From Short-Term to Long-Term Orientation - Political Economy of the Policy Reform Process

Despite the fact that policymakers often have a short-term horizon and prefer discretionary over rule bound policy, one can observe policy reform with a focus on rules and long-term orientation. Sometimes reforms are driven by crisis, sometimes they are pursued in times of relative prosperity. The paper analyses reform processes theoretically under the assumption of imperfect knowledge. After the introduction, the second section of the paper shows that rule bound policy encourages a long-term orientation of policymakers, resulting in higher economic dynamics as compared with discretionary policy. In the third section, the political economy of the reform process, i.e. replacing discretionary by rule-bound policy, is analysed in an evolutionary setting. The basic hypothesis is that a policy reform is triggered in a feedback-process determined by four key factors: (1) an emerging shadow economy and growing corruption, (2) external, in particular international pressure, (3) increasing knowledge of policymakers with respect to the effectiveness of policy paradigms and (4) improved economic knowledge of the public. In a fourth section, we draw conclusions and present some preliminary empirical evidence.