Skip to main content
SpringerLink
Log in

From short-term to long-term orientation—political economy of the policy reform process

  • Regular Article
  • Published:
Journal of Evolutionary Economics Aims and scope Submit manuscript

Abstract

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 analyzes 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 and growth as compared with discretionary policy. In the third section, the political economy of the reform process, i.e. replacing discretionary by more rule-bound policy, is analyzed in an evolutionary setting. The basic hypothesis is that a policy reform is triggered by three key factors: (1) a worsening economic situation, (2) increasing knowledge of policymakers and the public with respect to the effectiveness of policy paradigms and (3) external, in particular international support. In a fourth section, we present a case study. Finally, we draw conclusions.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. Note that it is crucial for the original Nordhaus concept that the public does not realize the routine in the government’s behavior. With rational expectations and full information, there will be no positive effect on the business cycle (see e.g., Nordhaus 1989). With rational expectations but without full information, the possibility of political business cycles returns (Rogoff and Sibert 1988).

  2. See, for example, De Haan et al. (2003) as well as Freytag (2005). For an overview of existing empirical literature, see Berger et al. (2001).

  3. For our purpose, the distinction between maximizing and satisfying behavior is not decisive. See Meier and Durrer (1992) for a careful discussion of the behavior of politicians within the framework of a cognitive image of man.

  4. In contrast to standard analysis, one may also argue that preferences themselves also are subject to change. However, changes in preferences take a long time and are more difficult to model than information based learning, albeit using the same categories of effects.

  5. Interest groups, whose members suffer from the policy, will certainly invest in counter-lobbying to change the policy. The worse their situation, the lower the opportunity cost of counter-lobbying (Becker 1983, 1985). However, it is not clear whether and if so when such activities lead to less discretion.

  6. See for the analysis of corruption Rose-Ackermann (1999, chapter 6). For a comprehensive analysis of the shadow economy see Schneider and Enste (2000).

  7. It is interesting to note that the credibility of policy changes is higher if the incumbent political party stands for a program different to the reform agenda (Cukierman and Tommasi 1998); in some countries, such as New Zealand, supply-side reforms have been undertaken by left wing (demand-side) governments.

  8. Which effect is more likely, is left to empirical research.

  9. An example of this is the history of exchange rate regimes, which we analyze more deeply in Section 4.

  10. This process is not to be mixed with but may be accelerated by external shocks, which reallocate resources and power (Olson 1982). The reform process will certainly be speeded up. However, instead of being evolutionary, this is rather revolutionary.

  11. See Mintrom and Vergari (1998) on the role of policy-networks for the diffusion of policy-innovations.

  12. For a comprehensive analysis of the determinants of successful monetary reforms, see Freytag (2002).

  13. See Freytag (2002).

  14. See James (1996) for a comprehensive overview.

References

  • Becker GS (1983) A theory of competition among pressure groups for political influence. Q J Econ 98:371–400

    Article  Google Scholar 

  • Becker GS (1985) Public policies, pressure groups and dead weight costs. J Public Econ 28:329–347

    Article  Google Scholar 

  • Berger H, de Haan J, Eijffinger SCW (2001) Central bank independence: an update of theory and evidence. J Econ Surv 15(1):3–40

    Article  Google Scholar 

  • Besley T, Case A (1995) Incumbent behavior, vote-seeking, tax-setting and yardstick competition. Am Econ Rev 85(1):25–45

    Google Scholar 

  • Blackburn K, Christensen M (1989) Monetary policy and policy credibility: theories and evidence. J Econ Lit 27(3):1–45

    Google Scholar 

  • Brennan HG, Buchanan JM (1981) Monopoly in money and inflation. Institute for Economic Affairs, London

    Google Scholar 

  • Brennan HG, Hamlin A (2001) Constitutional choice. In: Shughart WF II, Razzolini L (eds) The elgar companion to public choice. Edward Elgar, Cheltenham, UK

    Google Scholar 

  • Buchanan JM, Tullock G (1962) The calculus of consent. University of Michigan Press, Ann Arbor, MI

    Google Scholar 

  • Budzinski O (2000) Wirtschaftspolitische Implikationen evolutorischer Ordnungsökonomik: das Beispiel ordnungskonformer ökologischer Wirtschaftspolitik. Marburg, Germany

  • Cukierman AS, Tommasi M (1998) When does it take a Nixon to go to China? Am Econ Rev 88(1):180–197

    Google Scholar 

  • De Haan J, Leertouwer E, Meijer E, Wansbeek T (2003) Measuring central bank independence: a latent approach. Scott J Polit Econ 50(3):326–340

    Article  Google Scholar 

  • Dosi G, Nelson RR (1994) An introduction to evolutionary theories in economics. J Evol Econ 4(3):153–172

    Article  Google Scholar 

  • Fischer S, Sahay R, Vegh C (2002) Modern hyper- and high inflations. J Econ Lit 40:837–880

    Article  Google Scholar 

  • Freytag A (1995) The European market for protectionism: new competitors and new products. In: Gerken Lüder (ed) Competition among institutions. Macmillan, London and Basingstoke, pp 231–258

    Google Scholar 

  • Freytag A (2002) Success and failure in monetary reform. Monetary commitment and the role of institutions. Edward Elgar, Cheltenham, UK

