V Structural Reforms and Economic Growth
Author:
Mr. Jonathan David Ostry
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Mr. Alessandro Prati
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Mr. Antonio Spilimbergo
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Language:
English
Keywords:
OP; liberalization; liberalization index; economy; farm sector liberalization; stability benefit; trade liberalization index; growth benefit; Financial sector; Capital account liberalization; Financial sector reform; Structural reforms; Current account; Global; East Asia; Central and Eastern Europe
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Abstract

This volume examines the impact on economic performance of structural policies-policies that increase the role of market forces and competition in the economy, while maintaining appropriate regulatory frameworks. The results reflect 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. Among the key results of this study, the authors find that real and financial reforms (and, in particular, domestic financial liberalization, trade liberalization, and agricultural liberalization) boost income growth. However, growth effects differ significantly across alternative reform sequencing strategies: a trade-before-capital-account strategy achieves better outcomes than the reverse, or even than a "big bang"; also, liberalizing the domestic financial sector together with the external capital account is growth-enhancing, provided the economy is relatively open to international trade. Finally, relatively liberalized domestic financial sectors enhance the economy's resilience, reducing output costs from adverse terms-of-trade and interest-rate shocks; increased credit availability is one of the key mechanisms.

There is a broad consensus in the literature that structural reforms, and in particular measures aimed at promoting domestic financial development and trade liberalization, can be important components of a strategy to invigorate economic growth.3 Structural reforms may serve to boost aggregate income by promoting both faster capital accumulation and a more efficient allocation of resources. These benefits are typically spread over time, but forward-looking financial markets may anticipate the future benefits of reform, which would then be reflected in such forward-looking variables as credit ratings and borrowing costs.

While existing empirical studies generally support this line of reasoning, in a number of respects they fall short of providing a firm basis for policy. First, a global perspective based on a consistent data source spanning different segments of the IMF's membership has thus far been lacking. Second, existing studies have not tackled empirically key issues related to the interactions among reforms and sequencing, which have a critical bearing on growth. Third, previous studies have paid insufficient attention to the channels through which reforms affect growth. Evidence on such channels is needed to underpin confidence in the robustness of the observed empirical linkages. The remainder of this section considers, in turn, the impact of financial and real sector reforms on growth, focusing both on the aggregate effects and some key channels through which they may operate. The analysis focuses on the ceteris paribus effects of one reform at a time, with sequencing issues taken up in Section VI.

Financial Sector Reforms

Financial sector reforms may raise growth by helping to mobilize savings and thereby expanding the availability of credit, as well as by improving the allocation of capital in the economy.4 Prima facie, the data—across both developed and developing countries—do suggest that more financially liberalized economies enjoy faster growth, on average, over the sample (Figure 5.1). An economy with a domestic financial sector reform index above the median grows on average 1.3 percentage points faster than an economy below the median, with a higher score in each of the component (banking and securities market) reform subindices contributing to higher growth. The differential growth performance in favor of countries with relatively open, versus relatively closed, external capital accounts is positive but small (last two columns of Figure 5.1).

Figure 5.1.
Figure 5.1.

Financial Sector Reform and Growth

Source: IMF staff estimates based on Penn World Tables version 6.2.Note: The per capita growth rates portrayed on the y-axis are measured as deviations from country means over the sample period net of the trend in global growth; that is, the figure plots the residuals from a panel regression of annual per capita GDP growth on country fixed effects (to remove country averages) and year fixed effects (to remove global trends). This figure shows the difference in per capita growth rates between low-reform years (below median) and high-reform years (above median).

What lies behind the finding that economies with more liberalized domestic financial sectors enjoy faster growth? From an empirical standpoint, an answer to this question should take into account the very different features of the growth experience of developed and developing countries. While output paths in the former tend to resemble reasonably steady “hills,” in developing countries output paths are often characterized by “mountains, cliffs, and plains” (Pritchett, 2000), which suggests that focusing on determinants of a country's average growth rate, as portrayed in Figure 5.1, may miss important elements of the transmission channels from liberalization to growth. From this standpoint, across a broad sample of developing and advanced economies, an approach based on linking structural reform to growth accelerations and decelerations (“mountains and cliffs”), rather than average growth, may be more revealing. Such an approach is portrayed in Figure 5.2, which plots the behavior of financial reforms in the period leading up to, and following, growth upbreaks and downbreaks.5

Figure 5.2.
Figure 5.2.

Growth Breaks and Financial Sector Reforms

Source: IMF staff estimates based on Penn World Tables version 6.2.Note: The figures plot average liberalization indices for the period beginning five years before a growth break (year 0 on the horizontal axis) and ending five years after the growth break. The plots capture the within-country evolution of the liberalization indices obtained from a panel regression of each index on country fixed effects (to remove country averages) and year fixed effects (to remove global trends). As a result, the zero value on the vertical axis corresponds to the sample average of the liberalization indices for the countries considered. The number of countries used to compute each average varies across indices in line with data availability.

Two patterns emerge from Figure 5.2. First, both domestic financial/banking sector liberalization and external capital account liberalization increase in the run-up to growth accelerations. Second, the data suggest that growth downbreaks are associated with a high initial degree of external capital account liberalization; this result, however, needs to be interpreted with caution because, as discussed in the next subsection, external capital account liberalization appears to be detrimental for growth only if such liberalization precedes the opening of the trade account. The data do not suggest a strong effect of trends in domestic financial sector liberalization ahead of growth downbreaks.

Econometric evidence presented in Table 5.1 corroborates the finding of a favorable impact of financial reforms on growth accelerations. Controlling for a set of standard growth determinants, including lagged income per capita, educational attainment, a terms of trade index, and a measure of political institutions (democracy), an increase in the (lagged value) of each of the four main financial sector reform indicators has a positive, and statistically significant, effect on growth.6 There are, however, important differences in the magnitude of the effects of each reform. Specifically, domestic financial sector reforms have a long-run impact on income per capita that is three to four times larger than that of external capital account liberalization. For example, an increase in the indices from the 25th to the 75th percentile of the distribution is associated with a rise in long-run per capita income of about 50 percent in the case of domestic financial sector reform compared to 15 percent for external capital account liberalization.7 While liberalizations of such a magnitude are large, they have occurred in the sample, including, for example, during New Zealand's domestic financial sector reforms over 1983–86 and Chile's external capital account liberalization over 1997–2000. Finally, the second panel in Table 5.1 investigates whether there are significant differences in the impact of financial sector reforms across income groups. While the general tenor of the full-sample results holds across different income groups, the impact of banking sector reform on growth is much larger for the developing country group, possibly reflecting the greater importance of bank intermediation at lower income levels.

