International Organizations and Structural Reforms

64 Pages Posted: 29 May 2015 Last revised: 19 May 2018

See all articles by Sebastian Galiani

Sebastian Galiani

University of Maryland - Department of Economics

Ivan Torre

Sciences Po - Department of Economics

Gustavo Torrens

Indiana University

Multiple version iconThere are 2 versions of this paper

Date Written: May 27, 2018

Abstract

Different countries have been following different reform paths since the early 1990s. We develop a simple dynamic model of policy reform that captures some of the determinants that underlie these differences. The model emphasizes the interaction between domestic institutions and international organizations that promote reform, on the one hand, and the political incentives for reversing reforms, on the other. At equilibrium, there are three types of reform paths. A country can undergo a full-scale, lasting reform; it can undertake a partial but lasting reform; or it can go through cycles of reforms and costly counter-reforms. Domestic institutions, as well as the incentives provided by international organizations, determine the equilibrium path. Unless the cost of reversal is high enough, an international intervention that promotes reforms induces an increase in the probability of reversals. A benevolent international organization that is fully aware of the possibility and social cost of reversals will always increase social welfare if it embraces the following principle: promote the greatest partial reform that is compatible with no reversal, or induce cycles of full-scale reform and complete reversal, depending on which of those two paths will generate greater social welfare. A benevolent but politically myopic international organization, however, may reduce social welfare because it does not take the fact into account that an overly aggressive reform could trigger costly reversals that outweigh the benefits of the reform. Deliberately making the costs of reversal high could be a risky way of improving the trade-off between the extent of the reform and the probability of reversal. Our model suggests that international organizations should also consider the possibility of providing defensive funding for dealing with counter-reform shocks.

Keywords: Structural reform, Counter-reform, Interantional Organizations

JEL Classification: D72, F59

Suggested Citation

Galiani, Sebastian and Torre, Iván and Torrens, Gustavo, International Organizations and Structural Reforms (May 27, 2018). Available at SSRN: https://ssrn.com/abstract=2611172 or http://dx.doi.org/10.2139/ssrn.2611172

Sebastian Galiani (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Iván Torre

Sciences Po - Department of Economics ( email )

28, rue des Saints peres
Paris, 75007
France

Gustavo Torrens

Indiana University ( email )

Wylie Hall, 100 S Woodland Ave
Bloomington, IN 47405-7104
United States
8128568131 (Phone)

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