Economic reforms and collective choices

Abstract: A recent development of  studies on collective choices concerning the political feasibility of the projects of economic reforms. Two schools of thought confront each other on this matter. The first one has as its aim the dynamic control of public expenditure, in this area projects of welfare reform are located, which tend to increase the bond between social benefit and payment for it. A second stream concerns the political feasibility of structural reforms that are essentially pro-competitive reforms of product markets and possibly of the labor market. These studies, according to the new political economy emphasize the role of political institutional structures according to the forms and methods of political discourse. The contribution points out  how the response to new challenges proposed by the emerging industrialized countries with consolidated shortage of  primary imputs and the increasing competitiveness has to be pursued also in the reconsideration of the priority choices in allocating resources. Now that the people belonging to countries with a past industrial tradition sense the dangers that threaten their status of a privileged economic minority in the world, proposals to change the priorities in use of productive resources may have good prospects for political- electoral rally support. Uno sviluppo recente degli studi sulle scelte collettive riguarda la praticabilità politica dei progetti delle riforme economiche. Si fronteggiano al riguardo due scuole di pensiero. La prima ha per obiettivo il controllo della dinamica della spesa pubblica; in questo ambito si collocano i progetti di riforma del Welfare, che tendono ad aumentare il legame tra la prestazione sociale ed il pagamento per essa.  Un secondo filone di studio riguarda la praticabilità politica delle riforme di struttura che sono, sostanzialmente, riforme pro-concorrenziali dei mercati dei prodotti e, possibilmente, anche del mercato del lavoro. Tali studi, seguendo la nuova “political economy”, enfatizzano il ruolo delle strutture politico-istituzionali secondo le forme e le modalità della dialettica politica. Il contributo segnala come la risposta alle nuove sfide portate ai Paesi di consolidata industrializzazione dall’emergente scarsità di inputs primari e dalla crescente competitività dei Paesi emergenti, vada ricercata anche nella riconsiderazione delle scelte di priorità nell’allocazione delle risorse. Oggi che le popolazioni dei Paesi di antica industrializzazione avvertono pericoli incombenti sulla loro condizione di minoranza economicamente privilegiata nel globo, proposte di cambiamento delle priorità negli impieghi delle risorse produttive potrebbero avere buone prospettive di raccogliere consensi anche politico-elettorali. Sommario: 1. From individual to collective economic choices; 2. The “political economy” of stabilization of the public finances; 3. Structural reforms; 4. The contents of reforms matter in a political economy perspective: a different approach. 1. From individual to collective economic choices Traditional economic theory has built a normative model of efficient resource allocation [1] affirming that in markets, assumed to be perfectly competitive, every economic agent (perfectly informed) makes rational choices to maximize his utility function (generally equated with income). Welfare economics [2], observing real-world economies, has brought to light numerous market failures requiring government intervention to achieve Pareto-optimal conditions or to approximate them with “second-best” solutions [3]. Moreover, the definition of the set of efficient allocations has left open the question of the distribution of wealth (i.e., of the right to “command” resources) between individual economic agents. So theory has been obliged to admit the hypothesis of State redistributive intervention, based on a utilitarian social welfare function and according to the logic of the second fundamental theorem of welfare economics [4]. Recognizing that these hypotheses contain sound reasons for State intervention is tantamount to justifying the substitution, under those hypotheses, of collective (State) choices for individual choices on resource allocation [5]. In normative models of State intervention, it is legitimate, in order to redress market failures or modify the distribution of wealth, to set objectives of efficiency and equity and to indicate the actions the State should take to attain them. But these models, while analytically important, are not sufficient to make and guide practical policies of public intervention in the real, observable world. This is because the collective choice (of the State) cannot be derived directly from the preference structure of individual agents but must be calculated as the resultant of n sets of preferences of the n members of the community. Analysis of the process of formation of collective choices has clearly lost the simplicity and determinacy that characterize analysis of individual choice in free and perfect markets. Studies of the procedures for enacting public budgets have raised countless questions on the relationship between the voting rules and procedures and the results, based on various hypotheses concerning voters’ preference structures [6]. Upstream, we have studies of the processes by which political parties – the leading actors in parliamentary democracy – form their choices, of their “agency” relations with voters, of elections (which have highlighted the often decisive role of the “median” voter), and of the choices of coalition governments [7], under various assumptions concerning election laws