## sdnea2023005

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### Executive summary: context and objectives
- Multiple global shocks (COVID-19 pandemic and spillovers from Russia’s war in Ukraine) have left many emerging market and developing economies with limited fiscal space, declining growth, and strong inflation pressures.
- In 2022, economic growth in emerging market and developing economies on average declined again, widening the gap from the pre-pandemic trend.
- Objective: examine how market-oriented structural reforms can support debt sustainability by promoting growth and strengthening public finances through three channels:
  - (1) higher tax revenues,
  - (2) lower borrowing costs from confidence effects on sovereign debt risk premiums, and
  - (3) below-the-line proceeds from privatization.

### Key empirical findings
- Sample and period: analysis based on 62 emerging market and developing economies during 1973–2014.
- Medium-term impact of major market-oriented reforms (examples include reforms in Chile, Colombia, Hungary, Morocco, and Uruguay between 1991 and 2001):
  - Associated with a medium-term reduction in public-debt-to-GDP ratios of 3 percentage points.
  - Real GDP increases by about 1.2 percent over the medium term.
  - Overall fiscal balance improves by approximately 0.26 percentage point in the first two years, with the effect diminishing over time.
- Channels driving debt reduction:
  - Higher government revenues (government revenue increased by 0.4 percent of GDP in the first two years after a major reform).
  - Smaller sovereign bond spreads from confidence effects (sovereign spread reduction after four years: 188 basis points).
- Offsetting outcomes:
  - Public consumption increases by 0.15 percent of GDP over the medium term, nearly offsetting estimated revenue gains.
  - Effective interest rate declines by about 0.1 percentage point (not statistically significant).
- Robustness:
  - Results robust across sensitivity analyses, but granular detail on reform measures and complementary fiscal policies is needed for precise channel quantification.

### Reform areas analyzed
- Domestic Finance: government restrictions on domestic financial markets and regulatory development, including credit and interest rate controls, restrictions on bank entry, share of private institutions in credit market, adoption of international banking supervision standards, and private securities market development.
- External Finance: restrictions on exchange payments for capital inflows and outflows (FDI, equities, securities, bank credit, money market funds).
- Product Markets: government intervention in electricity and telecommunications (state-owned firms, access to services, independence of regulatory body, other market structures).
- Labor Market: degree of employment protection across five dimensions (valid-grounds dismissals, procedural inconvenience, firing costs, redress measures, additional requirements for collective dismissals).
- Trade: presence of tariff and nontariff restrictions on imports and exports and restrictions on receipts and payments for trade.

### Channels linking reforms to fiscal outcomes (empirical and model insights)
- Revenue channel:
  - Increases via expanded tax base (higher firm entry, formalization, deeper credit markets) and higher GDP.
  - Empirical medium-term contribution: government revenue increase of 0.4 percent of GDP (first two years).
  - Model long-term effect size: 2 to 6.5 percent of GDP in the long term, depending on reform.
- Sovereign risk (confidence) channel:
  - Reduces sovereign spreads; empirical reduction up to 188 basis points after four years.
  - Model contribution to debt reduction: 0.4–0.5 percent of GDP, depending on the reform.
- Denominator effect:
  - Higher output growth lowers debt-to-GDP; empirical medium-term real GDP increase about 1.2 percent.
  - Model-denominator contribution: 0.3–0.7 percent of GDP, depending on reform.
- Net direct revenue (privatization/product market reform):
  - Privatization proceeds can outweigh licensing-fee losses on average; accounts for 0.5 percent of GDP in debt reduction 10 years after product market reform.
- Fiscal impulse (spending response):
  - Governments may use new revenues for additional spending, muting debt-reduction benefits; effect size 0.8–1.5 percent of GDP (reduces debt-reduction benefit), depending on reform.
- Interaction with tax collection:
  - Tax collection efficiency amplifies fiscal gains; simulated improvements of 5 and 10 percentage points yield additional long-term (10-year) debt reductions of 1.7–4.4 percent of GDP depending on reform type.

### Model simulation (DIGNAR-19) results and counterfactuals
- Calibration and structure:
  - Representative emerging market and developing economy calibrated to historical averages; reforms enter via time-varying markups, wedges on marginal product of capital, tax collection inefficiency, and licensing/privatization revenue channels.
  - Key calibration exact values include:
    - Price Markup: 0.25
    - Wage Markup: 0.14
    - Government Domestic Debt: 0.16
    - Government External Commercial Debt: 0.15
    - Concessional Debt: 0.20
    - Private Investment to GDP: 0.21
    - Government Consumption to GDP: 0.18
    - Government Investment to GDP: 0.08
    - Privatization Receipts to GDP: 0.0028 (calibrated elsewhere as 0.28 percent of GDP)
    - Steady-State Tax Collection Efficiency: 0.31
    - Elasticity of licensing revenues to changes in markups: 0.04
    - Private Capital Depreciation Rate: 0.10
    - Investment Adjustment Cost: 25
- Main simulation findings:
  - Simulated impulse responses for real GDP and public debt closely match empirical responses over the first five years.
  - Assuming reforms persist beyond five years:
    - Additional debt reduction between five and ten years of 1.6 percent of GDP for product market reforms.
    - Additional debt reduction between five and ten years of 5.4 percent of GDP for financial market reforms.
  - Under plausible parameterization, long-term debt reductions are:
    - Product market reforms: 2.5 percent of GDP.
    - Financial market reforms: 7.7 percent of GDP.
- Counterfactual fiscal choices:
  - Containing post-reform public consumption or reallocating to public investment increases debt gains.
  - Replacing post-reform rise in public consumption with public investment yields:
    - Additional reduction in debt of 0.5–1.1 percent of GDP (depending on reform type) relative to historical scenario.
    - Additional average growth dividend of almost 0.2 percentage point a year over the first 10 years after the reform.
  - Using all additional fiscal revenues to reduce public debt yields approximately 0.8–1.5 percent of GDP greater debt reduction relative to historical scenario (but reduces the growth dividend).

### Heterogeneity, nonlinearities, and conditional factors
- Reform-type heterogeneity:
  - Domestic finance reforms, privatizations, and nontariff trade barrier reforms are associated with public debt reductions and statistically significant increases in real GDP over the medium term (significance at 10 percent).
  - Lower tariffs and more liberalized capital accounts associated with debt reductions (not statistically significant at 10 percent).
  - Employment protection legislation reforms show statistically insignificant increase in debt.
- Timing differences:
  - Debt reductions materialize by the first year for nontariff trade reform; take longer for domestic finance and privatization reforms.
- Key conditional factors with exact findings:
  - Higher VAT collection efficiency ("C-efficiency") associated with larger public debt reduction (statistical significance reported).
  - Higher statutory VAT rates statistically significantly associated with larger debt reductions.
  - Lower informality associated with larger debt reductions (statistical significance).
  - Reforms implemented during expansions ("good times") may yield greater growth dividends and require less compensatory fiscal spending.
  - Suggestive evidence: reforms associated with falling debt in countries with initially high debt but rising debt in countries with low initial debt (not statistically significant).
- Robustness and endogeneity:
  - Baseline includes lagged fiscal controls; alternative controls, IMF-program dummy, and lag structures yield broadly similar results.
  - Peer-country instrument (neighbor countries’ reforms) and synthetic control checks generally support baseline results.
  - Potential endogeneity: if reforms are motivated by difficult fiscal situations, estimates may underestimate impacts; if reforms coincide with fiscal consolidation, effects may be overestimated. Lagged fiscal controls suggest reverse causality likely biases toward underestimation.

