Structural Reforms at OECD Countriesweb.iss.u-tokyo.ac.jp/jss/pdf/jss6201_025049.pdfGermany 1975,77...

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Structural Reforms at OECD CountriesThe international monetary and domestic legislative

causes of policy similarity

Nobuhiro Hiwatari　　

Abstract

I. Introduction: Why Structural Reform?

Oneofthemostprominentoffshootsofeconomicglobalizationistheeffortbygovernmentstostabilizemonetarypolicyandcurrencyvaluesagainstthevolatileworldofrapidandmassiveshort-termcapitalmovements.Thespreadoffinancialliberalizationandtheincreaseincapitalmobility have introduced monetary volatility that has fundamentally changed economicpolicymaking.Generallyspeaking,financialglobalizationhasincreasedthedangerofacurrencycrisis or a twin crisis, it has synchronized economic downturns and made financial crisiscontagious,andithaslimitedtheutilityoftraditionalpolicytoolsavailableforgovernmentstorevivetheeconomyfromrecessions(Eichengreenetal.1995,EichengreenandWypolz1998,Kaminski and Reinhart 1998, Cusack 1999, 2001, Oatley. 1999, Clark and Hallerberg 2000,LeblangandBernhard2000,Way2000). Intheadventoftheseneweconomiccircumstances,internationaleconomicorganizations,suchastheOECD,theIMF,ortheEU,haveinsistedthatadvancedeconomiespursueacourseofmonetarystabilityandcarryoutstructuralreformstoenhancedomesticcompetitionand

Thispaperexplorestheinternationaleconomicandrepresentativedemocraticdeterminantsofproduction market policies, which has been showing a very similar trend among OECDcountriessince the1980s.Theoriginalityof thispaper lies in its incorporationofeconomicrecessionsandpartisanpreferencesascriticalcauses.Thispaperfinds thatmostcountriesundertookstructuralreformsinordertorevivetheeconomyandboosttradewithoutdisruptingmonetarystabilityinavolatileinternationalcontext,althoughsomegovernmentsundertookthereformsasadomesticresponsetoabankingcrisis.Thisfindingcombinedwiththediscoverythatarightlegislativemedianratherthantheinaugurationofarightistgovernmentpromotesstructural reforms casts doubts on the interpretations that claim structural reforms are acreatureofgovernments representing international trade interests or staunchlydevoted tomarketfundamentalism.

Key words:economic recessions, structural reform, partisan preferences, OECD countries,internationalpoliticaleconomy

SpecialIssue:Onstructuraldevelopments,Koizumireforms,andthecollapseofLDPrule

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international competiveness. The prescription has been insisted upon even during hardeconomictimesofhighunemploymentasanalternativetocounter-cyclicalfiscalspending,andhasbecomeaprescriptionoftenchidedbythecriticsasmarketfundamentalism. Table1liststheyearsofrecessionsatOECDcountriessincethemid-1970s.TheTableshows a synchronization of economic cycles among OECD countries. Figure 1 traces thetrends in average inflation and unemployment rates of OECD countries. The data clearlyindicatethatgovernmentshavebeenabletocontrolinflationevenwhileallowingunemploymentratestoremainhigherafterrecessions.Inspiteofeffortstostabilizemonetaryrelations,theearly1990srecessiontriggeredcurrencycrisesacrossEuropecausingwhataretodatetheonlythreeknowncasesofatwincurrencyandbankingcrisisinOECDmembers-thoseofNorway,Finland,andSweden.Althoughtwincrisesaremorefrequentindevelopingcountries,thefactthatdevelopedeconomiesarebynomeanssafefrombothabankingorcurrencycrisishasbeenamplydemonstratedbythe2008-09globalrecession.Furthermore,persistenthighunemployment in thewakeofrecentrecessions isoftenascribed to the inabilityofOECDgovernmentstodeploythefullarsenalofmonetaryandfiscalpoliciesintheadventofthefreecapitalflows(cf.Cusack1999,2001,ClarkandHallerberg2000,Way2000)Inthefaceoffreecapitalmovements,governmentsfacingrecessionscannolongerrelyonfiscalandmonetaryexpansion, insteadfindingthemselvescompelledtochoosebetweenfiscalexpansion, iftheyhaveadoptedafixedexchangerate,andmonetaryexpansion,iftheyhaveallowedthecurrencytofloat.Moreover,ifgovernmentsheavilyprioritizemonetarystabilityandfearthatexpan-sionarymonetaryorfiscalpolicies,whicheveravailable,mightigniteinflation,thatfactmight

Table 1. Recessions at 20 OECD countries (1975-2008)Late70s Early80s Late80s Early90s Late90s Early2000s Late2000s

Australia 1977 1980,82-83 1985-86 1990-91 2001 2008-Austria 1975,78 1980-81,84 1991-93 2001,03 2008-Belgium 1975,77 1981,83 1991,93 1996,98 2001 2008-Canada 1977 1980,82 1986 1989-91 1995 2001 2008-

Denmark 1975,77 1980-81 1987,-89 1993 2001 2007-Finland 1980-81 1991-93 2001-2002 2008-France 1975 1980,83 1993 2001 2008-

Germany 1975,77 1980-82 1992-93 2002-2003 2008-Ireland 1976,79 1983 1985-86 1991 1996,98 2000-01,03 2008-Italy 1975,77 1981-82 1993 1996 2002-2003 2008-Japan 1980 1986 1991-93 1997-99 2001-2002 2008-

Netherlands 1975,77 1981-82 1987 1991,93 2001-2003 2008-NewZealand 1975,77-78 1982 1985 1991 1995,98 2001,2005 2008-

Norway 1977 1981-82 1986-89 1998 2001-2003Portugal 1975,77-78 1981,83-84 1990,92-93 2001-2003 2008-

Spain 1975,78-79 1981 1992-93 2001 2008-Sweden 1976-77 1980-81 1990-93 1996 2001 2007-

Switzerland 1975-76,78 1981-82 1986 1991 1999 2001,03 2008-UK 1975 1980-81 1984 1989-92 1995 2001 2008-US 1975 1979-80,82 1990-91 1995 2001

RecessionYear:De[inedaswhengrowthrates(a)fallonestandarddeviationbelowcountryaverage,(b)arenegative,or(c)declineover1.25percentagepoints

StructuralReformsatOECDCountries

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makethemreluctanttoundertakeboldexpansionarymeasures.Undersuchcircumstances,instead of counter-cyclical spending, or disruptive monetary expansion, governments areadvisedtoexpeditestructuralreform. InspiteofeffortsbyOECDgovernmentstorealizemonetarystability,evenatthecostofrisingunemployment, therehasbeen littleempirical investigationonwhether internationalfinancial volatility and synchronized economic downturns have made them receptive tostructuralreforms,liberalizingtheirsupply‐sidepolicies.Recentempiricalstudiesofstructuralreform have unearthed some of its determinants but without providing an underlyingexplanation(PitlikandWirth2003,Belkeetal.2007,Pitlik2007,Alesinaetal.2006,Alesinaetal.2008,Duval2008,Butietal.2009,Wölfietal.2009). Thispaperhopestofillthatvacuum.Thus,thefocus,ordependentvariable,ofthispaperispoliciesaimedatliberalizingregulationsinproductionmarketstoincreasethemobilityandefficientuseofcapital,i.e.policiesaimedatincreasinginvestment,facilitatingcompetition,andpromotingindustrialstructuralchange.Thepaperfocusesonproductionmarketssincetheexistingresearchonlabormarketreformsuggeststhatpoliticsofreformdifferconsiderablybetweenproductionand labormarkets (Elmeskovetal. 1998,BlanchardandWolfers2000,Howelled.2005,Nickell,etal.2005,Baccaro,andRei2007).1)Thismakesadetailedexaminationoflabormarketreformincludingnecessarycomparisonswithproductmarketreformbeyondthescopeofasinglepaper.

