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Explaining Reform Deadlocks

  • Heinemann, Friedrich

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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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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  1. de Haan, Jakob, 2003. "Economic freedom: editor's introduction," European Journal of Political Economy, Elsevier, vol. 19(3), pages 395-403, September.
  2. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
  3. 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.
  4. Caplan, Bryan, 2001. "Rational Ignorance versus Rational Irrationality," Kyklos, Wiley Blackwell, vol. 54(1), pages 3-26.
  5. 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.
  6. Caplan, Bryan, 2001. " Rational Irrationality and the Microfoundations of Political Failure," Public Choice, Springer, vol. 107(3-4), pages 311-31, June.
  7. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
  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 1146-55, December.
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