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Nima Sanandaji is a Swedish author with a Kurdish Iranian background who holds a PhD from the Royal Institute of Technology in Stockholm. Stefan Fölster is professor of economics at the Royal Institute of Technology, and Director of the Reform Institute. They are the authors of a new IEA report, Renaissance for Reforms.

Public support for French President François Hollande has fallen after a series of redistributory measures, such as the 75 percent millionaire tax. Pressed by rising unemployment, Hollande may now reverse course, focusing on liberalising measures such as reduced spending and tax cuts. It is well-known that market liberal policies are a better recipe for growth than excessive taxation.

However, politicians in many parts of Europe shy from market reforms. Jean-Claude Juncker, a likely candidate for the EU-presidency after two decades as Luxembourg’s Prime Minister, famously lamented “We all know what to do, we just don’t know how to get re-elected after we’ve done it.”

Based on an analysis of 109 governments in rich countries, we would suggest that Juncker’s exasperated sigh was mistakenly gloomy. Although market-oriented reforms may initially meet fierce resistance, governments that introduce them are more often than not rewarded by voters. Voter backlashes seem more common amongst governments that are reluctant to boost growth, in line with Hollande’s experience.

In a forthcoming book, “Renaissance for Reforms” (co-published by Timbro and the Institute of Economic Affairs), we look at the pace and direction of reforms in 29 OECD governments between the mid-1990s and the end of 2012. We ask two simple questions:

1) How did the level of economic freedom in these countries actually change according to the WSJ/Heritage Index of Economic Freedom? This index captures the extent to which states regulate markets, inhibit trade, tax their citizens and own commercial firms. Lower economic freedom tends to go hand in hand with lower growth.

2) Were the governments that reformed more, and improved economic freedom, often re-elected or not? After controlling for the level of unemployment during the year of election and the year of possible re-election, we find a surprising result. In contrast to Juncker’s view, governments that increased economic freedom most were also most likely to become re-elected. Perhaps even more surprising is that this trend is most pronounced for governments on the left.

The average government that was re-elected increased its nation’s economic freedom score by 0.49 points. This is considerably higher than the average annual increase of 0.19 points among parties that lost power. However, centre-right governments that were re-elected increased economic freedom only marginally more on average compared to centre-right parties that lost re-election. Governing parties on the left, which lost their bid for re-election, constitute the least reform-oriented group. Left governments that won, however, increased economic freedom at a 60 per cent higher pace than the average centre-right governments.

For example, during Tony Blair’s first term from 1997 to 2001 the economic freedom score in the UK increased by 1.2 points. True to Tony Blair’s reputation as a champion of New Labour’s moderate policies, the economic freedom score of the country increased by 1.6 points during his second term. Based on this track-record, Labour managed to win a third election, during which Blair handed over power to his more left-leaning rival Gordon Brown. As the leadership changed, so did the direction of reform. Between 2005 and 2010 the United Kingdom’s economic freedom fell by 2.7 points. The next election was won by the conservatives.

A commonly held view is that parties on the right introduce market reforms in order to improve growth, whilst those on the left mainly reduce economic freedom and aim to spread the wealth through welfare systems. In fact, countries that have successfully increased their levels of competitiveness have seen both sides of politics pulling in the same direction. Bob Hawke, former leader of the Australian Labor Party led his party to four consecutive victories in 1983, 1984, 1987 and 1990 based on wide ranging economic liberalisations. Paul Keating, the reformist treasurer under Hawke, took over party leadership and won a fifth victory in 1993, in an election initially thought to be unwinnable for Labor. Since then, both conservative and left governments in Australia have continued on the path of market reform. The end result is more than two decades of consecutive growth.

Similarly, Canada was in very bad shape when Paul Martin, minister of finance in the newly elected left-liberal government, took office in 1993. The government made the difficult choice of market reforms, focusing on reduced spending through action such as abolishing transport subsidies for farmers as well as market liberalisation and lower taxation. Many interest groups objected to the changes. And yet, the Canadian Liberal party won a second term in 1997. The party campaigned on the promise to continue to cut the federal deficit, thereby creating a budget surplus which would allow tax cuts as well as repayment of Canada’s national debt. After another term of reformist policies, the liberals managed to win the elections again in 2000. In 2003 Paul Martin took over the reins and won yet another re-election. Conservative governments have since built upon the same policies, transforming Canada into North America’s free market role model.

Today, many governments dither with reforms. Change is always resented by vocal groups in the short run, and therefore meets political resistance. This can explain why some governments in particularly Southern Europe are stuck on a path to failure. A common fear is that “Juncker’s curse” will doom governments that are bold enough to change the status quo by cutting government handouts or liberalising the economy.

Our analysis of recent history shows that this impression is false. Change may be cumbersome. Those courageous governments that boost growth and employment in their countries, are ultimately rewarded by voters. This means that Hollande’s reversal of course, focusing more on liberalising the economy than taxing millionaires, might well increase his chances for re-election.

3 comments for: Nima Sanandaji and Stefan Folster: Why left wing governments which pursue free market reforms get re-elected

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