Figure 1 Unemployment and inf ation rates of OECD countries

1）Itshouldbenotedthat thedependentvariable in theempiricalstudiesof labormarketreformhavealmostalwaysbeenunemploymentrates, reflecting thepracticalconcern thathighlyregulated labormarketsarethecauseofpersistenthighunemploymentinEuropeduringthe1990s.


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Figures2aand2bdepict thetrendsofstructuralreformsanalyzed in thispaper.Thetrendsseemquitestraightforward:Structuralreformshavebeenproceedingsincethe1980s,depicting a very similar trajectory across allOECD countries.This convergence of policyoutcomes,however,doesnotmeanthatasinglecauseisresponsible.Therearetwowidelyaccepted explanations concerning this convergence: one is economic globalization and theotherisdiffusionofpolicyideas(SimmonsandElkins2004,Simmonsetal.2006,Swank2006).Although these explanations arepowerful, there is enoughcircumstantial evidenceagainsttheseideastowarrantaninvestigation.Forinstance,ifeconomicglobalizationmatters,whywouldalowtradedependencycountryliketheUnitedStatesbeatrailblazerandcontinuetodoso,orwhywouldasimilarlylowtrade-dependencycountrywithchronictradesurpluseslikeJapanfeelcompelledtofollow?Similarly,ifneoliberalideasmatter,whywouldcountrieswith social democratic governments eagerly adopt a neoliberal prescription? Even if suchEuropeancountriesweresmallopenstatesdependentontrade,whydon’tweseemorepolicyreversalsandidiosyncraticmovementsaspartygovernmentschange,insteadoftheconsistentpatternweseeinFigures2aand2b? Inshort,thispaperinvestigatesthecircumstancesunderwhichgovernmentsaremorelikely to enact structural reform to facilitate industrial competition, investment, andrestructuring.Morespecifically,thispaperasksthreeinterrelatedquestionsthathithertonotfullyaddressedintheexistingliteratureonthepolicyeffectsofeconomicglobalizationoronideadissemination.Thefirstquestion iswhether internationalrecessionsandthequest formonetarystability is themajorcausethatpromptsgovernmentstocontemplatestructuralreforms. Secondly, this paper probes whether there are any domestic policy factors thatfacilitatestructuralsuchreformsregardlessoftheideologicalorientationofthegovernment.Here,thepaperfocusesonthesizeofthefiscalstate,derivedfromthe“smallstate”literatureofthe1970sand80s(Katzenstein,1983,Cameron1978,1984).Finally,andmostimportantly,thispaperaskswhythechangesinpolicypositionsofmajorpartyandchangesofgovernmenthavenotintroducedmorediversityinproductmarketpolicies,avenueofinvestigationinspiredbytheliteratureondynamicrepresentationanddemocraticinstitutions(Lijphart1999,BudgeandMcDonald2005).Thus, internationalfinancialvolatility, thefiscal sizeof the state, andpreferenceshiftsconstitutetheindependentvariablesofthisstudy. With regard to these issues, there are reasons to expect that (a) governments facingrecessionsintheadventofeconomicglobalizationhavestrongincentivestopursuemonetarystability and enact productionmarket reforms, (b) a large fiscal state could facilitate suchreforms by subsidizing labor mobility and easing opposition to industrial restructuringregardlessoftheincumbentgovernment’sideology,andthat(c)thestablepatternofstructuralpolicychangesreflectthelegislativemedian’spreferenceratherthanshiftsinthegovernmentortheunderlyingelectoralinstitutions.Broughttogether,andifcorroborated,theseexpectationsprovideacoherentexplanation,hopefullymorepersuasivethantheeconomicglobalizationorideadiffusionliterature.Ashortexplanationofthetheoreticalfoundationsofeachexpectation,


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whichgenerate thehypothesesof thispaper, isgiven in thenext section.Thehypothesessectionwillbefollowedbythepresentationoftheevidence.Thepaperconcludesbylistingthe

Figure 2a Trends in OECD regulation

Figure 2b Trends in OECD taxes


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implicationsofthispaper’sfindingsforthebroaderliterature.

II. The Hypotheses

(1) The Importance of International Recessions

Inaworldoffreecapitalflows,monetarystabilityisnotonlyintheinterestofbusinessesoriented towards internationalmarketsbut also in the interests of governmentshoping tostrengthen such industries in order to realize growth and increase trade.The notion thatstablemonetarypolicyis intheinterestsof internationalbusinessescanbederivedfromastandard Mundell‐Fleming framework. Frieden’s (1991) succinct overview explains thedistributive conflicts implied in this framework. As his explanation goes, when capitalliberalization(i.e.theabolishmentofcapitalandexchangeratecontrols)isagivencondition,internationalmarketorientedbusinessespreferexchangeratestability(andthereforepricestability) over the autonomous employment of monetary policy, whereas domestic marketorientedbusinesses(importcompetinganddomesticserviceindustries)preferthegovernment’sunilateraluseofmonetarypolicy,evenatthecostofmonetaryinstability. Now,iftheperformanceofthetradesectorisvitaltoeconomicrecovery,governmentsare expected to pursue monetary stability along with structural reforms, especially afterrecessions,andtheywillprobablydosoregardlessoftheirexchangepolicycommitmentsandoppositionfromindustriesconfinedtothedomesticmarket.However,acaveatisinorder:thegovernment’s pursuit of monetary stability to expand economic activity and trade afterrecessionsisnotsynonymouswiththeincumbentgovernmentactinganagentofinternationaltrading and investment industries. Since this difference is more important to students ofrepresentativedemocracythantointernationalpoliticaleconomists,theempiricalstudiesbypoliticaleconomistshavehardlyaddressedtherepresentativeconditionsforstructuralreforms.In contrast, this paperwill shed light on this issue by askingwhether other policies helpstructuralreformregardlessofthepartisanshipofthegovernmentandwhetherstructuralreformrepresentsthestablepreferencesofthelegislativemedianinsteadofincumbentright-centerpartiesrepresentingspecificinterestsamplifiedbytheelectoralsystem(seebelow). Thispaperassumesthatgovernmentsundertakestructuralreformsasawaytorevivetheeconomyduringadverseeconomicconditionswhileadhering tomonetarystability.Analternativehypothesiswouldclaimthatgovernmentspursuestructuralreformtopromotetheinterestsof theexportersand international investors,against theopposition fromdomesticmarket-oriented industries. If the alternative claim is right, movements in trade – tradeopennessandtradevolatility–shouldtriggerstructuralreformsratherthanfinancialvolatility.Thesetofalternativesabouttheinternationaleconomicconditionsforstructuralreformcanbestatedinthefollowingway:


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Hypothesis 1: Production market policies are shaped after recessions while maintainingmonetary stability, making it more likely that states facing recessions and susceptibleinternationalfinancialturbulencestodevelopmarket-orientedproductionmarketpolicies.

Hypothesis1a:Productionmarketpoliciesareshapedtocatertointernationaltradinginterests,makingitmorelikelythatstatesdependentontradeandfacingtradeturbulencestodevelopmarket-orientedproductionpolicies.

Economic downturns against the backdrop of monetary volatility have never beenconsidered as a cause of structural reforms. Instead, empirical studies so far have askedwhetheradoptingfixedexchangeratesorjoiningtheEMUfacilitatesstructuralreforms(Belkeetal.2007,Alesinaetal.2008),reflectingtheoverwhelmingpractical interestonstructuralreformamongtheEurocountries.Hypothesis1,ifcorroborated,willnotonlybeoneofthefirsttoprovideabusinesscycleaccountof structural reformbutwillmarkacrucialfirst steptoward integrating the international with the domestic motivations of government policy,whichiswhatthenexttwosetsofhypothesesplantodo.

