Kinks in Reform

A new paper by Daron Acemoglu (see picture) and co-authors finds what I have suspected all along: that policy reform works best in middle income countries, and/or countries with some level of democracy. Or put differently, in MIT speak, "it is at intermediate values of constraints that policy may be both bad, but also reformable."

Whether or not groups and individuals with political power can thwart reforms depends on the constraints on politicians and on the process of policymaking. In societies such as many in Africa or the Middle East, where there are only few constraints and checks on politicians and on politically powerful groups, policy reform is unlikely to be very effective.

This insight explains a stylized fact in the Doing Business project: Eastern Europe has had the most successful reforms. The star reformers also show a pattern: countries coming out of less-than-democratic regimes. Examples are Estonia in the mid-1990s, Slovakia in the late 1990s, Georgia since 2004, Macedonia and the Kyrgyz Republic most recently.

Some of the reform zeal in Eastern Europe is also explained by the pendulum shift towards business-friendly policy. Countries like Azerbaijan are reforming fast, in spite of the presence of politically powerful groups opposed to reforms.

The Acemoglu et al paper makes another point, which I find trivial. Namely, that to understand the success of reforms you need to know why the constraints were put in the first place. In other words, in whose interest was it to do so. True, but well-known.