### India 1998–99 case study (synthetic control and outcomes)
- Context: major reforms in trade, domestic finance, and product markets; increase in reform indicators exceeding two standard deviations; political instability, decelerating growth, rising inflation, deteriorating fiscal accounts.
- SCM findings summary:
  - Real GDP: positive and statistically significant effect in the first half of the postreform period.
  - Gross-debt-to-GDP: realized value close to counterfactual shortly after reforms but remained above counterfactual later; estimated impact statistically insignificant.
  - Overall-balance-to-GDP: actual worse than counterfactual; estimated worsening statistically significant.
  - Revenues: improved after reforms but counterfactual impact insignificant.
  - Expenditures: actual expenditures higher than control in the second half of posttreatment period.
  - Effective interest rate: results suggest domestic finance reforms raised domestic interest rates; estimated impact indistinguishable from random effects given small donor pool and low fit.
- Historical fiscal facts and figures:
  - 1990s overall balance of general government: average deficit of 7.9 percent of GDP.
  - Debt-to-GDP ratio rose from about 40 percent (mid-1980s) to close to 80 percent in 1992.
  - Real GDP growth: declined from 6.2 percent in 1995–97 to 6 percent in 1998–2000.
  - Divestment receipts (Billions of Rupees / Percent of GDP):
    - 1997/98: 9.1 / 0.1
    - 1998/99: 58.7 / 0.3
    - 1999/2000: 17.2 / 0.1
    - 2000/01: 21 / 0.1
    - 2001/02: 36 / 0.2
  - Public debt increased in the three years after the reforms from an average of 67.9 percent of GDP to 70.6 percent of GDP (increase not statistically significantly different from counterfactual).

### Quantitative summary (preserved exactly)
- Sample period and coverage: 62 emerging market and developing economies for 1973–2014.
- Medium-term debt improvement after a major reform: about 3 percentage points of GDP.
- Medium-term real GDP increase after a major reform: about 1.2 percent.
- Short-term overall fiscal balance improvement: approximately 0.26 percentage point (first two years).
- Primary-balance-equivalent annual adjustment over five years: 1.4 (or 1.0) percent of GDP a year if interest-growth differential is zero (or –2 percentage points).
- Historical primary balance baseline: –3.6 percent of GDP in 2022.
- Linear annual adjustment to save 10 percent of GDP over five years:
  - 1.8 percent of GDP annually if interest-rate-growth differential is zero (occurred once in 18 years—top 5.7 percentile rank).
  - 1.4 percent of GDP annually if interest-rate-growth differential is –2 percentage points (occurred once in 12 years—top 8.3 percentile rank).
- Government revenue increase after a major reform (first two years): 0.4 percent of GDP.
- Sovereign spread reduction after four years: 188 basis points.
- Overall effective interest rate change: about 0.1 percentage point decline (not statistically significant).
- Public consumption increase over medium term: 0.15 percent of GDP.
- Model-calibrated long-term debt reductions:
  - Product market reforms: 2.5 percent of GDP.
  - Financial market reforms: 7.7 percent of GDP.
- Model additional five-to-ten-year debt reductions:
  - Product market reforms: 1.6 percent of GDP.
  - Financial market reforms: 5.4 percent of GDP.
- Calibration exact values (selected):
  - Price Markup: 0.25
  - Wage Markup: 0.14
  - Privatization Receipts to GDP: 0.0028
  - Steady-State Tax Collection Efficiency: 0.31
  - Elasticity of Licensing Revenues to Changes in Markups: 0.04
  - Private Capital Depreciation Rate: 0.10
  - Investment Adjustment Cost: 25

### Policy considerations and recommendations
- Consider initial conditions:
  - Countries’ initial debt burdens and potential inequality effects determine how fiscal space from reforms should be allocated (debt reduction, growth-friendly spending, or distributional measures).
- Improve tax collection:
  - Enhancing efficiency in tax collection can strengthen fiscal gains from an enlarged tax base; simulated improvements of 5 and 10 percentage points materially increase long-term debt reduction.
- Target reforms with short-term output impacts:
  - Prioritize reforms more likely to produce output gains in the short term (e.g., banking reforms, privatization, lowering nontariff barriers) to reduce debt ratios more quickly.
- Complement reforms with fiscal strategies:
  - Contain post-reform increases in public consumption or reallocate additional fiscal space toward public investment to materially improve debt and growth outcomes.
- Plan for distributional and political costs:
  - Anticipate fiscal costs needed to address distributional consequences and secure political support; avoid overoptimism about revenue windfalls.
- Use of fiscal gains depends on debt level:
  - Lower-debt EMDEs have more latitude to use gains for public investment.
  - Higher-debt countries should prioritize debt reduction.

*Source: Executive Summary and chapters from STAFF DISCUSSION NOTES — Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies (sdnea2023005).*

### Executive Summary ......................................................................................................

### sdnea2023005 - Executive Summary

### Executive summary: context and objectives
- Multiple global shocks (COVID-19 pandemic and spillovers from Russia’s war in Ukraine) have left many emerging market and developing economies with limited fiscal space, declining growth, and strong inflation pressures.
- In 2022, economic growth in emerging market and developing economies on average declined again, widening the gap from the pre-pandemic trend.
- The note examines how market-oriented structural reforms can support debt sustainability by promoting growth and strengthening public finances through three channels: (1) higher tax revenues, (2) lower borrowing costs from confidence effects on sovereign debt risk premiums, and (3) below-the-line proceeds from privatization.

### Key empirical findings
- Sample and period: analysis based on 62 emerging market and developing economies during 1973–2014.
- Major market-oriented reforms (examples include reforms in Chile, Colombia, Hungary, Morocco, and Uruguay between 1991 and 2001) are associated with a medium-term reduction in public-debt-to-GDP ratios of 3 percentage points.
- The estimated debt reduction from major reform episodes translates into an approximate adjustment similar in magnitude to that corresponding with major historical fiscal consolidation episodes.
- Debt reductions materialized mainly through:
  - higher government revenues, and
  - smaller sovereign bond spreads from confidence effects on sovereign debt risk premiums.
- The analysis finds a relatively small and temporary improvement in the overall fiscal balance, partly due to an increase in public consumption that has also followed reforms.
- The empirical results are robust across a large country-time sample and sensitivity analyses, but granular detail on reform measures and complementary fiscal policies would be needed to more precisely quantify channels.

### Reform areas analyzed (as defined in Table 1)
- Domestic Finance: degree of government restrictions on domestic financial markets and development of a regulatory framework, including credit and interest rate controls for banks, restrictions on entry of new banks, share of private institutions in the credit market, adoption of international standard of banking supervision regulation, and development of a private securities market.
- External Finance: degree of government restrictions on exchange payments for capital inflows and outflows, including foreign direct investment, equities, securities, bank credit, and money market funds.
- Product Markets: degree of government intervention in the markets for electricity and telecommunications, regarding presence of state-owned firms as well as access to services, independence of regulatory body, and other market structures.
- Labor Market: degree of employment protection in five dimensions: valid-grounds dismissals by employers, procedural inconvenience in layoffs, monetary and nonmonetary firing costs, redress measures to contest layoffs, and additional requirements for collective dismissals.
- Trade: presence of tariff and nontariff restrictions on imports and exports of products as well as restrictions on receipts and payments for trade.

