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Reform, FDI and Economic Growth: Tale of the Tortoise and the Hare

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  • Bruno Merlevede

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  • Koen Schoors

Abstract

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.

Suggested Citation

  • Bruno Merlevede & Koen Schoors, 2004. "Reform, FDI and Economic Growth: Tale of the Tortoise and the Hare," William Davidson Institute Working Papers Series wp730, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2004-730
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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/40116/3/wp730.pdf
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    References listed on IDEAS

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    1. Gérard Roland, 2004. "Transition and Economics: Politics, Markets, and Firms," MIT Press Books, The MIT Press, edition 1, volume 1, number 026268148x, January.
    2. 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.
    3. 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.
    4. Alesina, Alberto F & Roubini, Nouriel, 1990. "Political Cycles in OECD Economies," CEPR Discussion Papers 470, C.E.P.R. Discussion Papers.
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    Cited by:

    1. David Stuckler & Lawrence King & Greg Patton, 2009. "The Social Construction of Successful Market Reforms," Working Papers wp199, Political Economy Research Institute, University of Massachusetts at Amherst.
    2. David Stuckler & Lawrence P. King, 2007. "Social Costs of Mass Privatization," William Davidson Institute Working Papers Series wp890, William Davidson Institute at the University of Michigan.
    3. Kosta Josifidis & Radmila Dragutinović Mitrović & Olgica Ivančev, 2012. "Heterogeneity of Growth in the West Balkans and Emerging Europe: A Dynamic Panel Data Model Approach," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(2), pages 157-183, May.

    More about this item

    Keywords

    policy reform; gradualism; big bang; FDI; economic growth;

    JEL classification:

    • O57 - Economic Development, Innovation, 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

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