Table 5.1.

Growth Regression Results: Financial Sector Reforms (1)

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Sources: IMF staff estimates based on IMF, International Financial Statistics; Penn World Tables version 6.2; and World Bank, World Development Indicators. Notes: The table shows regressions of annual growth in real GDP per capita on financial sector liberalization indicators. The regressions are estimated for the entire country sample and for the group of low- and middle-income countries (see Appendix Table A1). Each regression includes as controls the lagged level of real GDP per capita, an indicator variable for democratic regimes, the level of terms of trade, and the level of tertiary school enrollment. The long-run income effect captures the estimated change in the steady-state level of GDP per capita resulting from an improvement in the liberalization index from the 25th to the 75th percentile. All specifications were estimated by panel OLS with country and year fixed effects, using annual data over 1960–2005. Robust standard errors are in parentheses. The standard errors on the long-run effects are calculated with the delta method. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively. Robustness: To address possible endogeneity, all specifications were also estimated by panel 2SLS with country fixed effects and five-year lags of the liberalization index as instrument. The results are robust to this alternative specification. Most results hold also in regressions estimated on five-year nonoverlapping intervals with growth rates over a five-year period regressed on five-year lags of each liberalization index.

The regression results presented in Table 5.1 derive from the standard neoclassical growth theory and are well suited to evaluating the impact of reforms on the equilibrium level of income. However, for economies that are still far from the long-term equilibrium growth rate, the most relevant question is what factors explain the speed of convergence. In order to analyze this, the growth equation is now estimated on the full sample (as in Table 5.1), but each liberalization index is allowed to enter the specification both directly and interacted with the country's “income gap,” that is, the ratio of its GDP to output in the world's richest economies (proxied by GDP in the United States). If a given interaction term is negative and statistically significant, then this implies that the growth returns from reforming that sector will be larger the further a country is from the world output frontier; in particular, the impact on growth will be relatively larger for low- and middle-income countries. Box 5.1 discusses in more detail the motivation for this alternative growth specification.

New-Schumpeterian Growth Specification

An alternative to the neoclassical specification considered in Table 5.1 is the neo-Schumpeterian specification presented in Tables 5.2 and 5.8. This specification derives from Schumpeterian growth theory, which is based on the process of “creative destruction.” Creative destruction, as discussed in the writings of Joseph Schumpeter (1928 and 1942), refers to the endogenous introduction of new products and processes, which inevitably eliminates some of the existing products and processes.

Schumpeterian growth theory has been revived and formally modeled by Aghion and Howitt (1992). A key implication of neo-Schumpeterian theory is that economic development can be evaluated by the distance of a country's per capita GDP from that prevailing in frontier countries. The most relevant question in neo-Schumpeterian growth literature is therefore how fast low-income countries can close the gap with the frontier (usually proxied by per capita GDP in the United States). Recent empirical research using the Schumpeterian specification has examined what drives the speed of income convergence among countries (see, e.g., Aghion and Howitt, 2005), stressing that some factors, such as high-quality institutions or high education levels, can speed up convergence.

As argued in Acemoglu, Aghion, and Zilibotti (2006) and van Elkan (1996), when a country is far from the world technology frontier, the most relevant source of growth is the adoption of already well-established technologies. The closer a country gets to the technological frontier, the more innovation matters for economic growth. In other words, the closer a country is to the world technological frontier, the higher is the relative importance of innovation versus imitation to sustain productivity growth. Consequently, the set of possible policies aimed at sustaining growth, what the authors define as “appropriate institutions,” can vary for countries at different stages of economic development. Building on these theoretical insights, Aghion and Howitt (2005) analyze in depth the case of education. The authors argue that primary and secondary education matters more for a country's ability to imitate the frontier technology, while tertiary education has a larger impact on a country's possibility of innovating. As a country catches up to the technology frontier, tertiary education becomes more relevant to growth than primary/secondary education.1 Vandenbussche, Aghion, and Meghir (2006) provide evidence for a panel of 19 OECD countries for the period 1960-2000 consistent with the idea that higher education matters more as a country catches up to the technological frontier.

The neo-Schumpeterian approach applied to the case of structural reform policies calls for an econometric specification such as that in Table 5.2. There are two main differences between this specification and the neoclassical specification in Table 5.1. First, convergence is now captured by an “income-gap” term that is measured by the ratio of per capita GDP in country j to per capita GDP in the United States (the country with the largest per capita GDP in our sample). Second, in addition to the reform variable, an interaction term between reform and “income-gap” is included to capture the potential effect of reforms in closing the gap relative to the level of output in the United States.

1 Aghion and Howitt (2005) combine insights from Nelson and Phelps (1966) and Acemoglu, Aghion, and Zilibotti (2006). Nelson and Phelps model an economy where the productivity growth can be expressed according to the equation: A= f(h) (Ā–A), where h is the current stock of human capital in a country, and Ā is the frontier technology growing over time at some exogenous rate. A higher stock of human capital fosters growth by facilitating catching up to the technological frontier. In Aghion and Howitt (2005), analogously to Acemoglu, Aghion, and Zilibotti (2006), productivity growth can be generated either by imitating the frontier technology or by innovating on past technologies. The relative importance of innovation increases as a country gets closer to the technological frontier. Moreover, higher education investment should produce a bigger effect on a country's ability to make leading-edge innovation, while primary and secondary education should exert a larger impact on a country's ability to implement frontier technology.

Table 5.2 shows that liberalizing the domestic financial sector, and more specifically the banking sector, not only has a larger direct effect on growth than opening the capital account, but also speeds up the convergence of a country's output level to that in frontier countries while an open capital account does not.

Table 5.2.

