Working paper

Navigating the treacherous political economy of structural reform

In setting economic policy, politicians should pay attention to the latest economic data and to when they next need to face voters at the polls

Publishing date
27 May 2024

We examine the economic and electoral effects of liberalisation measures using newly-constructed databases on structural economic reforms and the outcome of democratic elections since the 1970s. The data shows a remarkable slowdown in the pace of liberalisation in both advanced and emerging market and developing countries since the 1990s. A debate has emerged about the causes of this slowdown, including the possibility that reforms do not deliver the economic benefits that advocates, including the multilateral financial institutions, trumpeted. Some have pointed to the fact that the current and previous United States administrations have abandoned neoliberal policies in favour of more government intervention in the economy, and the effect has been globally contagious.

Our empirical analysis suggests that the growth dividend from liberalisation is economically and statistically significant, but it emerges only slowly over time. Because of this delay, liberalising reforms are costly to democratic incumbents when they are implemented close to elections. Reforms may generate immediate concentrated losses, which elicit an electoral backlash, especially when the aggregate gains are only visible several years after the reform’s implementation. The electoral penalty is also sensitive to overall business-cycle conditions, being much larger when an economy is in recession. Electoral effects also differ depending on the type of reform. Notably, financial reforms generate more perceptible growth-equity trade-offs than real-economy reforms, especially when implemented during weak economic conditions.

The political economy of reform is treacherous. To avoid adverse electoral effects, timing reform early in the electoral term and when business-cycle conditions are favourable is critical. So too is avoiding reforms that generate large distributional costs in the face of small aggregate gains (an adverse growth-equity trade-off). Focusing on these considerations is critical to reinvigorate support for structural reform.

About the authors

  • Davide Furceri

  • Jonathan Ostry

    Jonathan D. Ostry is a non-resident fellow at Bruegel, as well as Professor of the Practice of Economics at Georgetown University in Washington, DC; he is also a Research Fellow at the Center for Economic Policy Research in London and serves on the advisory board of the World Economic Forum's Global Risk Report in Geneva. Prior to his appointment at Georgetown, he served at the International Monetary Fund in senior roles, including as Deputy Director of the Research Department and Acting Director of the Asia and Pacific Department. Professor Ostry received his PhD in Economics from the University of Chicago, an MSc from the London School of Economics, and a BA in PPE from Oxford University.

    Professor Ostry’s recent academic and policy work has focused on the management of international capital flows; this work has been influential in bringing about a shift in the institutional position of the IMF on capital controls. Ostry has also published influential studies on the relationship between income inequality and economic growth, where his work suggests that high income inequality and a failure to sustain economic growth may be two sides of the same coin. Ostry’s work has also focused on the issue of fiscal sustainability, and in particular on the role of a country’s track record of fiscal management in determining access to international capital markets. This work is used by the main credit rating agencies for their sovereign credit rating analysis.

    Professor Ostry is a highly cited economist in scholarly journals (ranked in the top 1 percent of economists worldwide over the past ten years, according to RePEc), and his writings have featured prominently in the financial press (the Economist, the Financial Times, the New York Times, the Washington Post, the Wall Street Journal, Bloomberg, Time, Forbes, Fortune, CNBC, NPR, and the BBC). Earlier in his career, Ostry led the team at the IMF that produces its flagship publication, the World Economic Outlook, and was mission chief for Japan. His recent books include Taming the Tide of Capital Flows (MIT Press, 2018) and Confronting Inequality (Columbia University Press, 2019).

  • Chris Papageorgiou

  • Dennis P. Quinn

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