Economic Crises: a Catalyst for Reform

Despite general consensus that reforms are necessary, there is currently little evidence to suggest that the reform status of Germany is set to change. In discussions concerning the reasons for the rather cautious reform process in Germany, a variety of different reasons are presented.

Even where proposed reforms may have be beneficial for the population as a whole, well-organised interest groups, who might see themselves put at a disadvantage as a result of any changes, are often able to prevent the implementation of reforms. Reference is frequently made to the influence of the age structure of the population. The higher the average age in a given country, the more difficult it is for political bodies to implement reforms which the population suspects may lead to difficulties in the short- or mid-term, and the benefits of which will only be felt in the long-term. Finally, in order that the population are ready to accept changes and the economic data in Germany is considered, “bad enough” for reform, an extreme economic crisis must occur.

Researchers at the Centre for European Economic Research (ZEW), in Mannheim, wanted to gain a better idea of which factors are decisive in determining the readiness of a population to accept reform. In the course of their investigations it became apparent that countries which implement reforms generally have a younger population than those countries in which reforms are not implemented. A stronger correlation between the tendency of a country to favour reforms and the average age of its population, however, could not be proven.

According to the findings of ZEW researchers, further factors which have a significant bearing on whether reforms are implemented or not, include economic freedom and the rate of economic growth. Immediately prior to the implementation of reforms therefore, countries tend to show only a small degree of economic freedom, this is predominantly calculated with view to the significance of the state sector, the freedom to undertake international transactions and the extent of regulation. Significant findings were also made in relation to economic growth; the greater the extent to which the economy declines, in the form of falling rates of growth for example, the more likely it is that reforms will be implemented.

The ZEW study, which can be found in its entirety in the ZEW Conjecture Report for June 2004, is based on the “Economic Freedom of the World” (EFW) index, published by the Canadian Fraser Institute. The index currently includes 123 states around the world and existing archives date back to 1970.

Contact

Dr Friedrich Heinemann, Phone: +49(0)621/1235-149, E-mail: heinemann@zew.de