Growth Regression Results: Financial Sector Reforms (2)

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Sources: IMF staff estimates based on IMF, International Financial Statistics; Penn World Tables version 6.2; and World Bank, World Development Indicators. Notes: The table shows regressions of annual growth in real GDP per capita on real sector liberalization indicators. The regressions are estimated for the entire country sample (see Appendix Table A1). Each regression includes as controls the lagged ratio of the level of real GDP per capita in country j to the level of real GDP in the United States, an indicator variable for democratic regimes, the level of terms of trade, and the level of tertiary school enrollment. All specifications were estimated by panel OLS with country and year fixed effects, using annual data over 1960–2005. Robust standard errors are in parentheses. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively. Robustness: To address possible endogeneity, all specifications were also estimated by panel 2SLS with country fixed effects and five-year lags of the liberalization index as instrument. The results are robust to this alternative specification. Most results hold also in regressions estimated on five-year nonoverlapping intervals with growth rates over a five-year period regressed on five-year lags of each liberalization index.

What are the key channels through which domestic and external financial liberalization contribute to an acceleration in growth? A well-established empirical result is that financial depth is strongly correlated with growth (see, e.g., Levine, 1997 and 2005). One expected channel is suggested by the positive association between domestic financial sector liberalization and financial depth, as portrayed in Figure 5.3. Hence, financial liberalization may lead to an acceleration in growth by removing constraints on the supply of capital and improving access to credit for businesses.

Figure 5.3.
Figure 5.3.

Financial Depth and Domestic Financial Sector Liberalization

Sources: IMF staff estimates based on Abiad, Detragiache, and Tressel (2008); and World Bank Database on Financial Development and Structure (2007).Note: This figure plots the ratio of private credit to GDP against the index of domestic financial sector liberalization in 2005. The solid line shows the regression line of the ratio of private credit to GDP on the index of domestic financial sector liberalization.

Empirical analysis suggests that financial reforms boost financial development, but only in environments in which individuals are well protected from the risks of expropriation. Indeed, regression analysis (Table 5.3) corroborates the favorable impact of banking reforms on the credit-to-GDP ratio. However, the effect is sustained in the medium term only in countries with adequate checks and balances on political power (see Box 5.2). Moreover, not all dimensions of financial liberalization serve to boost credit growth: the removal of entry barriers and of restrictions on the allocation of credit have the most significant effect on financial deepening in developing countries, while improvements in supervisory and regulatory practices tend to reduce the credit-to-GDP ratio at impact (Table 5.3). The empirical analysis also confirms that good macroeconomic policies have a direct favorable effect on financial development.8

Table 5.3.

Effects of Financial Sector Reforms on Financial Depth

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Sources: IMF staff estimates; Abiad, Detragiache, and Tressel (2008); IMF, International Financial Statistics; and World Bank, World Development Indicators. Notes: The table shows regressions of the change in financial depth, measured as the change in the private-credit-to-GDP ratio, on changes of financial sector liberalization indicators. The banking subindex excluding supervision is a simple average of the credit control, interest rate control, privatization, and competition subindices. All specifications were estimated by panel OLS with year fixed effects, using annual data over 1975–2006. Robust standard errors are in parentheses. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively. Robustness: Results are robust to the inclusion of the rate of inflation, GDP per capita, real GDP growth, and a dummy for hyperinflation as control variables. The results hold also when the regressions are estimated on the subsample of developing countries.

The finding that strong property rights may be a necessary condition for the banking system's functioning to improve after financial liberalization is consistent with Acemoglu and Johnson (2005), who find that more stringent constraints on the executive have a significant positive effect on growth, investment, and financial development.9 They interpret their result as evidence that protection against expropriation by the state or by powerful elites helps develop financial systems.

Other researchers have found that, in addition to property rights protection, the cross-section of financial sector development is also explained by institutional country characteristics such as legal origin (La Porta and others,1998), contracting rights institutions (Djankov, MacLiesh, and Shleifer, 2007), and political stability (Roe and Siegel, 2008). Macroeconomic factors (Boyd, Levine, and Smith, 2001; and Hauner, 2009) and the ownership of banks (La Porta, Lopez-de-Silanes, and Shleifer, 2002; and Detra-giache, Tressel, and Gupta, 2008) are also determinants of financial development. Braun and Raddatz (2008), Baltagi, Demetriades, and Law (2007), and Hauner and Prati (2008) explore political economy theories of financial development by testing the hypothesis of Rajan and Zingales (2003) that financial development tends to occur when economies are opened up to foreign competition, so that the rents of incumbents who prevent broadening access to credit are eroded.

Turning to the role of external capital account liberalization, econometric results highlight a positive relationship between opening to external capital flows and the credit-to-GDP ratio (Table 5.3). In addition, fewer restrictions on capital movements seem to be associated with significantly higher FDI inflows (Table 5.4) which, as argued in Dell'Ariccia and others (2008), tend to be growth enhancing.10 Among the existing literature, Chinnand Ito (2006) focus on the effect of removing restrictions on international financial transactions (capital account liberalization) on various indicators of financial development. They find that capital account liberalization leads to stock market development only in countries with sufficiently developed legal systems, while the effect is negative elsewhere.

Table 5.4.

Foreign Direct Investment Inflows and Financial Sector Reforms

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Sources: IMF staff estimates based on IMF, International Financial Statistics; Penn World Tables version 6.2; and World Bank,World Development Indicators. Notes: The table shows regressions of inward FDI, measured as the log of FDI to GDP, on financial sector liberalization indicators. Each regression includes controls for the growth of real per capita GDP, the level of development (proxied by the lagged level of real GDP per capita), market size (proxied by the lagged level of real GDP), and inflation. All regressions were estimated by panel OLS and include country and year fixed effects, using annual data over 1961–2006. Robust standard errors, clustered at the country-year level, are in parentheses. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively.

Determinants of Financial Development1

The role of finance in development and its importance for economic growth have been well established (Levine, 1997 and 2005). A central question is why financial markets are deeper in some countries than in others, and which specific policies might accelerate financial development where it lags behind.

The impetus to reduce the role of the state in financial markets is often attributed to the influential work of McKinnon (1973) and Shaw (1973), who argued that widespread interference by the state in financial markets was responsible for low financial intermediation, especially in developing countries. Examples of interference by the state included low deposit interest rates, high lending interest rates, monopoly power of banks, and concentration of credit in favored sectors and firms. Has financial liberalization borne the fruits of deepening financial systems?

