Political models of macroeconomic policy and fiscal reform
AbstractThe author explains how recent developments in political economics improve our understanding of macroeconomic policy - especially the timing, design, and likelihood of stabilization's success through monetary and fiscal reform. The author reviews the literature on political business cycles and emphasizes several issues involving the relationship between the timing of elections and the timing of macroeconomic policies and outcomes. He also addresses how models can be useful in studying non-democratic systems. Two forces are crucial factors in both democratic and dictatorial systems, although they may manifest themselves differently: (1) the policymakers'incentive to retain power; and (2) society's polarization and the degree of social conflict. The author then analyzes why economic stabilization is delayed, even when it is obvious that sooner or later a stabilization program will have to be adopted. Some points made in the paper follow. Certain institutional characteristics make quick and successful stabilization more or less likely. The more unequal the distribution of stabilization's costs, the more likely that stabilization will be delayed. An increase in the cost of postponing stabilization reduces the delay. Political institutions that make it easier for small interest groups to veto legislation make delay more likely. If political and economic resources are unequally distributed, and it is obvious which group is stronger and has resources to wait longer, a war of attrition ends immediately, as there is no uncertainty about who will win it. Delay is more likely when information about who will bear the cost of delays is uncertain or unevenly distributed. Delay is also more likely when there is agreement about the need for fiscal change but a political stalemate about distribution - about how the burden of higher taxes or spending cuts should be allocated. Stabilization usually occurs when there is political consolidation. The burden of stabilization is sometimes unequal, with the politically weaker group (often the lower classes) bearing a larger burden (often regressive measures). If it is in the interest of the current government to do nothing for fear of failure because of government incompetence, the public may have no incentive to vote for the opposition because the opposition may also do nothing; the crucial factor here is how aware the government is of its own incompetence and thus its reasons for not attempting reform. Successful stabilization usually comes after several failed attempts, and the successful program is often very much like one that failed.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 970.
Date of creation: 30 Sep 1992
Date of revision:
Environmental Economics&Policies; Economic Theory&Research; National Governance; ICT Policy and Strategies; Health Economics&Finance;
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