Uncertainty, informational spillovers and policy reform: A gravity model approach

Abstract

Reforms often occur in waves, seemingly cascading from country to country. We argue that such reform waves can be driven by informational spillovers: uncertainty about the outcome of reform is reduced by learning from the experience of similar countries. We motivate this hypothesis with a simple theoretical model of informational spillovers and learning, and then test it empirically using an approach inspired by the gravity model. We find evidence of informational spillovers both with respect to both political and economic liberalization. While the previous literature has focused only on economic reform, we find that the spillovers are particularly important for political changes.

What determines the likelihood of structural reforms?

“…Brezis and Verdier (2013) show that repressed citizens in a given country are more likely to migrate to neighbouring countries with democratic regimes which, in turn, increases the probability of political liberalization in the first country. Fidrmuc and Karaja (2013) find that informational spillovers facilitate economic and political liberalization. Elhorst et al (2013) use an error-correction model within a dynamic spatial panel framework and show that the change in the liberalization index of a given country depends not only on the initial level of the index in that country (in line with the works of Abiad and Mody (2005) and Huang (2009)), but also on the financial reforms implemented by other countries (in accordance with the findings of Zandberg et al (2012)).…”

“…This Finally, there is another line of investigation that emphasizes the fact that policies and reforms in one country impact other countries" policies and reforms and, thus, cannot be considered isolated. As pointed out by Fidrmuc and Karaja (2013), these works can be clustered into the concepts of reform "contagion", "learning" and "snowballing", where economic reforms are interlinked with waves of political liberalization. For instance, Meseguer (2006) suggests that the existence of a learning process whereby the outcome of reforms (such as central bank independence, IMF agreements, privatizations and trade liberalization) influences the expectations that policy makers have about the effects of similar reforms in their own country.…”

Robust political economy correlates of major product and labor market reforms in advanced economies: Evidence from BAMLE for logit models

“…Informal pressure can result from learning about the experience of reforming and non‐reforming country peers, which changes beliefs about the consequences of policy action (e.g., Krueger, 1993; Tommasi & Velasco, 1996). Learning models have been tested in several studies, with fairly positive albeit somewhat mixed results (Elhorst et al, 2013; Fidrmuc & Karaja, 2013; Gassebner et al, 2011; Meseguer, 2006).…”

Policy Competition, Imitation and Coordination Under Uncertainty

“…If policies are costly to set or to reverse, however, uncertainty about policy effects also creates an incentive to free ride by observing and copying policy measures that have been implemented in neighboring economies (Fidrmuc and Karaja 2013, Pitlik 2007, Venkatesh and Goyal 1998. Thus, successful policies may be copied when informational spillovers occur as the outcome of policy measures can be observed in neighboring regions.…”