What Drives Opposition to Economic Reforms? The Role of Ex Ante Uncertainty

• Published date: 01 September 2018
• DOI: 10.1177/1065912917749892
• Date: 01 September 2018
• Author: Alan Potter
• Subject Matter: Articles

749892PRQXXX10.1177/1065912917749892Political Research QuarterlyPotter
research-article2018
Article
Political Research Quarterly
2018, Vol. 71(3) 560 –572
What Drives Opposition to
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Economic Reforms? The Role
https://doi.org/10.1177/1065912917749892
DOI: 10.1177/1065912917749892
journals.sagepub.com/home/prq
of Ex Ante Uncertainty
Alan Potter1
Abstract
The theoretical literature on support for pro-market economic reforms identifies uncertainty about the future
consequences of reform as an important determinant of opposition to pro-market policies. However, this literature
does not rigorously test the role of uncertainty on support for pro-market reforms. This paper addresses this gap by
testing the role of uncertainty using a new geocoded dataset of state-owned enterprises in India and a difference-in-
differences strategy. I find that voters who are threatened with privatization but do not experience the policy vote
against the privatizing party whereas voters that actually experience privatization vote in favor of the privatizing party.
These results provide strong empirical support for the role of uncertainty to explain opposition to economic reform
programs.
Keywords
economic reform, privatization, India economy
Introduction
geocode the locations of SOEs in India so as to isolate the
set of voters (i.e., employees and communities surround-
The literature on economic reforms and public opinion
ing SOEs) who have an interest in the privatization pro-
revolves around a very basic question: if economic
cess. Many scholars have noted that privatization2 should
reforms are beneficial for an economy, why do they gen-
be among the most electorally salient economic reforms
erate widespread resistance?1 In countries across the
because it is easy for the broad public to understand, and
world, major reform programs are slow to be imple-
directly affects a large and organized vested interest in the
mented and frequently rolled back after implementation
form of labor at state-owned enterprises (Haggard and
due to public opposition from large segments of society.
Webb 1994; Varshney 1998).
However, the reason why economists frequently recom-
Privatization in India is an ideal case to test the pro-
mend and politicians attempt to implement economic
posed theory because privatization was only implemented
reforms is generally because they believe they will pro-
at a subset of firms based on their respective finances.
vide long-term economic benefits. So, why is political
Prior to implementation of the policy, it was unclear
opposition to reforms so widespread?
which firms would be privatized, and, therefore, opposi-
One explanation that appears in the literature is that
tion groups mobilized against privatization across firms.
individuals, including both the general public and vested
Ultimately, however, the privatizations were only minor-
interests, have high levels of uncertainty about the future
ity sales and had a minimal effect on employment and
consequences of economic reforms and so support the
wages in the period under analysis. My primary empirical
status quo. This uncertainty may lead to opposition to
tests use a difference-in-differences strategy, in which I
reforms even if the expected utility of reforms is higher
compare constituencies with an SOE that was not priva-
than under the status quo (Bates and Krueger 1993;
tized to constituencies with an SOE that was privatized
Fernandez and Rodrik 1991; Przeworski 1991).
While intuitively appealing, an uncertainty-based
explanation for opposition to economic reforms has not
1Independent Researcher, New York, NY, USA
been rigorously tested. In this paper, I fill this gap by ana-
Corresponding Author:
lyzing the privatization of major state-owned enterprises
Alan Potter, 27 East 73rd Street, New York, NY 10021, USA.
(SOE) in India in the 1990s. I use satellite imagery to
Email: afp250@nyu.edu

