On the speed of economic reform : tale of the tortoise and the hare

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Title: On the speed of economic reform : tale of the tortoise and the hare
Author: Merlevede, Bruno ; Schoors, Koen
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 11/2005
Year of publication: 2005
Publication date: 15.8.2005
Published in: Published in Journal of Economic Policy Reform, 2007, Vol.10, No.1, pp. 29-50
Pages: 33 s.
Keywords: menetelmät; talousuudistus; suorat sijoitukset; talouskasvu; Bofit-kokoelma; vauhti
JEL: O57; P21; P26; P27
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. JEL Classification: O57, P21, P26, and P27 Keywords: policy reform, gradualism, big bang, FDI, economic growth
Rights: https://helda.helsinki.fi/bof/copyright


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