Economic Reform in Developing Countries

Economic Reform in Developing Countries

Reach, Range, Reason

Global Development Network series

Edited by José María Fanelli and Lyn Squire

This book offers insights into the process of economic reform in developing countries. It is organized around three factors that are critical to the success of any reform. According to Nobel Laureate Amartya Sen, these key dimensions are Reach, Range, and Reason. ‘Reach’ refers to the ability of reform to be person-centered and evenhanded, reaching all individuals in society. ‘Range’ considers the institutional reforms and policy changes necessary to implement change and the possible ripple effects on other policies and populations. Finally, ‘Reason’ captures the importance of constantly asking why a particular reform has been selected.

Chapter 8: Shock Therapy versus Gradualism Reconsidered: Lessons from Transition Economies

Vladimir Popov

Subjects: development studies, development economics, economics and finance, development economics, international economics

Extract

Vladimir Popov After the Berlin Wall collapsed in 1989, market reforms were initiated in the post-communist states of Eastern Europe, the former Soviet republics, China, Mongolia and Vietnam.1 However, their economic performance was more than disappointing. Nowhere else in the world was the failure of reforms in terms of Amartya Sen’s ‘three Rs’ – reach, range and reason – more spectacular than in Eastern Europe and the countries of the former Soviet Union. Output collapsed, inequalities and crime increased and life expectancy fell. In contrast, reforms introduced in two Asian communist states, China and Vietnam – but not in Mongolia – had more favorable outcomes. In light of these results, it is not surprising that the question of the ‘reason’ to reform had been at center stage in the policy discussions in the post-reform period. As Sen argues in the foreword to this volume, the basic issue underlying any reform is that some existing arrangements are not right. Therefore, the central question is how can we improve existing institutions and policies and make sure they work better. This chapter analyzes the shock-versus-therapy issue in order to clarify why institutional and policy reforms in transition countries were unable to achieve their goals, and it also contributes to the debate on the reasons to reform. In Eastern Europe the reduction of output lasted for three or four years and amounted to 20–30 per cent; GDP did not reach pre-recession levels until the late 1990s. This is comparable to the Great Depression (1929–33), when GDP...

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