The political cost or benefit of economic reforms

Member of the Academic Council of Libertad y Progreso.
PhD in Administration from the Catholic University of La Plata and Professor of Economics at the Faculty of Law and Social Sciences of the UBA. His research has been collected internationally and he has published books and scientific and outreach articles. He has served as Rector of ESEADE and as a consultant for the University of Manchester, Konrad Adenauer Stiftung, OAS, IDB and G7Group, Inc. He has received awards and scholarships, including the Eisenhower Exchange Fellowship and the Freedom Project of the John Templeton Foundation.

INFOBAE – In March of this year Alberto Alesina, a Harvard economics professor, passed away, perhaps one of the most prominent of a group of Italian economists who reached prominent academic positions in the United States in recent years. Among other areas, he wrote about the “political cycles” that affect the economy, a topic that would interest any country and concern ours.

A few months before his death, at age 63, he published a particularly interesting article for our future on the impact of structural reforms on electoral results (Alberto F. Alesina, Davide Furceri, Jonathan Ostry, Chris Papageorgiou and Dennis Quinn: Structural reforms and elections: evidence from a World-Wide new data set; NBER, WP 26720; January 2020).

They obtained data on structural reforms in 90 countries between 1973 and 2014, 66 of which are democracies. The reforms include changes in the local economic structure as well as trade and financial liberalization with respect to the rest of the world. They show that since the late 1980s there was a clear trend towards the opening and liberalization of economies, particularly in the 1980s in developed countries and China, for example, and in the 1990s in “developing” countries such as India or some Latin Americans. These liberalizations were more aggressive in Europe (financial deregulation, open skies, etc.). The politician has a perspective that goes until the next election, at the most the next one in which he hopes to be re-elected and a remedy for four years from now it doesn’t motivate him

But here comes what interests us the most, the political impact of the reforms. The “liberalizing” reforms accelerate economic growth, which is good news and confirms the arguments of their proponents, but their effect becomes evident after four years on average. It’s not good news, considering the short-term incentives of the policy.

The politician has a perspective that lasts until the next election, at most the next one in which he hopes to be reelected and a remedy for four years from now does not motivate him. You may have to bear the short-term cost for someone else to take the laurels later. So he does not make the reforms, and he also ends up failing, of course, but he prefers a populist policy that, perhaps, will allow him to obtain a good result in the next election … and then we will see what happens. For Alesina, when economies are falling the liberalizations are punished at the ballot box; on the other hand, when they are done with the economy in expansion, they are rewarded

The aforementioned study shows that the reforms implemented when the economy grows generate additional growth compared to the reforms carried out in recessive periods. It seems, and not surprisingly, that voters do not understand that it takes a certain time for the reforms to be successful. If the ruler carries out a liberalizing reform in the year prior to the election, he will be punished by the voters, because they do not see that the results take their time. The ruling party’s vote falls if the reforms are carried out in the election year, but could dissipate if they are made right after the election. For us, this tells us to forget about structural reforms here until the 2021 elections, but it gives us little hope that they will happen after those elections.

But something goes against, even that alternative. For Alesina, when economies are falling, liberalizations are punished at the ballot box; on the other hand, when they are done with the economy in expansion, they are rewarded. Voters fail to understand or differentiate the effects of the business cycle and the reform itself, and they punish a government for reforms made in periods of recession. This is not good news for us because it puts us at a crossroads: voters punish reforms in times of recession, but if we don’t do the reforms we can’t get out of the recession. Caught with no way out: Most reforms occur during recessions, which is counterproductive from an electoral point of view, but shows that reforms are often imposed by facts, despite polls

However, in order not to lose all hope, Alesina finds that most reforms occur during recessions, which is counterproductive from an electoral point of view, but shows that reforms are many times imposed by facts, despite the consequences. surveys.

Well, this leaves us with an opportunity since here the facts say much more than words, the price of the blue dollar speaks more than the speeches of officials or opponents. Making the reforms can generate electoral rejection, and we will have elections in 2021, but not doing them can generate an even greater cost. That’s right, Argentines sometimes vote more with dollars than with electoral ballots.

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