## sdnea2023007 - Executive Summary

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### Key messages and purpose
- Emerging market and developing economies face weak growth, high risk of scarring from the pandemic, and acute macroeconomic policy trade-offs amid high inflation, high debt, and balance of payments pressures.
- The Staff Discussion Note proposes a framework for prioritization, packaging, and sequencing of macrostructural and green reforms to accelerate growth, alleviate policy trade-offs, and support the green transition.
- Uses a new comprehensive data set on structural and green policies covering a sample of 51 low-income countries and 78 emerging markets during 2000–20.

### Main empirical findings (reform effects and channels)
- First-generation reforms (governance, business regulation, external sector) can front-load output gains by promoting domestic and foreign investment and enhancing labor productivity.
  - A package of major first-generation structural reforms—episodes with indicator improvement of at least two standard deviations—is estimated to have lifted the level of output by 4 percent in two years and 8 percent in four years in EMDEs with large initial structural gaps.
- Estimated dynamic output effects after four years (preserved exactly):
  - Major governance reforms: increase output by up to 2.7 percent (baseline) and up to 4 percent in countries with large initial structural gaps.
  - Major external sector reforms: increase output by up to 2.4 percent (baseline) and up to 5 percent in countries with large initial structural gaps.
  - Major business regulation reforms: raise output by up to 1.3 percent after four years; effects larger in countries with large initial structural gaps.
  - Major domestic credit market reforms: raise output by up to 2 percent after four years.
- Transmission channels:
  - Output channel: increased competition, investment, productivity, more efficient allocation of labor and capital, alleviation of credit constraints, near-term aggregate demand boost from higher productivity expectations.
  - Other-macro-effects channel: effects on prices, sovereign spreads, and net FDI inflows that ease policy trade-offs.
  - Green channel: macrostructural plus green reforms lower emissions intensity, facilitate low-carbon investment, and improve access to low-carbon technology.

### Reform complementarities, prioritization, packaging, and sequencing
- Bundling complementary reforms (governance, external sector, business regulation) generates more front-loaded output gains and broadens political support.
- Good governance is foundational and enhances effectiveness of business deregulation and external sector reforms.
- Empirical package effects:
  - In below-median first-generation-reform EMDEs, the governance–external sector–business regulation package could raise output by about 4 percent in the first two years and 7.6 percent after four years.
  - Additional output gains from credit market sequencing: up to 3 percent.
  - Employment gain from labor market sequencing: up to 1 percent (first two years).

### Effects on prices, external financing, and fiscal/external resilience
- External sector reforms exert a downward impact on consumer prices of about 3.7 percent in the first two years following the reform, rising to 2 percent in four years.
- In EMDEs facing acute policy trade-offs:
  - Governance reforms appear to increase net FDI inflows by about 1 percentage point of GDP on average in the near term.
  - Governance reforms are found to reduce sovereign spreads by more than 180 basis points on impact (cumulative effect declines over time).
- Package implementation can amplify impacts on prices, FDI, and spreads.
- Samples and coverage (preserved exactly):
  - Policy trade-off index sample: 58 large emerging market economies.
  - Full EMDE sample for some analyses: 125 EMDEs.
  - Sovereign spread analysis: 73 EMDEs.
  - Energy tax results sample: 72 EMDEs.
  - Green policy cross-country sample: 36 advanced economies and 127 emerging market and developing economies used for regional comparisons.

### Reforms and the green transition
- Macrostructural reforms combined with green reforms (for example, environmental taxation and regulations) are critical to support the green transition.
  - First-generation reforms can reduce the energy and emissions intensity of output in EMDEs but tend to raise overall emissions initially by stimulating stronger growth; they therefore need to be complemented by more stringent and credible green reforms to reduce absolute emissions over time.
  - Green policies operating through price signals (energy taxes) can reduce emissions and emissions intensity and increase the share of renewables.
  - For energy taxes, a “major historical change” equals two standard deviations, equivalent to 0.7 percentage point of GDP in the energy tax revenues-to-GDP ratio.
  - Main result: energy taxes are more effective at decarbonizing when preceded by macrostructural reforms—top-quartile reformers exhibit substantial and rapid emissions and emissions intensity reduction following major energy tax changes.
- Overall recommended strategy: combine macrostructural reforms and credible, stringent green policies (including price-based instruments) to put economies on a growth path with lower emissions intensity and declining absolute emissions over time.