The first figure describes the average behavior of the ratio of private credit to GDP during episodes of significant banking sector reforms. This figure suggests that banking reforms are often accompanied by a deepening of the financial system. However, a more nuanced stylized fact emerges when looking at the evolution over time of the cross-country dispersion of banking sector depth and of the banking reform index (see second figure). Indeed, while the dispersion in the banking reform index has drastically fallen over the past decades, an increase in the dispersion of the ratio of private credit to GDP has taken place, suggesting that banking reforms have not always led to higher financial depth. Possibly related, the recent empirical literature raises the potentially important issue that the impact of financial reforms on financial development may depend on the broader institutional environment (see discussion in main text).

uch05fig01

Standard Deviations over Time

Source: IMF staff calculations.Note: This figure presents the evolution over time of the cross-sectional standard deviation of the ratio of private credit to GDP and of the banking sector reform index.

To ascertain the relationship between banking reforms and financial deepening, we consider a general dynamic autoregressive distributed lag model linking financial development Yit in country i at date t, to the index of banking reforms Iit, and a vector of macroeconomic control variables Xit with year and country fixed effects. This specification allows us to analyze the dynamic effects of banking reforms. Specifically, we estimate the specification as an error-correction model, assuming a maximum number of lags N = 5.

uch05fig02

Private Credit to GDP During Banking Reform Episodes

(Mean, in percent)

Source: IMF staff calculations.Note: This figure presents the average behavior of the ratio of private credit to GDP around episodes of intense banking sector reforms (five years before the reform to five years following the reform). Episodes of intense banking sector reforms are defined as years when the change in the banking reform index is greater than the top quartile of the distribution of changes.

Estimating the dynamic specification as an error-correction model allows to go around the problem that the banking sector liberalization index is highly persistent within countries. Indeed, when we run a simple OLS regression with country and year fixed effects, the coefficient on the first lag of the index is 0.86. This high persistence may, in practice, introduce multicollinearity problems. Therefore, we rearrange the equation to estimate a relationship between the (log) change in financial development and changes in the banking sector liberalization index ΔIt–k (the formal derivation is in Tressel and Detragiache, 2008). In this error-correction specification, the level of the index appears only once, with N lags, and the change in the index ΔIt–k measures a banking sector reform occurring at date t-k:

What Explains the Lack of Sustained Effect of Reforms on Financial Depth in Developing Countries?

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Notes: This table presents regressions of the error correction specification (1). The dependent variable is the log of the annual change in the private credit-to-GDP ratio, and the right-hand side variables include lags of the log change in private credit to GDP, and the log of private credit to GDP, lagged five times. Key explanatory variables are the changes in the banking reform index, from t to t–4, and the level of the banking reform index, lagged five times. All regressions include country and year fixed effects, as well as five lags of inflation and of GDP per capita, as control variables. The sample is split using the median of the relevant variable, unless otherwise indicated. Robust standard errors in parentheses, observations are clustered by country. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively.

In these columns, the banking reform index excludes the banking supervision subindex which is instead used to split the sample. The “strong supervision” group includes all country-year pairs for which the supervision index takes one of the two top values at date t–5, and the “weak supervision” group is the complement.

Δyit=α0+Σj=1N−1λj⁢.  Δyi,t−j+λN⁢.yi,t−N+Σj=0N−1μj.⁢ ΔIi,t−j+Σj=0N−1θj.  ΔXi,t−j+μN⁢.⁢  Ii,t−N+θN.⁢Xi,t−N+ϵit.(1)

In this model, the cumulative direct effect of a reform episode occurring at date t–i on financial deepening of date of date t is given by μN. As a result of persistence in the levels of financial development, there are also indirect effects of past reforms on the current financial deepening through their effects on lagged values of the dependent variable. The long-run direct and indirect effects of financial reforms and the other control variables on financial development can be easily obtained from the coefficients of equation (1). Specifically, the long-run effect of financial reforms is equal to

−μNλN=−Σu=0NγuΣu=1Nβu−1.(2)

The long-run effect of the control variables on financial development is

−θNλN=−Σu=0NφuΣu=1Nβu−1⁢.(3)

Finally, the error term vit is assumed to be independently distributed. At a minimum of robustness, standard errors are clustered by country to allow for heteroskedasticity and possible serial correlation in the error term.

To test the importance of the institutional environment in shaping the impact of banking reforms, we split the sample according to various institutional characteristics (see table on previous page).2 We find that banking sector reforms have a sustained impact on financial development only in environments in which property rights are well protected.3 These results suggest that protection of property rights is complementary to financial reforms.

A possible interpretation is that, in countries where expropriation is easy, financial reforms reduce the role of the state in the financial sector only on paper, while powerful elites continue to be able to divert financial resources to their own benefit, ultimately undermining the effectiveness of market mechanisms. Also, in these countries private sector business initiatives from groups that are not politically powerful may be constantly threatened with expropriation by more powerful groups. As a result, such initiatives may not find financing from sound and profit-maximizing banks even if they are economically viable. Thus, with weak property rights protection, privatized banks operating in a competitive market may be able to lend profitably only to well-connected groups or the government.

1 This box draws upon Tressel and Detragiache (2008). 2 When estimated on the complete sample of countries, or on the sample of developing countries, the dynamic model shows that the effects of banking reforms on financial depth are, on average, not sustained beyond the first two years following a reform. 3 The degree of protection against the risk of expropriation is proxied by the Polity IV index of constraints on the executive. Results are robust when using other measures of property right protection.

To gain further perspective on the channels through which domestic financial sector reform underpins growth, we consider the possible allocative effects across different manufacturing sectors that result in efficiency gains at a macroeconomic level. As argued by Rajan and Zingales (1998), it is expected that liberalizing the financial sector should have particularly favorable effects on the growth of sectors that rely relatively heavily on external finance for their investment and growth. Those may be the sectors that require large up-front investments, that have greater growth opportunities, or that are more adversely affected by credit rationing (Fisman and Love, 2004; and Bernanke and Gertler, 1989).

The differential effect of financial reforms on manufacturing output growth is estimated as an interaction between the banking reform index and a measure of external dependence on finance. The measure of external dependence on finance is defined as the share of investment that is not financed by retained earnings. This share is computed for U.S. manufacturing industries over 1980–99. As explained by Rajan and Zingales (1998), the rationale for using U.S. data is that U.S. firms are the least likely to be financially constrained for regulatory reasons, and therefore the share of externally financed investment is more likely to capture industry technological characteristics rather than inefficiencies of the financial system. Regressions include a full set of country-specific time dummies that account for the effects of any possible macroeconomic factors on manufacturing output growth, as well as industry-specific dummies that account for industry-specific trends in output.

