Reform, FDI and Economic Growth: Tale of the Tortoise and the Hare
Our 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.
|Date of creation:||01 Nov 2004|
|Date of revision:|
|Contact details of provider:|| Postal: 724 E. University Ave, Wyly Hall 1st Flr, Ann Arbor MI 48109|
Phone: 734 763-5020
Fax: 734 763-5850
Web page: http://www.wdi.umich.edu
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Anders Åslund & Peter Boone & Simon Johnson, 1996. "How to Stabilize: Lessons from Post -communist Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 217-314.
- Gérard Roland, 2000.
"Transition and Economics: Politics, Markets, and Firms,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262182033.
- Gérard Roland, 2004. "Transition and Economics: Politics, Markets, and Firms," MIT Press Books, The MIT Press, edition 1, volume 1, number 026268148x.
- Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995.
"How Does Foreign Direct Investment Affect Economic Growth?,"
NBER Working Papers
5057, National Bureau of Economic Research, Inc.
- Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
- Alberto Alesina & Nouriel Roubini, 1990.
"Political Cycles in OECD Economies,"
NBER Working Papers
3478, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:wdi:papers:2004-730. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Laurie Gendron)
If references are entirely missing, you can add them using this form.