### Political economy, public buy-in, and implementation considerations
- Front-loading reform gains increases public buy-in for structural reforms and the green transition.
  - Risks to reforms: adverse distributional effects, perceived long growth lags, resistance by vested interests, limited administrative capacity.
  - Well-designed reform packages that deliver early growth gains help overcome political economy impediments.
  - Complementary measures required to mitigate adverse distributional effects (targeted support, reskilling, stronger social safety nets).
  - Public communication and administrative capacity building are important to foster understanding and support.
- Four-pronged approach to strengthen implementation:
  - Prioritize reforms that yield up-front benefits to ease trade-offs and create momentum.
  - Address distributional impacts to increase public buy-in; where fiscal space is limited, external assistance is critical.
  - Strengthen communication: clarity on timing and pace, early stakeholder engagement, credible communication of benefits.
  - Build capacity: capacity building is paramount in low-income and fragile countries.

### Stylized facts, context, and key statistics
- Real GDP growth projections five years ahead revised down from about 4.9 percent in 2019 to 3.9 percent in 2023.
- Average labor productivity in EMDEs about one-third that at the frontier (the 75th percentile of labor productivity in advanced economies).
- Policy space constrained by elevated public-debt-to-GDP ratios, high inflation, and balance of payments pressures; advanced-economy monetary tightening intensified exchange market pressures amid capital outflows.
- Geoeconomic fragmentation and protectionist measures would hinder benefits of external sector reforms and green sector development.
- Policy Trade-off (PT) Index factor loadings (preserved exactly):
  - Inflation deviation from 10-year average (percent): 34.2
  - Growth deviation from 10-year average (percent): 18.9
  - Public debt ratio: 16.7
  - Public debt ratio deviation from 10-year average: 14.0
  - Public external debt ratio deviation from 10-year average: 12.2
  - Exchange market pressure*: 4.3

### Prioritization framework and recommended granular priorities
- Framework: reforms are numerically scored by estimated impacts on short- and medium-term growth, consumer prices, and external resilience; policymaker-types weigh objectives differently (acute trade-offs, less acute, committed to green transition).
- For countries facing acute policy trade-offs, highest estimated-score reforms include:
  - Governance reforms improving political stability and reducing corruption and bureaucratic costs.
  - Greater exchange rate flexibility.
  - Greater interest rate flexibility (removal of interest rate controls).
  - Measures that ease the movement of people.
- For countries focused on medium- and long-term growth: governance and business regulation improvements (administrative process streamlining, reducing bureaucratic costs).
- For countries focusing on the green transition: energy taxes and climate policies considered in conjunction with macrostructural reforms; complementary measures include electricity market liberalization, removal of fossil fuel subsidies, and expanded access to low-carbon alternatives.

### Gender lens to amplify reform impact (Box 1 highlights)
- Global female labor force participation stood at 47 percent in 2021, compared with 72 percent for men.
- Example improvement: Saudi Arabia’s female labor participation rate rose more than 38 percent (7.7 percentage points) between 2017 and 2022.
- Illustrative scenario for 128 EMDEs: narrowing gender participation gaps by 5.9 percentage points (average reduction in top 5 percent of performers during 2014–19) could raise GDP by 7.7 percent on average across countries.
- Companies with more gender-balanced leadership reduced CO2 emissions 5 percent more than others (Altunbas and others 2021).
- Policy implications:
  - Design pro-growth structural reform packages with gender in mind to amplify macroeconomic gains and facilitate the green transition.
  - Address legal, financial, and care-service constraints to women’s labor market participation and promote women’s representation in decision-making to support more stringent climate policies.

### Empirical approach, robustness, and caveats
- Method: local projection method (Jordà 2005); sample: 51 low-income countries and 78 emerging markets (2000–20) with complementary analyses covering up to 125 EMDEs depending on variable.
- Major historical reforms defined as episodes with indicator improvement at least two standard deviations of the distribution of annual changes.
- Regressions control for country and year fixed effects, lags of dependent variable, past growth, past reforms, expected growth, and concomitant policy decisions; two lags included to control for autocorrelation.
- Robustness checks: controls for simultaneous reforms, fiscal consolidation episodes (improvement in cyclically adjusted primary fiscal balance by at least 1.5 percentage points of GDP), sensitivity across country groups (LICs vs EMs; fossil fuel exporters vs non-exporters).
- Caveats and limitations:
  - Some endogeneity concerns may persist despite controls.
  - Green-policy effects exhibit wide confidence bands and cross-country heterogeneity; conditional analysis for climate policy stringency was limited by correlation with macrostructural indicators.
  - Labor deregulation can have distributional trade-offs and may depress the labor share of income if not designed with distributional protections.
  - First-generation reforms can initially increase absolute emissions via higher output and thus must be paired with credible green policies to reduce overall emissions.

