Reform, FDI and Economic Growth: Tale of the Tortoise and the Hare
AbstractOur 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.
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Bibliographic InfoPaper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp730.
Date of creation: 01 Nov 2004
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policy reform; gradualism; big bang; FDI; economic growth;
Find related papers by JEL classification:
- O57 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
- P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform
- P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy
- P27 - Economic Systems - - Socialist Systems and Transition Economies - - - Performance and Prospects
This paper has been announced in the following NEP Reports:
- NEP-AFR-2005-03-13 (Africa)
- NEP-ALL-2005-03-13 (All new papers)
- NEP-DEV-2005-03-13 (Development)
- NEP-POL-2005-03-13 (Positive Political Economics)
- NEP-TRA-2005-03-13 (Transition Economics)
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