Policies in Hard Times: Assessing the Impact of Financial Crises on Structural Reforms

It is argued that crises open up a window of opportunity to implement policies that otherwise would not have the necessary political backing

Abstract

It is commonly argued that crises open up a window of opportunity to implement policies that otherwise would not have the necessary political backing. The argument goes that the political cost of economic and social reforms declines as crises unravel structural problems that need to be urgently rectified and the public is more willing to bear the pains associated with such reforms. This paper casts doubt on this prevalent view by showing that not only the crises-reforms nexus is unfounded in the data, but rather crises are associated with a reversal of liberalization interventions depending on the institutional environment. In particular, we look at measures of liberalization in international trade, agriculture, network industries, and financial markets. We find that, in democratic countries, crises occurrences have no significant impact on liberalization measures. On the contrary, after a crisis, autocracies reduce liberalization in multiple economic sectors, which we interpret as the fear of regime change leading non-democratic rulers to please vested economic interests.

This work is part of the ‘Macroeconomics in Low-income countries’ programme

Citation

Gunes Gokmen, Tommaso Nannicini, Massimiliano Gaetano Onorato, Chris Papageorgiou, Policies in Hard Times: Assessing the Impact of Financial Crises on Structural Reforms, The Economic Journal, Volume 131, Issue 638, August 2021, Pages 2529–2552,

Policies in Hard Times: Assessing the Impact of Financial Crises on Structural Reforms

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Published 10 March 2021