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Explaining Reform Deadlocks

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  • Heinemann, Friedrich

Abstract

Countries are often slow to adjust their economic structures to new necessities although this reform reluctance is costly in terms of growth and employment. This paper analyses the relevant factors that block or foster economic reforms. Theoretical considerations show that there are at least three classes of potentially relevant factors: the objective need for reforms, political-economic issues and factors associated with limited rationality or rational ignorance. In the empirical analysis, a reform event is quantified as a significant change of the Economic Freedom of the World indicator within a five-year-period. This allows to run probit estimations for a large country panel starting in the 1970s where the probability of reform is explained by a number of proxies covering all three classes of potential factors. The results suggest that the initial extent of economic freedom and growth performance are empirically relevant factors. Furthermore, countries with an ageing population appear to behave less reform friendly. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 04-39.

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Date of creation: 2004
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Handle: RePEc:zbw:zewdip:2035

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Related research

Keywords: economic policy reforms; economic freedom; reform resistance; limited rationality;

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References

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  1. Heinemann, Friedrich, 2000. "Die Psychologie irrationaler Wirtschaftspolitik am Beispiel des Reformstaus," ZEW Discussion Papers 00-12, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(1), pages 139-209, January.
  3. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, American Economic Association, vol. 81(5), pages 1170-88, December.
  4. de Haan, Jakob, 2003. "Economic freedom: editor's introduction," European Journal of Political Economy, Elsevier, vol. 19(3), pages 395-403, September.
  5. Caplan, Bryan, 2001. " Rational Irrationality and the Microfoundations of Political Failure," Public Choice, Springer, Springer, vol. 107(3-4), pages 311-31, June.
  6. Gwartney, James & Lawson, Robert, 2003. "The concept and measurement of economic freedom," European Journal of Political Economy, Elsevier, vol. 19(3), pages 405-430, September.
  7. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, American Economic Association, vol. 81(5), pages 1146-55, December.
  8. Caplan, Bryan, 2001. "Rational Ignorance versus Rational Irrationality," Kyklos, Wiley Blackwell, Wiley Blackwell, vol. 54(1), pages 3-26.
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Citations

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Cited by:
  1. Friedrich Heinemann & Benjamin Tanz, 2008. "The impact of trust on reforms," Journal of Economic Policy Reform, Taylor and Francis Journals, Taylor and Francis Journals, vol. 11(3), pages 173-185.
  2. Heinemann, Friedrich, 2006. "The Drivers of Deregulation in the Era of Globalization," ZEW Discussion Papers 06-12, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Mawussé K. N. Okey, 2011. "Institutional Reforms, Private Sector, and Economic Growth in Africa," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Working Paper W, World Institute for Development Economic Research (UNU-WIDER).
  4. Axel Dreher & Stefan Voigt, 2008. "Does Membership in International Organizations Increase Governments’ Credibility? Testing the Effects of Delegating Powers," KOF Working papers 08-193, KOF Swiss Economic Institute, ETH Zurich.
  5. Belke, Ansgar & Gros, Daniel, 2007. "Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms," IZA Discussion Papers 2547, Institute for the Study of Labor (IZA).
  6. Friedrich Heinemann & Theocharis Grigoriadis, 2013. "Origins of Reform Resistance and the Southern European Regime," WWWforEurope Working Papers series 20, WWWforEurope.
  7. Friedrich Heinemann & Michael Förg & Eva Jonas & Eva Traut-Mattausch, 2008. "Psychologische Restriktionen wirtschaftspolitischer Reformen," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, Verein für Socialpolitik, vol. 9(4), pages 383-404, November.

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