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

Bruno Merlevede and Koen Schoors

No wp730, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

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.

Keywords: policy reform; gradualism; big bang; FDI; economic growth (search for similar items in EconPapers)
JEL-codes: O57 P21 P26 P27 (search for similar items in EconPapers)
Pages: pages
Date: 2004-11-01
New Economics Papers: this item is included in nep-afr, nep-dev, nep-pol and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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