a tautological nature since the long-run growth and budgetary consequences should be the guiding
criterion for choosing and deciding a reform in the first place. There is much less agreement on
the other three time dimensions: the typical fiscal situation prior (period before reforms: BR),
during (reform period: R) and immediately after (period short-term after reform: SA) the reform
event.
Period BR:
The transition from a period of a stable institutional equilibrium to a pre-reform period occurs
through a shock or event which changes the balance of interests of decisive actors (Abiad and
Mody, 2005). This transition may occur, for instance, through learning processes, changes in the
ideologies of governments or changing structural factors like international competition or
demographic developments. With regard to the role of the fiscal situation there are counteracting
arguments whether a favourable fiscal situation is required to enter a BR period.
One of the strongest results of the above cited literature on the drivers of reforms is that the
perception of crisis is conducive for reforms (for further references see also Drazen, 2000). Bad
fiscal data may contribute to a general sense of crisis and as such prepare the ground for the
acceptance of reforms. If this aspect dominates, period BR should typically be characterized by
especially bad fiscal data which constitute one type of crisis symptoms (compared to normal
periods S with a stable institutional equilibrium).
The frequently cited compensation argument hints to the contrary expectations that the fiscal
situation at the eve of reforms should typically be positive. If politically influential interest groups
lose from the reform, compensation packages may be necessary to buy their consent (European
Commission, 2005; Grüner, 2002). If this is relevant, there needs to be budgetary room for
manoeuvre before a reform can occur. The same requirement applies if accommodating aggregate
demand policies can be helpful for a quick realization of benefits from structural reforms (as
argued, e.g., by Bean (1998) in the context of labour market reforms). In this case, too, a
comfortable budgetary starting point should make it politically more acceptable to initiate
structural change. As a consequence of the compensation and aggregate demand arguments,
reform periods should be typically preceded by relatively favourable fiscal situations.
134