Journal of Public Budgeting, Accounting and Financial Management, Winter 1998.Refereed Journal ArticleThis paper examines whether any relationship exists between
success or failure of policy reform on the one hand, and various
political/economic conditions in place at the time of reform on the other.
Nineteen countries were scored using three financial variables to measure the
degree of success or failure of the reform. The independent variables were
country scores for ten different economic and political conditions. The
independent variables were used to try and predict a priori which of the nineteen
countries would succeed and which would fail. Eighteen of the nineteen
countries were correctly placed into their respective success group. However
only three of the ten conditions appeared important in predicting success: a
visionary leader, a crisis, and a comprehensive program. Other writers have
suggested different sets of predicting variables

George M. Worley

Looney R. E

Michael A. Schaub

Peter C. Frederiksen

Robert E. Looney

ABSTRACT. This paper examines whether any relationship exists between success or failure of policy reform on the one hand, and various political/economic conditions in place at the time of reform on the other. Nineteen countries were scored using three financial variables to measure the degree of success or failure of the reform. The independent variables were country scores for ten different economic and political conditions. The independent variables were used to try and predict a priori which of the nineteen countries would succeed and which would fail. Eighteen of the nineteen countries were correctly placed into their respective success group. However only three of the ten conditions appeared important in predicting success: a visionary leader, a crisis, and a comprehensive program. Other writers have suggested different sets of predicting variables. 

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PREREQUISITES FOR SUCCESSFUL FISCAL REFORM: SOME PRELIMINARY RESULTS

Looney, R.E.

Fredericksen, P.C.