The results of Table 5.5 show that banking sector liberalization disproportionately increases the growth of the sectors that have a relatively higher need for external finance. This is consistent with the finding that financial development fosters an efficient use of resources at the aggregate level (Beck, Levine, and Loyaza, 2000). The estimated effects, moreover, are large: a one standard deviation increase in the banking liberalization index raises the annual growth rate of sectors with a high dependence on external finance (top 75th percentile of the distribution), relative to the growth rate of sectors with a low dependence on external finance (bottom 25th percentile of the distribution), by nearly 1 percentage point. These results are not explained by differences in GDP per capita (column (2)), nor by differences in the quality of private contract enforcement (column (3)).

Table 5.5.

The Differential Effects of Financial Reforms in Manufacturing Industries

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Sources: United Nations Industrial Development Organization (2006); Abiad, Detragiache, and Tressel (2008); World Bank, World Development Indicators; and IMF staff estimates. The sectoral measure of dependence on external finance is from Kroszner, Laeven, and Klingebiel (2007). Notes: The dependent variable is sectoral output growth of manufacturing industries over 1974–2003. The differential effects of a banking reform on sectoral output growth is estimated by interacting the measure of external dependence on finance with the reform index, following the approach of Rajan and Zingales (1998). Results are robust when controlling for the overall level of development (column 2), for the quality of contract enforcement (column 3), and hold when using the index of domestic financial reforms instead of the banking subindex. Regressions include industry dummies and a full set of country-specific time dummies. Standard errors are robust to heterogeneity and observations are clustered at the country-year level. R2 is a partial R-squared after netting out the country-specific time dummies. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively.

Column (4), however, shows that banking sector liberalization improves the allocation of capital only in countries with a good protection of property rights. In other countries, the allocative effect of banking reforms across manufacturing industries becomes economically and statistically insignificant, suggesting that the degree of protection of property rights can be a constraint on the effectiveness of financial reforms. The importance of property rights for development and growth has been recently emphasized by Acemoglu and Johnson (2005). Following North (1981), these authors argue that the social, economic, legal, and political organizations of a society (its broad “institutions”) are primary determinants of economic performance (Acemoglu, Johnson, and Robinson, 2001 and 2002). These results are consistent with recent papers that have found that property rights also have a direct differential effect on sectors according to the degree of intangibility of assets (Claes-sens and Laeven, 2003) or to the degree of technological advancement (Aghion, Alesina, and Trebbi, 2007).

As argued above, the effects of structural reforms on per capita income are spread out through time, as growth accelerates for a number of years in response to liberalization. Is this longer-run growth impact internalized in forward-looking variables that should, in principle, anticipate such effects? To assess this issue, the analysis now focuses on credit ratings, which should improve if reforms elicit persistent changes in the solvency of corporations and banks, beyond contemporaneous effects on determinants of repayment probability—such as the ratio of earnings to total assets and debt-equity ratios.11 The empirical results are very much in line with the hypothesis that credit ratings anticipate the persistent beneficial effects of structural reforms on the corporate sector (Table 5.6). Specifically, an improvement in the domestic financial sector reform index from the 25th to the 75th percentile of the distribution raises corporate credit ratings by almost 1½ points and banks' credit ratings by almost 4 points—equivalent to 40-80 percent of the sample difference in credit ratings between the average corporation/bank in high-income and middle-income countries. The impact of capital account liberalization on credit ratings is almost as large, reflecting also its positive effect on sovereign ratings, which lifts the sovereign ceiling on private ratings. Given that credit ratings are highly correlated with bond spreads, this evidence suggests that financial sector reforms reduce the cost of credit of banks and corporations, and improve their access to international credit markets.12

Table 5.6.

Financial Sector Reforms and Foreign Currency Bond Ratings

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Sources: IMF staff estimates based on IMF, International Financial Statistics; World Bank, World Development Indicators; and Standard &Poor's. Notes: The table shows regressions of foreign currency bond ratings on financial sector liberalization indicators. Bond ratings were mapped into numerical values ranging from 1 to 21, with 21 representing the highest (AAA) rating. Each regression also includes as control variables: time fixed effects, inflation, real per capita GDP, and real per capita GDP growth averaged over the previous five years. For corporate ratings, additional controls include sector fixed effects, current account balance, GDP growth volatility, and the ratios of earnings before interest and taxes (EBIT) to assets and to interest expense, retained earnings/assets, working capital/assets, total assets, and equity/(equity+debt). For bank ratings, additional controls include sector fixed effects, current account balance, GDP growth volatility, equity/assets, loan growth, operation expenses/assets, net interest margin, deposits/assets, and total assets. For sovereign ratings, additional controls include country dummies, external balance, fiscal balance, default history, and external debt. All regressions were estimated by panel OLS, using annual data over 1995–2005. Robust standard errors, clustered by country-year in the corporate and bank rating regressions, are in parentheses. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively. Robustness: The regressions in the table are estimated with contemporaneous control variables (except for the sovereign ratings regressions); results are broadly similar when controls are lagged one period. The results also hold when the sample is restricted to industrial countries or emerging markets, and, in the corporate ratings regressions, when liberalization firms in the tradable and nontradable sectors are considered separately. Results are also robust to using alternative external capital account liberalization indices, including those accounting for differences between restrictions on residents and nonresidents (Quinn, 1997) and those accounting for different asset categories and inflow versus outflow controls (Schindler, 2009).

Real Sector Reforms

This section examines how real sector reforms— those relating to international trade, agriculture, and the telecommunications and electricity sectors—affect growth. The conventional wisdom (based, for instance, on the studies by Krueger, Schiff, and Valdés, 1992; Sachs and Warner, 1995; and Dollar and Kraay, 2004) is that there is a positive association between real sector reforms—especially trade liberalization—and income growth, but a broad examination of the cross-country evidence is still missing to underpin this conclusion.