and political representation (presidential or parliamentary democracy, to name two). All these studies have enriched our knowledge and prompted reflection on the formation and stability of collective choices [8]. These studies, applied to public intervention in the economy, constitute the new approach of “political economy,” whose analysis of public economic choices has drawn on the contributions of the “public choice” school [9]. This body of work has shown the peculiarities and specificities of the utility functions of individuals and groups in the various sectors, grades and levels of government. These individuals and groups have their own particular motivations and objectives, as a function of which they may find convergences of interest and alliances with groups outside government [10]. Obviously, once it had incorporated the findings of these lines of research on the motivations and decision-making processes of government, the theory of collective choice could not retain the simplicity, the formal rigour and the determinacy of the possible results that characterized the formulas for economic choices by individual agents in free, competitive markets. For one thing – an aspect that the literature sometimes neglects – voters, parties and governments are not limited to exclusively economic aims but also have non-economic political objectives (civil rights, security, defence, justice, culture, and so on). Accordingly, government programmes and measures often stem from mediation among objectives, both economic and non-economic [11]. The theoretical indeterminacy of the outcome of these complex mechanisms of collective choice is what motivates empirical research on the determinants of collective choices and their effects on the relevant economic variables. 2. The “political economy” of stabilization of the public finances Empirical research has produced significant findings above all concerning the relationship between the formation of collective choices and macroeconomic stabilization via the intermediate objectives of curbing the growth of public spending and holding budget deficits to a target level [12]. The thesis is that over time fiscal consolidation will help control inflation and create sufficient financial scope to sustain productive investment. It has emerged that when a majority of the electorate perceives a situation of economic crisis (present or imminent), this fosters and sustains the political will and capacity of governments, including coalition governments, to undertake measures of fiscal adjustment. That is, there exists a sort of political built-in stabilizer [13]. Another factor affecting the ability to carry out a fiscal adjustment is the government’s likely duration. The election law, the cohesiveness of the majority coalition, and the distribution of functions among different levels of government all contribute to determine collective choices on the budget. In short, where the institutional process is such that the executive can decide – for a fairly long period of time, easily overcoming any parliamentary opposition and sheltered from conflicts between or within the majority parties – the conditions exist for a consistent, effective policy of macroeconomic stabilization. However, to consider this justification for calling for election laws designed to produce strong majorities and to compel the formation of coalitions (reducing the number of parties), and for broad executive powers, as in the US presidential system, is to make a value judgment. Others may well consider the priority value to be political representation for all parts of the population and defence of minority rights and actions. Besides, a key question is the sharing of the burden of stabilization policies among population groups according to income, economic sector, age or health status. Conflicts over the distribution of income and wealth are regulated and mediated by political parties and other organized social groups and by parliamentary and government discussion and interaction. It has been observed that a society’s sensitivity to distribution issues, which is reflected in political action, is correlated with the inequality of the initial distribution. What I mean to emphasize here is that whatever the rules of the game of the political mechanism that must mediate (and choose) between conflicting interests so as to arrive at the definitive collective choice, conflicts of interest will in any case emerge when the decisions have substantial impact on social groups that are large even if they do not form a majority of the electorate. The ageing of the population and the economic importance of pension expenditure (10 to 20 per cent of national income in the industrial countries) have posed the question of the sustainability of public pension systems, which entail redistribution according to age between economically active and inactive persons, between younger and older cohorts [14]. It has been proposed to let retirement benefits be determined by automatic rules aimed at macroeconomic control, such as reference to the growth of the taxable earnings base and the ageing of the population (as in the notional defined benefit systems now in effect in Sweden and Italy). Automatic rules determining pension benefits based on exogenous parameters that ensure sustainability should remove this essential part of public spending from the political conflict over income distribution. But as Lindbeck has observed, if at some time the rules, instituted to hold pension spending within planned budget limits (such as EU ceilings), should prove to cause substantial income losses for particular social groups, “irresistible