Structural reforms are a more elusive concept to measure than, say, the tenor of standard macroeconomic policies, where gauges—interest rates, liquidity measures, or the budgetary balance—are typically readily available for most countries. In the realm of structural policies, by contrast, researchers generally need to peruse legal statutes and rule books and devise classification criteria to create indicators that measure reform in different sectors of the economy, and that can serve as inputs for empirical analysis.
Structural reforms are usually held to include policy measures that reduce or remove impediments to the efficient allocation of resources. In many cases, the efficient allocation may correspond to “laissez-faire” or the “free-market” outcome and, as such, structural reforms would imply reduced government intervention, including the removal of state-imposed price controls, the abolition of state monopolies, and fewer restrictions on trade and domestic or international financial transactions. But structural reforms may also encompass measures to address market failures not due to government intervention, including natural monopolies, dominant market positions, or distortions in the financial sector arising, for example, from asymmetric information and moral hazard. Following this broader view, the indices of structural reform described below include measures of “effective regulation” to address potential market failures in product and financial markets. To take an example, countries with well-supervised banking systems will score highly on the banking liberalization index described below, even though banking regulation and supervision is a departure from laissez-faire.
Measuring Structural Reforms
This paper draws on an extensive dataset, compiled by the IMF's Research Department, which brings together information on a variety of structural reforms in different sectors over roughly the past 30 years, and that covers a cross-section of both industrial and developing countries. The new dataset thus has significant advantages over existing data sources that cover a narrower set of reforms and countries, and is likely to be useful not only for the analysis carried out below, but also more broadly for the IMF's surveillance activities (see Box 3.1 and Appendix Tables A1 and A2 for further details).
Reform indicators cover both the realm of the “financial sector” and the “real sector,” though, as will be evident in subsequent sections, financial sector reforms have important effects on real sector outcomes, and vice versa, given the significance of macro-financial linkages inherent in economic performance. Financial sector reform indicators include reforms pertaining to domestic financial markets, including banking and securities markets, as well as the external capital account, while real sector structural reform indicators include measures of product market and trade reforms.1
All indicators are scaled to vary between zero and unity, with higher values representing greater liberalization. Differences in the values of each index across countries and over time provide information on the variation in the absolute degree of economic reform within each sector. However, indices are not strictly comparable across sectors, so a higher value of, say, the trade reform index than the banking reform index does not imply that an economy is “more liberal” with respect to international trade than domestic finance.
Turning first to financial reforms, the domestic financial sector liberalization indicator includes measures of securities markets and banking sector reform. The securities markets subindex assesses the quality of the market framework, including the existence of an independent regulator and the extent of legal restrictions on the development of domestic bond and equity markets. The banking subindex captures reductions or removal of interest rate controls (floors or ceilings), credit controls (directed credit and subsidized lending), competition restrictions (limits on branches and entry barriers in the banking market, including licensing requirements or limits on foreign banks), and public ownership of banks. As foreshadowed above, the banking index also captures a measure of the quality of banking supervision and regulation, including the power and independence of bank supervisors, the adoption of Basel capital standards, and the presence of a framework for bank inspections.
Structural Reform Dataset
The main features of the dataset used in this paper are described below, with further technical details provided in Appendix Tables A1 and A2.
Domestic financial sector reforms. This indicator extends the country and time coverage of the domestic financial sector components in Abiad and Mody (2005), and adds a component covering credit controls (see Abiad, Detragiache, and Tressel, 2008). The index thus covers six broad areas: interest rate controls, entry barriers, privatization, supervision and regulation, securities markets, and credit controls. Other relevant work includes Williamson and Mahar (1998), who record financial reforms in 34 countries over 1973–96 along the same dimensions as Abiad and Mody (2005); Bekaert, Harvey, and Lundblad (2005), who date equity market liberalizations in 95 countries during 1980–95; and the European Bank for Reconstruction and Development's (EBRD) dataset of transition indicators for 29 nonindustrialized countries over 1989–2007 (published annually in the EBRD's Transition Report), which includes variables that measure banking and securities market reform gaps with industrialized market economies.
