ECONOMIC LIBERALIZATIONS AROUND THE WORLD SINCE 1970: SHOCK THERAPY VERSUS GRADUALISM.

• Author: Lawson, Kerianne N.

Since 1970 many countries have engaged in economic liberalization. They have lowered taxes, deregulated, removed barriers to international trade, reduced corruption, improved monetary stability, and privatized state-owned enterprises. While it is generally held that economic liberalization has improved economic performance (see, e.g., de Haan et al. 2006; Hall and Lawson 2014), there is still debate over how quickly refonns should be implemented. In particular, the question is whether the reforms should be enacted quickly via shock therapy or gradually.

This article examines 77 countries with the most significant economic liberalizations since 1970, as measured by changes in the Economic Freedom of the World (EFW) index. Measures of both the speed and comprehensiveness of the reforms are presented. Our empirical evidence suggests that faster reforming nations economically outperfonned slower reformers. We do not find evidence that more comprehensive reforms, as opposed to more narrowly targeted reforms, had much of an impact on ensuing economic growth.

Shock Therapy Versus Gradualism

Jeffrey Sachs (2012) explains and defends his participation in the use of shock therapy (aka "Big Bang") reforms in Bolivia, Poland, and Russia. He compared his approach to that of an emergency room doctor facing a patient on the verge of death from multiple ailments. In his view, treating the patient quickly, even rashly, is the only way to save the patient's life. In addition, given the speed with which distributional coalitions (Olson 1965) may form to disrupt or derail any reform process, a fast reform may be the only politically viable option. During a crisis period, such as that facing the nations Sachs dealt with, there is often only a short political window during which reforms can take place. This idea seems to be the motivation for Milton Friedman's (1962: ix) famous dictum: "Only a crisis--real or perceived--produces real change."

Despite Sachs's arguments, the consensus seems to be that the Big Bang approach, especially as it applied to Poland and Russia, was a failure, though it isn't clear if it was a failure of the reforms to work economically or a failure of political will to see them through (Marangos 2003; Hall and Elliott 1999; Rutland 2013). In contrast, other scholars have pointed to the slower-paced reforms enacted in China, and the economic success that has followed, as evidence in favor of gradualism (e.g., Liew 1995).

One interesting thesis, which we shall explore in this article, is the idea that there was a big difference in the character of reforms undertaken in the Big Bang nations compared with gradual reformers. In comparing Russia with China, Kazakevitch and Smyth (2005: 69) argue that the Big Bang reforms tended to be top-down, macroeconomic reforms such as monetary and financial stabilization, and that those reforms did not reach down to a microeconomic level that would foster "genuine market forces and competition." (1)

Perhaps it was not so much that the reforms were too fast in Poland and Russia, but that the reforms were too narrow. Perhaps China's reforms have not succeeded because they were slow, but because they were broad and both macro- and microeconomic in nature. If fast reforms tend to be narrow, and if slow reforms tend to be broad, it may be hard distinguishing one from the other without a larger sample of countries to draw inferences from. The main purpose of this article is to examine this question.

Measuring Economic Liberalization

Our measure of economic reform will be based on the Economic Freedom of the World (EFW) index (Gwartney et al. 2018), which is one of the most widely used measures of the of the consistency of a nation's policies and institutions with free-market capitalism. It currently generates a 0-10 rating, with higher ratings indicating greater economic freedom, for 162 nations for 2016. Data are available annually back to 2000 and in five-year intervals back to 1970, though the sample of countries gets smaller as you go back in time.

There is little question that we have seen a worldwide shift toward freer markets over the past 40 years or so. Among the 102 nations with EFW ratings in both 1980 and 2016, the average developed nation's rating increased to 7.71 from 6.43 (equivalent to 0.99 standard units), and the average developing nation's rating rose to 6.65 from 4.91 (1.35 standard units). (2) In fact, only one country, Venezuela, experienced any meaningful decrease in the EFW index over this period. (3) The bottom fine is that there has been a wave of market liberalization going on in almost all comers of the globe over the past several decades, and this liberalization was most emphatically not just about the breakup of the Soviet Union and Eastern Bloc. These events as well as the Reagan and Thatcher revolutions were emblematic of a much wider global phenomenon. (4)

Our first task is to identify and characterize the countries with the biggest economic liberalizations since 1970. To that end, we first identified every country that experienced a 2 unit or more increase in the EFW index rating over any time period between 1970 and 2016. Then we identified the shortest time period over which this 2 unit change took place. For example, suppose a country had the following data points: 2000: 3.0; 2001: 3.5; 2002: 4.5: 2003: 5.2; 2004: 5.4. The 2000-03 period of time, three years, would be the fastest 2 unit (or more) increase in the EFW rating. (5)

Table 1 shows the 77 countries whose EFW rating increased by 2 units (or more), the time period during which their reforms took place, the starting and ending EFW index values, and the standard deviation of the changes in the five subareas of the EFW index; the latter will be explained below. The list is sorted based on how fast the reform process took.

There are some limitations to this approach that should be acknowledged. First, the EFW index is available only in five-year intervals from 1970 to 2000 so the reform lengths can only be 5, 10, 15, ..., 30 years in length during these years. This obviously adds some imprecision to the reform length in the earlier years versus the post-2000 period, after which the data become available annually. Second, many countries may have been...