Reforms Doesn't Have To Cost Votes

Economic reforms are often painful in the short term and hence unpopular, but does not mean that Reform - minded leaders always pay a price at the ballot box. The question is timely, because Economic Policy Agenda in both advanced and developing economies is increasingly focused on structural reforms, amid weak medium-term growth and limited fiscal space. Policies that change
the way Governments work range from reducing regulatory barriers to competition and opening to trade and financial flows to increasing labour market flexibility. They are motivated by objectives which include Investment, Raising productivity and employment thereby making economy more resilient to shocks.

While there has been broad agreement on economic benefits of structural reforms, the Political impact is less settled. This is due to reforms may generate gains for society as a whole only in
longer term while effecting short-term pain on some sectors. Those affected may be highly vocal
and organised. In such cases, Politicians may hold back on reforms for fear of they will be
penalized at the ballot box. A key ingredient to make structural reforms work is strong ownership
and increased  dialogue with Business and Civil society.

While on average reforms linked with electoral costs, special effects depend not only on the type
of reform but also on when in electoral cycle it is implemented. Specifically, reforms are benign
or even favourable politically when implemented swiftly after the elections so that Governments
can reap rewards from Medium-Term economic gains. Electoral risks are heightened when Governments delay or enact reforms on the eve of an election, given short-term dislocation effects wrought by the reforms.

Timing is everything. Election year reforms can cost the ruling Government as much as 3%age
points share of vote in an election year, whereas reforms implemented at other times do not affect
re election prospects. Because the effect of reforms gets magnified when growth is strong and because voters may not be able to distinguish between the effects of reforms and result of underlying economic conditions, reforms do not seem to lead to Political costs when enacted at the time of strong economic activity. In contrast, reforms are more challenging politically under weak economic conditions.

Three lessons which comes out from the above are -

First, Govt. should act swiftly following an electoral victory to carry out reforms during their
Political Honeymoon period.

Second, reforms are best implemented when Economic conditions are favourable that is Govt.
should "Repair the Roof when Sun is shining".

Third, Policy makers should factor in any harm reforms may have on Income distribution and
take well - communicated steps to offset such effects. Strong social safety nets and active labour market that help displaced workers find new jobs can help in this regard, provided reforms mean
Job creation.

There is a need and strong case for well-designed, properly timed and carefully implemented structural reforms. This is especially true in emerging markets and developing economies, where
deregulation has stalled in recent years. A major push for such reforms would mean significant
output gains in the Medium Term in both the Advanced and Developing economies.  


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