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Explaining Reform Deadlocks

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  • Heinemann, Friedrich

Abstract

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.

Suggested Citation

  • Heinemann, Friedrich, 2004. "Explaining Reform Deadlocks," ZEW Discussion Papers 04-39, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:2035
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    References listed on IDEAS

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    1. Heinemann Friedrich, 2001. "Die Psychologie begrenzt rationaler Wirtschaftspolitik: Das Beispiel des Reformstaus," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 50(1), pages 96-112, April.
    2. de Haan, Jakob, 2003. "Economic freedom: editor's introduction," European Journal of Political Economy, Elsevier, vol. 19(3), pages 395-403, September.
    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. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
    5. 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.
    6. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    7. Heinemann, Friedrich, 2000. "Die Psychologie irrationaler Wirtschaftspolitik am Beispiel des Reformstaus," ZEW Discussion Papers 00-12, ZEW - Leibniz Centre for European Economic Research.
    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 1146-1155, December.
    9. Bryan Caplan, 2001. "Rational Ignorance versus Rational Irrationality," Kyklos, Wiley Blackwell, vol. 54(1), pages 3-26, February.
    10. Caplan, Bryan, 2001. "Rational Irrationality and the Microfoundations of Political Failure," Public Choice, Springer, vol. 107(3-4), pages 311-331, June.
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    Citations

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    Cited by:

    1. Dreher, Axel & Voigt, Stefan, 2011. "Does membership in international organizations increase governments' credibility? Testing the effects of delegating powers," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 326-348, September.
    2. Dreher, Axel & Rupprecht, Sarah M., 2007. "IMF programs and reforms -- inhibition or encouragement?," Economics Letters, Elsevier, vol. 95(3), pages 320-326, June.
    3. Friedrich Heinemann & Theocharis Grigoriadis, 2016. "Origins of reform resistance and the Southern European regime," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(4), pages 661-691, November.
    4. Callais, Justin T. & Young, Andrew T., 2023. "A rising tide that lifts all boats: An analysis of economic freedom and inequality using matching methods," Journal of Comparative Economics, Elsevier, vol. 51(3), pages 744-777.
    5. Belke, Ansgar H. & Gros, Daniel, 2007. "Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms," IZA Discussion Papers 2547, Institute of Labor Economics (IZA).
    6. Friedrich Heinemann & Michael Förg & Eva Jonas & Eva Traut‐Mattausch, 2008. "Psychologische Restriktionen wirtschaftspolitischer Reformen," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(4), pages 383-404, November.
    7. Friedrich Heinemann & Benjamin Tanz, 2008. "The impact of trust on reforms," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 11(3), pages 173-185.
    8. Heinemann, Friedrich, 2006. "The Drivers of Deregulation in the Era of Globalization," ZEW Discussion Papers 06-012, ZEW - Leibniz Centre for European Economic Research.
    9. Dreher, Axel & Lamla, Michael J. & Lein, Sarah M. & Somogyi, Frank, 2009. "The impact of political leaders' profession and education on reforms," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 169-193, March.
    10. Mawussé K. N. Okey, 2011. "Institutional Reforms, Private Sector, and Economic Growth in Africa," WIDER Working Paper Series 040, World Institute for Development Economic Research (UNU-WIDER).
    11. Theocharis Grigoriadis & Friedrich Heinemann, 2013. "Origins of Reform Resistance and the Southern European Regime. WWWforEurope Working Paper No. 20," WIFO Studies, WIFO, number 46881, February.
    12. Justin Callais & Andrew T. Young, 2021. "Does constitutional entrenchment matter for economic freedom?," Contemporary Economic Policy, Western Economic Association International, vol. 39(4), pages 808-830, October.
    13. Da Silva, António Dias & Givone, Audrey & Sondermann, David, 2017. "When do countries implement structural reforms?," Working Paper Series 2078, European Central Bank.
    14. Matthew Gould & Matthew D. Rablen, 2019. "Are World Leaders Loss Averse?," CESifo Working Paper Series 7763, CESifo.

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    More about this item

    Keywords

    economic policy reforms; economic freedom; reform resistance; limited rationality;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H00 - Public Economics - - General - - - General

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