cite this article as: George Economides, Arye L. Hillman and Apostolis Philippopoulos, The political economy of policy reform, European Journal of Political Economy, This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting galley proof before it is published in its final citable form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

Editorial introduction The political economy of policy reform

Reform implies change for the better. Economic reform is warranted and has consensus support if the reform is Pareto improving. When an efficiencyenhancing reform is in principle possible, Pareto improvement through compensation to losers may not be feasible, in which case there is opposition to reform from the losers. Resistance to reform by losers is a form of rent protection. The presence of gainers and losers, and rent protection, makes policy reform a political-economy topic. An extensive literature studies the political economy of reform through change from protectionist policies to liberalized trade (for an overview, see Hillman 2015). There is also a literature on reform through capital account liberalization (Haggard and Maxfield 1993), in which case a government benefitting from revenue from financial repression may itself oppose liberalization (Hillman, 2009, chapter 9). The source of opposition to efficiency-enhancing reform can be uncertainty among individuals about whether they will be amongst the gains and who loses (Fernandez and Rodrik, 1991; for experimental evidence, see Cason and Mui, 2003). Reform can entail resistance in a war of attrition (Alesina and Drazen 1991). Successful reform may in particular require a crisis that makes clear the need for reform through non-sustainability of the status quo (Drazen and Grilli 1993). Until the ship is sinking (with them on it), those who benefit from remaining without a reform may be unmoved to make any changes. For 1

instance, a crisis occurred in Greece when foreign debt could not be repaid (on the Greek crisis, see for example Katsimi and Moutos, 2010). Reform comes too late if one generation has already gained from public spending and has imposed the burden of repayment on a subsequent generation, which is required to reduce consumption. Reform can be reform of public policy but also reform of the government bureaucracy, which can be overstaffed and overpaid. Reform can entail restoring government solvency through reductions in budgetary deficits, in particular through politically (and perhaps ethically) difficult changes such as reduction in old-age pensions or child allowances. Such reforms are politically unpopular. Usually, losers from reform know who they are, while the gainers are widely distributed in society, making reform politically difficult, and hence the need for a crisis to raise the issue of reform. Crisis makes reform a policy issue because of force majeure. Because of the Greek crisis, but not only, after a seeming hiatus, there has been a renewed interest in the political economy of policy reform.1 Papers in this special issue of the European Journal of Political Economy reflect this renewed interest. We here briefly review the papers. The abstracts provide more extended summaries and the papers set out the details. Asatryan, Heinemann and Pitlik propose a new indicator to explore the determinants of public administration reform in a panel of EU countries. Fischer, Klauder, Potrafke and Ursprung use data from Germany to 1

See, for example, Fidrmuc and Karaja (2013), Wiese (2014), Agnello et al.

(2015), Waelti (2015), Philippopoulos (2016), Cassette and Farvaque (2016), and Grüner and Muller (2016). 2

determine whether students’ field of study influences support for marketoriented reforms. Fabella studies the political-economy determinants of education reform in the USA. Hofer, Marti and Butler set out a model in which









implementation of a reform and apply the model to data from Switzerland. Helerberg and Scartascini study determinants of tax reforms using data from a number of Latin American countries and focus on the role of elections and banking crises in triggering the reforms. Bucciol et al. develop a large-scale OLG model to quantify the distributional implications of tax-transfer policy schemes in France, Italy and Sweden. Vogel uses a version of the QUEST model (used by the European Commission) to quantify the effects of structural reforms, and studies how these effects depend on whether there are restrictions on the conduct of monetary policy. Papageorgiou and Vourvachaki use a DSGE model calibrated to Greece to study the macroeconomic implications of structural reforms in product and labor markets and how these effects depend on fiscal policy. Economides, Philippopoulos and Sakkas develop a dynamic general equilibrium model to study the implications of introducing tuition fees as a substitute for government








understanding of the political economy of policy reform in different countries and in different contexts.



This special issue is based on proceedings of a conference organized by the Athens University of Economics and Business, in Delphi, Greece, in June, 2015.

References Agnello, L., Castro, V., Jalles, J.T., Sousa, R.M., 2015. What determines the likelihood of structural reforms? European Journal of Political Economy 37, 129-145. Alesina, A., Drazen, A., 1991. Why are stabilizations delayed? American Economic Review 81, 1170-88. Cassette, A., Farvaque, E., 2016. A dirty deed done dirt cheap: reporting the blame of a national reform on local politicians. European Journal of Political Economy 43, 127-144. Cason, T.N., Mui, V.L., 2003. Testing political economy models of reform in the laboratory. American Economic Review 93, 208-212. Drazen, A., Grilli, V., 1993. The benefit of crises for economic reforms. American Economic Review 83, 598-607. Fernandez, R., Rodrik, D., 1991. Resistance to reform: Status quo bias in the presence of individual-specific uncertainty. American Economic Review 81, 1146-1155. Fidrmuc, J., Karaja, E., 2013. Uncertainty, informational spillovers and policy reform: A gravity model approach. European Journal of Political Economy 32, 182-192.


Grüner, H.P., Muller, D., 2016. Measuring political information rents: Evidence from the European agricultural reform. European Journal of Political Economy 43, 107-126. Haggard, S., Maxfield, S., 1993. The political economy of capital account liberalization. In: Reisen, H. and Fischer, B. (Eds.), 1993. Financial Opening: Policy Issues and Experiences in Developing Countries. OECD Publishing, Paris, pp. 65-83. Hillman A. L., 2009. Public Finance and Public Policy: Responsibilities and Limitations of Government (2nd edition). Cambridge University Press, New York. Hillman, A. L., 2015. Rents and international trade policy. In: Congleton, R. D., Hillman, A. L. (Eds.), Companion to Political Economy of Rent Seeking, Edward Elgar, Cheltenham UK, chapter 12, pp. 187-202. Katsimi, M., Moutos, T., 2010. EMU and the Greek crisis: The politicaleconomy perspective. European Journal of Political Economy 26, 568-576. Philippopoulos A. (Ed.), 2016. Public Sector Economics and the Need for Reforms, CESifo Seminar Series, MIT Press, Cambridge, MA. Waelti, S., 2015. Financial crisis begets financial reform? The origin of the crisis matters. European Journal of Political Economy 40 (Part A), 1–15. Wiese, R., 2014. What triggers reforms in OECD countries? Improved reform measurement and evidence from the healthcare sector. European Journal of Political Economy 34, 332-352.


George Economides, Athens University of Economics and Business, Department of International and European Economic Studies, 76 Patission Street, GR-10434 Athens, Greece and CESifo Arye L. Hillman, Department of Economics, Bar-Ilan University, Ramat Gan 52900 Israel and CESifo Corresponding author at [email protected] Apostolis Philippopoulos, Athens University of Economics and Business, Department of Economics, 76 Patission Street, GR-10434 Athens, Greece and CESifo