Maintaining sound economic growth, together with broad financial stability, is a perennial challenge for policymakers in developed and developing countries alike, and understanding the role that structural reforms may play in meeting this challenge remains a central element of surveillance for all segments of the IMF's membership. This paper has sought to draw lessons from the cross-country experience on structural reform, so as to strengthen the underpinnings of IMF policy advice and surveillance across the membership.
Past analyses of structural reforms have mainly focused on industrial countries, for which indicators of structural reform liberalization are readily available, or on selected groups of countries or regions of the world. In contrast, the present study rests on a new dataset, which includes comparable indicators of structural reforms for 91 developing, emerging market, and advanced economies over the past three decades, as well as an extensive coverage of different economic sectors. The broad cross-country and cross-sectoral approach is essential for drawing policy lessons across different segments of the IMF's membership, and for addressing empirically issues related to policy sequencing.
With respect to the causes of structural reform, the empirical analysis suggests that the quality of broad institutions initially spurred liberalization among advanced economies, but that, as cross-country reform gaps—either with respect to reform “leaders” or with respect to reformist “neighbors"—emerged, a catch-up effect led to subsequent reform in developing countries. There is also evidence that IMF-supported programs and, for some sectors, economic crises have been a catalyst for reform.
Real and financial sector reforms have helped to boost economic growth in both developed and developing countries, with domestic financial sector liberalization, trade liberalization, and liberalization of the agricultural sector exerting particularly favorable effects. The channels through which growth effects operate include greater availability of credit and FDI inflows; and improvements in allocative efficiency, which have acted to boost growth particularly in firms and sectors heavily dependent on imported intermediate inputs and external sources of financing. The implementation of structural reforms has also tended to enhance the assessment of the future profitability and solvency of domestic firms, as reflected in credit ratings, with a corresponding reduction in borrowing costs for domestic firms and banks following liberalization.
The nature of the reform sequencing strategy pursued affects the size of the ensuing growth benefits. The cross-country evidence strongly suggests that economies that liberalize trade before the external capital account grow more rapidly than those that follow the reverse sequence, and that a “trade-first” strategy yields better growth results than a “big bang” approach under which liberalization is pursued simultaneously across all sectors. While there is no evidence that the sequencing of domestic financial sector and external capital account liberalization has a significant impact on growth outcomes, the stability benefits—in terms of both macroeconomic volatility and crisis propensity— are more favorable when the domestic financial sector is liberalized before the external capital account.
Domestic financial sector reforms also enhance the way in which economies respond to various real and financial shocks, as financial reforms reduce the output costs from adverse terms of trade and foreign interest rate shocks, with a variety of mechanisms—especially improvements in credit availability—playing a key role. The greater resilience to real shocks in economies with more liberalized financial sectors is evidence of how such reforms can strengthen economy-wide real-financial linkages.
The evidence presented in this paper—given its broad country, time, and sectoral coverage—should help to strengthen the cross-country perspective in bilateral surveillance on the role of structural policies in fostering sound medium-run growth-cum-stability in member countries. The results highlight the growth benefits of a reform strategy that relies on early trade liberalization and, in the context of a relatively open trade regime, accelerates the process of liberalizing both the domestic financial sector and the external capital account. The paper also highlights that, as long as the domestic financial sector is reformed before opening the capital account, structural reform can enhance growth opportunities without raising macroeconomic volatility or crisis risks. Appropriately sequenced structural reforms, thus, seem to improve the growth-volatility frontier for the economy, rather than simply engendering a move along the existing frontier.