The role of political partisanship during economic crises

Major economic crises may promote structural reforms, by increasing the cost of the status quo, or hinder them, by inducing more demand for protection. The ideology and political partisanship of the ruling government may be crucial in determining the prevailing course of action. In good times, conservative parties are typically pro-reform. However, do these parties try to exploit periods of crisis to carry out their reforms? Do social-democratic parties support even greater social protection? To answer these questions, this paper uses indicators of structural reforms in the labor, product, and financial markets for 25 OECD countries over the 1975–2008 period. The empirical analysis confirms the ambiguous effect of crises: product markets are liberalized, but financial markets become more regulated. Partisan politics also matters, as right parties are associated with more pro-market reforms. Yet, crises modify partisan politics: right-wing parties refrain from promoting privatizations, and oppose the introduction of greater financial market regulations. By contrast, center parties liberalize and trim unemployment benefits generosity, while left parties privatize. Furthermore, weak, fractionalized governments, which are associated with more regulated product markets, are also more likely to liberalize during a crisis.