Title Page
OCCASIONAL PAPER 268
Structural Reforms and Economic Performance in Advanced and Developing Countries
Jonathan D. Ostry, Alessandro Prati, and Antonio Spilimbergo
INTERNATIONAL MONETARY FUND
Washington DC
2009
Copyright
© 2009 International Monetary Fund
Production: IMF Multimedia Services Division
Figures: Theodore F. Peters, Jr. and Tom Wood
Typesetting: Alicia Etchebarne-Bourdin
Cataloging-in-Publication Data
Ostry, Jonathan D., 1962–
Structural reforms and economic performance in advanced and developing countries / Jonathan D. Ostry, Alessandro Prati, and Antonio Spilimbergo— Washington, D.C.: International Monetary Fund, 2009.
p.; cm.—(Occasional paper (International Monetary Fund); no. 268).
Incudes bibliographical references.
ISBN 978-1-58906-818-6
1. Structural adjustment (Economic policy)—Developed countries. 2. Structural adjustment (Economic policy)—Developing countries. I. Prati, Alessandro, 1961–. II. Spilimbergo, Antonio. III. International Monetary Fund. IV. Title. V. Series: Occasional Paper (International Monetary Fund); no. 268.
HD87.O88 2009
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Contents
Preface
I Overview
II Introduction
III Structural Reforms: Measurement and Trends
Measuring Structural Reforms
Trends in Structural Reform Since the 1970s
IV Determinants of Structural Reforms
Institutional Quality
International Factors
IMF-Supported Programs
Economic Crises
V Structural Reforms and Economic Growth
Financial Sector Reforms
Real Sector Reforms
VI Sequencing Real and Financial Sector Reforms
VII Financial Sector Reforms and Resilience
VIII Conclusions
Appendix Data, Sources, and Methods
References
Boxes
3.1 Structural Reform Dataset
4.1 Democracy and Reforms
5.1 New-Schumpeterian Growth Specification
5.2 Determinants of Financial Development
7.1 Banking Sector Competition and Macroeconomic Stability
Figures
3.1 Economic Liberalization Indices
3.2 Economic Liberalization Indices by Income Group
4.1 Institutional Quality and Timing of Major Reforms
5.1 Financial Sector Reform and Growth
5.2 Growth Breaks and Financial Sector Reforms
5.3 Financial Depth and Domestic Financial Sector Liberalization
5.4 Growth Breaks and Real Sector Reforms
6.1 Growth Breaks and Sequencing of Reforms
7.1 Financial Sector Reforms, Output Volatility, and Capital Account Crises
7.2 Terms of Trade Shocks and the Financial Sector
Tables
4.1 Determinants of Reforms
5.1 Growth Regression Results: Financial Sector Reforms (1)
5.2 Growth Regression Results: Financial Sector Reforms (2)
5.3 Effects of Financial Sector Reforms on Financial Depth
5.4 Foreign Direct Investment Inflows and Financial Sector Reforms
5.5 The Differential Effects of Financial Reforms in Manufacturing Industries
5.6 Financial Sector Reforms and Foreign Currency Bond Ratings
5.7 Growth Regression Results: Real Sector Reforms (1)
5.8 Growth Regression Results: Real Sector Reforms (2)
5.9 Trade Reforms and Export- and Import-to-GDP Share
5.10 The Differential Effects of Trade Reforms in Manufacturing Industries
5.11 Real Sector Reforms and Foreign Currency Bond Ratings
5.12 Effects of Trade Reforms on Financial Depth
5.13 Foreign Direct Investment Inflows and Real Sector Reforms
6.1 Sequencing of Structural Reforms
6.2 Growth Effects of Alternative Reform Sequencing Strategies
6.3 Cumulative Growth Effects of Alternative Reform Sequences: A Numerical Example
7.1 Financial Sector Reforms, Output Volatility, and Capital Account Crises
7.2 Financial Sector Reforms and Resilience to Terms of Trade Shocks
A1 List of Economies in the Sample
A2 Description of Reform Indices
The following conventions are used in this publication:
In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.
An en dash (-) between years or months (for example, 2007-08 or January-June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2007/08) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2008).
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points”refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Preface
This paper examines the impact on economic performance of structural policies—that is, policies that increase the role of market forces and competition in the economy, while maintaining appropriate regulatory frameworks. It examines the effects of structural reforms on two aspects of economic performance—medium-run growth and macroeconomic stability and resilience—from a global standpoint, and in so doing improves the analytical basis of IMF policy advice by drawing on the lessons from broad cross-country experience. Underpinning the results was a major data collection effort, involving the compilation of indicators of structural reform for a large sample of 91 developing and developed countries over the past three decades. The resulting dataset is unique in its country and time coverage. Compared to most previous efforts, it is also much broader in terms of the sectoral coverage of reforms—including indicators of liberalization in domestic product markets, international trade, several indicators of liberalization of the domestic financial sector, and measures of external capital account liberalization. The dataset's breadth along the sectoral dimension is essential to address issues of reform sequencing, an area that has generated much thought from a theoretical standpoint, but where systematic cross-country evidence—as opposed to smaller-scale case studies—is sorely lacking.
The paper was prepared under the direction of Jonathan D. Ostry (Deputy Director, Research Department) by a staff team led by Alessandro Prati (Chief, Macroeconomic Studies Division in the Research Department) and Antonio Spilimbergo, and comprising Lone Christiansen, Prachi Mishra, Chris Papageorgiou, Rodney Ramcharan, Martin Schindler, Nikola Spatafora, Stephen Tokarick, and Thierry Tressel. The paper has benefited from comments from a number of IMF colleagues. Special thanks are due to Manzoor Gill and Freddy Cama for outstanding research support, and to Tracey Lookadoo whose help ensured the timely preparation of the manuscript. Esha Ray of the External Relations Department edited the manuscript and coordinated its publication. The opinions expressed in this paper are those of the authors and do not necessarily represent the views of national authorities, the IMF, or IMF Executive Directors.
This paper is dedicated to the memory of Alessandro Prati.