Reform Doesn’t Have to Cost Votes

IMF Blog, October 18, 2019

Source details

Studied the economic and regulatory environment in 90 advanced and developing economies.
Indicators examined include interest rate and credit controls, entry barriers, restrictions on external payments and receipts, trade tariffs, and employment protection.
Data coverage: 1973–2014.
Electoral outcomes analyzed for countries in the sample with fully democratic and open elections; key electoral analysis based on 66 democratic countries.

On average, structural reforms are associated with electoral costs, but effects depend on type of reform and timing within the electoral cycle.
Timing effect:
- Reforms implemented swiftly after elections are generally benign or politically favorable, allowing governments to reap medium-term economic gains.
- Reforms enacted on the eve of an election heighten electoral risks due to short-term dislocation effects.
- A major reform just before an election costs the government coalition an average 3 percentage points in its share of the vote.
Economic conditions effect:
- Reforms tend to be politically easier when growth is strong; voters may attribute gains to reform or to underlying economic conditions.
- Reforms are more challenging politically under weak economic conditions.
- Crisis periods can present reform opportunities without electoral costs if leaders build consensus and show strong ownership (examples: Spain in 1979; Peru in 1995).
Heterogeneity by reform type:
- Reforms that engender increased income inequality—particularly financial sector deregulation (banking sector privatization, removing controls on credit and interest rates) and opening to financial flows under some conditions—can exact a higher electoral cost.

Design and timing:
- Act swiftly following an electoral victory to carry out reforms during the political honeymoon period.
- Implement reforms when economic conditions are favorable: “repair the roof when the sun is shining.”
Distributional considerations:
- Factor in harms to income distribution and take well-communicated upfront steps to offset side effects.
- Strengthen social safety nets and active labor market programs to help displaced workers find new jobs, recognizing that reforms often imply simultaneous job creation and destruction.
Process and ownership:
- Ensure strong ownership of the reform agenda and enhance dialogue with business and civil society to build broad-based support—this is especially important when economic conditions are tough.

Structural reforms aim to raise productivity, investment, employment, and economic resilience; they include measures such as reducing regulatory barriers to competition, opening to trade and financial flows, and increasing labor market flexibility.
There is a pressing need for well-designed, appropriately timed, and carefully implemented structural reforms, particularly in emerging market and developing economies where deregulation has stalled, with substantial potential medium-term output gains in both advanced and developing economies.

Source: IMF blog post “Reform Doesn’t Have to Cost Votes” (October 18, 2019) by Davide Furceri, Jonathan D. Ostry, Chris Papageorgiou.