The strongpolitical economystrong of reform - European Commission.pdfVIP

DG ECFINs 6th Annual Research Conference (ARC 2009) SESSION A The political economy of reform Crisis and reform Brussels, 15-16 October 2009 Allan Drazen University of Maryland, NBER, and CEPR Financial market crisis, financial market reform: Why hasnt reform followed crisis (Keynote address) Copyright rests with the author Financial Market Crisis, Financial Market Reform Why Hasn’t Reform Followed Crisis? Allan Drazen University of Maryland, CEPR, and NBER This is based on my Keynote Lecture at DG EC FINs 6th Annual Research Conference, “Crisis and Reform”, Brussels, 15-16 October 2009. I wish to thank Charles Goodhart, Peter Murrell, and conference participants for useful comments. 1 “One year after the collapse of Lehman Brothers, the surprise is not how much has changed in the financial industry, but how little.” New York Times, September 12, 2009 1. Introduction Much conventional wisdom argues that crisis triggers or induces reform, though what this means has different interpretations. One view (Bruno, 1993) is that a crisis is necessary for major reform, that is, major reform rarely takes place without an economic crisis. Another view, closer to a statement about sufficiency rather than necessity, is that a severe enough crisis will lead to major reform, as in Olson (1982) or Drazen and Grilli (1993). The “crisis hypothesis”, as it is sometimes termed, is part of political wisdom. For example, Rahm Emanuel, President Obama’s chief of staff, has been quoted as saying