(2) The Role of the Fiscal State

Theideathatstructuralreformsmaybefosteredwhenstateshavelargerevenuesthatenablethemtoassistlabormobilitydrawsitsinspirationfromthe“smallstates”literatureofthe1980s.TheseminalworksofKatzenstein(1983)andCameron(1978,1984)arguedthatopeneconomiesareassociatedwithlargefiscalexpendituresthatenablethemtocompensatelabordisplacement caused by volatile changes in trade (cf. Rodrik 1998,Adsera andBoix 2002).However, inthis literaturethecrucialpolitical factorthatturnsthe interestsoftheexportsectorintolargeexpendituresishighlyorganizedunionsandpeakassociationsinmanufacturingindustries.IversenandCusack(2000)challengethesmallopenstatestheorybyclaimingthatindustrial structural change and not trade openness is the direct cause of social spendingincrease.Bothsidesofthedebatesharetheassumptionthatalargefiscalstateenablesthegovernmenttowinsupportforlabormobilityandindustrialstructuralchange.2)Assuch,boththeoriesprovidefoundationscompatiblewiththispaper’shypothesisthatalargefiscalstateconducivetolabormobilityisalsocomplementarytostructuralreformsaimedatrealizingtheefficientallocationofcapital(cf.AlesinaandDrazen1991,Duval2008). However,thispaperdepartsfromthesmallopenstatesliteratureanditscriticsintwoways;firstly,itassumesthatlargefiscalstatesareconducivetostructuralreformregardless

2）Boththeoriesexaminethecausesoffiscalstateexpansion.Althoughtheexpansionoffiscalprogramsmaybetheresultofpartisanpreferences,thereformingofsuchprogramsmightrequireamuchbroaderpoliticalalliance.Ontheargumentthatthepoliticsofreformingspendingprogramsisquitedifferentfromexpandingthem,aperspectivesharedbythispaper,seePierson(1995,1996,1998,2001)


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ofthepartisancompositionofgovernment,and,secondly,itspecifiesinternationalrecessionsastheeconomicconditionthatpressuregovernmenttoundertakestructuralreform.Hypothesis1assumedthatstructuralreformiscarriedoutduringeconomicdownturnsinafinanciallyvolatileglobal economy, as a strategy to revive theeconomywithoutdisruptingmonetarystability (cf.DrazenandGrilli1993,PitlikandWirth2003).Basedonthisnotion,thispaperclaimsthatstructuralreform isundertakenduringdifficultfiscal timesevenat thecostofaggravatingpublicdebt. Thisclaimonthefiscalconditionsofstructuralreformsactuallyspeakstoarecentdebateoverwhetherfiscaldisciplineiscompatiblewithstructuralreforms,aquerystronglyreflectingthepolicycontroversyovertheEuropeanUnion’sStabilityandGrowthPact.Skepticsofthecompatibilityviewclaimthatstructuralreformworsensbudgetdeficitsanddiminishesthepowerofautomaticfiscalstabilizers,whilesupportersofthisviewclaimthatstructuralreformhaspositivefiscaleffects(vandenNoodandCournède2006,Butietal2009).Theevidenceismixed (Duval 2005,Duval andElmeskov 2005, Buti et al. 2009). In comparison, this paperexamineswhetherstructuralreformtakesprecedenceoverfiscaldisciplineforgovernments.Notethatthispaperhasreversedthequestionoftheabovedebate.Insteadofaskingwhetherstructuralreformsarecompatiblewithfiscaldiscipline,thispaperaskswhethergovernmentspursuestructuralreformsatthecostofsacrificingfiscaldiscipline. Inshort,thispaperassumesthatgovernmentsofalargefiscalstatearemorelikelytoembarkonstructuralreformsafterrecessionsregardlessof theirpartisancomposition.Analternative hypothesis (Hypothesis 2a) based on the idea dissemination theory and thecompatibletheorywouldassumethatgovernmentsundertakestructuralreformindifferenttothesizeofthefiscalstateorthepublicdebt.Governmentsendorsingneo-liberalismaremorelikelytoenactstructuralreformswithoutfeelingtheneedtomollifyopponentsortosolicitsupportbeyondtradinginterestsand/orbelievethatstructuralreformswillgeneraterevenuestoamelioratefiscalproblems.Thus,whileHypothesis2isinlinewithHypothesis1,Hypothesis2aiscompatiblewithHypothesis1a.

Hypothesis2:Structuralreformsarelikelytoprogresswhenthefiscalsizeofthestateislarge,evenwhenthestateisaccumulatingpublicdebts.

Hypothesis2a:Structuralreformsarelikelytoprogressindifferentofthefiscalsizeofthestateortheconditionofpublicdebts.

Aninterestingpointmadebytheskepticsofthecompatibilityviewisthatgovernmentsusuallydonothaveenoughpoliticalcapitaltorealizebothfiscalreconstructionandstructuralreform(cf.EichengreenandWyposz1998).Thisraisesthequestionofwhatsortofgovernments,orwhatsortofpoliticalconditions,accompanystructuralreform.Toanswerthisquestion,thispaperreferstoanotherdebateinthesmallopenstateliterature,whichistheissueofwhose


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interestsarerepresented inshapingpoliciescharacteristicof smallopenstates.The initialexplanationfocusedontheexportsectoranditsheavilyorganizedbusinessassociationsandlaborunions (Cameron1978, 1984),whereas a later revision emphasized the importance ofbroader“cross-class”alliance(Swenson1991).Thispaperwillapproachthisquestionbyaskingwhetherabroadelectoralcoalitionisnecessaryorwhetheragovernmentrepresentingthesectoral interests would suffice to foster structural reforms. However, to understand therelevance of this question, it is necessary to briefly review the recent discussions on howpoliticalinstitutionsandpreferencesarelikelytoshapepolicies.

(3) The Significance of Political Preferences and Institutions

Domesticpoliticsiscrucialinexplainingwhenandhowexternalshocksresultinstructuralreforms,althoughsortingoutwhataspectsofdomesticpoliticsmatterisadauntingtask.Sofar,empiricalstudiesofpoliticaleconomyhaveoverwhelminglyfocusedonelectoralinstitutions.For instance, Persson and Tabellini (2005) on fiscal policy, Iversen and Soskice (2006) onredistributivespending,andRogowski(1987)ontradepolicy,allascribepolicyoutcomestothecountry’s electoral system. Persson and Tabellini (2005) argue that proportional electoralsystemsaremorelikelytocreatelargefiscalstatesbyshapingpartycompetitioninawaythatapartycanwinastablemajoritybyofferingpublicgoodsandspreadingitscosts,whereassinglememberdistrictsgeneratecollectiveactionproblemsbyenablingpartiestooccasionallywinpowerrepresentingthosefearingbeingleviedwithdisproportionatecosts.IversenandSoskice(2006)elaboratethisbasicideawithregardtodistributivepolicies.Similarly,Rogowski(1987)arguedthatproportionaldistricts,largeelectoraldistricts,andcentralizedpartiesarebetterequippedtoovercomelocalprotectionistdemandsanddevelopanopentradeeconomy. Interestingly,recentstudiesrefinetheimpactofelectoralsystemsbyclaimingthatthestructureoftheballot,especiallytheincentivetocultivateapersonalvotebyrepresentingspecificinterests,isabetterpredictorofpoliciesaimedatinterveninginthemarket(cf.CareyandShugart1995).Theadvantageofthisrevisionisthatitprovidesanexplanationabouttheabilityofpartyleaderstoovercomeinternaloppositionagainstformulatingnation-widepolicies.Ehrlich (2007) and Hankla (2006) revisit Rogowski’s results and find that the incentive tocultivateapersonalvoteisabetterpredictorofactualtradepolicies(forwhichRogowskiusestradedependence)thanelectoralsystemsper se.Thus,thispaperwillexaminetheeffectsofapersonalvotealongwiththoseofelectoralsystems.Inshort,institutionalistanalysissuggeststhatproportionalelectoralsystems,multi-partylegislatures,andsmallerincentivestosolicitpersonalvotesarecapableofpromotingnation‐wideregulatoryandredistributivepoliciesaimedtorectifytheworkingsofafreemarketbecausetheyarebettersuitedtoovercomelocalorparochialopposition. However,thelimitsandinadequaciesofinstitutionalanalysisbecomeapparentwhenonerealizesthatpartieswilloftenrevisetheirpoliciesinfacingtheelectorateand,asaresultof


