Media Briefings

DISAGREEING ON THE RIGHT PATH OF ECONOMIC REFORM: Why it leads to political paralysis and what can be done

  • Published Date: May 2015

Many developing countries find themselves politically paralysed because of fundamental disagreements about which reforms will deliver prosperity. Writing in the May 2015 issue of the Economic Journal, Johannes Binswanger and Manuel Oechslin explain why this undesirable situation is so common. They also explore potential solutions, including better data collection to evaluate quickly whether a reform is ÔrightÕ or ÔwrongÕ, and sunset provisions that allow reforms to be cancelled in the event of their failure or lack of support.

The authors describe a familiar situation: everyone in a country agrees that the status quo is bad and that major reforms are required to promote economic growth and wellbeing – yet nothing happens. Their study explores whether there may be any logic behind this seemingly perverse outcome – and what could be done to overcome political paralysis.

The research focuses on the specific circumstances of developing countries where there is often extreme uncertainty about which direction of reform would work best. From an objective perspective, it is often impossible to learn from the experiences of other countries, even seemingly similar ones, since the success or failure of a reform depends on a staggering amount of local details. This point has been well documented in previous research.

A super-rational decision-maker would draw the conclusion that the best way to proceed would be to experiment. This can be illustrated thus: imagine a group of prospectors who do not know whether they will find gold in the West or the East (but they know that there will be gold somewhere).

The best way to proceed may be to flip a coin, move in one direction according to the outcome and reverse course should the search turn out to be unsuccessful. To make the story fit, the assumption is that that the entire search team has to move in the same direction, just as an entire country in search of good macroeconomic policies is affected similarly by a reform.

But citizens, policy-makers and experts are hardly rational coin flippers but opinionated human beings who often hold strong and opposing views about appropriate reforms. As a result, they may be unwilling to experiment: the more that some segments of society are convinced that a particular reform proposal is misguided, the more inclined they will be to spend resources to block the approval or implementation of that reform.

Returning to the prospectors, one subgroup might be strongly convinced that there is gold only in the West, while another subgroup may be convinced that there is gold only in the East. But they all will have to move together (they are subject to one macroeconomic policy). Thus, the more convinced each subgroup is of its own opinion, the more it will try to block the option favoured by the other – and so the two groups may end up in infighting and paralysis, not moving anywhere at all.

The authors explore whether these arguments hold when taking account of the institutional arrangements that are typical in developing countries. They also provide suggestive evidence from developing countries confirming their argument.

A natural question is what measures could be taken to make the problem of paralysis due to disagreement become less threatening. The authors show that so-called sunset provisions may alleviate the problem. These would mean that a reform automatically expires and turned back to the status quo if it is not formally reconfirmed at a later stage by a supermajority. This may make those opposed to a particular option less fearful about getting stuck with the wrong reform.

Another remedy is better data collection. If there is an objective way to determine quickly whether a reform is a success or failure, then resistance to ÔwrongÕ reforms may also be reduced, as it will quickly become clear whether a reform is ÔrightÕ or ÔwrongÕ.

ENDS


Notes for editors: ÔDisagreement and Learning about ReformsÕ by Johannes Binswanger and Manuel Oechslin is published in the May 2015 issue of the Economic Journal.

Johannes Binswanger is at Tilburg University. Manuel Oechslin is at the University of Lucerne.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh); Johannes Binswanger via email: J.Binswanger@uvt.nl; or Manuel Oechslin via email: Manuel.Oechslin@unilu.ch