On the Speed of Economic Reform: Tale of the Tortoise and the Hare

42 Pages Posted: 26 Jul 2007

See all articles by Bruno Merlevede

Bruno Merlevede

Ghent University - Department of General Economics

Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE); Ghent University - Department of General Economics

Date Written: September 5, 2005

Abstract

We analyse how the choice of reform speed and economic growth affect one another. We estimate a system of three equations where economic growth, economic reform and FDI are jointly determined. New reforms affect economic growth negatively, whereas the level of past reform leads to higher growth and attracts FDI. This means that the immediate adjustment cost of new reforms is counterbalanced by a future increase in FDI inflows and higher future growth through a higher level of past reform. Reform reversals contribute to lower growth. We use the model to simulate the impact of big bang reform and gradualist reform on economic growth. This is only meaningful in the presence of reform reversals, which requires aggregate uncertainty about the appropriate reform path. Using the coefficients from the empirical model, we find that even relatively small ex ante reversal probabilities suffice to tilt the balance in favour of gradualism. The case for gradualism gains strength if policymakers are short-sighted, but weakens if voters are myopic.

Keywords: policy reform, gradualism, big bang, FDI, economic growth

JEL Classification: O57, P21, P26, P27

Suggested Citation

Merlevede, Bruno and Schoors, Koen J. L., On the Speed of Economic Reform: Tale of the Tortoise and the Hare (September 5, 2005). BOFIT Discussion Paper No. 11/2005, Available at SSRN: https://ssrn.com/abstract=1002909 or http://dx.doi.org/10.2139/ssrn.1002909

Bruno Merlevede (Contact Author)

Ghent University - Department of General Economics ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium

Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE) ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium
+32 9 264 34 78 (Phone)
+32 9 265 35 99 (Fax)

Ghent University - Department of General Economics ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium
+32 9 264 34 78 (Phone)
+32 9 264 35 99 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
40
Abstract Views
584
PlumX Metrics