Learning About Reform: Time-Varying Support for Structural Adjustment

Political support for structural reforms can vary dramatically over time. Countries that have sustained reforms have seen their popularity grow, while others have witnessed sudden reversals of political support. Opinion can reverse itself, without any apparent provocation, when voters are learning about the effects of reform. In this model, structural adjustment causes a drop in government services and temporary unemployment. The unemployed gradually learn about when they will be re-employed. As labor markets adjust and the cost of reform is revealed, support can gradually rise, it can remain low and suddenly rise, or there can be a quick reversal of support for a previously popular policy. Cross-sectional data, event studies and case study support the explanation. Extensions consider international policies to maintain support for reform. ∗[email protected], NYU Stern School of Business, 44 West 4th Street, 7th floor, New York, NY 10012. Phone: (212) 998-0527, Fax: (212) 995-4812. I am indebted to Paul Romer for invaluable advice and support. I would also like to thank David Baron, Jeremy Bulow, Pierre-Olivier Gourinchas, Robert Hall, Peter Henry, Dirk Krueger, Tom Sargent, Stijn Van Nieuwerburgh, and Romain Wacziarg for helpful comments and conversations. JEL codes: D72, F13, D83.