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SUMMARYWhile economic policy liberalization is a key to higher overall growth, reforms are often not implemented due to a fierce opposition from politically powerful prospective losers from reforms. In this respect, it is frequently claimed that economic crises can help overcome resistance to policy liberalization. Furthermore, political authorities not constrained by democratic checks and balances are supposed to be more decisive and are thus expected to carry out market‐friendly policy change in times of crises more easily. Rules of democratic participation and checks and balances may however also be good for policy reform, as they can serve as an institutional mechanism for peaceful conflict resolution.The paper investigates empirically the interaction between economic growth performance and political institutions in producing free‐market reform. We explore whether political regime types shape systematically government policy responses to good or bad growth performance, employing panel econometric techniques and using recently updated data for economic reform and political institutions. Contrary to conventional wisdom we find that a bad growth performance is conducive to reforms in democracies, but not in autocracies. Democracies not only carry out more liberal economic policies in general, but they are also more responsive to economic growth crises. Democratic rule seems to be favorable for policy liberalization, but a very good growth performance weakens liberalization incentives considerably.

The paper investigates empirically the interaction between economic growth performance and political institutions in producing free-market reform. In particular, we explore whether political regime types systematically shape government policy responses to good or bad growth performance, employing panel econometric techniques and using recently updated data for economic reform and political institutions. Contrary to conventional wisdom we find that a bad growth performance is conducive to reforms only in democracies, but not in autocracies. Democratic rule seems to be favourable for policy liberalisation in general, but a very good growth performance weakens liberalisation incentives considerably.

This report collects and draws conclusions from research papers of Area 1. It summarises the results against the background of the existing literature, focusing in particular on the challenges arising on welfare states from globalisation, post-industrialisation, and demographic changes. The report also discusses problems of the political economy of policy reform and large-scale economic and social transitions.

AbstractA popular explanation for economic development is that 'individualistic values' provide a mind-set that is favorable to the creation of growth-promoting institutions. The present paper investigates the relationship between individualistic values and personal attitudes toward government intervention. We consider two key components of an individualistic culture to be particularly relevant for attitude formation: self-direction ('social' individualism) and self-determination ('economic' individualism). Results indicate that both are negatively associated with interventionist attitudes. Effects of self-direction are much weaker though, than self-determination. Moreover, the effects of self-direction are mitigated through higher trust in the state and lower confidence in companies, while that is not the case for self-determination values. We conclude that especially economic individualism supports attitudes conducive to the formation of formal market-friendly institutions.

Ever since Max Weber (1930) uncovered the cultural origins of capitalism, a common denominator for explanations of economic development is that "individualistic values" provide a more favourable background for promoting the wealth of nations. This paper investigates the impact of individualist values on personal attitudes towards government intervention, as a potential link of culture and formal institutions. We consider two key components of an "individualistic culture" to be particularly relevant for attitude formation, namely values related to self-direction and self-determination. Results indicate that both elements of individualistic values are associated negatively with interventionist preferences. Interestingly, effects of self-direction values on intervention attitudes are much weaker though, than the effects of a strong belief in self-determination. Moreover, the effects of self-direction on intervention preferences are mitigated through higher trust in state actors and lower confidence in major companies, while that does not appear to be the case for self-determination values.

Which impact does government size have on life satisfaction, and how do effects of bigger government differ between income groups in society? Previous studies typically employed country averages and thus neglect possibly heterogeneous happiness effects between income groups. The paper addresses empirically the effects of government spending on subjective well-being of individuals belonging to different income groups. Our analysis is based on individual data from 25 European countries participating in the European Social Survey. In contrast to most previous studies we take account of the endogeneity between relative income position and reported life satisfaction by an instrumental variable approach. Our results suggest, first, that most government spending categories, including social protection, are on average negatively related to individual well-being. Secondly, estimated marginal effects of health, education and social protection spending at different income levels show that spending increases always have a stronger negative effect on high income groups' well-being than on low income groups' life satisfaction. For all government spending categories, marginal happiness effects of higher public spending are clearly negative for income groups at the top.

The relationship between government size and growth has received an enormous attention in the economics literature, and the recent financial crisis has forced this topic back on the agenda. A highly controversial debate in this respect is whether large governments are harmful for growth. Endogenous growth theory provides us with the view that tax structure and the composition of public expenditure may be important for growth, perhaps even more than total tax or expenditure levels. Government size and structure are, however, also reflected in the level and structure of market regulations, which may substitute or complement fiscal intervention. The study provides an overview of the growth-friendliness of fiscal and regulatory structures in a cross-section of EU 15 and EU 12 countries and highly developed OECD countries. Peripheral European (transition) countries are also included, whenever respective data are available. Our analysis is based on several measures capturing the expenditure and the tax side of the budgets, as well as regulatory policies. It is shown that the size and the structure of fiscal and regulatory regimes and, hence, the expected long-run growth impact of government activities, still differ markedly across countries.

Debates about the appropriate role of markets and governments are often shaped by sharply contrasting opinions. Based on individual data from the World Values Survey and the European Values Study for up to 190,000 respondents in a sample of 68 democratic countries, we find that social trust is associated with tempered attitudes regarding government intervention and redistribution. Results corroborate ideas from socio-psychological research that trusting people have personality attributes which work towards a moderation on politically divisive topics. Complementary to the existing literature on political polarisation, this opens the possibility that trusting societies may be superior at implementing controversial policy reforms because social trust reduces the probability of extreme attitude formation.

Recent research has shown that the degree to which people feel they are in control of their lives is an important correlate of individual happiness, where those who feel more in control are found to be systematically happier. In turn, the economic sources of perceived life control are only insignificantly established in the literature. The present paper employs individual data from the World Value Survey and European Values Study, covering the period from 1981 to 2013, to establish the macro-determinants of individual life control. We find that living in a country with high overall economic freedom is a major determinant of feeling in control of one's own life. The effect is similar for individuals in high- and low-income countries, while the impact of democracy is negligible in both cases. Interacting relative income with economic freedom, we find that, contrary to conventional wisdom, it is by far the lower income groups that derive the biggest gain of perceived life control from living in a country with comparatively high economic freedom. In low-income countries, the effects of economic freedom on life control perceptions do not appear to be conditional on personal income levels.