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elections governments are replaced with new ones with completely different ideologicaldispositions.Incomparison,electoralsystemsandballotstructureseldomchange.Thisobviouspointisimportantinprobingwhoseinterestsarereflectedinstructuralreform,andwhethergovernmentchangegeneratespolicychange.Thus,itisnecessarytorectifywhatismissingfrominstitutionalistexplanations,whichcanbesummarizedintothreepoints.Firstofall,notalleconomicpolicyissuesarepositionissuesinwhichpartiestakeaclearpositioninoppositionto,orshowsignificantideologicaldistanceamong,eachother.Forinstance,moreoftenthannot, politicians under certain circumstances agree to delegate monetary policymaking tocentralbanksby increasing theirautonomyand thereby insulatingmonetarypolicies frompartisanbattles.Secondly,policieschangeaspartiesshifttheirpositionsinfacingtheelectorate.Although major parties never swap policy positions, they may nonetheless “co-move” bysofteningtheirpositionsandadoptingpoliciessimilartotheirrivalsinordertoappealtothemedianvoter.Finally,governmentschangewithelections,meaningthatanewgovernmentmightembracepoliciesopposedtoitspredecessor(Budge1994,Budgeetal.1987,Budgeetal.2001McDonaldetal.2004,McDonaldandBudge2005,BudgeandMcDonald2007). Theincorporationofelectoralandgovernmentchangeintotheframeworkcorrespondstothethornyproblemofwhetherpoliciesreflectthelegislativemedian(Krehbiel1991,1993,1998)orthegoverning(orthelegislativemajority)party’smedian(cf.CoxandMcCubbins1993,2005,Binder1999,Lawrence2006,Smith2007);anissuethatisheatedlydebatedamongstudentsofU.S.Congressover“responsiblepartygovernment.”Itisnoteworthythatpoliciesrepresentingthelegislativemedianarelikelytoapproximatevalenceissuesoverwhichcompetingpartiesdonotopposeeachotherandwhichcanberealizedthroughcompromise,andarelikelytoremainstable.Incontrast,policiesthatreflectthegoverningmajorityarelikelytobepositionissuesoverwhichcompetingpartiesareopposedtoeachotherandwhichhavetobepursuedbyconfrontationandmightberepealedoncetheoppositionpartyisinpower. Basedon theabovediscussion, thefinal setofhypothesesof thispaperaddresses thepossibilityofpoliciesbeingaconsequenceof(a)thelegislativemedian,asaresultofcomovementsofpartisanpreferences,(b)thegoverningmajority,and(c)theunderlyingelectoralinstitutions.ConsistentwithHypothesis 1 andHypothesis 2, this paper assumes structural reforms toproceedwitha right-leaning legislativemedianevenwithout the inaugurationof a rightistgovernment,andsuggeststhatinstitutionsalonecannotpredictstructuralreform.Assuch,ifcorroboratedHypothesis 3 provides a repudiation to the common criticism that structuralreformsandliberalsupply-sidepoliciesembodyarightistgovernment’sadherencetomarketfundamentalism.

Hypothesis3:Structuralreformsreflectthe legislativemedian intandemwithmajoritarianelectoralsystemsthathinderthedevelopmentregulatoryandredistributivepoliciestorectifymarketforces.


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Hypothesis3a:Structuralreformsreflecttheideologyoftheincumbentgovernment,assistedbymajoritarianelectoralinstitutionsthatpromotestrongpartisangovernments.

Havingstatedthehypothesesandexplainedtheirtheoretical foundations, thispaper isnowreadytoexplaintheempiricalmodelandthevariablesusedtotestthehypotheses.

III. The Model

Table2liststhevariables–theirnames,expectedsigns,andsummaryinformation,andsources–usedtotesttheabovehypothesesandtheiralternatives.Allthelinearregressionshaveusedpanelcorrectedstandarderrorsandcountryunitfixedeffects. Thedependentvariableofthispaper–productmarketpolicies–isrepresentedbytwovariables,whichcapturethedifferentaspectsofsuchpolicies.Thevariablesare,theregulationinnon-manufacturingindustries(regulation)andtheaverageofcorporatetaxandtopmarginalincometaxrates(taxrates).ThefirstvariableregulationisactuallythemeanofthreeseparateindicescompiledbytheOECDontheextentofthepublicownership,governmentregulation,andentrybarrierstosevennon-manufacturingindustries.Thisistheonlyindexofgovernmentregulationcurrentlyavailableasannualdata,andthechoiceofindustriesisjustifiedongroundsthatcostreductionandcompetitionintheseindustries,whichprovideintermediategoodstoexportmanufacturing,lowerthecostsofexports(NicolettiandScarpetta2003Conwayetal.2005Boerietal.2006,ConwayandNicoletti2006,Højetal.2006,Wölfietal.2009)3).Thesecondvariable,thetworatesthatcomposethetaxratesvariablehavebeenfrequentlydebatedingovernmentsandpolicycirclesacrosscountriesasakeytooltoencourageinvestmentintimesofeconomicdownturns.Also,corporatetaxrateshavebeenamajorissueintheneoliberal“race to the bottom” debate on whether economic globalization, especially the threat ofcorporateexit,forcescountriestolowertaxratesandcutsocialexpenditures(Swank1998,2002).Thesetwovariablescapturecrucialaspectsofsupply-sidepoliciesandalwaysappearinthedebatesoverstructuralreform,makingthemsuitableasthedependentvariablesofthispaper.


Theindependentvariablescanbedividedintothreegroupscorrespondingtothethreesetsofhypothesesofthispaper.Growthandunemploymentarethestandardmeasuresofeconomiccycles.Thusweexpect,growthtobepositivelyandunemploymenttobenegativelycorrelatedwithchangesinproductionmarketpolicies.Hypothesis1and1adifferastowhether

3）Theindustriesareelectricity,gas,airlines,rail,telecommunications,andpost.


