On the Speed of Economic Reform - A Tale of the Tortoise and the Hare: Evidence from Transition Countries

We analyse how the choice of reform speed, foreign direct investment (FDI) and economic growth affect one another. New reforms affect economic growth negatively, whereas the level of past reform leads to higher growth and attracts FDI. We simulate the impact of big bang and gradualist strategies on economic growth. This is only meaningful in the presence of reform reversals, which requires aggregate uncertainty about the appropriate reform. We find that even relatively small ex ante reversal probabilities suffice to tilt the balance in favour of gradualism. The case for gradualism gains strength if policymakers are short-sighted, but weakens if voters are myopic.