Conflicts, Interest Groups and Politics in Structural Reforms

Abstract

The present study is the first to examine the balance of power among all the players who influence the adoption of structural reforms - politicians, regulators, and interest groups. Special attention is devoted to the effect of conflicts between regulators. Professional conflicts signal to politicians that there is a high level of risk in implementing a given reform, thereby weakening their confidence in it. Conflicts also benefit interest groups, increasing their effectiveness vis-a-vis politicians. Using a unique data set on 32 attempts to reform Israel’s financial market, I find that the greater the extent of conflicts among regulators and the greater the intensity of the opposition of interest groups, the lower the probability that a reform will be implemented. These conflicts, together with the strength of interest groups, have led to repeated attempts to introduce reforms, so that on average it has taken ten years for a reform to be adopted.