political demands for overturning those rules” could well arise [15]. Alesina, Ardagna and Trebbi have concluded that the slowness of governments to proceed with stabilization policies when analysis indicates their urgency depends essentially on political conflict over the sharing of the costs of the adjustment between competing social groups [16]. Consequently, stabilization is carried out when one group succeeds in imposing its desired policy on the others. The political, institutional and electoral system can facilitate or hinder this possibility. This conclusion is correct, but I believe that it needs qualification. Such a model implies breaking points, limits to the tolerance of the social groups that lose out in the sharing of the burden. The “social compacts” on which today’s democracies in the OECD and EU countries are based do envisage and accept the economic inequality implicit in the market economy and private ownership of capital. But those pacts also imply safeguards – sometimes explicitly recognized in a formal constitution – for primary citizenship rights to life, personal dignity, work and active participation in social life. Policies that seriously and systematically violate the rights of large groups of citizens put the social compacts on which the State is founded at risk. A high degree of instability and social unrest can even jeopardize the economic outcome of the stabilization measures and ultimately oblige the politically dominant group to halt or radically revise its policy. In democracy, the art of politics necessarily consists, among other things, in forming collective choices by mediation among conflicting interests. One aspect of such mediation is “compensation” of the social groups most directly affected by the costs of the stabilization. The most immediate instrument at government’s disposal is transfer payments on the government budget (expenditure and tax relief). Unfortunately, when stabilization turns, as it usually does, on the reduction or curbing of deficits, the path of compensatory expenditure is barred. Solutions become hard to find and must be sought in changes in the composition of expenditure and revenue that reconcile the overall budget target with the transfer of resources to the social groups that are the “losers” (at least during the transition to the economic upswing fostered by stabilization). Stabilization programmes can be compatible with compensation if they are designed and implemented by selective criteria, rationing categories of public expenditure by a scale of priorities enjoying sufficient social consensus. It is often said that international treaties imposing budget constraints – in particular the Stability Pact among EU members – are a powerful means of persuading governments and parliaments to comply with the public finance objectives, because political parties, trade unions and voters fear the consequences of violations. The experience of the European Union in recent years demonstrates on the one hand that national governments and parliaments have made serious efforts to achieve or at least approach the budget objectives. But it also shows that the authority charged with enforcing the constraints – at the top, the EU Council of Ministers – has been cautious in applying sanctions, aware as it is of the social and political difficulties that arise at national level when the costs of stabilization must be apportioned [17]. To my mind, the proposal to exempt public investment (at least direct investment) from the calculation of the deficit is a sound one. True enough, the Ecofin’s rejection of this proposal, to date, has been motivated by the suspicion that governments can disguise public consumption and transfer payments as investment, as well as by the fear that an excessive deficit, no matter how it arises, will weaken the financial system as such and undermine the ability to keep inflation under control. It is also true, however, that when it is properly targeted, public investment contributes to GDP growth and thus lowers the deficit ratio. What is more, public investment in infrastructure and social services improves the quality of life for all citizens (in particular those who cannot afford the alternative of private services), thus attenuating the social conflict over income distribution and enhancing the sustainability of economic stabilization programmes. 3. Structural reforms Studies of the political feasibility of fiscal stabilization programmes have reached several unambiguous, uncontested findings: the perception that there is a crisis situation weakens resistance to stabilization; governments that are strong and cohesive   because the election law and the results of voting produce such an outcome, because the executive branch has ample autonomy with respect to parliamentary decisions, because the next elections are still far off – are better able to withstand parliamentary and social opposition to stabilization; countries where the distribution of income is more uneven encounter greater problems in apportioning the costs of stabilization (spending cuts and/or tax increases); international treaties with provisions like the European Union’s Stability Pact help make domestic stabilization programmes politically feasible; extensive local government power (“fiscal federalism”) retards and may impede the overall stabilization of the public finances The results of “political economy” analyses of structural reforms are more uncertain and complex. It has been observed that there is a broad consensus in the OECD countries, and in the EU countries in particular, that structural reforms are necessary so that those