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The Reform Capacity of Governments

Final Report Summary - REFORM CAPACITY (The Reform Capacity of Governments)

Throughout the history of democratic government, scholars, statesmen, and intellectuals have argued that political leaders will not be able to respond to changing economic, political, and social circumstances unless political power is concentrated. If we want effective government, the argument goes, we need electoral procedures that identify a clear winner, and then we need to leave the winner to run the government until the next election. The idea behind this argument is that governments are unable to respond effectively to economic, political, and social changes if governing parties have to negotiate with other parties or institutions – other “veto players” – before adopting new legislation.

The main idea behind the Reform Capacity project is the hypothesis that this simple, straightforward, common-sense argument is wrong since it underestimates the ability of political decision-makers to put together policy packages that compensate “losers” from reform (that is, groups that stand to lose if a policy change is implemented).

The project has demonstrated, on the basis of both theoretical arguments and empirical evidence, that political decision makers in power-sharing systems are often able to adopt and implement big policy changes, and that they do so by compensating losers. The project team has conducted empirical analyses of policymaking in areas such as international trade, fiscal policy, education, social policy, labor market regulation, and taxation, showing that the possibility of compensation explains why power-sharing institutions do not necessarily lead to low “reform capacity.”

The project has also shown, however, that bargaining over compensation can be associated with political problems that are difficult to solve, since it is only possible to reach a political agreement that includes compensation for losers if political decision makers are able to identify an appropriate compensation mechanism, to negotiate a deal, and, importantly, to promise credibly that they will respect that deal in the future. Power-sharing institutions are only associated with high reform capacity if these conditions are met.

If they can be met, however, the Reform Capacity project shows that power-sharing institutions may in fact lead to higher reform capacity, in comparison with power-concentrating institutions – that is, to a superior ability to respond to changing economic, political, and social circumstances. The reason is that power-sharing institutions allow policymakers to address two problems that are difficult to solve in power-concentrating systems. The first problem is how to adopt large policy reforms in societies where strong interest groups, operating outside the bounds of formal political institutions, are able to block the implementation of important reforms. The second problem is how to counteract the inherent “short-sightedness” of democratic decision-making, which often leads politicians to resist policy changes that come with short-term costs, even if the long-term benefits are large.

Since the Reform Capacity project started in 2012, the issues examined by the project team have, if anything, become more important than ever: the project examines problems in democratic theory and practice that are highly relevant for those who wish to understand the political situation in European states, and within the European Union itself.