How expectations affect reform dynamics in developing countries

Reform is often flawed by delayed implementation and, after initial acceptance, sudden reversals in public reaction. In recent years, many attribute these delays and reversals to reform dynamics because reform, particularly when comprehensive, rarely takes place all at once. In designing reform, it is important to determine what the best sequencing of reform would be, under what conditions that sequence is feasible, and how expectations will affect the success of alternative reform strategies. In the literature on second-best reform strategies, misperceptions about the prospective costs and benefits of reform add another intertemporal distortion to the many already identified. Bold moves, such as pre-announced institutional changes, are often suggested as a way to signal the beginning of a new policy regime. The author advocates a more cautious approach when a government has been discredited by a history of policy failures.