Free-market reforms insulate against economic crises and electoral defeat

New IEA research shows that free-market reforms insulate countries from the worst effects of economic crises

There is no need for a government to choose between reforming the economy and remaining popular, according to new research released today by the Institute of Economic Affairs and Timbro.

In Renaissance for Reforms, Stefan Fӧlster and Nima Sanandaji lay out the evidence, gathered from OECD countries around the world, that governments who carry out free-market reform are more likely to be re-elected – especially if they are made up of left-wing parties. Looking at the pace and direction of reforms in 29 OECD countries between the mid-1990s and the end of 2012, and an analysis of 109 governments, voter backlashes appear more common for governments that fail to introduce growth reforms.

These pro-growth, free-market reforms can also insulate countries during periods of economic upheaval and prevent people experiencing long periods of unemployment during a recession, such as in Poland, Estonia and Lithuania during the recent economic crisis.

The key findings of the book include:

·         Institutional reforms, particularly those that increase economic freedom, can often prove difficult to implement due to special interest groups arrayed against them – for example, European royalty working with farmers to protect the Common Agricultural Policy.

·         It is often Centre-Left parties, such as the Liberal Party in Canada and the Labor Party in Australia, who benefit most from introducing free-market reforms while in office. Analysis shows that left-wing parties who introduce or extend free-market, pro-growth reforms are more often re-elected than those who seek to enact big spending, big-state policies.

·         Reforms are easier to introduce in countries with higher levels of national solidarity, as opposed to high levels of interest group solidarity – for example, farmers in Northern Europe are less likely than the French to strike over farming benefit reforms.

·         Crises can drastically lower the ‘reform threshold’- or the level of public acceptance of free-market refor