Identifying drivers of economic reform: a case studies approach.

Author:Brown, Matthew
  1. Introduction and Background

    A growing body of research has been dedicated to understanding the role that economic institutions and policies play in determining economic and social outcomes. The primary finding of that research, although not universally agreed to by researchers, is that more liberal institutions and policies are positively causally associated with more economic growth (Acemoglu and Robinson 2012). (1) But significant ignorance largely remains in regard to our understanding of how countries achieve and maintain those institutions, and empirical analysis is limited in its ability to illuminate that question. (2) Qualitative, historical, and interdisciplinary analysis is required to better understand how institutions and policies evolve (Boettke, Coyne, and Leeson 2013; Boettke 2011). This paper summarizes the findings of twenty-four country case studies of institutional reform since 1980 in an attempt to illuminate some of the recurring themes and possible causal factors in significant reform processes.

    From 1980 to the middle of the first decade of the twenty-first century, there was a broad worldwide movement toward freer markets and government deregulation, a move away from the trend toward more centralization and planning that had dominated since the Great Depression and World War II. The reforms of the Reagan and Thatcher governments in the 1980s were seen as examples to be followed by some developing countries, and at the end of the 1980s, the collapse of communist systems in Eastern Europe and the Soviet Union led to a widespread period of economic and institutional reform. Reforms of the Chinese communist system begun in the early 1980s and the liberalization begun by India in the early 1990s provide examples of countries not directly in either the American or Soviet spheres that also took part in the trend away from planning and centralization during this period (Yergin and Stanislaw 2002).

    This era provides the possibility for historical and comparative study of the factors that lead to institutional and policy change. Although the period under question coincides with a renaissance of economics research concerned with the question of growth, much of that literature has been focused on theoretical models and later empirical analysis rather than case studies of actual reforms. (3) The process of institutional reform and economic growth is so complex and involves so many different actors that one methodological approach, while potentially very valuable, is bound to leave important questions unaddressed. Case studies should simultaneously make it possible to identify areas for more rigorous empirical analysis and possibly shed light on areas that are not as easily addressed empirically, such as the roles of culture, history, the transmission and adoption of ideas, and informal institutions--areas where more interdisciplinary efforts and approaches may be needed. A large body of literature in the social sciences, mostly outside of economics, has demonstrated the importance of these approaches and questions. (4)

    This paper summarizes and contextualizes a much larger project of case studies that identifies the major institutional reforms that have occurred since 1980. It identifies from those case studies some major underling factors associated with the significant reforms of this period, suggests some hypotheses about how they may be related, and identifies significant holes in our understanding that need further investigation. Data is provided on the largest movements in economic institutions (toward, as well as away from, more economic liberalism) and should provide starting-point evidence for scholars in various disciplines interested in determining which countries' reforms should be studied in more detail in future work to begin to build a better understanding of the drivers of institutional reform.

  2. Case Study Selection

    The period from the very late 1970s and early 1980s up to the onset of the global economic crisis beginning around 2006 was characterized by broad movements globally toward economic liberalism. (5) Countries were examined in three different periods: 1980-2005, 1990-2005, and 1995-2005. This allowed for the inclusion of countries that were late reformers and for those that simply did not exist during the earlier periods, such as countries that became independent after the breakup of the Soviet bloc. The Economic Freedom of the World (EFW) dataset (Gwartney and Lawson 2007), which has been broadly used in empirical studies of economic institutions (Hall and Lawson 2014), was used to identify the most substantial reforms.

    First, the absolute size of the institutional change, as measured by the index, was taken into account. Table 1 shows the highest ranked countries for absolute increases in EFW score; those countries that increased their overall EFW score by two or more points are listed. (6) The downside to this approach is that it could bias the countries selected to those that have very low scores at the beginning of the period, as casual analysis of table 1 reveals.

    An alternative criterion is the size of change as a percentage of possible increase (how much of the existing room for increase was actually captured). This is defined as the change during the period divided by the highest possible score minus the score from the beginning year of the period--essentially measuring how much possible movement at the beginning of the period was captured by a country's subsequent reforms. This method will not be subjected to the low-starting-score bias. The formula used is:

    % improve = (2004 score - base year score)/(highest possible score - base year score) (1)

    Table 2 gives the biggest increases in EFW based on equation 1 for the three periods: 1980-2005, 1990-2005, and 1995-2005. Table 2 is the table from which the majority of the countries for the case studies were chosen. All the countries from the list of top ten increases for the period 1980-2005 were chosen. They are: Iceland, New Zealand, Israel, Hungary, Ghana, El Salvador, Jamaica, United Kingdom, Peru, and Uganda. Of the top ten movers in the second period, 1990-2005, five were on the list of top ten for 1980-2005 and were already included. They are: El Salvador, Uganda, Peru, Israel, and Hungary. Thus, to include all of the top ten countries for the second period, 1990-2005, only five countries needed to be added to the list: Zambia, Poland, Nicaragua, Kuwait, and Tanzania. The top three countries for 1995-2005, Estonia, Latvia, and Lithuania, were added to the list to capture the more recent movers from the former Soviet Union. Finally, Ireland and Chile, which were ranked eleventh and twelfth in 1980-2005, were included. Prior to the recent economic crisis, Ireland was probably the most frequently cited example of successful neoliberal economic reform in recent years, and Chile, along with the UK, is one of the earliest of the recent wave of reformers, having begun reforms in the late 1970s.

    To examine the opposite phenomenon, movements away from economic liberalism, several countries that experienced significant declines in EFW scores were included in the case studies. Most countries around the world experienced at least modest increases in their EFW scores from 1980 through 2005, but four countries--Zimbabwe, Venezuela, Myanmar, and Republic of Congo--experienced consistent and large negative changes in their score over all three periods. All four were added to the list of twenty-four countries studied, as shown in table 3. This group is diverse geographically, culturally, religiously, historically, and in terms of economic performance.

    After reviewing the countries chosen, there are a few surprises. Two of the most widely discussed examples of rapid economic growth over the past twenty years are absent. While both China and India increased their EFW scores, neither increased nearly enough to make this list. For 1980-2005, China ranked fifty-sixth in terms of possible increase captured. For 1990-2005, it ranked forty-fifth, and for 1995-2005, it ranked fifty-first. India scored higher; its rankings for the three periods were forty-second, eighteenth, and twenty-seventh, respectively. The United States, while typically considered a leader in the emergence of the neoliberal consensus from 1980 through 2001, did not rank high in any period despite what, at least domestically, are often cited as major reforms beginning in 1981. For 1980-2005, the United States ranked fifty-fourth in terms of possible increase captured. For 1990-2005, it ranked 100th, and for 1995-2005, it did not make the list because its EFW score decreased slightly.

    While there are doubtless many other interesting cases of reform in this quarter-century period characterized by the dominance of the neoliberal consensus, these data were used in order to identify countries with the largest shifts in institutional character over the period. These countries can help shed light on why and how institutions and policies change.

  3. Summary of Case Studies

    Studying the reforms of the twenty-four countries listed in table 3, a number of factors can be identified as potentially important, either individually or in combination with other events and circumstances.

    A partial but...

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