Reform, FDI and Economic Growth: Tale of the Tortoise and the Hare

22 Pages Posted: 10 Feb 2005

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: November 2004

Abstract

Our main interest is the impact of the choice of the speed of economic reform on economic growth. We estimate a system of 3 equations where economic growth, economic reform and FDI are jointly determined. We find that new reforms affect economic growth negatively but attract FDI, whereas the level of past reform leads to higher growth. This means that the immediate adjustment cost of new reforms is counterbalanced by an immediate increase in FDI inflows and higher growth in the future 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. This could be reinforced by the shortsightedness of policymakers, but may be moderated by voter myopia.

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

JEL Classification: O57, P21, P26, P27

Suggested Citation

Merlevede, Bruno and Schoors, Koen J. L., Reform, FDI and Economic Growth: Tale of the Tortoise and the Hare (November 2004). Available at SSRN: https://ssrn.com/abstract=665125 or http://dx.doi.org/10.2139/ssrn.665125

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)

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