The event study analysis based on growth accelerations/decelerations discussed in the previous subsection generally supports the view that real sector reforms anticipate growth spurts, while reversals foreshadow decelerations (Figure 5.4). Specifically, in the run-up to growth upbreaks, economies have already reduced tariff rates—with the tariff-based trade liberalization index above the country-specific average in the top panel of Figure 5.4. In addition, reductions in trade-related current account restrictions and in the pervasiveness of agricultural sector restrictions (e.g., export marketing boards) are in evidence about three years before a growth upbreak, and continue thereafter (middle and bottom panels of Figure 5.4). Conversely, growth downbreaks seem to be anticipated by an illiberal tariff regime and reversals of current account liberalization, but no significant change in agricultural liberalization (although reversals are apparent once the downturn is in train).

Figure 5.4.
Figure 5.4.

Growth Breaks and Real Sector Reforms

Source: IMF staff estimates based on Penn World Tables version 6.2.Note: The figures plot average liberalization indices for the period beginning five years before a growth break (year 0 on the horizontal axis) and ending five years after the growth break. The plots capture the within-country evolution of the liberalization indices obtained from a panel regression of each index on country fixed effects (to remove country averages) and year fixed effects (to remove global trends). As a result, the zero value on the vertical axis corresponds to the sample average of the liberalization indices for the countries considered. The number of countries used to compute each average varies across indices in line with data availability. No figure is shown for the case of telecommunications and electricity reform, because there are not enough growth breaks after 1990, the year that liberalizations in this sector generally begin.

Econometric evidence corroborates the event-study analysis, with panel growth regressions indicating a statistically significant impact of real sector reforms on economic growth, after controlling for a standard set of growth covariates (Table 5.7). Agricultural liberalization and reductions in restrictions on trade-related current account transactions yield the largest growth benefits. An improvement in the corresponding indices from the 25th to the 75th percentile—consistent, for example, with the changes in agricultural liberalization achieved in Poland in the late 1980s and current account liberalization achieved in Peru at roughly the same time—is estimated to increase long-run income per capita by about 40–50 percent.13 The effects are somewhat stronger over the sample of low- and middle-income countries, in line with the greater weight of the farm sector in such economies, and the role of exports in the development strategies of a number of nonindustrial countries. Finally, with respect to telecommunications and electricity deregulation, while previous studies for industrial countries have found significant effects on productivity growth (Nicoletti and Scarpetta, 2003), the broad cross-country evidence fails to uncover much impact, likely reflecting the late adoption of these reforms in developing countries.

Table 5.7.

Growth Regression Results: Real Sector Reforms (1)

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Sources: IMF staff estimates based on IMF, International Financial Statistics; Penn World Tables version 6.2; and World Bank, World Development Indicators. Notes: The table shows regressions of annual growth in real GDP per capita on real sector liberalization indicators. The regressions are estimated for the entire country sample and for the group of low- and middle-income countries (see Appendix Table A1). Each regression includes as controls the lagged level of real GDP per capita, an indicator variable for democratic regimes, the level of terms of trade, and the level of tertiary school enrollment. The long-run income effect captures the estimated change in the steady-state level of GDP per capita resulting from an improvement in the liberalization index from the 25th to the 75th percentile. All specifications were estimated by panel OLS with country and year fixed effects, using annual data over 1960–2005. Robust standard errors are in parentheses. The standard errors on the long-run effects are calculated with the delta method. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively. Robustness: To address possible endogeneity, all specifications were also estimated by panel 2SLS with country fixed effects and five-year lags of the liberalization index as instrument. The results are robust to this alternative specification. Most results hold also in regressions estimated on five-year nonoverlapping intervals with growth rates over a five-year period regressed on five-year lags of each liberalization index.

Next, Table 5.8 reports alternative regression results from a specification based on the neo-Schumpeterian approach (discussed in Box 5.1), in which each liberalization index enters the regression both directly and interacted with the country's “income gap” relative to the world output frontier, as in Table 5.2. The results imply that, in addition to domestic financial liberalization, some real structural reforms also speed up income convergence. Specifically, liberalizing the agricultural sector and the current account both help to close the income gap relative to frontier countries (proxied here by the level of output in the United States).

Table 5.8.

Growth Regression Results: Real Sector Reforms (2)

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Sources: IMF staff estimates based on IMF, International Financial Statistics; Penn World Tables version 6.2; and World Bank, World Development Indicators. Notes: The table shows regressions of annual growth in real GDP per capita on real sector liberalization indicators. The regressions are estimated for the entire country sample (see Appendix Table A1). Each regression includes as controls the lagged ratio of the level of real GDP per capita in country j to the level of real GDP in the United States, an indicator variable for democratic regimes, the level of terms of trade, and the level of tertiary school enrollment. All specifications were estimated by panel OLS with country and year fixed effects, using annual data over 1960–2005. Robust standard errors are in parentheses. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively. Robustness: To address possible endogeneity, all specifications were also estimated by panel 2SLS with country fixed effects and five-year lags of the liberalization index as instrument. The results are robust to this alternative specification. Most results hold also in regressions estimated on five-year nonoverlapping intervals with growth rates over a five-year period regressed on five-year lags of each liberalization index.

Taken together, the results from the alternative “income-gap” approach (Tables 5.2 and 5.8) show that some reforms, namely of domestic finance, agriculture, and the current account, can speed up the convergence of a country's income toward the levels prevailing in the world's richest economies. It is important to note here that these results are consistent with the results from the neoclassical specification (Tables 5.1 and 5.7), which showed that the growth effects of agriculture and current account reforms (among real sector reforms) and of banking reform (among financial sector reforms) are larger in low- and middle-income countries.

What can be said about the channels through which real sector reforms affect growth? A starting point, given the established linkage between growth and trade (e.g., Frankel and Romer, 1999), is to examine the association between trade liberalization and de facto trade openness (import- and export-to-GDP shares), which indeed is robustly positive (Table 5.9). In line with the results in Table 5.6, the index based on current account liberalization has a larger effect on trade flows than the index based on tariffs, with an increase in the current account reform index from the 25th to the 75th percentile of the sample distribution yielding an increase in trade shares of 10–15 percentage points of GDP (last row of Table 5.9).

Table 5.9.