*International Monetary Fund — Staff Discussion Note sdnea2023007*

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

### sdnea2023007 - Executive Summary

### Key messages and purpose
- Emerging market and developing economies face weak growth, high risk of scarring from the pandemic, and acute macroeconomic policy trade-offs amid high inflation, high debt, and balance of payments pressures.
- This Staff Discussion Note proposes a framework for prioritization, packaging, and sequencing of macrostructural and green reforms to accelerate growth, alleviate policy trade-offs, and support the green transition.
- The note uses a new comprehensive data set on structural and green policies covering a sample of 51 low-income countries and 78 emerging markets during 2000–20.

### Main empirical findings
- First-generation reforms (addressing the most critically binding constraints such as governance, business regulation, and external sector reforms) can front-load output gains by promoting domestic and foreign investment and enhancing labor productivity.
  - A package of major first-generation structural reforms—defined as episodes for which an improvement in the relevant indicator is at least two standard deviations of the distribution—is estimated to have lifted the level of output by 4 percent in two years and 8 percent in four years in emerging market and developing economies with large initial structural gaps.
- First-generation reforms can ease macroeconomic pressures by reducing price pressures, lowering elevated sovereign risk premia, and strengthening foreign direct investment inflows through increased competition and improved investor confidence.
- Reform payoffs are larger when reforms are well sequenced (removing the most binding constraints first) and packaged (implementing governance, external sector, and business regulation reforms jointly).

### Reforms and the green transition
- Macrostructural reforms combined with green reforms (for example, environmental taxation and regulations) are critical to support the green transition.
  - First-generation reforms can reduce the energy and emissions intensity of output in emerging market and developing economies.
  - First-generation reforms make green reforms that operate through price signals (such as energy taxes) more effective at reducing emissions.
  - Because first-generation reforms tend to raise the overall level of emissions by stimulating stronger growth, they need to be complemented by more stringent and credible green reforms to reduce absolute emissions over time.
- The overall strategy recommended is to put economies on a growth path with lower emissions intensity and declining absolute emissions over time through a combination of macrostructural reforms and credible green policies.

### Political economy and public buy-in
- Front-loading reform gains can increase public buy-in for both structural reforms and the green transition.
  - Reforms risk being derailed by concerns over adverse distributional effects, perceived long growth lags, resistance by vested interests, and limited administrative capacity.
  - Well-designed reform packages that deliver early growth gains can help overcome political economy impediments.
  - Complementary policies are required to mitigate adverse distributional effects, including targeted support to ensure reforms’ benefits are shared broadly.
  - Public communication and improvements to administrative capacity are important to foster understanding and support for reforms.

### Stylized facts and context
- Real GDP growth projections five years ahead have been revised down from about 4.9 percent in 2019 to 3.9 percent in 2023.
- Emerging market and developing economies exhibit persistent and large labor productivity gaps, with average labor productivity about one-third that at the frontier (the 75th percentile of labor productivity in advanced economies).
- Policy space is constrained by elevated public-debt-to-GDP ratios, high inflation, and balance of payments pressures; monetary policy tightening in advanced economies has intensified exchange market pressures amid capital outflows.
- Rising geoeconomic fragmentation and protectionist measures would hinder the benefits of external sector reforms and the development of green sectors in these economies.

### Policy implications and recommendations (prioritization, packaging, sequencing)
- Prioritize first-generation macrostructural reforms that alleviate the most binding constraints to economic activity (governance, business regulation, external sector).
- Package complementary reforms (governance, external sector, business regulation) to maximize synergies and front-load output gains.
- Sequence reforms to remove the most binding constraints first to amplify gains from subsequent reforms.
- Combine macrostructural reforms with credible, stringent green policies (including price-based instruments) to ensure reductions in absolute emissions while supporting growth.
- Use targeted distributional measures and communication strategies to build political space and public support for reform packages.