Worley, George

Schaub, Michael

Calhoun, Institutional Archive of the Naval Postgraduate School

Calhoun: The NPS Institutional ArchiveFaculty and Researcher Publications Faculty and Researcher Publications1998Prerequisites for Successful FiscalReform: Some Preliminary ResultsLooney, R.E.Looney, R.E., Fredericksen, P.C., Worley, George, and Schaub, Michael, "Prerequisites forSuccessful Fiscal Reform: Some Preliminary Results" Journal of Public Budgeting, Accountingand Financial Management, Winter 1998.http://hdl.handle.net/10945/40628I I J. OF PUBLIC llUDGR'llNG, ACCOUN'IlNG & FINANCIAL MANAG&IRNT, 9(4), 617-626 \\'IN'IBR. 1998 PREREQUISITES FOR SUCCESSFUL FISCAL REFORM: SOME PRELIMINARY RESULTS Robert E. Looney, Peter C. Frederiksen, George M.Worley, and Michael A. Schaub* ABSTRACT. This paper examines whether any relationship exists between success or failure of policy reform on the one hand, and various political/economic conditions in place at the time of reform on the other. Nineteen countries were scored using three financial variables to measure the degree of success or failure of the reform. The independent variables were country scores for ten different economic and political conditions. The independent variables were used to try and predict a priori which of the nineteen countries would succeed and which would fail. Eighteen of the nineteen countries were correctly placed into their respective success group. However only three of the ten conditions appeared important in predicting success: a visionary leader, a crisis, and a comprehensive program. Other writers have suggested different sets of predicting variables. I INTRODUCTION In a recent series of papers edited by Williamson (1994), the political conditions necessary for successful economic and fiscal reform were discussed in detail. In one of the most illustrative papers, Williamson and Haggard (1994) examined thirteen countries to see *Robert Lnoney and Peter Frederiksen are Professors of Economics at the Naval Postgraduate School, Department of National Security Affairs and Defense Resources Management Institute, respectively. Both have written widely on the role defense spending has on developing ec01wmies and on the role of investment in development. George Worley and Michael Schaub are officers in the United States Air Force and were graduate students in the Department of National Security A/airs at the Naval Postgraduate School. Copyright © 1998 by PrAcademi~ Press 618 LOONEY, FREDERIKSEN, WORLEY & SCHAUB whether or not a particular country's ability to embrace economic reform was in any way influenced by the political process in the country. The study methodology was a country-by-country review to derive some empirical generaliz.ations on the politics of economic reform. Williamson and Haggard (1994: 589) concluded "It is obvious at a glance that there are no fully robust empirical generaliz.ations; in every case there is at least one partial counter example." Williamson and Haggard's approach was descriptive. This paper extends their ideas by seeking a statistical link between existing political and economic conditions on the one hand and a country's subsequent success or failure in economic and fiscal reform on the other hand. In other words, can we describe some set of political and economic conditions which will allow us to predict the likelihood of success or failure of fiscal reform? Much has been written on what constitutes economic reform.<!) For many economists, including Hirschman (1958), the most beneficial type of reform for long-run development was land reform. While Williamson and Haggard conclude that land reform is still an important and viable policy tool (especially for Latin American economic development), they adopt a broader definition of policy reform developed in the late 1980s and named the "Washington consensus" (see Willamson, 1990). The Washington consensus, comprised of ten separate policies, can be summarized under the three broader headings of macroeconomic stabiliz.ation, economic liberaliz.ation toward a market system, and the opening of the economy to world influences. It is interesting to note that these policies are "good" for First, Second and Third World countries. Since the convictiort that economic reform will lead to long-run benefits may not be widely held by either economists, politicians, the general public, or especially specific interest groups which may suffer immediate or short-term losses, Williamson and Haggard focus on the strategy of economic reform. They conclude that economists ..... must be concerned with the conditions under which their advice is followed, and this implies a need to concern themselves with questions of political economy" (Williamson and Haggard, 1994: 531). CONDITIONS FOR SUCCESS OR FAILURE mm;""'"'"n :mo Haggard (1994) list thirteen conditions PREREQUISITES FOR SUCCESSFUL FISCAL REFORM 619 economic reforms. The thirteen conditions ar general categories· economic di. . . e grouped under four of the implementi~g team an~ tions, polmcal conditions, the position described as follows: ' e nature of the program itself. These are Economic Conditions 1. ~rises: _may shock countries from traditional d1sorgamze opposing interest groups. approach and 2. ~:!:~~: ~~~p: may support change through both intellectual and Political Conditions 3. Authoritarian regime: m b potential reforms. c2> ay e more successful in carrying out 4. ~ig~~ wing government: policy reform is inherently a right wing n mn and more than likely only introduced by such government. a 5. Honey~o~n hypothesis: economic reformers may have reater success m implementing change soon after election. g 6. Solid political base: needed even if reforms are unpopular. 