The inverse domino effect: are economic reforms contagious?

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 marketliberalising reforms and panel data 144 countries and the years 1995-2006, we identify the most important channels through which reforms are transmitted from country to country. We find evidence of the importance of reforms in other countries. Moreover, 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.