### Channels and model simulation insights
- Complementary structural model: a structural model calibrated to a representative emerging market and developing economy (DIGNAR-19 model simulation discussed in Annex II) projects public debt dynamics beyond the medium term and finds larger long-term debt reductions.
- Long-term gains: the simulation highlights cumulative debt reductions over the long term that are cumulatively almost three times the estimated medium-term reduction.
- Counterfactuals illustrate fiscal outcomes under alternative policy choices:
  - containing the increase in public consumption after reforms can enhance debt gains, and
  - replacing the post-reform rise in public consumption with public investment can generate additional benefits for debt and growth dynamics.

### Limitations and uncertainty
- Important elements remain uncertain for the working of reforms: lack of granular information on reform measures, complementary fiscal policy packages, conditioning factors (such as other accompanying structural reforms), and sector-specific privatization dynamics limit precise quantification of channels.
- A case study (Box 1: India 1998–99) illustrates challenges in translating reform gains into improved fiscal accounts.

### Policy considerations and recommendations
- Consider initial conditions: countries’ initial debt burdens and potential inequality effects are key determinants of how much of the fiscal space generated by reforms should be directed to debt reduction, growth-friendly spending, or distributional measures.
- Improve tax collection: enhancing efficiency in tax collection can strengthen the fiscal gains from an enlarged tax base following reforms.
- Target reforms with short-term output impacts: identifying reforms more likely to produce output gains in the short term can help reduce debt ratios more quickly.
- Complement reforms with fiscal strategies: containing post-reform increases in public consumption or reallocating resources toward public investment can materially improve debt outcomes.

*Source: Executive Summary, STAFF DISCUSSION NOTES — Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies (sdnea2023005).*

### 2. Distribution of five-year changes in primary balance in

### 2. Distribution of five-year changes in primary balance in EMDEs (1990–2019, annualized)

### Overview and context
- Dataset and period: Panel analysis covers 62 emerging market and developing economies for 1973–2014 using the IMF Structural Reform Database (Alesina and others 2020) and the World Economic Outlook database 2023.
- Methodology: Aggregate indicator of reforms constructed as the change in the simple average of indicators in domestic finance, external finance, trade (tariffs and current account restrictions), labor market, and privatization (telecommunications and electricity). Local projection method (Jordà 2005) used to estimate impulse response functions.
- Key interpretative caveats:
  - Magnitude and sign of fiscal effects depend on conjunctural factors (for example, phase of the business cycle) and structural characteristics (for example, governance and institutional capacity).
  - Time horizons differ across channels; short-term and medium-/long-term effects may diverge.
  - Potential endogeneity issues in the empirical estimates are acknowledged.

### Channels linking market reforms to fiscal outcomes (direct and indirect)
- Revenue-side channels (examples):
  - Increase: Expansion of tax base via higher firm entry, more developed credit markets, lower product market entry barriers, and formalization of workers and firms.
  - Increase: Aggregate economic growth raising income, profits, and sales.
  - Decrease: Loss in trade tariffs, licensing fees, or other revenue sources.
  - Decrease: Loss in revenue sources linked to state-owned enterprises; privatization can provide one-off below-the-line proceeds but forgo future revenue streams.
- Expenditure-side channels (examples):
  - Increase in expenditure:
    - Possible rise in domestic borrowing costs if removal of interest rate controls raises interest rates on public debt.
    - Possible increase in unemployment insurance claims if unemployment rises due to lower employment protection.
    - Compensatory measures (for example, support for those adversely affected by reforms).
    - Spending for other policy priorities using fiscal space generated by reforms.
  - Decrease in expenditure:
    - Decline in external borrowing costs with lowered sovereign risk premiums.
    - Decline in domestic borrowing costs as the domestic financial sector deepens.
    - Possible decline in unemployment insurance claims if structural unemployment falls as labor markets become more flexible.
- Indirect channels:
  - Higher real GDP growth both automatically lowers debt-to-GDP via the denominator and increases tax revenues.
  - Effects on prices are not unidirectional: reforms could lower prices (more competition, removal of tariffs) or raise costs (removal of subsidies after privatizations).
  - Exchange rate effects via foreign-currency-denominated debt: real exchange rate appreciation could lower debt-to-GDP, but empirical analysis reported no statistically significant change in real effective exchange rate associated with reforms.

### Empirical findings and magnitudes
- Average medium-term debt response:
  - Following a major reform (scaled as two standard deviations of the aggregate reforms indicator), the debt-to-GDP ratio improves over the medium term by about 3 percentage points (that is, after four to five years).
  - Real GDP increases by about 1.2 percent over the medium term.
  - The overall fiscal balance improves by approximately 0.26 percentage point in the first two years, with the effect diminishing over time.
- Primary-balance-equivalent interpretation:
  - The estimated debt reduction over five years is approximately equivalent to an adjustment to the primary balance of 1.4 (or 1.0) percent of GDP a year if the interest-growth differential is zero (or –2 percentage points).
- Historical frequency/context from distributional note:
  - Given the average primary balance of –3.6 percent of GDP in 2022, a linear path needed to save 10 percent of GDP over five years results in an annual adjustment of 1.8 percent of GDP if the interest-rate-growth differential is zero. This level of change in primary balance occurred once in 18 years—top 5.7 percentile rank.
  - If the interest-rate-growth differential were –2 percentage points, the necessary adjustment would be 1.4 percent of GDP annually, corresponding to the level that occurred once in 12 years—top 8.3 percentile rank.
  - Note: high risk premiums could result in an interest-rate-growth differential that might be almost zero.
- Fiscal component dynamics (empirical impulse responses):
  - Revenue: During the first two years after a major reform, government revenue increased by 0.4 percent of GDP. The impact diminishes over time and turns slightly negative but statistically insignificant by the fifth year (possible explanations include subsequent tax cuts or new exemptions).
  - Sovereign spreads: Reduction as large as 188 basis points after four years following a major reform, leading to lower government borrowing costs.
  - Effective interest rate: Declines by about 0.1 percentage point (effect not statistically significant).
  - Public consumption: Increase reaches 0.15 percent of GDP over the medium term, nearly offsetting the estimated increase in revenue.
  - Public investment: Shows no statistically significant historical association with reform implementation.

### Interpretation and policy-relevant implications
- Net effect ambiguity: Individual reforms can have ambiguous net effects on debt due to offsetting revenue and expenditure channels and timing differences (for example, privatization receipts versus foregone future revenue; labor-market deregulation and short-term unemployment insurance claims versus lower structural unemployment).
- Offsetting fiscal choices: Governments have historically used newly created fiscal space to increase public consumption or pursue other policy priorities (for example, education, health, public services, infrastructure) or to provide compensatory support to affected groups—reducing the fiscal gains available to lower public debt.
- Role of fiscal support and design:
  - Reforms paired with targeted fiscal support—especially to low-income households and vulnerable groups—have a stronger chance of going through and can deliver stronger fiscal gains in the medium term if fiscal space allows.
  - The eventual debt-reducing impact of reforms is larger when fiscal gains are allocated to debt reduction rather than to other spending priorities.
- Broader resilience and debt-carrying capacity:
  - Market reforms can increase potential output and resilience to shocks by lowering informality, fostering competition, and improving institutional capacity and governance, indirectly lowering debt levels.
  - Conversely, stronger and more resilient economies raise implicit government debt-carrying capacity, allowing higher sustainable debt levels.

