Why Do Obvious Reforms Never Happen? The Political Economy of Things

04/26/2012 07:45 am ET | Updated Jun 26, 2012
  • Marcelo Giugale Senior Economic Adviser at the World Bank - Fellow of the National Academy of Public Administration - Author of "Economic Development: What Everyone Needs To Know".

Case One. An African country spends four percent of its GDP every year paying for the gasoline consumed by its relatively few rich people. That would be enough money to double the budget for public education or triple the construction of hospitals -- all services mostly used by the poor. One day the government decides to do something about this madness. Social unrest follows. Who goes out to protest? The rich, right? After all, it is them who will lose the subsidy. No, actually the poor lead the demonstration.

Case Two. A Latin-American government buys the television rights to the country's professional soccer league -- yes, don't ask -- and airs the games for free. Men -- for in this country "futbol" is almost exclusively for them -- are happy. Women hate it -- their husbands will be glued to their TV sets all weekend long. Cost to the national treasury: about $250 million per year. This would be enough cash to give every two- to five-year-old child a preschool education, something that currently only well-to-do families can afford. Women would of course love that kind of child care, not least because it would allow more of them to work outside the home. So, does the female vote in this country swing wildly against the party in office? Does the opposition even raise the possibility of trading soccer balls for children's cognitive development? Nope.

Case Three. A European country with massive unemployment decides to make it easier to hire and fire workers. The expectation -- backed by pretty solid evidence -- is that this will convince enterprises to recruit more, especially among the young. Labor unions, which are made up of people who already have jobs, strike in disgust. The government recoils, delays and, finally, drops the reform. The unemployed do not get a chance to speak out.

Case Four. The most powerful government in the world runs a huge budget deficit and borrows to pay for it. That means that the current generation consumes more than it produces, and passes the bill to the next generation in the form of larger national debt. Yes, some of today's expenditures are for things that will last a long time -- like infrastructure. But most of the money goes to pay for tax breaks, free prescription drugs and housing subsidies. Little of that benefits the young. Why are they not talking about it?

And Case Five. A developed Asian economy restricts -- and, at times, bans -- the importation of rice, even though it is the staple food of its people. This makes consumers pay four times more for rice than they should. For the average family, that adds up to $400 per year of unnecessary expenditures, just to keep local rice farmers in business.

You see, all these cases are true stories. They are happening as we speak. And you can find hundreds more around the world. [Right now, you are probably thinking of one in your own country.] The losers in each case -- the poor, the women, the unemployed, the young, the consumers -- do not get organized to defend themselves. Somehow, societies tolerate these aberrations. They seem trapped in the status-quo -- a kind of low-level equilibrium that makes us collectively worse off. How come? Why is it that obvious reforms don't get done? Because behind every status-quo, there is a complex cobweb of vested interests of people, institutions, and corporations -- "actors" -- who would be hurt by change, so they stop it. Economists call this interplay between losers, winners and decision-makers, the "political economy" of reform -- think of it as a power game played over economic policy.

There are, of course, ways to break the status-quo. Crises are, ironically, among the most effective. It took a global financial meltdown to get politicians everywhere to really focus on supervising banks, and it may take a natural disaster of cataclysmic proportions to get them to do something together about climate change. Not exactly a path to reform that you would wish on anyone.

Another way to break the impasse is through transformative leadership. Once in a while, societies find someone who inspires them, who is different, who can relate to people's present, and who can show them a vision of a better future. If you are lucky, that vision becomes actual progress. But, with inspirational leaders, you never know -- off the top of your head, how many can you name that started well and ended well?

Perhaps technology is a more reliable, but still unpredictable, change-maker. An invention or a discovery can turn the political-economy game upside down. Mobile phones destroyed the dominant position of the old telephone companies. The web is doing the same to once all-mighty newspapers. Drones will soon make fighter pilots look silly. And imagine what will happen to the clout of oil companies (and oil-rich countries) the day we figure out a cheaper way to fuel cars?

But, if crises, leaders and technology are just draws from a hat, is there a more systematic way to wake societies up? Yes, information. You see, most status-quos are based on ignorance. When people find out how much money their governments waste or give to the rich, or the kind of privileges unions get, or how much cheaper imported stuff can be, their anger opens an opportunity for change. Opposition politicians -- especially those that do not benefit themselves from the status-quo -- live off and tease that anger. Social outrage breaks out and the game starts again until a new, hopefully better, equilibrium is reached. All you need is for knowledge to be put in the hands of ordinary people. Thank God for the Internet.