Underperforming reformers: Examining disappointing cases of economic reforms

Abstract

While pro‐market economic institutions are a strong and causal predictor of economic development, such institutions are not expected to have the same impact across countries. Furthermore, there are actually a few instances where countries that enacted market‐friendly reforms had negative economic growth soon after. Examining 49 cases of large and sustained increases in economic freedom over a five year window, we find 10 cases that were followed by low/negative economic growth thereafter. We consider various potential determinants of failed reforms by comparing different measures between the successful and failed reforming countries. Our strongest evidence points to the following as plausible reasons for failed reforms: culture (high levels of power distance, low levels of individualism, and low levels of generalized trust), areas of economic freedom that countries reformed (less focus on sound monetary policy, more focus on limiting the size of government, and more variance between the five areas), and autocratic political institutions.