Financial Reforms : Benefits and Costs

Abstract

Using financial reforms as example, we demonstrate that reform measures should be undertaken only when they have substantial net expected benefits. In most cases, financial reform measures entail substantial upfront fixed costs in return for a steady flow of benefits over a long period of time. The benefits tend to become larger in tandem with the volume of financial transactions. Because of these, it would be easier for wealthier countries to undertake financial reforms: They can afford expensive but better systems. However, poor countries cannot do so easily, because they lack sufficient resources. Consequently poor countries would better take more gradual and pragmatic approaches to financial reforms.