Learning Dynamics and Support for Economic Reforms: Why Good News Can Be Bad
- His e-mail address is tim.willems{at}economics.ox.ac.uk.
-
↵* Sweder van Wijnbergen is a professor at the Department of Economics, University of Amsterdam, The Netherlands. He is also affiliated with the Tinbergen Institute. His e-mail address is s.j.g.vanwijnbergen{at}uva.nl. Tim Willems (corresponding author) is a research fellow at Nuffield College and the Department of Economics, University of Oxford, UK. He is also a member of the Centre for Macroeconomics. The authors thank the editor (Andrew Foster), two anonymous referees, Philippe Aghion, Björn Brügemann, Tom Cunningham, Allan Drazen, Michal Horvath, Ruixue Jia, Matija Lozej, Torsten Persson, Dani Rodrik, Gérard Roland, and audiences at the EBRD and the 2013 SITE Conference in Stockholm for useful comments and discussions.
Abstract
Support for economic reforms has often shown puzzling dynamics: many reforms that began successfully lost public support. We show that learning dynamics can rationalize this paradox because the process of revealing reform outcomes is an example of sampling without replacement. We show that this concept challenges the conventional wisdom that one should begin by revealing reform winners. It may also lead to situations in which reforms that enjoy both ex ante and ex post majority support will still not come to completion. We use our framework to explain why gradual reforms worked well in China (where successes in Special Economic Zones facilitated further reform), whereas this was much less the case for Latin American and Central and Eastern European countries.
Key words
- © The Author 2014. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / the world bank. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com.