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monetarystabilityor tradestability ismore important in shapingproductmarketpolicies.Hypothesis1expectsstructuralreformstoproceedduringdifficulteconomictimes.Monetarystabilityismeasuredbyacountry’sinflationratesaswellasthenumberofdrasticdepreciationsit has experienced in the past.The number of past drastic depreciations is the times the

Table 2. Summary of variables

VariableName Hypothesis Summary SourcesNo. Sign mean sdv min max

Regulation D.V 3.88 1.52 0.759 6OECDIndicatorsofproductmarketregulationhomepage<http://www.oecd.org/document/36/0,3343,en_2649_34323_35790244_1_1_1_1,00.html>

Tax rates D.V. 0.48 0.11 0.26 0.737

InstituteforFiscalStudies<http://www.ifs.org.uk/publications/3210>,Devereuxetal.(2002)andFraserInstituteconomicFreedomoftheWorlddatabase<http://www.freetheworld.com/datasets_efw.html>

In1lation 1 + 0.05 0.05 ‒0.02 0.27Growth 1 + 0.03 0.02 ‒0.07 0.115 OECDEconomicoutlook<http://stats.oecd.org/>Unemployment 1 ‒ 0.07 0.03 0.002 0.20

Drastic depreciations 1 ‒ 5.86 3.21 0 14 CalculatedbytheauthorusingIMFInternationalFinancialStatistics,<http://www.imfstatistics.org/imf/>

Trade Openness 1 n.s 0.65 0.32 0.161 1.84 CalculatedfromPENNWorldTables<http://pwt.econ.upenn.edu/>&WorldBankWorld

Trade balancedeteriorations 1 ‒ 3.96 2.16 0 8 DevelopmentIndicatorsdatabase

<http://databank.world-bank.org/ddp/home.do>Centralbankautonomy 1 ‒ 0.56 0.23 0.19 0.94 Arnoneetal(2007),Daunfeldtetal.(2010)EMU 1 ‒ 0.15 0.36 0 1

EUROPAwebsite<http://europa.eu/index_en.htm>GSP 1 ‒ 0.22 0.41 0 1Banking crisis 1 + 0.04 0.18 0 1 Boyedetal.(2009),LaevenandValencia(2008)Revenue 2 ‒ 0.36 0.07 0.184 0.522 OECDRevenuedatabase<http://stats.oecd.org/>VAT 2 ‒ 0.13 0.09 0.00 0.25 OECDTaxdatabase<www.oecd.org/ctp/taxdatabase>Government Debt 2 ‒ 0.45 0.27 0.024 1.638 JaimovichandPanizza(2006)Legislative median 3 ‒ ‒1.49 11.36 ‒30.6 39.71 ManifestoProject(MRG/CMP/MARPOR),Berlin:

WissenschaftszentrumBerlinfürSozialforschung(WZB)(<http://www.wzb.eu/zkd/dsl/Projekte/projekte-manifesto.en.htm>),Woldendorpet al. (2000),European Journal of Political Research(variousissues)

Governmentpartymedian 3 n.s ‒0.05 16.87 ‒37.26 48.46

Governmentmedian 3 n.s ‒0.03 16.74 ‒37.41 48.46Legislative right-center 3 ‒ 0.51 0.19 0.06 0.97

Government party right-center 3 n.s 0.29 0.24 0.00 0.80 DuaneSwankComparativePartiesdataset

<http://www.marquette.edu/polisci/faculty_swank.shtml>Government right-center 3 n.s 0.60 0.39 0.00 1.00

Legislativefragmentation 3 n.s 68.11 11.16 40.91 88.98 KlausArmingeon,SarahEngler,PanajotisPotolidis,Mar-

lèneGerber,PhilippLeimgruber,ComparativePoliticalDataset<http://www.ipw.unibe.ch/content/team/klaus_armin-geon/comparative_political_data_sets/index_ger.html>

No.ofEffectivelegislativeparties 3 n.s 3.61 1.48 1.69 9.07

Electoral districts 3 + 0.59 0.80 0 2District Magnitude 3 + 14.99 31.78 1 150

PersonalVote 3 ‒ 2.81 1.61 0 5 ElectoralSystemsandPersonalVotedataset,JohnsonandWallack(2007)

Note:onlythevariablesinboldappearintheresults


37

exchangerates(S=ΔSj,t/σΔSj)fallsmorethantwostandarddeviationfromtheaverage.4)Assuch, Hypothesis 1 expects inflation to be positive (meaning low inflation is conducive tostructuralreforms)anddrastic depreciationstoshowsignificantnegativesigns.Bycomparison,Hypothesis1aassumestradestability,measuredbyacountry’sopennessandthenumberoftrade deteriorations,tobeabetterpredictorofproductmarketpolicies.Trade opennessistheexportandimportratio-to-GDP.Trade deteriorationismeasuredbythenumberofyearsacountry’stradebalancedropsmorethanonestandarddeviationbelowtheaverage.Hypothesis1aexpectsbothvariablestoshowanegativesign. Inadditiontointernationalfinancialvolatility,thispaperincludesthreeothermeasuresofinternationalrecessionsandthegovernment’squestformonetarystability.Onevariableisthebanking crisis, which occurs during recessions, increases financial instability, and prodsgovernmentstoundertakestructuralreformtorevivetheeconomy.Thebanking crisisindexisadummyvariablewitha0.25scorefornon-systemicbankingcrisisandascoreof1forsystemicbankingcrisisduringthedurationofthecrisis.Thevariableiscreatedfromseveralsources,whichseemtobeinaccordaboutthedurationandseverityofabankingcrisisamongOECDcountries(seeTable2).AnothermeasureexaminedhereismembershipintheEMU(European Monetary Union) or Stability and Growth Pact (SGP): both international pactscommitsignatorygovernmentstoundertakemonetarystability.Thefinalmeasureiscentral bank autonomy,whichcanbeseenasatoolforgovernmentstocontrolinflation.Sinceallthreetypesofmeasureshelpgovernmentstorealizemonetarystabilityinordertopursuestructuralreforms,thispaperexpectsbanking crisis,EMU(or SGP),andcentral bank autonomytobenegativelycorrelatedtothedependentvariables.


ThevariablesusedandtheexpectedsignsofHypothesis2andHypothesis2aarequitestraightforward.Tomeasurethefiscalsizeofthestate,thispaperusesrevenue-to-GDPratioaswell asVAT rates.To test the fiscal situation, this paper usesgovernment debt:Thedifference betweenHypothesis 2 and its alternative is the role of the fiscal state and theprecariousnessofthefiscalsituationwhengovernmentsareassumedtocarryoutstructuralreform. According to Hypothesis 2 governments are more likely to embark on structuralreformtoreinvigoratetheeconomywhenitrulesalargefiscalstateinspiteofadversefiscalcondition.Incomparison,inHypothesis2agovernmentsdosoregardlessofthefiscalstatesizeandthefiscalsituation.Hypothesis2expectsallofthesignstobenegative,whileHypothesis2aexpectsittobeinsignificantorpositive.

4）SisthebilateralexchangerateofcountryjwiththeU.S.dollar(andthenominaleffectiveexchangeratesfortheUnitedStates).Themonthlychanges(ΔSj,t)arestandardizedwithstandarddeviationsservingascountry‐specificweights(σΔSj).


38


With regard to the effect of partisanship, this paper uses the Comparative ManifestoProjectdataset(seeTable2).TotestHypothesis3,thispaperusesthemeanpreferencesofthemajorpartiesinthelegislatureweightedbytotheirseatshare(legislative mean)andsizeofright-centerpartiesinthelegislature(legislative right-center).TotestHypothesis3athefollowingindicesareused:theweightedpreferencesofthegovernmentparties(government mean),theseatshareofright-centerpartiesingovernment(government party right-center),andthegovernmentportfolioshareofright-centerparties(government right-center). Itisnoteworthythatthelegislative meanorthelegislative right-centerontheonehand,andtheothermeasuresaretotallydifferentmeasures.Thiscanbebetterexplainedbyexample.Figure3chartsthetrendsinthelegislative meanandthegovernment party meanfortheOECD and theUnited States.The pointworth noting is that the legislativemean ofU.S.CongresshasbeenshiftingtotherightthroughouttheperiodexaminedandhasbeenmuchfurtherrightoftheOECDaveragesince1981,regardlessofwhethertheRepublicansortheDemocratsarethemajority.Furthermore,althoughtheU.S.government party meanduringtheClintonadministrationistotheleftofitspredecessoranditssuccessor,itismuchfurthertotherightthanmostOECDgovernmentparties.Thismeansthatwhetherthegovernment’spartyisright-centerorleftcenterasmeasuredbyseat(orportfolio)sharesissomethingquitedifferenttowherethegovernment party meanpreferenceisontherightleftscale.Usually,