### Quantitative summary of key statistics (preserved exactly as in source)
- Sample period and coverage: 62 emerging market and developing economies for 1973–2014.
- Medium-term debt improvement after a major reform: about 3 percentage points of GDP.
- Medium-term real GDP increase after a major reform: about 1.2 percent.
- Short-term overall fiscal balance improvement: approximately 0.26 percentage point (first two years).
- Primary-balance-equivalent annual adjustment over five years: 1.4 (or 1.0) percent of GDP a year if interest-growth differential is zero (or –2 percentage points).
- Historical primary balance baseline: –3.6 percent of GDP in 2022.
- Linear annual adjustment to save 10 percent of GDP over five years:
  - 1.8 percent of GDP annually if interest-rate-growth differential is zero (occurred once in 18 years—top 5.7 percentile rank).
  - 1.4 percent of GDP annually if interest-rate-growth differential is –2 percentage points (occurred once in 12 years—top 8.3 percentile rank).
- Government revenue increase after a major reform (first two years): 0.4 percent of GDP.
- Sovereign spread reduction after four years: 188 basis points.
- Overall effective interest rate change: about 0.1 percentage point decline (not statistically significant).
- Public consumption increase over medium term: 0.15 percent of GDP.

*Source: IMF staff discussion notes, Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies.*

### 1. Revenue (Percent of GDP)

### 1. Revenue (Percent of GDP)

### Empirical evidence: aggregate reform effects and confidence intervals
- Results are cumulative effects after a one standard deviation shock to the aggregate indicator of reforms.
- Lighter (darker) gray shading indicates 90 (68) percent confidence intervals.
- Reforms raise real GDP over the medium term but can be followed by offsetting increases in expenditure that worsen overall fiscal balances in some cases.

### Case study: India (1998–99)
- India experienced major reforms in trade, domestic finance, and product markets with an increase in reform indicators exceeding two standard deviations over the emerging market and developing economy sample.
- Context: political instability; decelerating growth; increasing external sector pressure; rising inflation; deteriorating fiscal accounts.
- Counterfactual synthetic control analysis shows:
  - Statistically significant impacts of reforms on output (success in increasing output).
  - Worsening of the overall fiscal balance driven by increased expenditure that offset lagged revenue improvements.
  - Observed increase in debt-to-GDP was not statistically different from a random effect.
- Implication: fiscal gains from reforms may not be sufficient to reverse fiscal sustainability concerns without favorable implementation context.

### Heterogeneity by reform type (empirical impulse responses)
- Individual reform types show varied implications for debt dynamics (see Figure 6 in source):
  - Domestic finance reforms, privatizations, and nontariff trade barrier reforms are associated with public debt reductions and statistically significant increases in real GDP over the medium term (statistical significance at 10 percent).
  - Lower tariffs and more liberalized capital accounts are associated with debt reductions over the medium term but not statistically significant at the 10 percent level, with medium-term increases in real GDP.
  - Employment protection legislation reforms are associated with a statistically insignificant increase in debt (indicator shows least variation).
- Timing:
  - Debt reductions materialize by the first year for nontariff trade reform.
  - Debt reductions take longer to materialize for domestic finance and privatization reforms.
- Caveat: individual reform indicators have less variation than the aggregate indicator, reducing statistical precision and robustness.

### Conditional factors: tax collection capacity, tax rates, informality, and business cycle
- Key nonlinear finding: higher efficiency in VAT collection ("C-efficiency") is associated with larger public debt reduction (with statistical significance) (Figure 7, panel 1).
- Higher statutory VAT rates are statistically significantly associated with larger debt reductions after structural reforms (Figure 7, panel 2).
- C-efficiency defined exactly as: VAT revenues / (VAT rate X   aggregate consumption).
- Lower informality is associated with larger debt reductions with statistical significance (Annex Figure I.A.4, panel 1).
- Business cycle timing matters:
  - Reforms implemented during economic expansion ("good times") may yield greater growth dividends and require less compensatory fiscal spending (Annex Figure I.A.4, panel 2).
- Initial debt level conditions effects:
  - Suggestive evidence: reforms associated with falling debt in countries with initially high debt but followed by rising debt in countries with low initial debt (Annex Figure I.A.4, panel 3).
- Governance and other characteristics:
  - Conditional results on governance levels do not show clear differential patterns.
  - Debt reductions seem larger for cases with higher initial indebtedness levels, but result is not statistically significant and depends on reform type.

### Robustness and endogeneity considerations
- Baseline specification includes controls such as lagged fiscal variables to capture consolidation efforts.
- Changing controls (e.g., fiscal expenditure to revenue), adding IMF-program dummy, or modifying lag structure yields broadly similar results.
- Individual reform effects remain broadly same when controlling for other simultaneous reforms.
- Potential endogeneity directions:
  - If reforms are motivated by difficult fiscal situations, estimates may underestimate reform impacts.
  - If reforms coincide with broad policy actions including fiscal consolidation, effects may be overestimated.
  - Lagged fiscal controls suggest overall direction of reverse causality is more likely underestimation.
- Additional robustness checks, including an instrumental variable using neighbor countries' reforms, generally support baseline results.

### Model simulations (DIGNAR-19): long-run dynamics and channels
- A calibrated DIGNAR-19 dynamic general equilibrium model is extended to incorporate reform channels:
  - (1) time-varying markup rates to reflect product market competition;
  - (2) time-varying wedges on marginal product of capital to capture resource allocation efficiency;
  - (3) tax collection inefficiency to scale fiscal gains consistent with empirical findings;
  - (4) licensing fees linked to markup rates and privatization revenues to capture direct revenue impacts.
- Simulated reform types: domestic finance reforms and privatization in product markets.
  - Domestic finance reforms reduce wedge on marginal product of capital and improve resource allocation.
  - Privatization modeled as up-front one-off revenue to government; increased competition reduces markup rates and lowers licensing-fee revenue.
- Calibration approach:
  - Time-varying parameters set so that over a five-year horizon, simulated real GDP response approximately matches empirical local-projection point estimate.
  - Tax collection efficiency set to produce medium-term debt reductions similar to empirical analysis.
  - Fiscal rule calibrated to reproduce increased public consumption found empirically.
- Main model findings:
  - Simulated impulse responses for real GDP and public debt closely match empirical responses over first five years.
  - Assuming reforms persist beyond five years:
    - Additional debt reduction between five and ten years of 1.6 percent of GDP for product market reforms.
    - Additional debt reduction between five and ten years of 5.4 percent of GDP for financial market reforms.
  - Overall, model shows larger long-term debt reductions than empirical medium-term estimates due to compounding effects.

### Channels and decomposition insight
- The change in public-debt-to-GDP ratio following reforms is decomposed into five factors (decomposition described in source; see Figure 9 for detailed decomposition).
- Quantification highlights:
  - Expansion of government revenue is a primary channel for debt reduction.
  - Offsetting channel: ensuing fiscal expansions (increased public consumption) can partially or fully offset revenue gains from reforms.