Capital account reforms. The data collected cover controls on external borrowing and lending as well as other restrictions on financial transactions between residents and nonresidents, including approval requirements for foreign direct investment. The sources are Abiad, Detragiache, and Tressel (2008) and Quinn (1997), extended to include additional countries and years. Other relevant work includes Schindler (2009), which constructs a disaggregated capital controls index for 91 countries over 1995–2005 and reviews other related indices.
Product market reforms. The product market reform index covers the agricultural sector and the telecommunications and electricity sectors, and comprises simplified versions of existing indices produced by the Organization for Economic Cooperation and Development (OECD), extended to include non-OECD countries. Relevant data by the OECD include an index of regulatory reform in the telecommunications, electricity, gas, post, rail, air passenger transport, and road freight sectors (Conway and Nicoletti, 2006), and the OECD's producer and consumer support estimates of agricultural policies during 1986–2006 (published as a complement to the OECD report Agricultural Policies in OECD Countries: Monitoring and Evaluation 2007). Other relevant work includes the World Bank's Doing Business database (http://www.doingbusiness.org/), which provides measures of business regulations for a large number of countries during 2004–07; and the EBRD's transition indicators database, containing variables pertaining to telecommunications and electricity liberalization in transition countries.
Trade reforms. There are two indices: the first is an extension of the database on average tariff rates in IMF (2004) to include non-OECD countries and a broader time coverage; the second is based on Quinn (1997), and captures the degree to which proceeds from international trade in goods and services are free from restrictions as defined under Article VIII, extended to include additional countries and years. Other relevant work includes Sachs and Warner (1995), who provide a binary measure of trade liberalization based on a mix of regulatory and outcomes-based information; and the EBRD's transition indicators database, which contains variables pertaining to liberalization of trade and the foreign exchange system in transition economies.
Regarding the extent of external capital account liberalization, the data collected cover a broad set of restrictions including, for example, controls on external borrowing between residents and nonresidents, as well as approval requirements for FDI.
Turning to structural reforms in the real sector, the first indicator measures reductions in public intervention in the agricultural sector, including removal of export marketing boards and reductions in the incidence of administered prices. The second indicator covers the degree of liberalization in the telecommunications and electricity markets, including the extent of competition in the provision of these services and the presence of an independent regulator. The third index captures liberalization of international trade along two dimensions: tariff liberalization, which measures average tariff rates; and a broader indicator of current account liberalization, which captures surrender requirements for export proceeds, and other items under Article VIII of the Fund's Articles of Agreement.
Trends in Structural Reform Since the 1970s
Figures 3.1 and 3.2 portray the broad global trend toward greater structural reform and liberalization over the past three decades across different segments of the IMF's membership. Some key points follow from the figures:
Domestic financial sector reforms and the opening of the capital account accelerated sharply in the early 1990s, reflecting, inter alia, the expansion of the European Union (which involved harmonization of financial legislation and regulation across member countries), the accession of a number of emerging market countries to the Organization for Economic Cooperation and Development, and the economic transition of Central and Eastern Europe.
Both measures of trade liberalization follow a gradual upward trend with a noticeable pickup since the late 1980s, reflecting the pursuit by developing countries of greater trade liberalization in the aftermath of the debt crisis, and more generally the demise of import substitution policies pursued earlier. The global context of several rounds of multilateral and regional trade negotiations also contributed.
Liberalization of the agricultural sector gathered speed during the 1990s, with the adoption of more market-friendly policies in the developing world. This partly reflected an emphasis on such policies in World Bank structural adjustment lending, as well as falling agricultural prices, which made marketing boards less sustainable.
In the telecommunications and electricity sectors, deregulation began in earnest in the second half of the 1990s, reflecting to a large degree innovations in communications technology—such as cellular phones and the diffusion of the Internet—that exposed public telecommunications monopolies to competition.