Figure 3 Mean government and legislative preferences of the OECD and the United States


39

whenonetalksofthegovernmentbeingrightorleft,itistheshareofseatsorportfoliosthatthepersonhas inmind. Incidentally,Figure2 also showsagradual rightward shift in theOECDcountries’legislative meanandamorecyclicaltrajectoryforthegovernment mean,especiallyafterthe1980s. Hypothesis 3 expects the signs of the legislative mean tobe significant andnegative,meaningarightleaningmedianwillresultinliberalsupply-sidepolicies.Sincearightleaningmedian is likely to translate into a larger share of right-center parties in the legislature,Hypothesis3alsoassumesthatthesizeofright-centerpartiesinthelegislature(legislative right-center)willbenegativelycorrelatedwithliberalsupply-sidepolicieswhilethegovernment party right centerandgovernment right-centertobeinsignificant.Bycomparison,Hypothesis3aexpectsgovernment party right-centerand/orgovernment right-centertobesignificantlyandnegativelycorrelatedtothepolicyvariablesbutlegislative meanandlegislative right-centertobeinsignificant.Astatisticallysignificantresultofthegovernment meanvariablelendssupporttoeitherhypothesisdependingonwhatothervariablesaresignificant.Ifthelegislative meanvariableisalsosignificant,thatimpliesthatthegovernmentmeanco-moveswith the legislativemean and that preferences aremore important thanwhat party is inpower,supportiveofHypothesis1,whereasiftheseatorportfolioseatsarealsosignificantthatimpliesthatthestrengthofwhatpartyisingovernmentmattersmorethanwhatpoliciesithadadvocatedinthelastelection,corroboratingHypothesis2. Inaddition,severalvariablesareusedtotesttheeffectofelectoralinstitutions.Amongthemtwovariables–electoral districtanddistrict magnitude–directlymeasuretheelectoralsystem.Electoraldistrictisacoarsemeasure,whichdifferentiatesamongsingle-member(=2),mixed-member(=1),andproportional(=0)districts.District magnitudeisdefinedasthemeannumberofrepresentativeselectedfromeachdistrict,takingthevalueof1forsinglememberdistrictsandaspecifiednumberlargerthan1forothertypeofdistricts.Inaddition,apersonal vote index, which is the mean of the three variables that generate incentives to solicit apersonalvote(CareyandShugart1995,JohnsonandWallack2007),isincludedtocheckforthepolicyeffectsoftheballotstructure.Finally,sincesinglememberdistrictsfacilitatetwopartysystems and other electoral systems create multi-party systems, the composition of thelegislatureisalsotakenintoconsideration.Thetwomeasuresforlegislativecompositionarethelegislative fragmentationindexandtheeffectivenumberoflegislativeparties(legislative parties).However,thelasttwovariablesneverhadsignificantpowertoexplainthedependentvariablesandthuswillbeomittedhereafterfromtheexplanationoftheresults. For the institutional variables, Hypothesis 3 predicts electoral district (or district magnitude) to be positively significant and personal vote to be negatively significant. Bycomparison,Hypothesis3atheseinstitutionalvariablesshowthesamesignsasHypothesis3buttobelesssignificantsincethemajorroleofelectoralinstitutionsisassumedtobeoneofcreatingstrongpartisangovernmentsratherthangeneratingmarketfriendlypolicies.


40

IV. The Results


Table3presentstheeconomicconditionsunderwhichstructuralreformstakeplace.Theupperrowshowstheresultsforregulationequations,whilethelowerrowshowstheresultsfortax rates.Inthetwomeasuresofproductionmarketpolicieschangestakeplacewhenthegovernment is pursuing monetary stability (i.e., low inflation), or facing adverse economicconditions(i.e.,highunemployment),andhasbeenexposedtointernationalfinancialvolatility.Theresultsshowthatinflationinpositiveandsignificant,whereasunemploymentisnegativeand significant, although the twovariables cannotbeput in the sameequationbecause ofapparentcollinearity.Economicgrowthrates,althoughstatisticallysignificant,turnedouttobeaquiteinferiorpredictorcomparedtounemploymentwithregardtotheeconomicconditionsunderwhichstructuralreformstakeplace.Thisresultstronglysuggeststhatgovernmentspaymoreattentiontotheemploymentsituationthantotheactualgrowthoftheeconomy.

Table 3. International monetary determinants of structural reformsInternationalfinancialvolatility Internationaltradevolatility

Regulation Coef. Std.Err. z P>|z| Coef. Std.Err. z P>|z| Coef. Std.Err. z P>|z|regulation(t-1) 0.959 0.012 78.61 0.000 0.966 0.012 79.93 0.000 0.996 0.011 91.07 0.000Inflation(t-1) 0.767 0.240 3.20 0.001Unemployment(t-1) ‒0.9222 0.308 ‒2.99 0.003Drasticdepreciations(t-1)

‒0.022 0.006 ‒3.71 0.000 ‒0.0251 0.006 ‒4.52 0.000

Openness(t-1) 0.122 0.091 1.33 0.182Tradedeteriorations(t-1)

‒0.029 0.010 ‒2.88 0.004

Bankingcrisis ‒0.140 0.045 ‒3.13 0.002 ‒0.1465 0.044 ‒3.30 0.001 ‒0.139 0.048 ‒2.89 0.004EMU ‒0.125 0.030 ‒4.15 0.000 ‒0.1347 0.030 ‒4.49 0.000 ‒0.155 0.036 ‒4.35 0.000Countrydummies Omitted Omitted OmittedNumberofobs. 640 640 640R-squared 0.988 0.988 0.987Waldchi2[#ofvari.] 37194.4[24] 35247.5[24] 28936.7[24]

Taxes Coef. Std.Err. z P>|z| Coef. Std.Err. z P>|z| Coef. Std.Err. z P>|z|Taxes(t-1) 0.885 0.023 38.52 0.000 0.897 0.022 40.32 0.000 0.920 0.021 44.3 0.000In5lation(t-1) 0.098 0.033 2.95 0.003Unemployment(t-1) ‒0.116 0.048 ‒2.42 0.015Drasticdepreciations(t-1)

‒0.002 0.001 ‒2.28 0.022 ‒0.002 0.001 ‒2.66 0.008

Openness(t-1) 0.018 0.013 1.37 0.170Tradedeteriorations(t-1)

‒0.005 0.001 ‒4.25 0.000

Bankingcrisis ‒0.021 0.005 ‒4.42 0.000 ‒0.022 0.005 ‒4.46 0.000 ‒0.017 0.005 ‒3.48 0.001EMU ‒0.004 0.005 ‒0.74 0.460 ‒0.006 0.005 ‒1.21 0.226 ‒0.011 0.005 ‒2.12 0.034Countrydummies Omitted Omitted OmittedNumberofobs. 576 576 576R-squared 0.9667 0.9666 0.9665Waldchi2[#ofvari.] 24439.7[22] 25238.7[22] 36707.4[22]


41

More importantly, theresultsshowthatpastexperienceof internationalfinancialvolatility,indicatedbytherateofdrastic depreciationandnumberofcurrency crises,prodsgovernmentstoliberalizeproductionmarketsasexpectedinHypothesis1.Incomparison,asdiscernedfromthe thirdcolumnofTable3, thedegreeof tradeopennesswasnotsignificant inexplainingproductmarketchange,althoughthenumberoftrade balance deteriorationswas. Among the othermeasures thatmight induce governments to contemplate structuralreform,bankingcrisisandEMUwerestatisticallysignificant.Abakingcrisishasacleareffectinreducingregulationandinitiatingtaxcuts.MembershipintheEMUfacilitatesstructuralreform,althoughitseffectontaxratesdidnotreachstatisticalsignificance.EMUturnedouttobeabetterpredictorof supply‐sidepolicies thanSGP.Unexpectedly,however, centralbankautonomy turnedout tobe insignificant, andoften showed thewrongsignwhen theinternationalfinancialvariableswereentered.Aplausibleexplanationisthatalthoughcentralbankautonomycontributestoloweringinflationratesandrealizingmonetarystability,itdoesnotserveasaproxyformonetarystabilityanditsexistencemaysparethegovernmentfromundertaking drastic supply-side policies.All in all, it could be said that the overall resultscorroborateHypothesis1.