Trade Reforms and Export- and Import-to-GDP Share

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Sources: IMF staff estimates based on IMF, International Financial Statistics; and World Bank, World Development Indicators. Notes: The table shows regressions of the share of exports and imports of goods and services in GDP on indices of trade reform, separately for the index based on tariffs and the index based on current account restrictions. The control variables include domestic GDP growth (for imports) and trading partners' GDP growth (for exports); all variables are lagged one year to avoid potential problems of endogeneity. In addition, all regressions include the lagged dependent variable to control for persistence in export- and import-to-GDP shares. The long-run effect is the long-term change in terms of GDP shares resulting from an increase in the openness index from the 25th to the 75th percentile of the in-sample distribution. All specifications are estimated by ordinary least squared regression with country fixed effects, using annual data over 1968–2006. Robust standard errors are in parentheses. The standard errors on the long-term effects are calculated with the delta method. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively. Robustness: The results are robust to additional controls used in the related literature, including terms of trade shocks and fiscal balance as a share of GDP; however, the inclusion of these variables reduces considerably the sample size.

Apart from the trade channel, resource reallocation in response to a move to a more market-based price structure is likely to be a key driver of growth following trade reforms. The aggregate impact of trade reforms has been well established (see Berg and Krueger, 2003; and Edwards, 1993, for a discussion of earlier literature). Theories of trade under imperfect competition indeed show how trade enhances growth through the import of new varieties of intermediate inputs in which technical knowledge is embodied, and predict that lowering the cost of imported inputs faced by domestic firms is likely to increase their productivity (Romer, 1986; and Grossman and Helpman, 1990). These theories imply that trade liberalization (in particular a reduction in tariffs) is likely to particularly benefit sectors relying relatively more on imports of intermediate goods in production.

The findings of recent microeconometric and country studies confirm the importance of a trade channel going through the imports of intermediate goods (Pavcnik, 2002; Edwards and Lawrence, 2006; Amiti and Konings, 2005; and Broda, Greenfield, and Wein-stein, 2006). The hypothesis is that trade reforms—such as a reduction in import tariffs—should disproportionately foster growth in sectors in which a country has a comparative advantage and that, for technological reasons, depend on traded intermediate goods in the production process. For each three-digit manufacturing sector, we construct a measure of intensity of the use of traded inputs, defined as the share of imported inputs in the total value added of intermediate inputs, averaged across a large number of countries.

Table 5.10 shows that trade liberalization—measured by a simple index of average tariffs(column 1), or by an index of restrictions on the current account (column 2)—disproportionately improve the growth of sectors that have a relatively higher dependence on imported intermediate goods in production. The estimated coefficient of column 1 implies that a one standard deviation improvement in the average tariff index (i.e., a reduction in average tariff rates of about 15 percentage points) raises relative annual growth in sectors using imported inputs intensively by about 0.1 percentage point. Like financial sector reforms, however, trade reforms effectively improve the growth of sectors dependent on imported intermediate inputs only when the protection of property rights is strong enough, in particular in developing countries (columns 3 and 4).

Table 5.10.

The Differential Effects of Trade Reforms in Manufacturing Industries

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Sources: United Nations Industrial Development Organization (2006); Abiad, Detragiache, and Tressel (2008); World Bank, World Development Indicators; and IMF staff estimates. The sectoral measure of dependence on external finance is from Kroszner, Laeven, and Klingebiel (2007). Notes: The dependent variable is annual sectoral output growth of manufacturing industries over 1974–2003. The differential effects of a reform on sectoral output growth is estimated by interacting a sectoral characteristic with the reform index. The differential effect of trade reforms is estimated as an interaction between the trade index and a measure of intensity of use of imported intermediate inputs. Industry dummies and a full set of country-specific time dummies are included in the regressions. Standard errors are robust to heterogeneity and observations are clustered at the country-year level. R-squared is a partial R-squared after netting out the country-specific time dummies. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively.

Like financial sector reforms, real sector reforms also have persistent effects that are anticipated in such forward-looking variables as credit ratings. Results reported in Table 5.11 suggest that both measures of trade liberalization significantly improve the credit ratings of domestic firms, controlling for other potential determinants of repayment probability. A reform, for example, that increases the index of current account liberalization from the 25th to the 75th percentile of the sample distribution is associated with an increase in average corporate credit ratings equivalent to about 20 percent of the sample difference in credit ratings between high- and middle-income countries. Moreover, the total effect approximately doubles if one takes into account that corporate ratings are capped by sovereign ratings, and that the latter are also improved by current account liberalization.

Table 5.11.

Real Sector Reforms and Foreign Currency Bond Ratings

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Sources: IMF staff estimates based on IMF, International Financial Statistics; World Bank, World Development Indicators; and Standard &Poor's. Notes: The table shows regressions of foreign currency bond ratings on trade liberalization indicators. Bond ratings were mapped into numerical values ranging from 1 to 21, with 21 representing the highest (AAA) rating. Each regression also includes as control variables: time fixed effects, inflation, real per capita GDP, and real per capita GDP growth averaged over the previous five years. For corporate ratings, additional controls include sector fixed effects, current account balance, GDP growth volatility, and the ratios of earnings before interest and taxes (EBIT) to assets and to interest expense, retained earnings/assets, working capital/assets, total assets, and equity/(equity+debt). For bank ratings, additional controls include sector fixed effects, current account balance, GDP growth volatility, equity/assets, loan growth, operation expenses/assets, net interest margin, deposits/assets, and total assets. For sovereign ratings, additional controls include country dummies, external balance, fiscal balance, default history, and external debt. All regressions were estimated by panel OLS, using annual data over 1995–2005. Robust standard errors, clustered by country-year in the corporate and bank rating regressions, are in parentheses. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively. Robustness: The regressions in the table are estimated with contemporaneous control variables (except for the sovereign ratings regressions); results are broadly similar when controls are lagged one period. The results also hold when the sample is restricted to industrial or emerging markets, and, in the corporate ratings regressions, when firms in the tradable and nontradable sectors are considered separately.

The positive impact of trade reforms on credit ratings is an important example of a favorable real sector and financial sector linkage following structural reform, with the increased efficiency brought about by real sector reforms fostering improved access to credit/investment financing for domestic firms. Such favorable real sector and financial sector linkages are also apparent from the impact of current account reform on financial depth (Table 5.12, second row/second column), and the effects of telecommunications and electricity reforms on FDI (Table 5.13, fourth column).

Table 5.12.

