Economic policy agendas in member countries—even as they have been dominated over the past year by the response to the global financial crisis—will, going forward, increasingly need to refocus on core issues related to strengthening medium-term economic performance, including both average growth and resilience to shocks. This paper examines the contribution of structural policies—that is, policies that increase the role of market forces and competition in the economy, while maintaining appropriate regulatory frameworks to deal with market failures—to economic performance. The results are based on a new dataset covering reforms of domestic product markets, international trade, the domestic financial sector, and the external capital account, in 91 developed and developing countries. The key results are:
There has been a broad tendency to pursue structural reforms across all segments of the IMF's membership over the past three decades. Reforms have been driven by a number of factors, including the quality of broad political institutions in advanced economies early in the sample, and a catch-up effect spurring reform in developing countries subsequently, as sizable cross-country reform gaps—with respect to either reform “leaders” or reformist “neighbors"—emerged. There is also evidence that IMF-supported programs and, in the case of some sectors, economic crises have helped to catalyze structural reforms.
Real and financial sector reforms have boosted per capita income growth in all segments of the Fund's membership, with domestic financial sector liberalization, trade liberalization, and farm sector liberalization exerting particularly large effects.
Financial sector reforms have raised growth through a number of channels, including a reduction in domestic credit constraints and larger inflows of foreign direct investment (FDI). Structural reforms have exerted (statistically and economically) meaningful effects on allocative efficiency, as firms across different sectors react to the shifts in comparative advantage brought about by deregulation. The growth effects of financial and real sector reforms also reflect a more favorable assessment of the future profitability and solvency of domestic firms as embodied in their credit ratings.
Growth effects differ significantly across alternative reform sequencing strategies. A trade-before-capital-account strategy achieves better outcomes than the reverse sequence, or even more than a “big bang” where reforms are pursued together. Liberalizing the domestic financial sector together with the external capital account is also growth-enhancing, provided the economy is relatively open to international trade. While the data do not speak loudly on the relative growth benefits of pursuing domestic financial reform versus external capital account liberalization early in the reform process, the stability benefits of early domestic financial sector liberalization dominate those of early capital account liberalization.
The stability benefits flowing from domestic financial sector reform are also evident in the way in which economies respond to real and financial shocks, with relatively liberalized domestic financial sectors reducing the output costs from adverse terms of trade and interest rate shocks. A variety of mechanisms—especially improvements in credit availability—play a key role in enhancing the economy's resilience to shocks.