    Google Scholar 

  • Freytag A (2005) The credibility of monetary reform: new evidence. Public Choice 124:301–409

    Article  Google Scholar 

  • James H (1996) International monetary cooperation since Bretton Woods. International Monetary Fund and Oxford University Press, Washington DC, New York, Oxford

  • Kydland FE, Prescott EC (1977) Rules rather than discretion: the inconsistency of optimal plans. J Polit Econ 85(3):473–491

    Article  Google Scholar 

  • Laidler D (2003) The role of the history of economic thought in modern macroeconomics. In: Mizen P (ed) Monetary history, exchange rates and financial markets. Edward Elgar, Cheltenham, UK, pp 12–29

    Google Scholar 

  • McCallum BT (1997) Crucial issues concerning central bank independence. J Monet Econ 39:99–112

    Article  Google Scholar 

  • Meier A, Durrer K (1992) Ein kognitiv-evolutionäres Modell des wirtschaftspolitischen Prozesses. Witt U (ed) Studien zur Evolutorischen Ökonomik II. Berlin, Germany, pp 229–254

  • Meier A, Slembeck T (1998) Wirtschaftspolitik: ein kognitiv-evolutionärer Ansatz. Munich, Germany

  • Mintrom M, Vergari S (1998) Policy networks and innovation diffusion: the case of state education reform. J Polit 60(1):126–148

    Article  Google Scholar 

  • Nordhaus WD (1975) The political business cycle. Rev Econ Stud 42:169–190

    Article  Google Scholar 

  • Nordhaus WD (1989) Alternative approaches to the political business cycle. Brookings Pap Econ Act 2:1–49, 66–68

    Article  Google Scholar 

  • Olson M (1965) The logic of collective action. Harvard University Press, Cambridge, MA

    Google Scholar 

  • Olson M (1982) The rise and decline of nations. Yale University Press, New Haven, CT

    Google Scholar 

  • Persson T (1988) Credibility of macroeconomic policy: an introduction and a broad survey. Eur Econ Rev 32:519–532

    Article  Google Scholar 

  • Rodrik D (1996) Understanding economic policy reform. J Econ Lit 34(1):9–41

    Google Scholar 

  • Rogoff K, Sibert A (1988) Elections and macroeconomic business cycles. Rev Econ Stud 55:1–16

    Article  Google Scholar 

  • Rose-Ackermann S (1999) Corruption and government-causes, consequences, and reform. Cambridge University Press, Cambridge, UK

    Google Scholar 

  • Saade R (2002) Rules versus discretion in tax policy. Small Business Research Working Papers 02rs

  • Schneider F, Enste DH (2000) Shadow economies: size, causes and consequences. J Econ Lit 38:77–114

    Google Scholar 

  • Schnellenbach J (2005) Model uncertainty and the rationality of economic policy. An evolutionary approach. J Evol Econ 15:101–116

    Article  Google Scholar 

  • Slembeck T (1998) A behavioral approach to learning in economics. Prepared for the European Economic Association Congress, Berlin 1998

  • Slembeck T (2003) Ideologies, beliefs, and economic advice: a cognitive-evolutionary view on economic policy-making. In: Pelikan P, Wegner G (eds) The evolutionary analysis of economic policy, pp 128–161

  • Tullock G (1965) Entry barriers in politics. Am Econ Rev 55:458–466

    Google Scholar 

  • Vanberg VJ (1994) Rules and choice in economics. Routledge, London

    Google Scholar 

  • Vaubel R (1991) A public choice view of international organization. In: Vaubel R, Willett TD (eds) The political economy of international organizations: a public choice approach. Westview, Boulder, San Francisco and Oxford, pp 27–45

    Google Scholar 

  • Wegner G (2004) Political learning: the neglected precondition of constitutional reform. Const Polit Econ 15(4):339–358

    Article  Google Scholar 

  • Witt U (1992) The endogenous public choice theorist. Public Choice 25:117–129

    Article  Google Scholar 

  • Witt U (1996) The political economy of mass media societies. Papers on Economics and Evolution # 9601, MPIEW Jena

  • Witt U (2003a) Economic policy making in evolutionary perspective. J Evol Econ 13:77–94

    Article  Google Scholar 

  • Witt U (2003b) The evolving economy: essays on the evolutionary approach to economics. Edward Elgar, Cheltenham, UK

    Google Scholar 

  • Wohlgemuth M (2000) Political entrepreneurship and bidding for political monopoly. J Evol Econ 10:273–296

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Chair of Economic Policy, Friedrich-Schiller-University Jena, Carl-Zeiß-Str. 3, 07743, Jena, Germany

    Andreas Freytag & Simon Renaud

Authors
  1. Andreas Freytag
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Simon Renaud
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Andreas Freytag.

Additional information

This paper is part of a research project entitled “Economic Order and CBI in the Enlarged EMU,” the authors are conducting for the Otto–Wolff–Institute for Economic Policy, Cologne. In addition, the authors gratefully acknowledge very helpful comments by Jean-Pierre Allegret, Jonathan C. Borck, Uwe Cantner, Markus Pasche and three anonymous referees.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Freytag, A., Renaud, S. From short-term to long-term orientation—political economy of the policy reform process. J Evol Econ 17, 433–449 (2007). https://doi.org/10.1007/s00191-006-0049-x

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00191-006-0049-x

Keywords

JEL Classification

Search

Navigation