Despite of the fact that the market economy has demonstrated its superiority before the others types of economies it is still not protected from crises. Economic crises are usually connected with the end of business cycles but they can also take place by the negative state of economy or mistakes of governments. In any case crises have negative influence on the electoral support of governments because voters have to accept such negative economic phenomena as unemployment, inflation, bankruptcy of banks and companies. Voters are inclined to blame governments and political actors with such problems.
The most popular form of response of governments to economic crises is the implication of appropriate economic reforms. Some reforms can have negative consequences for voters and therefore for the electoral support and restrict some essential options of the welfare state. Nevertheless the examples from the current crisis of the Euro zone as well as the examples from previous crises show that certain states implement reforms and therefore overcome crisis more successful than others. In this way, the problem of this term paper is the following one: why are some countries in the Euro zone are more successful in implementing reforms than others?
In order to answer this question first of all the theoretical frames are represented. They include two theories which explain the decision of governments to undertake economic reforms as well as the behavior during the reforms’ implementation. The empirical examples of Italy which went through the severe economic crisis before the joining the Euro zone in the 1990s and Ireland which suffered from the financial crisis of 2008 – 2009 as a member state of the Euro zone and then overcame it will show how and why some countries can be successful in implementation of risky reforms in practice.
Table of Contents
Introduction
I. Theories of state reforms
1. The Prospect Theory
2. The Theory of Blame Avoidance
II. Empirical examples
1. Italy in 1990s
2. Ireland in 2008 – 2010
Conclusion
Research Objectives and Key Topics
This paper investigates why certain countries within the Euro zone demonstrate varying degrees of success when implementing risky economic reforms during times of crisis. It explores how government decisions are influenced by political risks and voter perceptions, analyzing the intersection of economic necessity and the maintenance of electoral support.
- Theoretical application of Prospect Theory to political decision-making.
- Mechanisms of Blame Avoidance strategies used by governments.
- Comparative analysis of reform implementation in Italy during the 1990s.
- Evaluation of banking sector reforms in Ireland between 2008 and 2010.
- The influence of voter domain perception (losses vs. gains) on reform success.
Excerpt from the Book
1. The Prospect Theory
Prospect Theory was developed by American – Israeli economists Daniel Kahneman and Amos Tversky in 1979 and is mostly applied in the sphere of international relations. The theory is destined to explain the behaviour of people and political actors under conditions of risk and uncertainty (Kahneman/ Tversky 1979: 263 - 292).
The theory is based on experiments which have disclosed that people usually decide to behave themselves in the risky way if they appear in the situation of losses. However, they do not undertake risky actions if they find themselves in the domain of gains. Furthermore the way of the peoples’ behaviour has often deviated from the theoretical outlook of certain utilities. Such state of affairs has driven to the creation of two main statements of the Prospect Theory: ‘losses loom larger than gains’ and ‘losses hurt more than equal gains please’ (Kahneman/ Tversky 1979: 279; McDermott 2004: 298). In this way, one needs to explain, why do peoples’ and political actors’ choices deviate from the theoretical predictions of the expected utility?
There are a few reasons which can explain this phenomenon. The first one is connected with the so – called ‘negativity effect’, which bases itself on the fact, that the subjective comprehension of the meaning of negative information always prevails the subjective comprehension of the meaning of equally extreme and equally likely positive information (s. Lau 1985: 119). The second reason is the so – called ‘certainty effect’, which means that the majority of people prefer to obtain the outcomes that are considered certain rather than outcomes which are merely probable (s. Kahneman and Tversky 1979: 265). The third reason is the ‘reflection effect’, which supposes that the preference order in the negative domain mirrors the preference order in the positive domain. In other words, the ‘frames’ of comprehension are built by individuals, which order the information from different sources according to individual preferences.
Summary of Chapters
Introduction: This chapter defines the problem of implementing economic reforms during crises and sets the scope for the comparative analysis of Italy and Ireland.
I. Theories of state reforms: This section introduces Prospect Theory and the Theory of Blame Avoidance to explain the behavioral motivations of political actors during uncertain economic periods.
1. The Prospect Theory: Explains how framing effects, such as the 'negativity' and 'certainty' effects, influence whether political actors view their situation as a loss or a gain.
2. The Theory of Blame Avoidance: Outlines specific political strategies used to deflect negative feedback and manage voter hostility when pursuing unpopular reforms.
II. Empirical examples: This chapter transitions to practical application, analyzing specific case studies to test the theoretical framework in real-world contexts.
1. Italy in 1990s: Analyzes the Italian government's approach to necessary economic reforms required for EMU entry and the resulting political consequences.
2. Ireland in 2008 – 2010: Examines the Irish response to the banking crisis and the specific strategies employed to stabilize the financial sector while minimizing electoral backlash.
Conclusion: Synthesizes the findings, suggesting that reform success depends on a complex interplay between government strategy, voter perception of the 'domain of loss', and specific macro-economic conditions.
Keywords
Prospect Theory, Blame Avoidance, Economic Reform, Euro zone, Financial Crisis, Electoral Punishment, Welfare State, Political Actors, Italy, Ireland, Banking Regulation, Status Quo, Risk Management, Political Strategy, EMU.
Frequently Asked Questions
What is the fundamental focus of this research?
The research focuses on the political economy of implementing reforms during economic crises and explores why some countries are more successful than others in this process.
What are the primary theoretical pillars used in this study?
The study relies on Prospect Theory, which analyzes decision-making under risk, and the Theory of Blame Avoidance, which examines how politicians handle negative feedback from voters.
What is the central research question?
The main question is: Why are some countries in the Euro zone more successful in implementing reforms than others?
Which scientific methods are applied?
The author uses a qualitative comparative analysis, applying established political science theories to two distinct historical case studies.
What is the scope of the main analysis section?
The main section investigates the decision-making processes in Italy during the 1990s and Ireland during the financial crisis of 2008–2010.
Which concepts define the success of a reform?
Success is defined by the government's ability to implement necessary measures while navigating the potential for electoral punishment or socio-political conflict.
How does the Italian case study illustrate the theory?
It illustrates the use of risk-taking behaviors by a government that perceived itself in a 'domain of loss' while aiming for EMU entry.
How did Ireland manage its 2008-2010 banking crisis?
The Irish government implemented structural banking reforms and specific communication strategies to stabilize the sector while attempting to avoid blame for economic hardship.
- Arbeit zitieren
- B.A. Andrei Horlau (Autor:in), 2013, Implementing reforms during the economic crisis, München, GRIN Verlag, https://www.hausarbeiten.de/document/215519