7. Fragmented/demoralized opposition· weak and d" "d d .. makes reform easier. · 1v1 e opposmon 8. Social consensus· pol" · h to last. . ic1es reac through consensus are more likely 9. Visionary leader: strong leadership and willingness to take risks. Position of Team 10. Coherent economic team: must be united on economic strategy. 11. Presence of a technopol. . 1. . . . . · economists should be in a position of po It1cal respons1b1hty as opposed to merely technical advisers. 620 LOONEY, FREDERIKSEN, WORLEY & SCHAUB The Reform Program 12. Comprehensiveness of program: re~ormers nee? to set up a comprehensive program capable of quick accomphshment. 13. voodoo politics: reformers should not d~lare specific intentions ~o the public before election -- rather promise they can cure economic ills painlessly. COUNTRY CHOICE As noted Williamson and Haggard (1994) conducted a case by case study of individual countries -- a sample which included bot~ develop~d and developing countries. The criteria for a country to be mcluded m their sample was (a) that the country had attempted a well-de~ned post-1960 economic reform program, and (b) t~at enou~h da~ existed. T?e thirteen countries examined were: Austraha, Braztl, Chtle, Colombia, Indonesia, South Korea, Mexico, New Zeala~d, Peru, Poland, Portugal, Spain, and Turkey. Only in the cases of Brazil and Peru was reform not successfully consolidated. · While Williamson and Haggard (1994) did not claim randomness in the sample selection, and also admitted to bias is cho?sing "successes," they concluded that none of the conditions was either necessary ?r sufficient for successful reform. However, they conclu~e? that certam conditions seemed important: the need for a strong pohttcal base, for visionary leadership, and for a coherent econ~mic team. Several ?ther conditions were important enough to be considered by ref~rm-mmded leaders. This was especially true for external financial support (Williamson and Haggard, 1994: 589). A COUNTRY PROFILE ANALYSIS In extending Williamson and Haggard's study, we e?1ployed a discriminant analysis to see if we could predict success. or fatlure based on a set of existing conditions (the independent vanables).. Befo~e starting the analysis, we enlarged the original s~mple o.f countrt~ by six to get more robust results. Argentina, India, Pakistan, Sn Lanka, PREREQUISITES FOR SUCCESSFUL FISCAL REFORM 621 T~~and, and Venezuela met the original inclusion conditions set forth by Wilhamson and Haggard and were included for a sample size of nineteen. The Independent Variables . ~nitially, ~ch country was "scored" in terms of the pre-existing conditions descnbed above. In our opinion, three of the original thirteen conditions (honeymoon period, technopols, and voodoo politics) were too subjective for measurement and were excluded. Each of the four general groups listed by Williamson and Haggard were still represented by the remaining ten conditions. For each country, the ten conditions were given a score between 1 and 4. A score of 1 represented a non-existent condition (in Williamson and Haggard's terminology an "unsatisfied hypothesis"), and a score of 4 indicated a fully satisfied condition. Table 1 describes the attributes requ~r.ed for scores of 1 and 4. Scores of 2 or 3 would represent condmons clo~e to 1.or 4, respectively. The scoring was completed using con.tent analysis apphed to the original study by Williamson and Haggard, various country studies, and the Financia.l Times. The scores, shown in Table 2, represent the predicting (or independent) variables in the TABLE! Scoring of Existing Conditions Variable Authoritarian Regime Rightist Government Crises Political Base Demoralized Opposition Social Consensus Visionary Leader Coherent Team Comprehensive Program External Aid Score of 1 Score of 4 Democracy Authoritarian Left-wing Government Rightist Government No Crises Severe Crises No Political Base Broad Political Base Strong Motivated Demoralized Opposition Opposition No Social Consensus Weak Visionless Leader No Organized Coherence Piece-meal Program No Aid Strong Social Consensus Strong Visionary Leader Organized Coherent Team Comprehensive Program Intellectual and Financial Source: Williamson and Haggard (1994). 622 ~~ ~ &l • El Ft~ 0 0 u P:: a s ~ ~ ~o 8 E-o it 0 -g ·c;;~ > ~ ~ :0 "1 = ell ..... 0 ·c 8 ~ ell r.I) 0 > C..) -.g = c: ~ 0 M Q.) ......... "Q 8·~ ~ ii s 8. ~ Q. 0 8' < Q,) E-- -g "1 -.g ~ """ ;.= ~ 0 ~~ OJ) c: ·c "' 0 0 u "' rJ:l ·i::u LOONEY, FREDERIKSEN, WORLEY & SCHAUB PREREQUISITES FOR SUCCESSFUL FISCAL REFORM 623 discriminant analysis. While these scores are necessarily arbitrary, we feel that Table 2 results fairly represents the conditions in place when reforms were enacted. The Grouping Variable The grouping variable in this paper is a composite measure of actual success (or failure) each country experienced in adapting to economic and political reform. Since no individual measure reflects "success," three financial indicators were used and then combined into one score. The indicators are changes in (a) the fiscal deficit or surplus as a percent of Gross Domestic Product (GDP), (b) the level of aggregate domestic credit as a percent of GDP, and (3) percentage changes in the Consumer Price Index (CPI). All data came from the International Monetary Fund (various issues). Data were collected for each country for a seven year period:<3) three years before and three years after refonn introduction and also for the year in which the refonn took place. Percent changes in the variables were calculated for a one, two, and three year period before policy implementation and the same measure was calculated for three similar periods after reform introduction. The percentage changes for the similar time periods ( before and after) were then compared and assigned a score from 1 to 3. Countries showing a consistent positive change in the