*Source: STAFF DISCUSSION NOTES Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies — INTERNATIONAL MONETARY FUND (content extracted from sdnea2023005 - 1. Revenue (Percent of GDP))*

### 1. Revenue channel: For both reforms, the largest effect comes from revenue growth, which occurs thanks to the

### sdnea2023005 - 1. Revenue channel: For both reforms, the largest effect comes from revenue growth, which occurs thanks to the

### Channels through which market reforms reduce public debt
- Revenue channel:
  - Largest effect comes from revenue growth due to increases in labor and capital productivity that magnify factor incomes.
  - With constant tax rates, the resulting increase in government revenues leads to an improvement in the primary balance.
  - Effect size: 2 to 6.5 percent of GDP in the long term, depending on the reform.
- Fiscal impulse channel:
  - Governments may use some new tax revenues for additional spending, which mutes long-term government debt reduction.
  - Effect size: 0.8–1.5 percent of GDP (reduces the debt-reduction benefit), depending on the reform.
- Denominator effect:
  - Higher output growth increases GDP by which the existing stock of debt is divided, directly lowering the debt-to-GDP ratio.
  - Effect size: 0.3–0.7 percent of GDP, depending on the reform.
  - Clarification: revenue channel captures flow effects (higher primary balances); denominator effect captures the stock effect from higher g in the r–g term.
- Sovereign risk channel:
  - Reforms reduce risk premiums associated with sovereign debt, reflecting confidence effects, especially for countries with access to international debt markets.
  - Effect size: 0.4–0.5 percent of GDP, depending on the reform.
- Net direct revenue (product market reform only):
  - For product market reforms involving privatizations, revenue gains from sale of government-owned assets outweigh losses in licensing fee receipts on average in emerging market and developing economies.
  - This channel accounts for 0.5 percent of GDP in debt reduction 10 years after the product market reform is implemented.

### Model simulations and magnitude of impacts
- Under a plausible parameterization, model predicts long-term debt reductions:
  - Product market reforms: 2.5 percent of GDP.
  - Financial market reforms: 7.7 percent of GDP.
- Counterfactual fiscal policy choices:
  - Replacing public consumption with public investment would lead to:
    - Additional reduction in debt of 0.5–1.1 percent of GDP (depending on reform type) relative to the historical scenario.
    - Additional average growth dividend of almost 0.2 percentage point a year over the first 10 years after the reform.
  - Utilizing all additional fiscal revenues to reduce public debt (likely when debt burden is high) would:
    - Reduce the growth dividend but allow for an even greater reduction in the debt-to-GDP ratio: approximately 0.8–1.5 percent of GDP relative to the historical scenario.
- Tax collection efficiency (simulated together with market reforms):
  - Efficiency improvements of 5 and 10 percentage points (moving to the 68th and 76th percentile of the IMF FAD distribution) are associated with an additional long-term (10-year) debt reduction of 1.7–4.4 percent of GDP, depending on reform type.

### Fiscal composition and multipliers
- Empirical findings embed an increase in government spending following reforms; some of this may be politically or socially necessary, while some may be discretionary.
- Evidence cited indicates capital expenditure has a higher fiscal multiplier than other fiscal spending (Ilzetzki, Mendoza, and Végh 2013; IMF 2014).
- Using reform-driven fiscal space for productive public investment magnifies debt reductions and growth dividends compared with using it for public consumption.

### Case study: India (1998–99) — illustrative historical account
- Context and macro facts:
  - 1990s overall balance of general government showed a large deficit of 7.9 percent of GDP on average.
  - Debt-to-GDP ratio increased from about 40 percent of GDP in the mid-1980s to close to 80 percent in 1992.
  - After 1991–92 IMF-supported program, debt ratio improved until the mid-1990s, but started increasing in 1996.
  - Real GDP growth: declined from 6.2 percent in 1995–97 to 6 percent in 1998–2000.
- Direct fiscal implications of reforms:
  - Trade reforms had direct fiscal revenue losses estimated at 0.2 percent of GDP for 1997/98 (not sustained as import duty changes were reversed in 1998/99).
  - Divestment strategy generated a stream of domestic financing from FY 1998 to FY 2002 of 0.1–0.3 percent of GDP a year.
  - Box Table 1.1. Divestment Receipts (Billions of Rupees / Percent of GDP):
    - 1997/98: 9.1 / 0.1
    - 1998/99: 58.7 / 0.3
    - 1999/2000: 17.2 / 0.1
    - 2000/01: 21 / 0.1
    - 2001/02: 36 / 0.2
- Impact:
  - Reforms estimated to have increased output but worsened overall fiscal balance.
  - Public debt increased in the three years after the reforms from an average of 67.9 percent of GDP to an average of 70.6 percent of GDP (increase not statistically significantly different from the estimated counterfactual).
  - Revenue initially declined and improved only a couple years after reforms; expenditure rose from 2000 onward relative to counterfactual.

### Policy considerations distilled from the analysis
- Countries’ initial debt levels matter for how to use fiscal space from market reforms:
  - Lower-debt emerging market and developing economies have greater latitude to use fiscal gains for public investment if cyclical and structural conditions allow.
  - Higher-debt countries should prioritize debt reductions.
- Plan for fiscal costs needed to address distributional consequences and secure political support; avoid overoptimism in revenue windfalls.
- Strengthening tax collection efficiency is key to amplifying fiscal gains and is an important complement to market reforms.
- Prioritize reforms with sizable short-term output and fiscal gains (for example, banking reforms, privatization, lowering nontariff barriers) to maximize short-term debt reduction.

*INTERNATIONAL MONETARY FUND — STAFF DISCUSSION NOTES Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies*

### 1. Real GDP (2017 PPP dollars), logarithm

### 1. Real GDP (2017 PPP dollars), logarithm

### Empirical strategy: local projection method (LPM)
- Baseline LPM specification (Jordà 2005) estimated by ordinary least squares with spatial correlation consistent standard errors (Driscoll and Kraay 1998).
- Dependent variable: change in fiscal or macro variable from t−1 to t+k, for k = 0,1, ...,5 (horizon up to five years).
- Fixed effects: country (αi) and time (τt).
- Reform shock measure: first difference of structural policy indicator normalized to represent one standard deviation of the respective reform category.
- Control variables (Xit): two lags of structural reform shocks, real GDP growth, level of the overall balance (percent of GDP), government expenditures (percent of GDP), inflation, and the relevant dependent fiscal variable.
- Additional controls in some specs: two lags of change in cyclically adjusted primary balance, dummy for IMF-supported programs, financial crisis dummy, expectations of future growth/deficit/debt, and neighbor-country reform instrument.
- Confidence bands: 90 (68) percent confidence intervals plotted for impulse response functions (IRFs) using standard errors of estimated βk.

### Data, sample, and variables
- Estimation sample: unbalanced panel of 62 emerging market and developing economies between 1970 and 2014 (common sample across fiscal variables after outlier cleaning).
- Alternative sovereign spread measures: 10-year foreign-currency-denominated government bond spread vis-à-vis the United States (Bloomberg) and EMBIG (J.P. Morgan) for broader coverage; results similar.
- Debt data cleaning algorithm:
  - Compute first difference of debt-to-GDP ratio.
  - Mark years with changes in excess of one standard deviation of the sample’s distribution of annual changes for each country.
  - Mark years with two consecutive odd movements (spike then dip or dip then spike).
  - Apply unanimous rule to identify and remove outliers (details available upon request).
- Sources: IMF Structural Reform Database (Alesina and others 2020); Estefania-Flores and others (2022) for nontariff indicators; IMF World Economic Outlook database 2023; IMF Global Debt Database (Mbaye, Badia, and Chae 2018); Bloomberg Finance L.P.

### Reform indicators and scaling
- Six reform areas considered plus an aggregate indicator (simple arithmetic average of individual reform indicators):
  - Domestic finance
  - External finance
  - International trade (tariffs)
  - Trade (nontariff barriers)
  - Labor market (employment protection legislation)
  - Privatization in product markets (telecommunications and electricity sectors)
- Reform shock for IRFs scaled to one standard deviation (note: IMF (2019) used two standard deviations; using same scaling and controls yields similar dynamics and order of magnitude).

