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International Organizations and Structural Reforms

Listed author(s):
  • Sebastian Galiani
  • Ivan Torre
  • Gustavo Torrens

Different countries have been following different reform paths since the early 1990s. We develop a simple dynamic model of policy reform that captures some of the determinants that underlie these differences. The model emphasizes the interaction between domestic institutions and international organizations that promote reform, on the one hand, and the political incentives for reversing reforms, on the other. At equilibrium, there are three types of reform paths. A country can undergo a full-scale, lasting reform; it can undertake a partial but lasting reform; or it can go through cycles of reforms and costly counter-reforms. Domestic institutions, as well as the incentives provided by international organizations, determine the equilibrium path. Unless the cost of reversal is high enough, an international intervention that promotes reforms induces an increase in the probability of reversals. A benevolent international organization that is fully aware of the possibility and social cost of reversals will always increase social welfare if it embraces the following principle: promote the greatest partial reform that is compatible with no reversal, or induce cycles of full-scale reform and complete reversal, depending on which of those two paths will generate greater social welfare. A benevolent but politically myopic international organization, however, may reduce social welfare because it does not take the fact into account that an overly aggressive reform could trigger costly reversals that outweigh the benefits of the reform. Deliberately making the costs of reversal high could be a risky way of improving the trade-off between the extent of the reform and the probability of reversal. Our model suggests that international organizations should also consider the possibility of providing defensive funding for dealing with counter-reform shocks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 21237.

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Date of creation: Jun 2015
Handle: RePEc:nbr:nberwo:21237
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  1. Mathias Dewatripont, 1992. "Economic Reform and Dynamic Political Constraints," ULB Institutional Repository 2013/175991, ULB -- Universite Libre de Bruxelles.
  2. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March.
  3. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
  4. Dennis P. Quinn & A. Maria Toyoda, 2008. "Does Capital Account Liberalization Lead to Growth?," Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1403-1449, May.
  5. Acemoglu,Daron & Robinson,James A., 2009. "Economic Origins of Dictatorship and Democracy," Cambridge Books, Cambridge University Press, number 9780521671422, December.
  6. repec:cup:apsrev:v:97:y:2003:i:03:p:407-423_00 is not listed on IDEAS
  7. M. Dewatripont & G. Roland, 1992. "Economic Reform and Dynamic Political Constraints," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 703-730.
  8. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-1155, December.
  9. Sebastian Galiani & Daniel Heymann & Mariano Tommasi, 2003. "Great Expectations and Hard Times: The Argentine Convertibility Plan," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Spring 20), pages 109-160, January.
  10. Laban, Raul & Sturzenegger, Federico, 1994. "Fiscal conservatism as a response to the debt crisis," Journal of Development Economics, Elsevier, vol. 45(2), pages 305-324, December.
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