variable-- consistently lower deficits, increases in domestic credit or lower inflation-- received a score of 3. A score of 1 was assigned for consistent negative change. A score of 2 was assigned where the pattern was mixed.'4) A weighted average of the scores was calculated: the deficit and the CPI were each weighted twice as heavily as the domestic credit score reflecting the main emphasis of the initial reform which was to immediately enjoy lower deficits and inflation. The weighted average was expressed in a three point scale as follows: Aggregate Score ~ 0-9 1 10 - 13 2 14 - 15 3 624 LOONEY, FREDERIKSEN, WORLEY & SCHAUB Thus individual countries fell into thre.e distinct ?r~ups de~ending on their relative success or failure (se.e Table 3). It ~s mterestmg to note t our results for Brazil and Peru -- a failure -- replicate tho.se s~g~ested ~~Williamson and Hag~ard (1994). However, our sconng md1cates reform failure in Colombia. Results A step-wise discriminant analysis ~as conducte~ whe~ th~ in*~! . ·n was the country success/failure score m Ta e . r~~~g~n~ent variables are used to predict the grouping based lon ~~ existing conditions at time of reform ('fable 2); Impo:U~~y~f the discriminant analysis correctly predicted the country s group m . ses -- a roximately 95 percent of the time. The exception was ~e~co who;~ initial grouping was a 2 (the weighted average was 13). The discriminant analysis indicated that ~exico s~o~~d ha':;:~~~~ based on the existing economic and political vana es. tl analysis we conclude that the original score of 2 was correct -- apparen Y TABLE 3 Success/Failure Scoring, by Country Country Score Country Score -----------------------;--------------------------~~;~~;-------------~---------Australia 1 Brazil 1 Cqlombia 3 Peru 1 New Zealand Poland 23 Pakistan 23 Argentina Portugal 2 Venezuela 2 Spain 2 India 2 Chile 2 Thailand 3 Indonesia 3 Sri Lanka 2 South Korea Mexico 2 Source: International Monetary Fund (various years). PREREQUISITES FOR SUCCESSFUL FISCAL REFORM 625 the country has peculiarities (mostly political) which do not lend the country fitting into our hypotheses. Recent economic problems in Mexico reflect the inconsistencies of economic policy and the subjugation of economic policy to political desires. Interestingly, the results show that only three of the ten existing conditions --a visionary leader, a comprehensive program, and the existence of a crisis-- seem important in predicting ultimate success or failure of policy reform. Williamson and Haggard concluded a different set of important pre-existing conditions --a visionary leader, a strong political base, and a comprehensive reform program (and to a lesser degree external aid)-- were suggestive of success. SUMMARY AND CONCLUSION This paper has extended Williamson and Haggard's work (1994) by examining whether or not any statistical relationship exists between successful reform and existing political/economic conditions in place at the time of reform. The initial grouping variable was a score reflecting relative success or failure in ninete.en different countries. The independent variables were assigned scores for ten existing conditions at the time of reform. Our purpose was to see if we could predict success or failure using this set of variables. We were able to do so in eighteen of nineteen cases, with Mexico as the exception. However, only three conditions --existence of a visionary leader, whether or not a comprehensive reform program exists, and the presence of a crisis in the country-- seem to account for subsequent success. These three variables fall under the 1 general categories of political conditions and the nature of the program itself. The remaining seven variables which fall under the "economic conditions" or "position of the team" apparently had little effect on reform. While important in their own right, they did not seem to be prerequisites for predicting success in this sample of countries. The Willamson and Haggard study suggested a different set of variables are important as the base for successful reform. Further research would be well directed at more in depth case studies and also statistical analyses to uncover valid predictors of successful reform. NOTES I. For an excellent review of the literature. c:.ee (;:i,..i.., :i~-' ur- - - -If""~-626 LOONEY, FREDERIKSEN, WORLEY & SCHAUB 2. For a wider discussion on regimes, see Looney and Frederiksen (1987). 3. Available from authors upon request. 4. Where a data point was missing, a score of 2 was automatically assigned. REFERENCES Financial Times (Various years) Hirschman A. 0. (1958), The Strategy of Economic Development, New Haven: Yale University Press. International Monetary Fund (various issues), International Financial Statistics, Washington, DC: Author. Looney, R. E. and Frederiksen, P. C. (1987), "Consequences of Military and Civilian Rule in Argentina: An Analysis of Central Government Budgetary Trade-Offs, 1961-1982," Comparative Political Studies, 20, 34-46. Sachs, J. D. and Warner, A. (1995), "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, 1, 1-118. Williamson, J. (Ed.) (1994), The Political Economy of Policy Reform, Washington, DC: Institute for International Economics. Williamson, J. (Ed.), (1990), Latin American Adjustment: How Much Has Happened? Washington, DC: Institute for International Economics. Williamson, J. and Haggard, S. (1994), "The Political Conditions for Economic Reform," in J. Williamson (Ed.), The Political Economy of Policy Reform, Washington, DC: Institute for International Economics, pp. 527-596. 

Prerequisites for Successful Fiscal Reform: Some Preliminary Results

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Prerequisites for Successful Fiscal Reform: Some Preliminary Results

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