### Key empirical findings (impulse responses)
- Real GDP:
  - Aggregate indicator: Up* (ST-MT)
  - Domestic finance: Up* (ST-MT)
  - External finance: Up* (ST-MT)
  - Privatization: Up* (ST-MT)
  - Trade (tariff): Up* (MT)
  - Trade (nontariff): Up (no star)
  - Note: For real GDP, IMF (2019) comparable impacts between 0.5 and 1 percent at the peak, four years after the shock when using comparable controls and shock scaling.
- Public debt:
  - Aggregated indicator: Down* (ST-MT)
  - Domestic finance: Down* (ST-MT)
  - External finance: Down (ST-MT)
  - Trade (nontariff): Down* (ST-MT)
  - Other individual reform areas: None (no clear effect) for some categories (see Annex Table I.A.1).
- Overall balance:
  - Aggregated indicator: Up* (ST)
  - Domestic finance: Up* (ST)
  - External finance: None
  - Privatization: Down* (ST-MT)
  - Trade (nontariff): Up* (ST)
- Primary balance: Mixed responses across reform areas (e.g., Down* (MT) for aggregated; Up* (ST) for domestic finance; Down* (ST-MT) for privatization).
- Revenues and expenditures:
  - Revenue: Aggregated Up* (ST); Domestic finance Up* (ST); Privatization Down* (ST-MT); Trade (nontariff) Up* (ST)
  - Expenditure: Aggregated Up (ST-MT); Public consumption and public investment responses vary by reform area.
- Effective interest rate on government debt:
  - Aggregated: Down (ST)
  - Domestic finance: Down* (MT)
  - External finance: Down* (ST)
  - Privatization: Down* (ST)
  - Trade indicators: none or mixed
- Statistical significance convention: star (*) denotes significance at the 10 percent level or greater; ST denotes short term; MT denotes medium term. All dependent fiscal variables are percent of GDP except real GDP (natural logarithm).

### Descriptive statistics (selected)
- Debt/GDP: Mean 52.44; Median 43.7; 25th Percentile 27.6; 75th Percentile 67.4
- Overall Balance/GDP: Mean -0.1; Median -0.2; 25th Percentile -2.0; 75th Percentile 1.8
- Expenditure/GDP: Mean 29.6; Median 27.7; 25th Percentile 18.5; 75th Percentile 39.6
- Revenue/GDP: Mean 27.1; Median 24.7; 25th Percentile 16.2; 75th Percentile 37.1
- Effective Interest Rate: Mean 5.75; Median 5.0; 25th Percentile 3.4; 75th Percentile 7.2
- Public Consumption/GDP: Mean 16.4; Median 15.7; 25th Percentile 11.5; 75th Percentile 19.5
- Public Investment/GDP: Mean 6.2; Median 4.7; 25th Percentile 3.2; 75th Percentile 7.5
- Real GDP Growth Rate: Mean 3.4; Median 3.8; 25th Percentile 1.6; 75th Percentile 5.9

### Heterogeneity and nonlinear effects
- Nonlinear LPM (STAR-style) allows fiscal response to vary with initial country characteristics (e.g., tax efficiency, VAT rates, informality, initial debt).
- Specification introduces regime-weighting function F(zit) (logistic form with γ = 3 chosen; results robust to γ between 1 and 4).
- Coefficients βLk and βHk capture fiscal impacts when tax efficiency/level is low (F ≈ 1) and high (1−F ≈ 1), respectively.
- Informality: level based on Colombo and others (2022) / Elgin and Oztunali (2012) updated by Elgin and others (2021); “low” informality defined as value below cross-country median.
- Heterogeneity findings illustrated in Annex Figure I.A.4: responses of debt to trade (nontariff) reforms vary by informality, business cycle phase, and initial debt level.

### Robustness checks
- Results robust to:
  - Including dummy for IMF-supported programs (MONA, period 1993–2014).
  - Controlling for financial crises.
  - Controlling for prior-period expectations of future growth, deficit, or debt.
  - Using distance-weighted average of other countries’ reforms as an instrument (peer-country instrument), which yields larger point estimates in general.
- Alternative sovereign spread measure (EMBIG) produces similar qualitative results.

### Summary implications (analysis)
- Aggregate market reforms tend to raise real GDP (statistically significant in many reform areas) and, on average, reduce public debt over the short-to-medium term.
- The fiscal channel of reforms is heterogeneous:
  - Some reforms raise both revenues and expenditures, with net effects on overall and primary balances varying by reform type.
  - Reforms in domestic and external finance and trade (nontariff) are most consistently associated with debt reductions and improvements in interest rates.
- Nonlinearities matter: the fiscal payoff from reforms depends on country-specific features such as tax efficiency, VAT rates, informality, and initial debt levels.
- Outlier cleaning of debt series is important for avoiding spurious regression impacts due to data revisions, debt restructuring, or hyperinflation events.

*Source: IMF staff calculations and Annex I.A of "Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies" (Staff Discussion Notes).*

### 4. Controlling for Debt Forecast

### 4. Controlling for Debt Forecast

### I.B. Synthetic Control Method — design and main empirical findings
- Methodology:
  - Synthetic control method (SCM) builds a counterfactual from comparator (donor pool) countries using pretreatment data to estimate the effect of major market reforms on outcome variables.
  - Outcomes examined: real GDP, gross-debt-to-GDP ratio, overall fiscal balance, government expenditure-to-GDP, government revenues-to-GDP, and the effective interest rate.
  - Sample window: seven years pretreatment for calibration and seven years posttreatment for evaluation.
  - Pretreatment matching uses a model with covariates that includes the pretreatment average value of the overall reforms index, the pretreatment average value of real GDP growth, and remaining most recent T-2 pretreatment observations.
  - Two fit measures reported: fit index (closer to 0 better) and relative fit index (closer to 1 better).
- Donor pool restrictions:
  - Countries with a major reform within five years before or after the treatment year are excluded.
  - Isolated outliers replaced with before-and-after average; countries with many missing values dropped.
  - East Asia countries directly affected by the 1997 East Asian financial crisis excluded.
  - Donor pool restricted to countries in the same income group as the treated country (advanced, emerging market, or low-income developing).
- India case (SCM results, summary):
  - Real GDP: SCM estimates a positive effect of reforms on output; p-values indicate a significant effect in the first half of the postreform period.
  - Gross-debt-to-GDP ratio: realized value close to counterfactual shortly after reforms but remained above the counterfactual later; estimated impact is statistically insignificant, driven by idiosyncratic factors not captured by SCM.
  - Overall-balance-to-GDP ratio: actual worse than counterfactual; estimated p-values indicate a statistically significant worsening. Lower pretreatment fit reduces credibility of the counterfactual for this variable.
  - Revenues: real revenues found to have improved after reforms, but the counterfactual impact is insignificant.
  - Expenditures: close to zero and insignificant effect shortly after reforms; actual expenditures higher than control in the second half of posttreatment period.
  - Effective interest rate: results consistent with domestic finance reforms raising domestic interest rates; estimated p-values suggest the reform impact cannot be distinguished from random effects given small donor pool and low fit.
- SCM diagnostics and synthetic compositions (selected reported diagnostics):
  - Real GDP (2017 PPP dollars, log): RMSPE: 0.0109; Fit index: 0.0014; Relative fit index: 0.9333. Synthetic India composition: 59% Brazil, 38% China, 3% Georgia.
  - Gross-Debt-to-GDP Ratio (Percent of GDP): RMSPE: 8.1920; Fit index: 0.1086; Relative fit index: 0.2667. Synthetic India composition: 31% Jordan, 26% China, 19% Ecuador, 9% Brazil, 8% Algeria, 7% South Africa.
  - Overall-Balance-to-GDP Ratio (Percent of GDP): RMSPE: 1.2000; Fit index: 0.1377; Relative fit index: 0.6154. Synthetic India composition: 55% Türkiye, 43% South Africa, 2% China.
  - Effective Interest Rate (Percent): RMSPE: 1.7747; Fit index: 0.2392; Relative fit index: 0.3333. Synthetic India composition: 60% Jordan, 26% Chile, 8% Costa Rica, 6% Türkiye.
  - Revenues-to-GDP Ratio (Percent): RMSPE: 0.9625; Fit index: 0.0543; Relative fit index: 0.8462. Synthetic India composition: 55% Costa Rica, 42% Tunisia, 2% Bolivia, 1% Jordan.
  - Expenditures-to-GDP Ratio (Percent): RMSPE: 0.9934; Fit index: 0.0245; Relative fit index: 0.8333. Synthetic India composition: 33% Algeria, 24% China, 17% Uruguay, 17% Jordan, 8% Costa Rica, 1% Paraguay.
- Interpretation:
  - For India, SCM suggests output gains from reforms but mixed and generally insignificant or idiosyncratic effects on debt dynamics and interest rates; overall fiscal balance worsened relative to the synthetic control, with revenue and expenditure channels varying across postreform horizons.
  - Small donor pools and low pretreatment fit for some variables limit the ability to credibly attribute some outcomes to reforms rather than idiosyncratic factors.

