Why countries reform

• Author: Enrica Detragiache/Akito Matsumoto
• Position: IMF Research Department
• Pages: 349-355

Page 349

Structural reforms often play a critical role in energizing the development process and sustaining the high growth rates needed to transform countries' economic destinies. This year, in a departure from its traditional concerns with classic international monetary economics, the IMF's Jacques Polak Annual Research Conference focused on structural reforms and explored why and how countries change and what the consequences are.

Page 354

Reforms take center stage

Departing from the classic themes of international monetary economics, the IMF's 2005 Jacques Polak Annual Research Conference, held at IMF headquarters on November 3-4, focused on structural reforms and how changes in the "rules of the game" and in institutions can reshape economies. Understanding the impetus for and consequences of reforms, said IMF Deputy Managing Director Agustín Carstens in his opening remarks, is no less central to the IMF's daily work than is understanding the macroeconomics of stabilization.

If reforms are good for society, why is it so difficult to make them happen? According to Ernesto Dal Bó (University of California, Berkeley) and Pedro Dal Bó (Brown University), a possible explanation is that an economist's view of the world does not take into account how social conflict and reforms interact. Assuming that conflict is a relatively labor-intensive activity, then reforms that enhance the productivity of the capital-intensive sector-which would typically make a country better off-may hurt the country because they result in more conflict by reducing the opportunity cost of engaging in conflict activity. This could explain why politicians are reluctant to undertake apparently beneficial reforms. Although it is debatable to what extent this conclusion can be generalized, the Dal Bó study is a reminder that both the potential political consequences of reform and the political constraints on it need to be considered.

There is wide recognition that the IMF can play a role in spurring reform efforts. Anna Ivanova (IMF) explained that outcome-based conditionality calls on member countries that receive IMF financing in support of their economic adjustment programs to meet particular targets or objectives rather than implement specific actions.

This type of conditionality may be...