Working Paper: CEPR ID: DP734
Authors: Charles Wyplosz
Abstract: This paper focuses on the obvious: Pareto-improving programmes may fail to improve everyone's lot. Politically, it has often been interpreted as a requirement that a majority should benefit from the change. Events in Central and Eastern Europe suggest otherwise and cast doubt on the relevance of the median-voter theorem. The addition of minority discontents may result in major political difficulties that lead governments to avoid actions that generate strong minority objections. As a result, the technically best-crafted plans may be rejected for political reasons. In addition, reform programmes which are ex ante politically acceptable may well become rejected ex post after they are implemented. One solution is to introduce a heavy dose of egalitarian income distribution, even if it runs against labour supply incentives.
Keywords: economic reform; political equilibrium
JEL Codes: E62; E63; E65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Pareto-improving economic reforms (D78) | political acceptability (D72) |
| political opposition from minority groups (D72) | rejection of economic reforms (P41) |
| fear of adverse effects on minority groups (J15) | rejection of Pareto-improving economic reforms (D69) |
| political resistance ex post (D72) | rejection of initially accepted reforms (D72) |
| egalitarian income distribution measures (D31) | enhanced political acceptability (D72) |
| public foreign borrowing (F34) | enhanced support for reforms (E69) |
| domestic credit markets (G21) | intensified political opposition (D74) |