Excessive Policy Volatility: A Framework for Analysis with Some Illustrations from Recent Pension Reforms

While scholars and practitioners are often concerned about why policy change occurs so rarely, known as policy gridlock, an alternative concern is related to disproportionate policy change and policy bubbles, perhaps resulting from diffusion (Howlett & Kemmerling, fc.; Jones et al., 2014; Maor, 2012). We study the long term durability of reforms with particular interest in cases where policy change occurs with high frequency and amplitude, referred to as ‘excessive policy volatility’ (EPV). This paper develops a theoretical framework to understand the internal and external factors that produce EPV after major reforms and outline different forms of it, including pendulum swings and bubbles. Our findings suggest that international policy diffusion makes adoption of big, excessive, or structurally unstable reforms more likely, but certain domestic political structures also contribute to the adoption and implementation of these reforms. Furthermore we find strong negative consequences of EPV for political trust and economic outcomes, particularly increasing debt levels. To illustrate, we primarily rely on examples from the last three decades of pension reform focusing on the rise and fall of mandatory private pension schemes in Eastern Europe and Latin America, but also briefly show instances of EPV in other policy areas.