countries can remain competitive (and thus maintain the average living standards of their inhabitants) in the face of globalization and of the mounting pressure of world demand on energy, raw materials and environmental resources that are tending to become scarce; and continue to be able to meet the technological, organizational and demographic challenges that mark the opening of the third millennium [18]. Yet this widespread awareness that structural reforms are urgently needed has not made them any easier to carry them out. On the contrary, in the case of the OECD countries, there is the “difficulty of creating the necessary pro-reform consensus in the electorate and/or overcoming strong resistance to reform by parts of it” [19]. Some of the above observations concerning opposition to stabilization programmes by those who believe the costs they will have to shoulder are unacceptable (in absolute terms or relative to those borne by others) also serve to explain the opposition to structural reforms. However, these encounter specific problems. Hoj et al. summarize them in three points: the uncertainty surrounding the benefits of reforms is often greater than the uncertainty surrounding their costs; politicians may fear that during their term of office (in the executive or legislature) the electorate will experience only the costs of reforms and not their benefits; the costs of reforms are concentrated on relatively small and socially (politically) well-organized groups, while the benefits tend to be spread over a much larger and less organized electorate, which at times has difficulty perceiving them as the result of reforms [20]. It think I should underline that these remarks on the difficulty of forming a pro-reform consensus drive come from observation of the structural reforms that most scholars and the above-mentioned organizations (European Union and OECD) propose in order to overcome the current (and expected) slowing of economic growth in the industrial countries. That is to say, the structural reforms proposed turn essentially on the liberalization of the product and labour markets, opening them up to competition where possible (including by means of privatizations, on the assumption that private businesses are spurred to efficiency by their interest in the return on private capital invested). The economic approach of reference therefore remains that of the greater allocative efficiency associated with competitive, free markets in which economic agents maximize their utility function, generally equated with income. With respect to these contents of structural reforms— essentially, liberalization of all markets and opening them up to competition —the political impediments to reforms found by empirical studies correspond to logical expectations. These studies’ “political economy” conclusions also correspond to logical expectations [21]. An ability to carry out structural reforms has been displayed by governments (the executive branch) that are internally united, political strong vis-à-vis the opposition in or outside of parliament (organized social groups such as trade unions, trade associations, etc.); have lengthy prospects of remaining in office (so that the public has time to notice the benefits of the reforms after bearing their costs), and do not have to spend their political capital on belt-tightening measures to stabilize the public finances. In a political economy perspective, it is interesting to note the observation by Hoj et al. (2006) that “on average left-of-centre governments tend to undertake less reform” (I will return to this point later). In general, they find that left-of-centre governments’ greater attention to distribution issues makes it harder for them to undertake labour market reforms (often opposed by the trade unions, which tend to be political allies of such governments); the problems of distribution are attenuated in the case of product market reforms, whose expected benefits extend to all consumers (hence all voters) while their costs are concentrated on the relatively limited interest groups of producers of goods and services [22]. 4. The contents of reforms matter in a political economy perspective: a different approach The studies of the public choices regarding structural reforms have therefore reached interesting findings for which rational explanations can be given. These results do not depend only on the dialectics of social groups with heterogeneous (and often conflicting) interests and on the political and institutional mechanisms through which collective choices are formed in a representative democracy; they also depend on the contents of the proposed reforms, and so we can hypothesize situations of reverse causality with respect to the general approach of political economy that studies the effect of the decision-making process on economic outcomes. The contents of structural reforms, proposed by the prevailing literature and by the international economic organizations (and by the EU Council) and actually implemented in some countries for some sectors of activity [23], turn essentially on creating or reinforcing the structure of competition. The goal is achieved by liberalizing market access, breaking up producers’ monopolies and cartels, and eliminating the other barriers to competition. The economic premise is the superior allocative efficiency of the competitive market structure, which supposedly leads to greater correspondence between supply and consumers’ preferences, greater efficiency in the allocation of productive resources, hence higher growth (the competitive market correctly signals to factors the most productive