Compensation contracts and the sustainability of economic reforms

TERRA ECONOMICUS, , Vol. 15 (no. 1),

The article describes the features of the compensation contracts, which can accelerate reforming process and reduce resistance to them from losers. Four basic types of compensation, as well as four phase of the compensation transactions are described. The presented typology is illustrated by the examples from South America, Europe and the former socialist countries. Next, the theoretical limits of compensation contracts are described. There are identified seven such restrictions. They are connected with changes in the motivations of special interest groups, as well as the complexity of the calculation of costs and benefits. The article shows that there is no possibility for the Kaldor-Hicks improvement due to the lack of the mechanisms to precise calculation of the economic impact of reforms. But at the same time, there are some specific approaches to reforming, which can partially flatten the complexity of compensation contracts. Finally, we are considering the ethical issues that arise during the compensation, and which are associated with the need to leave unpunished crimes committed in the past. These problems are often ignored in the economic literature, but in fact ethical restrictions are the main barrier for successful reforms. In general, the main finding is that compensatory contracts, in contrast to what is commonly believed, do not accelerate reforms, but on the contrary, hinder their implementation through the political compromises and a partial preservation of the significance of the old advocacy group. That’s why mechanisms for compensations are often used as an element of political bargaining only in the case of small changes, but not during the radical and ambitious reforms.

Keywords: compensation deals; reforms; economic policy

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Publisher: Southern Federal University
Founder: Southern Federal University
ISSN: 2073-6606