Effects of Trade Reforms on Financial Depth

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Sources: IMF staff estimates based on Abiad, Detragiache, and Tressel (2008); IMF, International Financial Statistics; and World Bank, World Development Indicators. Notes: The table shows regressions of the change in financial depth, measured as the change in the private credit to GDP ratio, on lagged changes in financial, trade, and external capital account liberalization indices. All specifications were estimated by panel OLS with year fixed effects, using annual data over 1975–2006. Robust standard errors in parentheses. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively. Robustness: Results are robust to the inclusion of the rate of inflation, GDP per capita, real GDP growth, and a dummy for hyperinflation as control variables. The effect of reforms is also robust when estimated on the subsample of developing countries.
Table 5.13.

Foreign Direct Investment Inflows and Real Sector Reforms

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Sources: IMF staff estimates based on IMF, International Financial Statistics; Penn World Tables version 6.2; and World Bank, World Development Indicators. Notes: The table shows regressions of inward FDI, measured as the log of FDI to GDP, on real sector liberalization indices. Each regression includes controls for the growth of real per capita GDP, the level of development (proxied by the lagged level of real GDP per capita), market size (proxied by the lagged level of real GDP), and inflation. All regressions were estimated by panel OLS and include country and year fixed effects, using annual data over 1961–2006. Robust standard errors, clustered at the country-year level, are in parentheses. ***, **, and * denote statistical significance at the 1, 5, and 10 percent level, respectively.
3

McKinnon (1973), Krueger (1997), and Henry (2007) are among the seminal studies supporting this view. The literature is not, of course, all to one side on the role of reforms in the growth process. Easterly (2005), for instance, focuses on the association between a larger set of economic policies (price distortions, financial development, trade openness, and macroeconomic policies) and growth. Easterly's baseline growth regression suggests that improvement in the considered policy dimensions leads to a substantial increase in income per capita growth. Nevertheless, once the sample is restricted to exclude large outliers, any association between policy variables and growth disappears. Hausmann, Pritchett, and Rodrik (2005) discuss how policies aimed at promoting economic growth can be highly context-specific.

Recent literature also investigates whether institutions are more relevant than policies to explain country-wide differences in economic performance. Easterly and Levine (2003) ask whether policies such as openness to international trade, inflation, and impediments to international transactions matter to explain current differences in income levels. The evidence they provide suggests that macroeconomic policies are not very relevant to explaining the current level of economic development once the impact of the institutions on economic development is taken into account. They argue that bad policies might be “symptoms” of deeper institutional failures. Acemoglu and others (2003) reach a similar conclusion. Once the historically determined component of institutions is controlled for, economic policies play a small role in explaining economic volatility, crises, and growth. Distortionary policies are likely to be mirroring the existence of weak institutions.

4

A large literature suggests that a well-developed financial sector promotes economic growth (Levine, 2005). However, relatively few studies try to assess the impact of financial sector reforms on economic growth. Bekaert, Harvey, and Lundblad's (2005) main measure of financial liberalization is a dummy variable equal to one for the years in which foreign investors may own equities in a particular market. Equity market liberalization increases annual real per capita GDP growth by almost 1 percent. Quinn and Toyoda (2008) provide detailed de jure measures of capital account and financial current account openness and document that capital account liberalization is positively associated with growth. Finally, recent empirical work provides evidence that structural reforms improve economic performance in advanced economies. Nicoletti and Scarpetta (2003), using an original dataset on product market regulation in 18 OECD countries, show that product market reforms that promote private corporate governance, competition, and privatization raise productivity growth.

5

See the Appendix, as well as Berg, Ostry, and Zettelmeyer (2008) and Antoshin, Berg, and Souto (2008), for a deeper discussion of the statistical procedures used to identify upbreaks and downbreaks.

6

The presence of a convergence term (lagged income per capita) in the regressions implies that a change in the level of reforms has a transitional effect on growth and a permanent effect on income. During the transition to the new post-reform steady state, growth rates will be higher than before, but will eventually return to their steady-state level (see, relatedly, Henry, 2007). This is in line with the graphical event study presented in Figure 5.2, which links reform to growth accelerations and decelerations. In practice, transitions across steady states last for many years, resulting in persistent increases in growth rates during the transition.

7

About two-thirds of these effects occur within a two-decade horizon of the policy shock, while the impact (one-year) effects are about 5 percent of the long-run impact.

8

The regression analysis shows that countries with lower inflation rates have deeper banking systems (results not shown).

9

The index of constraints on the executive, from the Polity IV database, measures checks and balances on the executive branch of government. It is used as a proxy for the quality of property rights, given that data on the latter are severely constrained in the timeseries dimension.

10

A recent study by Binici, Hutchison, and Schindler (2009) examines in more detail the effects of capital controls on financial flows. Consistent with the findings reported here, they find that the effects of capital controls on equity-like flows (portfolio equity and FDI) are larger than those on debt flows. However, they also differentiate between inflow and outflow controls, based on the dataset in Schindler (2009), and find that outflow controls tend to be more effective in limiting financial flows.

11

Equity prices should also incorporate relevant information about the impact of structural reforms on the solvency/health/profitability of domestic firms. The empirical association of equity prices with structural reform indices is weak, however, likely reflecting the very different volatility properties of the two sets of variables.

12

Focusing on corporate foreign currency bond ratings as a dependent variable, and using a difference-in-difference approach, Prati, Schindler, and Valenzuela (forthcoming) argue that capital account restrictions have a particularly strong effect on firms in the non-tradables sector, that is, on firms that cannot easily generate foreign currency out of their regular business activities.

13

About half the long-run effects are achieved within 20 years, and 20 percent in the first 5 years.

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Cover Structural Reforms and Economic Performance in Advanced and Developing Countries
Structural Reforms and Economic Performance in Advanced and Developing Countries
Author:
Mr. Jonathan David Ostry
,
Mr. Alessandro Prati
, and
Mr. Antonio Spilimbergo
ISBN:
9781589068186
ISSN:
0251-6365
Publication Date:
15 Oct 2009
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781589068186.084
Pages:
60
Figure 5.1.

Financial Sector Reform and Growth
Figure 5.2.

Growth Breaks and Financial Sector Reforms
Figure 5.3.

Financial Depth and Domestic Financial Sector Liberalization

Standard Deviations over Time

Private Credit to GDP During Banking Reform Episodes

(Mean, in percent)
Figure 5.4.

Growth Breaks and Real Sector Reforms

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