Financial Reform: What Shakes it? What Shapes it?

IMF Working Papers, April 1, 2003

Source details

Despite stops, gaps, and reversals, financial reforms advanced worldwide in the last quarter century.
Using a new index of financial liberalization, the authors conclude:
- Influential events (shocks) "shook the status quo," inducing both reforms and reversals.
- Learning, more so than ideology and country structure, shaped and sustained widespread reforms.
Among shocks:
- A decline in global interest rates strengthened reformers.
- Balance of payments crises strengthened reformers.
- Banking crises were associated with reversals.
- New governments brought about both reforms and reversals.
Learning mechanisms:
- Domestic learning: initial reforms raised the likelihood of further reforms.
- Regional learning: observing regional reform leaders encouraged reform.
Structural features:
- Greater openness to trade appears to have increased the pace of financial reform.

Empirical approach:
- The study uses a new index of financial liberalization to track reforms and reversals.
Role of shocks:
- Shocks can both enable reformers and trigger reversals depending on type:
- Decline in global interest rates → strengthened reformers.
- Balance of payments crises → strengthened reformers.
- Banking crises → associated with reversals.
- Government turnover (new governments) → associated with both reforms and reversals.
Role of learning:
- Initial domestic reforms raise the probability of subsequent reforms (reform momentum).
- Observing regional reform leaders contributes to policy adoption (regional learning).
Role of country structure and ideology:
- Learning explains reform diffusion and persistence more than ideological orientation or country structure.
- Among structural features analyzed, trade openness is the notable factor increasing reform pace.

Subject areas:
- Banking crises, Economic sectors, Financial crises, Financial institutions, Financial regulation and supervision, Financial sector, Financial sector reform, Interest rate policy, Legal support in revenue administration, Monetary policy, Multilateral development institutions
Keywords:
- balance of payments, Banking crises, centrist government, country dummy, Financial reform, Financial sector, Financial sector reform, Global, Interest rate policy, left-wing government, liberalization experience, liberalization process, Multilateral development institutions, policy liberalization, policy reform, policy regime, political economy, political orientation, reform momentum, reform process, right wing, status quo, status quo bias, WP

Financial Reform: What Shakes It? What Shapes It? - WP/03/70
- Financial Reform: What Shakes It? What Shapes It? - WP/03/70 (Markdown version)
- Financial Reform: What Shakes It? What Shapes It? - WP/03/70 (PDF)