A new perspective on the sequence of economic policy transformation and regulation: An empirical analysis from the developing economy

Abstract

This paper proposes strategies for the gradual and secure transition to a heavily regulated economy. This paper uses a multidisciplinary approach with stylized data obtained from the World Bank for 63 countries between 1980 and 2021. The findings recommend prioritizing macroeconomic stabilization, which includes fiscal consolidation and low inflation, to establish the foundation for subsequent reforms. Subsequently, the government should implement measures to eliminate distortions in domestic goods, labor, and capital markets, thereby enhancing its capacity to collect non-inflationary taxes and generate income. Next, liberalizing international trade can be undertaken to remove quotas, tariffs, and other direct administrative controls. The subsequent phase entails the liberalization of the capital account, aiming to alleviate constraints on both inward and outward flows of foreign direct investment, portfolio investment, and the utilization of long- and short-term financial instruments. Yet, opening the economy is not sufficient. A successful structural transformation needs to be facilitated by upgrading products and services as well as diversifying the manufacturing base to consistently facilitate the process of structural change and maintain economic growth. During the transition period, a stronger constitutional order and rule of law are needed to minimize rent-seeking, which would impede the complete transition.