### Annex II. DIGNAR-19 Model Simulation — structure (how reforms enter the model)
- Model overview:
  - DIGNAR-19: Debt, Investment, Growth, Natural Resources, and COVID-19 model extended to account for market reforms.
  - Real, dynamic, open-economy general equilibrium model that jointly determines output, private investment, consumption, government debt, etc.
  - Government reacts to changes in the debt/GDP ratio with a lag; tax rate hikes (cuts) follow increases (decreases) in the debt ratio.
- Four channels through which reforms are modeled:
  1. Product market reforms increase competition: modeled as a permanent decrease in the average markup via a permanent shock to the intratemporal elasticity of substitution between goods. Aggregate price relates to average marginal cost via:
     - P_t = (1 + λ_t) MC_t, with λ_t = 1/ζ_t − 1.
  2. Financial market reforms increase efficiency of resource allocation: captured by an implicit cost of renting capital. Firm profit:
     - Π_t = Y_t − w_t L_t − (1 + κ_t^K) r_t^K K_t^K,
       where κ_t^K ∈ [0,1] is the cost of financial repression as a share of capital expenditure, and r_t^K is the rental rate of private capital.
     - Rental rate equation: r_t^K = (1/(1 + κ_t^K)) ∂f(·)/∂K_t.
     - A decrease in the wedge (1 + κ_t^K)^−1 < 1 raises demand for capital and the rental rate, boosting output, employment, and private investment.
  3. Public debt trajectory depends on tax collection efficiency, sovereign risk premium reaction, and government revenue from market distortions. Law of motion for real total government debt:
     - D_{t+1} = S_t D_t + G_t − (1 − θ)(T_t + Λ_t),
       where θ ∈ [0,1) is the share of tax revenue lost owing to tax collection inefficiency, and Λ_t represents government revenues deriving from product market distortion (licensing fees).
     - Higher θ (more leakage) implies higher debt for a given tax revenue.
  4. Net direct revenue effects of product market reforms: reforms can reduce licensing fee receipts (fiscal cost) but privatizations can generate one-off revenue gains. Net direct revenue Λ_t is modeled as:
     - Λ_t = −LF + PSS_t for t = 0,1,...,H,
       with LF = γ Σ_{s=0}^H Δλ_s and PSS_t > 0 only for t = 1 (zero otherwise).
     - γ ∈ [0,1] is the elasticity of government licensing revenues to the decrease in the average markup; γ = 0 implies only privatization receipts matter; γ ∈ (0,1] implies short-term fiscal costs from reforms.

### II.B Calibration — key calibration choices and initial values
- Approach:
  - Calibrated at an annual frequency to a representative emerging market and developing economy.
  - Initial values obtained by computing historical averages for individual countries in the sample and then taking means/medians of those distributions.
  - Deep structural parameters mostly taken from Melina, Yang, and Zanna (2016).
- Key calibration choices and reported initial values (selected exact figures):
  - Price Markup: 0.25
  - Wage Markup: 0.14
  - Government Domestic Debt: 0.16
  - Government External Commercial Debt: 0.15
  - Concessional Debt: 0.20
  - Private Investment to GDP: 0.21
  - Government Consumption to GDP: 0.18
  - Government Investment to GDP: 0.08
  - Natural Resources to GDP: 0.12
  - Private Foreign Debt to GDP: 0.15
  - Exports to GDP: 0.43; Imports to GDP: 0.43
  - Domestic Real Interest Rate: 0.04
  - Real Risk-Free Rate: 0.04
  - Real Interest Rate on External Commercial Debt: 0.06
  - Real Interest Rate on Concessional Debt: 0
  - Foreign Real Interest Rate on Savings: 0.027
  - Privatization Receipts to GDP: 0.0028
  - Consumption Inequality (Gini) Index: 35.76
  - Labor Income Tax Rate: 0.05; Consumption Tax Rate: 0.1; Tax Rate on the Return on Capital: 0.2
- Parameters (selected exact values):
  - Private Capital Depreciation Rate: 0.10
  - Investment Adjustment Cost: 25
  - Inverse of Frisch Labor Elasticity: 10
  - Inverse of Intertemporal Elasticity of Substitution: 2.94
  - Intratemporal Substitution Elasticity of Labor: 1
  - Elasticity of Substitution between Traded and Nontraded Goods: 0.44
  - Elasticity of Licensing Revenues to Changes in Markups: 0.04
  - Steady-State Tax Collection Efficiency: 0.31
  - Output Elasticity to Public Capital: 0.2
  - Depreciation Rate of Public Capital: 0.07
  - Steady-State Efficiency of Public Investment: 0.50
  - Severity of Absorptive Capacity Constraint: 25
  - Adjustment Share by Consumption Tax: 1; Adjustment Share by External Commercial Debt: 1
  - Elasticity of Portfolio Adjustment Costs: 0.5
  - Measure of Optimizers in the Economy: 0.2
  - User Fees of Public Infrastructure: 0.50
  - Home Bias of Government Purchases: 0.6
- Additional calibration notes:
  - Initial level of price markup set at 25 percent following Adrian, Gaspar, and Vitek (2022) and Diez, Leigh, and Tambunlertchai (2018).
  - Labor market distortion calibrated to produce a 14 percent markup over a competitive wage (Costa 2016).
  - Financial market distortion set to match the average private-investment-to-GDP ratio in the sample.
  - Elasticity of licensing revenues to markups γ set to 0.04 (derived by combining estimates in Ebell and Haefke (2009) and Djankov and others (2002)).
  - Privatization receipts size set at 0.28 percent of GDP (reported as 0.28 percent of GDP in calibration text; privatization receipts to GDP in table: 0.0028).
  - Steady-state tax collection efficiency set at θ = 0.31, implying an average tax collection inefficiency of 69 percent across three types of taxes included in the model.