Table4addsfiscalpolicyvariablestotheresultsshowninTable3.Inallequations,rev-

Table 4. International monetary and fiscal determinants of structural reformsRegulation Coef. Std.Err. z P>|z| Coef. Std.Err. z P>|z|regulation(t-1) 0.966 0.012 80.56 0.000 0.960 0.012 79.67 0.000In1lation(t-1) 0.698 0.238 2.93 0.003Unemployment(t-1) ‒0.702 0.333 ‒2.11 0.035Drasticdepreciations(t-1) ‒0.021 0.006 ‒3.72 0.000 ‒0.020 0.006 ‒3.51 0.000Bankingcrisis ‒0.149 0.044 ‒3.35 0.001 ‒0.138 0.045 ‒3.10 0.002EMU ‒0.129 0.029 ‒4.38 0.000 ‒0.124 0.030 ‒4.08 0.000Revenue(t-1) ‒0.745 0.312 ‒2.39 0.017Governmentdebt(t-1) ‒0.067 0.039 ‒1.74 0.082Countrydummies Omitted OmittedNumberofobs. 640 640R-squared 0.9883 0.9883Waldchi2[#ofvari.] 35456.8[25] 37215.5[25]Taxes Coef. Std.Err. z P>|z| Coef. Std.Err. z P>|z|Taxes(t-1) 0.904 0.022 40.21 0.000 0.890 0.022 39.66 0.000In1lation(t-1) 0.072 0.032 2.27 0.023Unemployment(t-1) ‒0.085 0.049 ‒1.71 0.086Drasticdepreciations(t-1) ‒0.001 0.001 ‒1.85 0.064 ‒0.001 0.001 ‒1.73 0.080Bankingcrisis ‒0.022 0.005 ‒4.59 0.000 ‒0.021 0.005 ‒4.28 0.000EMU ‒0.005 0.005 ‒1.01 0.312 ‒0.004 0.005 ‒0.86 0.387Revenue(t-1) ‒0.095 0.041 ‒2.34 0.010Governmentdebt(t-1) ‒0.018 0.006 ‒3.05 0.002Countrydummies Omitted OmittedNumberofobs. 576 576R-squared 0.9669 0.9673Waldchi2[#ofvari.] 32403.6[23] 32706.5[23]


42

Tabl

e 5.

Pol

itica

l det

erm

inan

ts o

f stru

ctur

al re

form

Regu

latio

nCo

ef.

Std.E

rr.

zP>

|z|Co

ef.

Std.E

rr.

zP>

|z|Co

ef.

Std.E

rr.

zP>

|z|Co

ef.

Std.E

rr.

zP>

|z|Re

gula

tion

(t-1)

1.027

0.011

94.58

0.000

1.027

0.01

94.43

00.0

001.0

270.0

1194

.970.0

001.0

230.0

1195

.850.0

00Le

gisla

tive

mea

n‒0

.002

0.001

‒1.88

0.061

‒0.00

20.0

01‒2

.270.0

23‒0

.002

0.001

‒2.35

0.019

‒0.00

20.0

01‒2

.060.0

40Le

gisla

tive

right

-cen

ter

‒0.1

760.0

83‒2

.130.0

34‒0

.087

0.084

‒1.03

0.304

Gove

rnm

entp

arty

rig

ht-ce

nter

‒0.07

00.0

40‒1

.770.0

77Go

vern

men

trig

ht-c

ente

r‒0

.012

0.021

‒0.59

0.554

Elec

tora

ldist

ricts

Dist

rictm

agni

tude

0.010

0.003

3.08

0.002

Coun

try

dum

mie

sO

mitt

edO

mitt

edO

mitt

edO

mitt

edN

umbe

rof

obs

.62

162

262

362

0R-

squa

red

0.985

60.9

857

0.985

60.9

858

Wal

dch

i2[#

ofv

ari.]

2587

2.3[2

2]25

528.8

[22]

2353

0.4[2

2]27

795.5

[23]

Tax

esCo

ef.

Std.E

rr.

zP>

|z|Co

ef.

Std.E

rr.

zP>

|zC

oef.

Std.E

rr.

zP>

|z|Co

ef.

Std.E

rr.

zP>

|z|T

axes

(t-1

)0.9

560.0

2243

.410.0

000.9

580.0

2243

.210.0

000.9

58‒.0

2223

43.08

0.000

0.953

0.021

44.37

0.000

Legi

slativ

em

ean

‒0.00

030.0

001

‒2.58

0.010

‒0.00

039

0.000

1‒2

.980.0

03‒0

.0004

0.000

13‒3

.02

0.002

‒0.00

030.0

002

‒2.10

0.036

Legi

slativ

erig

ht-c

ente

r‒0

.027

0.010

‒2.63

0.008

Gove

rnm

entp

arty

rig

ht-ce

nter

‒0.00

60.0

05‒1

.140.2

54Go

vern

men

trig

ht-c

ente

r‒0

.001

0.002

77‒0

.400.6

88El

ecto

rald

istric

ts‒0

.016

0.007

‒2.14

0.032

Dist

rictm

agni

tude

Coun

try

dum

mie

sO

mitt

edO

mitt

edO

mitt

edO

mitt

edN

umbe

rof

obs

.56

056

056

149

7R-

squa

red

0.963

20.9

627

0.962

70.9

637

Wal

dch

i2[#

ofv

ari.]

2370

5.9[2

0]25

131.2

[20]

2521

1.3[2

0]19

423.9

[19]


43

enueshowedtheexpectednegativesignandprovedsignificant,indicatinglargefiscalstatesmakesiteasierforgovernmentstocarryoutstructuralreforms.Theresultsremainedessen-tiallythesamewhenrevenuewasreplacedbyVAT(althoughnotshownintheTable4)SincetheintroductionofVATandsubsequentincreasesofitsratesisarelativelyrecentphenom-enaamongOECDcountries,itcanbeinferredthatgovernmentshavebeentryingtomaintainthe levelof spendingcommitmentsbydependingonVATtosupplement therevenue lossderivingfromcorporateandhigh‐incometaxcuts. Althoughthesizeofthefiscalstatefacilitateschangesinsupply‐sidepolicies,thatfactdoesnotmean thatgovernmentsundertake reformduring timesoffiscal stability.On thecontrary,theresultsshowthatthesizeofthepublicdebtactuallyfosteredstructuralreform,corroboratingHypothesis 2,which assumes thatgovernmentsundertake structural reformevenatthecostofsacrificingfiscaldiscipline.Table5showsgovernment debtwithanexpectednegativesignandsignificant.Thus,Table5corroboratesHypothesis2ratherthan2a.


