Are politicians brave enough for daredevil economics?

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Are politicians brave enough for daredevil economics?

The Economist | November 8, 2023

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The world has forgotten how to reform. The Economist analysed data from the Fraser Institute, a free-market think-tank, which measures “economic freedom” on a ten-point scale. The analysis considered cases where a country improves by 1.5 points or more—a quarter of the gap between Switzerland and Venezuela—within a decade, indicating that bold, liberalising reforms have been undertaken. In the 1980s and 1990s such “daredevil economics” was common, as countries left the Soviet Union, and many deemed unreformable, such as Ghana and Peru, proved they were in fact reformable. Politicians changed foreign-trade rules, fortified central banks, cut budget deficits and sold state-owned firms.

In recent years just a handful of countries, including Greece and Ukraine, have implemented reforms. And in the decade to 2020 only two countries, Myanmar and Iraq, improved by more than 1.5 points. The same year a paper by economists at Georgetown and Harvard universities, as well as the IMF, looked at structural reforms, and found similar results. In the 1980s and 1990s politicians across the world implemented lots of them. By the 2010s reforms had ground to a halt.

Daredevil economics has declined in popularity in part because there is less need for it. Although in recent years economies have become less liberal, the average one today is 30% freer than it was in 1980, according to the Economist analysis of the Fraser Institute’s data. There are fewer state-run companies. Tariffs are lower. 

But the decline of daredevil economics also reflects a widely held belief that liberalisation failed. In the popular imagination, terms such as “structural-adjustment plan” or “shock therapy” conjure up images of impoverishment in Africa, the creation of mafia states in Russia and Ukraine, and human-rights abuses in Chile. 

Today, international organisations like the IMF and the World Bank are rather less interested in daredevil economics than they once were. In an edition of its “World Economic Outlook” published in October 1993, the imf mentioned the word “reform” 139 times. In its latest edition, published exactly 30 years later, the word appears a mere 35 times.

These days America has a new consensus, which takes a sceptical view of globalisation’s benefits, prioritises domestic interests over international ones and favours large-scale subsidies in order to speed up the green transition and bring home manufacturing. With less chivvying from the West, governments elsewhere feel less pressure to reform their own economies.

Yet the view that daredevil economics failed does not stand up to scrutiny, even if projects often produced short-term pain. A growing body of research suggests that daredevil economics has largely achieved its aims.  In most places where reforms appear to fail, the problem is a lack of commitment. 

3 key takeaways from the article

1. In the 1980s and 1990s “daredevil economics i.e., bold, liberalising reforms ” was common. Politicians changed foreign-trade rules, fortified central banks, cut budget deficits and sold state-owned firms.  By the 2010s reforms had ground to a halt.  And in the decade to 2020 only two countries.  Now the world has forgotten how to reform.  
2. The decline of daredevil economics also reflects a widely held belief that liberalisation failed.  But the view does not stand up to scrutiny, even if projects often produced short-term pain. A growing body of research suggests that daredevil economics has largely achieved its aims. 
3. In most places where reforms appear to fail, the problem is a lack of commitment. 

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Topics:  Inflation, Reforms, Economics