### II.C Simulation — counterfactual scenarios and fiscal trade-offs
- Counterfactual exercises:
  - Historical scenario: part of additional fiscal space from reforms finances additional public consumption (as estimated in Section II).
  - Government investment scenario: instead of increasing unproductive public consumption, additional fiscal space finances productive public investment. The increase in public investment (percent of GDP) matches the increase in public consumption under the historical scenario.
  - Additional debt reduction scenario: improvement in the overall fiscal balance is used to reduce the debt burden by paying off part of public debt.
- Tax collection efficiency experiments:
  - Higher tax collection efficiency converts a larger share of the expanded potential tax base into actual receipts, enabling greater debt-to-GDP reduction.
  - Scenarios modeled: gradual improvements in tax collection efficiency of 5 and 10 percentage points that take three years to materialize.
- Linking empirical estimates to model shocks:
  - Market reform shocks calibrated to match cumulative growth dividends estimated by local projection methods in Section II (e.g., decrease in average markup delivering the target increase in real GDP after five years).
  - Domestic finance reform shocks calibrated similarly using empirical local projection results.
  - Net direct revenue channel leverages average revenue from privatizations and γ = 0.04 for elasticity of licensing revenues to changes in markups.
  - Privatization receipts calibrated to 0.28 percent of GDP (average of Private Participation in Infrastructure Database subsector "telecom" and "electricity" divestiture fees).
- Key modeling implication highlighted:
  - The debt-reduction benefits of market reforms depend critically on tax collection efficiency and on how additional fiscal space is used (consumption, productive investment, or immediate debt reduction).

*Source: IMF staff estimates as presented in the chapter "4. Controlling for Debt Forecast" (SDN/EA2023/005).*

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- International Monetary Fund (IMF). 2023b.  “On the Path to Policy Normalization." Fiscal Monitor, Chapter 1. Washington, DC, April.  
- Klaassen, Felipe D., Roel Beetsma, and João Jalles. 2023. "How Do Governments Respond to Changes in Public Debt Interest Rates?" CEPR Discussion Paper 18257, Centre for Economic Policy Research, London.  
- Raveh, Ohad, and Yacov Tsur. 2020. “Reelection, Growth and Public Debt.” European Journal of Political Economy 63: 101889.  

### Macroeconomic models, DSGE, and analytical tools
- Adrian, Tobias, Vitor Gaspar, and Francis Vitek. 2022. “A Medium-Scale DSGE Model for the Integrated Policy Framework.” IMF Working Paper WP/22/15, International Monetary Fund, Washington, DC.  
- Costa, Silvio. 2016. “Structural Trends and Cycles in a DSGE Model for Brazil.” Banco Central do Brazil Working Paper 434, Brasilia.  
- Gurara, Daniel, Giovanni Melina, and Luis-Felipe Zanna. 2019. “Some Policy Lessons from Country Applications of the DIG and DIGNAR Models.” IMF Working Paper WP/19/62, International Monetary Fund, Washington, DC.  
- Melina, Giovanni, Shu-Chun S. Yang, and Luis-Felipe Zanna. 2016. “Debt Sustainability, Public Investment and Natural Resources in Developing Countries: The DIGNAR Model.” Economic Modelling 52 (Part B), 630–49.  
- Granger, Clive W. J., and Timo Terasvirta. 1993. Modelling Non-Linear Economic Relationships. Oxford University Press, New York.  
- Jordà, Òscar. 2005. “Estimation and Inference of Impulse Responses by Local Projections.” American Economic Review 95 (1): 161–82.  
- Driscoll, John C., and Aart C. Kraay. 1998. “Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data.” Review of Economics and Statistics 80 (4): 549–60.  

### Informality, market power, governance, and datasets
- Diez, Federico, Daniel Leigh, and Suchanan Tambunlertchai. 2018. “Global Market Power and Its Macroeconomic Implications.” IMF Working Paper WP/18/137, International Monetary Fund, Washington, DC.  
- Elgin, Ceyhun, Ayhan Kose, Franziska Ohnsorge, and Shu Yu. 2021. “Understanding Informality.” CEPR Discussion Paper 16497, Centre for Economic Policy, London.  
- Elgin, Ceyhun, and Oguz Oztunali. 2012. “Shadow Economies around the World: Model Based Estimates.” Working Paper 2012/05, Bogazici University, Department of Economics, Istanbul, Türkiye.  
- Gonzalez-Garcia, J. 2022. “Improving Sovereign Financing Conditions through Data Transparency.” IMF Working Paper WP/22/230, International Monetary Fund, Washington, DC.  
- World Bank. 2022. Private Participation in Infrastructure Database. Accessed October 2022.  
- Organisation for Economic Co-operation and Development (OECD). 2023. OECD Product Market Regulation Database. Accessed January 2023.  
- Kaufmann, Daniel, and Aart Kraay. 2022. “The 2022 Worldwide Governance Indicators Update.” Accessed August 2022.  

### Country and policy reports, historical IMF documents, and other relevant references
- International Monetary Fund (IMF). “India Staff Report for the Article IV consultation.” Various issues: 1996, 1997, 1998, 2000, 2002, Washington, DC.  
- International Monetary Fund (IMF). “India: Selected Issues.” Various issues: 1997, 1998, 2000, 2001, 2002, Washington, DC.  
- International Monetary Fund (IMF). “India: Recent Economic Developments.” Various issues: 1997, 1998, 2000, 2001, Washington, DC.  
- International Monetary Fund (IMF). 2008. “Structural Reforms and Economic Performance in Advanced and Developing Countries.” Policy Paper, Washington, DC.  
- International Monetary Fund (IMF). 2015a. “Structural Reforms and Macroeconomic Performance: Initial Considerations for the Fund.” Policy Paper, Washington, DC.  
- International Monetary Fund (IMF). 2015b. “Structural Reforms and Macroeconomic Performance—Country Cases.” Policy Paper, Washington, DC.  
- International Monetary Fund (IMF). 2016. “Time for a Supply-Side Boost? Macroeconomic Effects of Labor and Product Market Reforms in Advanced Economies.” World Economic Outlook, Chapter 3. Washington, DC, April.  
- International Monetary Fund (IMF). 2018. “Structural Issues in EMDCs and Initial Considerations for Structural Reform Prioritization for LIDCs.” Policy Paper, Washington, DC.  
- International Monetary Fund (IMF). 2019. “Reigniting Growth in Emerging Market and Low-Income Economies: What Role for Structural Reforms?” World Economic Outlook, Chapter 3. Washington, DC, October.  
- Roper references to country- and crisis-related macro studies: Romer, Christina D., and David H. Romer. 2017. “New Evidence on the Aftermath of Financial Crises in Advanced Economies.” American Economic Review 107 (10): 3072–118.  
- Duttagupta, Rupa, and Futoshi Narita. 2017. “Emerging and Developing Economies: Entering a Rough Patch or Protracted Low Gear?” Journal of Policy Modeling 39: 680–98.  
- Chuku, Chuku, Joyce Saito, Prateek Samal, Dalia Hakura, Marcos Chamon, Martin Cerisola, Guillaume Chabert, and Jeromin Zettelmeyer. 2023. “Are We Heading for Another Debt Crisis in Low-Income Countries? Debt Vulnerabilities: Today vs the pre-HIPC Era.” IMF Working Paper WP/23/079, International Monetary Fund, Washington, DC.  

*Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies — Staff Discussion Note No. SDN/2023/005*

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_Source: https://www.imf.org/-/media/files/publications/sdn/2023/english/sdnea2023005.pdf_