Regarding trends in structural reform across different income groups, advanced economies began implementing reforms relatively early, and these “first movers” have also progressed the furthest with structural reform. This being said, emerging market and developing countries are catching up with advanced economies in the level of liberalization achieved, with a substantial narrowing of the reform gap in evidence for all sectors since the mid-1980s. To take an example, the average level of domestic financial sector reform in low- and middle-income countries is now comparable to that of high-income countries in the early 1990s.
Economic Liberalization Indices
(Degree of liberalization, average)
Source: IMF staff estimates.Note: Higher values of the liberalization indices represent greater liberalization. Each index is standardized to lie between zero and unity. The plotted index average is measured as the mean of the index across countries for each year. The “domestic financial sector” liberalization index captures restrictions on interest rate determination and competition, credit controls, and the quality of supervision in the banking sector, as well as the degree of liberalization of securities markets. The “external capital account” liberalization index measures restrictions on international financial transactions between residents and nonresidents. The “trade (tariff)” liberalization index measures average tariff rates. The “trade (current account)” liberalization index captures government restrictions on the proceeds from international trade in goods and services. The “agriculture” liberalization index captures intervention in the market for each country's main agricultural export commodity. The “telecommunications and electricity”liberalization index captures the degree of competition and liberalization, and the quality of regulation, in these sectors. See Appendix Table A2 for more details.Economic Liberalization Indices
(Degree of liberalization, average)
Source: IMF staff estimates.Note: Higher values of the liberalization indices represent greater liberalization. Each index is standardized to lie between zero and unity. The plotted index average is measured as the mean of the index across countries for each year. The “domestic financial sector” liberalization index captures restrictions on interest rate determination and competition, credit controls, and the quality of supervision in the banking sector, as well as the degree of liberalization of securities markets. The “external capital account” liberalization index measures restrictions on international financial transactions between residents and nonresidents. The “trade (tariff)” liberalization index measures average tariff rates. The “trade (current account)” liberalization index captures government restrictions on the proceeds from international trade in goods and services. The “agriculture” liberalization index captures intervention in the market for each country's main agricultural export commodity. The “telecommunications and electricity”liberalization index captures the degree of competition and liberalization, and the quality of regulation, in these sectors. See Appendix Table A2 for more details.Economic Liberalization Indices
(Degree of liberalization, average)
Source: IMF staff estimates.Note: Higher values of the liberalization indices represent greater liberalization. Each index is standardized to lie between zero and unity. The plotted index average is measured as the mean of the index across countries for each year. The “domestic financial sector” liberalization index captures restrictions on interest rate determination and competition, credit controls, and the quality of supervision in the banking sector, as well as the degree of liberalization of securities markets. The “external capital account” liberalization index measures restrictions on international financial transactions between residents and nonresidents. The “trade (tariff)” liberalization index measures average tariff rates. The “trade (current account)” liberalization index captures government restrictions on the proceeds from international trade in goods and services. The “agriculture” liberalization index captures intervention in the market for each country's main agricultural export commodity. The “telecommunications and electricity”liberalization index captures the degree of competition and liberalization, and the quality of regulation, in these sectors. See Appendix Table A2 for more details.
Economic Liberalization Indices by Income Group
(Degree of liberalization)
Source: IMF staff estimates.Note: Each index is standardized to lie between zero and unity. Higher values of the liberalization indices represent greater liberalization. This figure shows the evolution of liberalization indices over time. See Appendix Table A2 for more details.Economic Liberalization Indices by Income Group
(Degree of liberalization)
Source: IMF staff estimates.Note: Each index is standardized to lie between zero and unity. Higher values of the liberalization indices represent greater liberalization. This figure shows the evolution of liberalization indices over time. See Appendix Table A2 for more details.Economic Liberalization Indices by Income Group
(Degree of liberalization)
Source: IMF staff estimates.Note: Each index is standardized to lie between zero and unity. Higher values of the liberalization indices represent greater liberalization. This figure shows the evolution of liberalization indices over time. See Appendix Table A2 for more details.Data on labor market and fiscal reforms are being gathered, but cross-country coverage, especially for emerging market and developing countries, remains insufficient for inclusion in the analysis.