Table6displaystheresultsshowingtheeffectofpoliticalvariablesonproductionmarketpolicies. Since the economic andpolicyvariables run the risk ofbeing correlatedwith thepoliticalvariablesinonewayortheother,allsuchvariableswereexcludedfromtheregressions. Table5showsthatbothregulationandtax ratesareshapedbythelegislative meanandthechangesinthestrengthoflegislativeparties:boththelegislative medianandlegislative right-centershowtheexpectednegativesignsandaresignificant,whereaslegislative right-center, government party right-center, and government right-center are all insignificant.Hence,wecanconcludethatstructuralreformsareshapedbythelegislativemedianratherthanthepartyinpower.Inthecaseofregulation,boththelegislativemeanandshiftsinthelegislativemedian(legislative median change)weresignificantlycorrelated,whileintax rates thegovernment medianwassignificant.Neitherresult isshowninTable5forthesakeofbrevity,sinceitdoesnotaffecttheoverallargument.Intoto,theseresultssuggestthatthelegislativemedianshapessupplysidepoliciescorroboratingHypothesis3butnotHypothesis3a. Table5alsodisplaystheeffectsofinstitutionsonsupply-sidepolicies.However,itwasonlyfortax ratesthatthemeasuresforinstitutions–electoral district, district magnitude, and personal vote–weresignificantwith therightsign,althoughonly theresult forelectoral district isshown.Althoughdistrict magnitudewassignificant forregulation, thesignwaswrongandwastheoppositefromelectoral district,whichdidnotreachsignificancelevels.Thus,althoughelectoraldistrictsshapetaxpolicyinexpectedways–singlememberdistrictsareconducivetolowerinvestmenttaxation–itisdubiouswhetherelectoraldistrictshaveanyeffect on regulatory policies. Also, as mentioned earlier, none of the variables measuringlegislativeheterogeneityprovedtobesignificantfromthestart.Thus,theeffectsofinstitutions


44

weremuchweakerthanexpectedbyHypothesis3. Allinall,theaboveempiricalresultssupportthetwomajorclaimsofthispaperthat(a)structural reformsarepart of agovernment’s strategy to realizegrowthduringeconomicdownturnswhilemaintainingmonetarystabilityandthat(b)theyarereflectthepreferencesoflegislativemediansratherthanapartisangovernmentrepresentinginternationaltradersoradheringtoneoliberalideas.

V. The Implications

Thispaperhaspresentedacoherentviewof the internationaleconomicanddomesticpoliticaldeterminantsofproductionmarketpolicies,consistingofthefollowingmajorfindings:(a)supply-sidepoliciesareshapedduringrecessioninordertospurgrowthandtrade,affectedbythegovernments’quest formonetarystability inacontextof internationalvolatility. (b)Structural reforms are more likely to proceed when governments regardless of partisanorientationcanmobilizefiscalresourcestoconciliateopponentsandexpandsupport,evenatthe cost of sacrificingfiscal discipline.And, finally, (c) supply-sidepolicies are shapedby aright‐leaninglegislativemedian,ratherthanbythepresenceofaright-centergovernment.Thesefindingscastdoubtontheinterpretationthatsuchreformsarearesultofeconomicglobalizationper se,orgovernmentsrepresentinginternationaltradeinterests,orgovernmentsfollowingmarketfundamentalism.Thefactthatmonetarystabilityandstructuralpoliciesareinlinewiththeinterestsofexportersandinternationaltradersdoesnotmeanthattheyareundertakenbygovernmentsrepresentingspecific interestsordevoted toneo-liberalism. Inmakingthisdistinctionandtestinghypothesesthatconflictwiththepartisanview,thispaperhasunearthedsomepointsworthreiterating. Firstly, this paper points to global recessions in a world of precarious internationalmonetarystabilityasthemaincharacteristicsofeconomicglobalizationtowhichgovernmentsmustadjust. Internationalmonetarydisruptionmattermore togovernments than tradeorinvestmentbecauseitisthecause,theaggravatorandthesynchronizerofeconomicdownturns,directly affecting the availability of counter‐cyclical spending available to governments.However,theoriesontheinternationaloriginsofcorporatistpolicymaking,referredtoasthesmallopenstatestheory,inadditiontotheresearchempiricallyrefutingtheneoliberal“racetothebottom”theory(cf.Garrett1998,Swank2002)regardinternationaltradeandinvestmentasthekeyelementthatcompelgovernmentstoembarkonpolicyreforms.Veryfewworkshaveexaminedtheimpactofglobalrecessionsaccompanyinginternationalfinancialvolatilityonthedevelopmentofeconomicpoliciesbeyondmonetarypolicy.Theempiricalresultsofthispapersuggestsuchavenuetoberewarding. Secondly, this paper emphasizes the political utility of large fiscal states on pacifyingoppositiontostructuralreforms.Thispaperhasfoundthatwhenconfrontedbyarecession,


45

governmentsarelikelytoshelvefiscalreconstructionforthesakeofstructuralreformbecausestructuralreformisviewedasaviablestrategytoallowfortherevivaloftheeconomywhilesimultaneously expanding trade andmaintainingmonetary stability.A large fiscal state ismore likely to help governments regardless of their ideological orientation by somewhatpacifyingtheexpectedoppositiontosuchreforms.Thisresultsuggestshowimportantitistoprobeintothepolicyarsenalofgovernmentswhentheyareabouttoundertakedifficultchoicesinordertoconstructrealisticaccountsofpolicydilemmasandpolicychoices. Thirdly,thispaper’sfindingarightleaninglegislatureisconduciveinstructuralreformcorrespondstopuzzlesraisedatthebeginningofthispaperandquestionstheutilityofsomeof the commonsensical political economy regime typologies. The empirical findings of thispaper suggest that structural reforms aremost likely to progresswith large fiscal statescharacterizedbytradeopennessinlinewiththesmallopenstatetheory.Ontheotherhand,manyauthorswritingonstructuralreform,includingadviserstotheOECDandtheEU,findtheliberalmarketsoftheUnitedStates,whichhasthelowestdegreeoftradeopennessandfiscalsize,tobeattheforefrontofstructuralreforms,servingasamodelforEurope.ThesetwoostensiblyconflictingaccountscanbebridgedifweacknowledgethattheUnitedStatesisexceptionallyrightistintermsoflegislativeandgovernmentalpreferences,makingitmoreofapoliticaloutlierthanamodel(seetheaboveFigure3).Similarly,Japan’saveragescoreonreformscanbeunderstoodifonerealizesitssmallstateandrelativeinsulationfrominternationalmonetaryturbulenceiscounteredbyitsprolongedbankingcrisisandright‐centerdominance.Theseresultsquestiontheusefulnessofanalyzingpolicythroughthelensesoftypologiessuchas,liberalmarketsvs.smallstatecorporatism,orliberalmarketsvs.coordinatedmarkets(cf.Hall and Soskice 2001). More importantly, it speaks to the utility of providing dynamicrepresentative foundations to the explanation of policy adjustments. Political economictypologieshaveyettoprovidesuchfoundationsthatdemandstheincorporationofelectoralandgovernmentchangewithintheframework. Thispaperhastriedtorectifythelackofattentiontotheeffectsofpartisanpreferencechanges and government changes on policies,which can be discerned even in the leadingworksofpoliticaleconomy.Withregardtostructuralreform,thispaperhasfoundthatnotallliberalizing policies need a rightist government. In other words, a rightleaning legislativemedianistheonlycommonconditionthatshapesproductionmarketpolicies.Thisfindingnotonlyquestionsthemarketfundamentalistcriticismsofstructuralreformbut,moreimportantly,isconsistentwiththeotherfindingsofthispaper,namely,thatgovernmentspursuestructuralreformtorevitalizetheeconomy,notmerelytocatertonarroweconomicinterests,anddosoduringadverseeconomicandfiscalconditions,madeeasierbyalargefiscalstatewhichhelpsforgeabroadercoalitionforreform.Assuch,thispaperprovidesacoherentexplanationofproductionmarketpolicyofOECDcountrieswithsomeimplicationsforthefieldingeneral.


46

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