uses) [24]. The recent studies in “political economy” have sought to bring to light the causes (conflicts of interest, political and institutional mechanisms, technological and other factors) of the difficulties encountered by many governments in implementing such structural reforms, or at least in implementing them with a speed consistent with recognition of their necessity. Yet I think that insufficient attention has been paid to the question of the choice of contents (pro-competitive), on which there is disagreement in economic theory, and to their effects on decision-making processes. It is not, in fact, a unanimous opinion that pro-competitive strategies are necessary and sufficient to foster a return of the older industrial economies to satisfactory growth [25], to restore their competitiveness vis-à-vis the emerging economies and their ability to supply themselves with the necessary primary inputs in quantities and at prices compatible with the desired growth rates [26]. Historically, important experiences   from the stock-market crash of 1929 and the Great Depression to the present currency and financial disequilibria and the generalized slowing of growth   contradict the neo-classical thesis that the free forces of the market tend to produce optimal economic outcomes for the collectivity. Not everyone agrees, therefore, that pro-competitive reforms, preceded by stabilization of public budget balances, are a sufficient condition to restore the growth rates to which the population of the older industrial countries had become accustomed after the Second World War and on which they had based their expectations for the future. These experiences and expectations also have a significant implication for political economy: in their choices voters seek and prefer the “promises” of the political actors (and organized social groups) that claim to be able to restore the previous rates of economic growth and thus maintain and even improve the electorate’s living standards. There are reasons to doubt that pro-competitive reforms are a sufficient response to the new challenges posed to the advanced economies both by the emerging relative scarcity of primary inputs (energy, raw materials, environmental resources) and by the competition in terms of labour costs (direct or incorporated in the production of capital goods) practised by China, India and other countries whose productive systems — note well! — are driven by major monopolistic groups that have the support and guidance of the State rather than by competitive market structures. Significantly, even in the United States, the ideological leader of pro-competitive policy, there is a debate on the limits of that policy and on the desirability of supplementing and correcting it with public “nudges” to what were traditionally considered the “sovereign” choices of consumers and firms. Even economists of the neo-classical school are now beginning to be beset by the doubt that the older industrial economies may well have to examine (or re-examine) issues and make choices about the priorities for the investment of available resources in the various economic sectors. In the normative neo-classical theory, such choices of priority are entrusted to the “sovereignty” of the consumer [27], with the specification that this sovereignty is not exercised directly according to individual preferences but under individuals’ respective budget constraints. The allocation of resources is regulated not only by consumers’ preferences but also by the distribution of wealth among consumers (the right to “command” resources: so that there exist n efficient allocational solutions corresponding to n distributive solutions). Furthermore, the static model of optimal general equilibria does not answer the question of who guides (and finances) the research that gives priority to certain paths of technical progress or of the motives for those choices. The neo-classical growth models assume technical progress as exogenous or else endogenous to investment, which again raises the question of who decides on investment, in certain directions rather than others, and why. The critics of this traditional normative approach object that the thesis of consumer sovereignty in the allocation of resources — even putting aside the question of distribution — is not borne out in real observable systems, because companies, by investing capital, plan the development of new products (and processes), produce and then market the resulting products (goods and services) in order to have consumers absorb (“choose”) them. Their goal is to have consumers’ “choices” validate their capital investment, on which they intend to obtain the planned return. Firms’ obtain this economic validation of their investments, with consumers’ purchases, not only or even mainly through direct advertising, but in a far more systematic, pervasive and effective way: by using the modern instruments and techniques of mass information (the media, mass events, etc.), firms guide consumers’ “tastes” towards “lifestyles” that require the consumption of the types of goods and services in which they have invested [28]. If the foregoing interpretation is at least partly acceptable, then the question of economic choices regarding resource allocation and growth cannot be reduced only to the traditional contraposition between the (individual) choices of consumers and the (collective) choices of the State. Firms’ choices also play a decisive role in allocation and growth. And since their choices are expressed by the distribution of ownership of private capital and have as their object the return on capital invested, it is permissible to