Why Do Reforms Occur in Crises Times?

Structural reforms, whereby organized groups lose their power to extract rents, tend to occur in bad times rather than during prosperous times. We present a model where rent-seeking leads to economic decline, which, in turn, will make a future reform inevitable when times will be bad enough. Furthermore, we show that in the case of trade liberalization–a prime example of structural reform–there is strong empirical evidence that reforms are induced by severe crises. ∗We thank Allan Drazen, Ron Rogowski and Romain Wacziarg for helpful comments. We also thank Michael Pursey for excellent research assistance. 1