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After the honeymoon: on the economics and the politics of economic transformation

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This paper focuses on the obvious: Pareto-improving programs may fail to improve everyone's lot. Politically, it has been often interpreted as requiring that a majority benefits from the change. Events in Central and Eastern Europe suggest otherwise and cast doubt on the relevance of the median voter theorem. The addition of minority discontents may result in major political difficulties and this leads governments to avoid actions that generate strong minority objections. As a result the technically best-crafted plans may end up being politically rejected. In addition, reform programs which are ex ante politically acceptable may well become rejected ex post after they are implemented. One solution is to introduce a heavy dose of egalitarian income distribution, even if it runs against labor supply incentives.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp1992/92-52.pdf

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Copyright INSEAD. All rights reserved