observe that a complete democracy means more than equally weighted individual votes: it must also have an economic profile. Collective economic choices, founded on the equal weight of each vote (through different possible arrangements of representative democracy), rightfully have a significant role in the overall decision-making system of a democratic country. In specific terms, the response to the challenges posed to the industrial countries by the increasing scarcity of primary inputs and the growing competitiveness of the emerging countries must also be sought in a reconsideration of priorities and in the allocation of resources. It is legitimate to ask whether it is possible to respond to these challenge while continuing to assign a higher priority   determined by the choices of the market (consumers and firms)   to superfluous categories of consumption that often incorporate scarce inputs, than to research resulting from social choices and other social investments that would improve distribution and in this way could also raise labour productivity. The most recent “vintages” of development models have shown the importance of “human capital formation”, investment in technical knowledge and know-how. This investment, needed to respond to the new challenges, lies largely in the sphere of collective choices, which give priority to these uses of resources with respect to superfluous goods and services. The selective taxation of consumption or forms of general, possibly progressive taxation of expenditure [29] are available instruments with which to induce relative shifts of productive factors towards infrastructure and social investment, research and the diffusion of new technologies. In “political economy”, the ability of specific reform programmes, with their contents, to win public consensus cannot be separated from analysis of the effects of political and institutional processes on their feasibility. Whatever the complexities of the collective decision-making processes (which it is necessary to know), the contents of proposed reforms can give rise to a consensus strong and extensive enough to overwhelm the defences of interest groups and entrenched rents; or else they can meet with a cool reception and scepticism about their effects, compromising their political feasibility. Today the populations of the older industrial countries perceive looming threats to their position as the economically privileged minority of the planet. There are proposals for changes of the priorities in the use of productive resources. If these proposals are adequately explained and justified through the mass media, I think there is a good chance they can gain political and electoral support. These proposals for reordering priorities in the use of resources intrinsically belong to the sphere of collective choices. _______ Notes [*] This work has been previously subjected to blind refereeing entrusted to a member of the Referee Committee in accordance with the regulations adopted by this Journal. [1] The general equilibrium model is static but can be extended to generate a model of dynamic equilibrium with efficient resource allocation and full employment of productive factors, as in Solow’s seminal model (1956, 1970). [2] See also Forte (1961), Fedeli (2008). [3] The circumstances immediately revealing the need for State intervention were the existence of public goods and natural monopolies. Macroeconomic failure, Keynes’s focus in his studies of the Depression that threatened to sweep the market economies away, is now also recognized by most neo-classical economists. [4] The theoretical and practical difficulties in constructing a utilitarian social welfare function are well known, as are those in using the second fundamental theorem of welfare economics to separate distributive equity from efficiency. What is more, this neo-classical approach is strictly utilitarian, while redistributive intervention often depends on non-utilitarian motivations. The neo-classical construct has also been criticized for having an indeterminate theory of distribution, in that the determination of the rate of profit as the marginal productivity of capital is not logically acceptable. [5] Actually, the conventional theory of individual choice by rational economic agents was itself criticized as regards corporations with broad share ownership and the separation of ownership from control. For an analysis of the effects of fiscal measures, see Steve (1976), pp. 94-97. The complexity of the motives for agents’ choices was already raised by Keynes in “The End of Laissez-Faire” (1926), reprinted in Essays in Persuasion (London, 1933). Collective market actors, such as trade unions and trade associations, have mechanisms of choice that are more complicated than those of the individual agent. [6] For a recent critical survey see Drazen (2000), Chapters 3 and 13; Persson and Tabellini (2000), Chapter 9 and the references cited, pp. 245-246. [7] Actually, of course, the problems typical of “coalitions” are often also found within single parties, owing to the presence of factions, divergent views of high-ranking members and their competition for party leadership. [8] See Drazen (2000); Persson and Tabellini (2000). The problem of the formation of collective choices does not concern only the “State” (central government) but also the rest of general government bodies. On local governments, see Mudambi and Navarra (1996, 1999). [9] A thorough examination of the likenesses and the differences between the public choice school and the new political economy can be found in Drazen (2000), Chapter 3. See also Padovano and Petretto (2010). For