Learning Dynamics and the Support for Economic Reforms: Why Good News Can Be Bad

Abstract:     
Support for economic reforms has often shown puzzling dynamics: many reforms that started off successfully, lost public support nevertheless. We show that learning dynamics can rationalize this paradox, the reason being that 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 start by revealing reform winners. We use our framework to explain why gradual reforms worked well in China (where successes in Special Economic Zones facilitated further reform), while this is much less so for Latin American and Central and Eastern European countries.

Number of Pages in PDF File: 32

Keywords: learning, political economy, reform, sequencing, privatization

JEL Classification: D72, D83, P21

working papers series