EXPLAINING REFORM REVERSALS: THE ROLE OF EXTERNAL CONSTRAINTS IN TRANSITION AND LATIN AMERICAN COUNTRIES

Abstract

Why were ex-communists returned to power in many transition countries so soon after they were vanquished in popular revolutions? Why didn't these ex-communists immediately reverse the previous policies, but in fact in many cases continue market-oriented reforms? Using a political economy model, the first half of the thesis provides new answers to these questions and shows that they are linked. The model analyzes the interaction between voters and political parties over two electoral terms. In one prominent equilibrium, right wing parties are elected for the first term and implement radical market-oriented reforms, but the second elections are won by ex-communists, who continue with the reforms. This equilibrium occurs in countries with somewhat low levels of corruption, high uncertainty, and moderate distance between political parties. Differences in conditions that lead to other types of equilibria are analyzed, for example the delayed reforms in Russia or the gradual but consistent reforms in Slovenia.

The second half of the thesis empirically analyzes the causes of policy reversals in both transition and Latin American countries. Indexes of reforms are used to identify those time periods in which reversals occur. Using the political economy model of the first half of the thesis plus other theories of political behavior, variables are identified that could affect the decisions of politicians on whether to reverse reforms or to move forward. The estimated relationships show that external constraints from international financial markets or supranational organizations are important factors preventing policy reversals. Macroeconomic crises, usually thought to lead to more market reforms, do not necessarily do so. More corruption leads to more policy reversals, as does less democratic government. This first attempt to capture the basic causes of reversals shows that they are the same in both regions, for example very low or very high debt service obligations, or the absence of an external disciplining force, such as the promise of future entry into the European Union.