the public choice school itself, in addition to the classic work of Buchanan and Tullock (1962), see among many others Mueller (1989, 1997). [10] A familiar example is the de facto alliance between the managers of the large nationalized enterprises in Britain and their trade unions, in defence of those enterprises’ rents, prior to the privatizations under Margaret Thatcher, who denounced this collusion. [11] For a clear exposition of this argument, see Steve (1976), Chapter 1. [12] For an analysis of the political economy of macroeconomic stabilization, see Alesina, Ardagna and Trebbi (2006). [13] The neo-Keynesians of the 1950s and 1960s observed that the dialectic between profits and wages was marked by cyclical phases of rising profits which, at a certain level, provoked a reaction on the part of wages, bringing the profit share back down below the long-run level around which the two shares fluctuate. See for instance Goodwin (1959). [14] See Bergstrom and Hartman (2004).  See also for Italy, the recent pension reform proposal by Minister Fornero ( DECREE LAW NO 201 OF 6 DECEMBER 2011; Law  no 214 of 22 December 2011). [15] Lindbeck (2005), p. 12. [16] Alesina, Ardagna and Trebbi (2006). [17] Note that while the EU intervenes promptly to demand observance of the budget deficit constraint, it is much less consistent and less effective in calling for compliance with the public debt constraint of 60 per cent of GDP (in Italy the debt ratio has been over 110 per cent for years). Moreover, in assessing excessive deficit infractions (over 3 per cent of GDP) by member countries, the EU has often been quite understanding of the justifications of violators, seeking to take account of their efforts towards structural reform and of the gradualism of policies to adjust excessive deficits. The amendments to the “Stability Pact” in 2005 significantly attenuated the initial rigidity of interpretation. For a comment, see European Central Bank (2005). It is worth underscoring that deficit overshoots of the 3 per cent ceiling are considered acceptable in severe economic recession, which provides scope for compensatory policies. [18] Hoj, Galasso, Nicoletti and Thai-Thanh Dang (2006). [19] Hoj et al (2006). It is worth recalling that the costs of new measures begin to be felt immediately, whereas it often takes time for their benefits to become discernible. [20] Hoj et al (2006). [21] Hoj et al. (2006), pp. 5 ff., offer the following findings: Pro-competitive product market reforms generally obtain the necessary consensus in periods of economic crisis, when voters and organized social groups are persuaded of the need for deep-going change and effective measures. (however, this refers to product market reforms, whereas labour market reforms tend to be associated with periods of satisfactory economic activity, presumably because in such period workers are less worried about the reduction of the statutory protection of job security and/or unemployment benefits.) Opening up to international economic integration stimulates product market reforms but has an ambiguous effect on labour market reforms because greater competition from abroad worries workers (the structural unemployment rate may rise). The government’s duration in office and cohesiveness favour its ability to carry out such reforms, with the qualification that already balanced public finances are associated with this ability, both because they make possible budget measures compensating for the costs of reforms borne by some groups and because the government, not having to cope with resistance to fiscal stabilization measures, can spend its political capital exclusively in support of structural reforms. Left-of-centre governments tend to be less inclined and/or politically able to carry out structural reforms, especially in the labour market. The degree of income inequality can influence the strength of support for reforms: if inequality is pronounced, support for redistributive polities that would benefit the average voter can prevail over other considerations; similarly, significant disparities in the labour market can lead to a preference for unemployment benefits over statutory job protection. The older the population, and thus the older the average voter, the weaker the support for reforms, because older voters discount expected future benefits at a higher rate than younger persons. [22] Hoj et al (2006), pp. 6-9, refer to pro-competitive reforms carried out in product markets in the United States (1975-85), the United Kingdom (from the mid-1980s), New Zealand and Canada, and to the effects in the EU countries of the Community’s internal market programme in the 1990s. They also consider labour market reforms, job protection, unemployment benefits and the tax wedges on compensation. Regarding specific sectors, they examine the initial pro-competitive reforms in the transport sector and the subsequent ones in the electricity, telecommunications, natural gas, postal services and rail services sectors. For a discussion of the liberalization of network services and, in particular, an analysis of the situation and prospects of the market in rail services with a focus on Italy, see Taccone (2008). [23] Hoj et al (2006). [24] See Trento and Bentivogli (2005). [25] An earlier work of mine (Taccone 2008) examined the theoretical and policy motivations (particularly in the European Union) for the liberalization of rail services and the consequent proposals and measures. It found theoretical and operational limits to the expected benefits from opening up the rail transport sector to competition. 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