Wealth and structure of the economy

The wealth of an economy can have both direct and indirect effects on the choice of reform strategies. If agents in an economy are below or near the poverty line, reforms that seek to change the system that in part caused the poverty will be welcome or at least not resisted. In contrast, if the original system, no matter what its macroeconomic costs, has bestowed a high level of benefits on a subset of individuals, those individuals should be expected to resist reforms that seek to dismantle the system that is providing the benefits.

In addition, it is well known that the structure of the economy and the nature of institutions in it are highly influenced by a nation's wealth. One example is that wealthier countries invariably have a lower share of their population in the agricultural sector. Another example is that poor nations almost never choose to invest their scarce financial resources in a welfare system. In gauging the costs and benefits of a reform policy in agriculture, reformers in poorer countries with large parts of the population in the agricultural sector almost certainly will have more to gain if the reforms are successful than leaders in wealthier nations. In contrast, when considering restructuring policies that threaten to lay-off farm workers, the relative cost to poorer nations will be higher since those that are laid off will take a direct income cut and have little recourse. Those that are laid off in richer countries, while certainly not happy, may be somewhat mollified if they are able to collect unemployment insurance or have access to other benefits. As with technology, in order to streamline the analysis, in the rest of the chapter, when we refer to wealth, the word can embody these several different dimensions.

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