The Inverse Domino Effect: Are Economic Reforms Contagious?

Martin Gassebner, Noel Gaston and Michael Lamla

No 31-07, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper examines whether a country’s economic reforms are affected by reforms adopted by other countries. A simple model of economic reforms is developed to motivate the econometric work. Unsurprisingly, the model predicts that reforms are more likely when factors of production are internationally mobile and reforms are pursued in other economies. More interesting is the finding that reforms are not driven by greater trade openness. Using the change in the Index of Economic Freedom as the measure of market-liberalising reforms, we examine two issues. First, we examine whether economic reforms are ‘habit-forming’, and secondly, we identify the most important channels through which reforms are transmitted from country to country. For a panel of 144 countries and the years 1995-2006, we find little evidence that reforms are habit- forming, if anything there is a status quo bias. However, we do find evidence of the importance of reforms in other countries. Consistent with our model, international trade is not a vehicle for the diffusion of economic reforms, rather the most important mechanism is geographical or cultural proximity.

Keywords: Economic reforms; economic freedom; resource flow models; spatial interdependence (search for similar items in EconPapers)
JEL-codes: H71 H77 O57 P51 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: THE INVERSE DOMINO EFFECT: ARE ECONOMIC REFORMS CONTAGIOUS? (2011)
Working Paper: The Inverse Domino Effect: Are Economic Reforms Contagious? (2008)
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