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Potter
561
before and after the initiation of privatization policy in
Margalit (2013) find experimental evidence that voters
1991. I find that constituencies with an SOE that was not
condition their economic voting in the present period on
privatized show a significant decline in vote-share for the
expectations about economic conditions in the future.
incumbent after the initiation of privatization policy in
A second explanation is that the general public’s opin-
other locations, whereas constituencies with an SOE that
ion on reforms is not what makes reform difficult to
was privatized show an increase in vote-share for the
implement, and, instead, it is vested interests that benefit
incumbent. These results provide strong evidence that
under the status quo that block reforms. In most cases of
uncertainty explains ex ante opposition to economic
pro-market economic reform, the benefits of reform are
reforms even in cases when affected voters ultimately
diffuse whereas the costs are concentrated for a set of
support the policy.
vested interests (Haggard and Kaufman 1992; Olson
The article proceeds in four sections. In the first sec-
1996). Because of this, a number of scholars have noted
tion, I discuss the literature on why voters oppose eco-
that if pro-market reforms improve the overall perfor-
nomic reforms, with a focus on uncertainty-based mance of the economy, then it should be possible to com-
explanations. In the second section, I outline the case of
pensate the vested interests who lose from reforms and
Indian privatization, and why it is an ideal case to study
make everyone at least as well off as they were prior to
the role of uncertainty in voter support/opposition to eco-
reforms, and, therefore, remove opposition from vested
nomic reforms and present the data I use in my analysis.
interests. However, in many cases, it will not be possible
In the third section, I present the empirical test of the
to credibly commit to compensation prior to reforms.
uncertainty-based theory for opposition to economic
North, Wallis, and Weingast (2009) and Acemoglu and
reforms. In the last section, I discuss my results and
Robinson (2000) argue that the process of economic
conclude.
reform can permanently alter who is in power, and make
ex ante promises of compensation by existing elites not
What Causes Opposition to
credible. Krueger (1974) and Tullock (1975) create mod-
Economic Reforms?
els in which the rent-seeking costs to be among the win-
ners pre-reform are already priced into the benefits of the
There are three common answers to the question of why
winners. Furthermore, these works point out that the ben-
economic reforms are politically difficult to implement
efits to winners ex ante reform are often illegal, as are the
despite the fact that they are intended to improve overall
costs needed to acquire benefits (e.g., in the form of
economic performance: (1) retrospective voting makes
bribes). This also makes a credible commitment to vested
the general public myopic and unable or unwilling to give
interests who lose from reforms difficult.
economic reforms sufficient time to improve the econ-
An alternative explanation for opposition to economic
omy; (2) the general public does not block reforms, and
reforms, and the one tested in this paper, is that voters are
instead it is special interests that are the main obstacle;
highly uncertain about the future effects of reform poli-
and (3) uncertainty about the impact of economic reforms
cies and so oppose them even if they believe the reforms
causes opposition to reforms even in cases where the
will benefit the economy as a whole. In uncertainty-based
expected net impact of reforms on society is positive.
theories, voters support the status quo because they are
None of these explanations is mutually exclusive. In fact,
uncertain about how reforms will affect them at an indi-
there is no doubt that the first two explanations play an
vidual level. Note that this explanation may play a role in
important role in explaining opposition to economic
both the general public theory and vested interest theory
reforms in some cases. The focus of this paper is on the
discussed above. For example, in the context of vested
third explanation, voter uncertainty, which has yet to be
interests, uncertainty about whether vested interests will
rigorously tested in the scholarly literature.
be compensated for losses is critical to the arguments of
A retrospective voting model as applied to economic
Krueger (1974) and Tullock (1975).
reforms implies that voters only consider past or current
Bates and Krueger (1993) point out that professional
economic conditions in their voting decisions, and given
economists are uncertain about the effect of proposed
that economic reforms generally hurt the economy in the
reforms, so it is not surprising that individuals are uncer-
short term (Przeworski 1991), voters oppose them.
tain whether they are themselves future winners or future
However, a number of works have found this explanation
losers from proposed economic reforms. Przeworski
to be lacking. Case studies of economic reforms from
(1991) argues that even when voters believe that reforms
Stokes (1996), Przeworski (1996), and Haggard and
may benefit the economy in the long term, they may
Webb (1994) show that in some cases voters are able to
oppose them because they...