Each economic reform has unique effects on growth prospects. With growth models we can show how each reform changes behavior of optimizing agents or parameters on which their behavior depends. These changes in turn alter steady-state values of income, capital, consumption and utility. Price liberalization directly raises utility by improving the mix of consumer goods, but it reduces effective incomes of those who had beneﬁted from low administered prices. Property privatization improves growth prospects by raising output per set of inputs and by fostering formation of both physical and human capital. Macroeconomic stabilization lowers the cost of the public sector by eliminating waste; lower military spending and fewer subsidies for inefﬁcient state-owned enterprises leave more income for consumption and accumulation. Lower taxes and transfers help some people and hurt others, while improving incentives to produce. Industry deregulation reduces effective burdens on capital, which increases growth. Free trade improves the mix of goods, ameliorates local monopoly power, enhances competition, disciplines the authorities responsible for stabilization and fosters technology transfer. All of these reforms generate relative losers who will resist the reforms politically. THE ECONOMIC CHANNELS OF REFORM If citizens understand the relationship between market-oriented reforms and improved living standards, then voters are more likely to allow reformers to impose the necessary structural shocks on the body politic. In Chapter 3 we explained the theoretical beneﬁts of each of the basic reforms needed for a market economy to thrive. In Chapter 4 we developed models to explain how private...
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