### Complementary reforms noted (not the primary focus)
- Fiscal structural reforms (revenue mobilization, public finance management, spending efficiency) can enhance fiscal space and reduce fiscal risks over time.
- Improved monetary policy and macroprudential frameworks can strengthen monetary policy transmission and macroeconomic stability.
- Reforms facilitating factor accumulation (education, public infrastructure, reducing barriers to women’s participation) can yield substantial medium- to long-term growth benefits.

*International Monetary Fund — Executive Summary of Staff Discussion Note sdnea2023007*

### 1. Medium-T erm Growth

### 1. Medium-T erm Growth

### Structural gaps and constraints to growth
- Growth in emerging market and developing economies (EMDEs) is held back by significant structural impediments.
- Largest structural reform gaps (relative to the global frontier) are in:
  - governance,
  - business regulation,
  - external sector reforms (first-generation structural reforms),
  - labor market and credit market reforms (second-generation structural reforms).
- Governance shows a larger median gap relative to the frontier compared with other reform areas.
- The ease of setting up and operating a business (business regulation) has substantial room for improvement, particularly in low-income countries.
- Gaps in external sector reforms and in credit market regulation are somewhat smaller.

### Green transition challenges and opportunities
- EMDEs face the additional challenge of facilitating a smooth green transition while having limited policy space and competing development needs.
- Emissions intensity of output remains high across EMDEs despite some improvement over the past two decades, implying:
  - the presence of relatively cheap opportunities to reduce emissions and move to cleaner growth.
- Investing in cleaner and more efficient energy sources is increasingly urgent amid accelerating climate change.

*Sources: IMF, World Economic Outlook; and IMF staff calculations.*

### Transmission channels of macrostructural reforms
- Macrostructural reforms operate through several channels:
  - Output channel: promote competition, investment, productivity, and more efficient resource allocations; can also boost short-term aggregate demand.
  - Other-macro-effects channel: directly affect macroeconomic variables such as prices, sovereign spreads, and FDI inflows, easing policy trade-offs.
  - Green channel: combination of macrostructural and green reforms can lower emissions intensity, facilitate low-carbon private investment, improve access to low-carbon technology, and enhance resilience to global decarbonization spillovers.
- Sub-channels under the output channel include:
  - increased competition,
  - more efficient allocation of labor and capital from informal/less productive to formal/more productive firms,
  - alleviation of credit constraints benefiting small and medium-sized companies,
  - greater employment from reduced distortions to labor market participation and hiring,
  - near-term aggregate demand boost from credible reforms raising productivity expectations.

### Effects on prices and external financing
- Some reforms can lower aggregate price level by reducing prices of imported inputs (trade liberalization), promoting competition, improving monetary policy transmission (when markups are lowered), or increasing labor force participation to limit wage pressures.
- Reforms may initially boost inflation due to short-run demand effects, but evidence suggests net effects are neutral in advanced economies; in EMDEs, reforms may contribute to sharper reductions in inflation compared with advanced economies because:
  - cheaper foreign goods can increase supply,
  - exchange rate or capital flow reforms can improve resource allocation and productivity,
  - demographic pressures and unemployment can mute wage pressures.
- Reforms can ease growth, debt, and external sustainability trade-offs by strengthening investor confidence, lowering sovereign risk premiums, and boosting FDI inflows.

### Empirical approach and sample
- Sample: 51 low-income countries and 78 emerging market economies over the period 2000–20.
- Method: local projection method by Jordà (2005) to estimate dynamic effects of reforms on outcome variables.
- Major historical reforms defined as episodes where improvement in the relevant indicator is at least two standard deviations of the distribution of annual changes in that indicator across the sample.
- Regressions control for country and year fixed effects, lags of the dependent variable, past economic growth, past reforms, expected growth, and potential concomitant policy decisions; two lags included to control for autocorrelation.
- Some endogeneity concerns may persist despite controls.

### Estimated dynamic output effects of major reforms (reform multipliers)
- Baseline results point to sizable positive output effects from major reforms.
- Examples of estimated impacts after four years:
  - Major governance reforms: increase output by up to 2.7 percent (baseline) and up to 4 percent in countries with large initial structural gaps.
  - Major external sector reforms: increase output by up to 2.4 percent (baseline) and up to 5 percent in countries with large initial structural gaps.
  - Major business regulation reforms: raise output by up to 1.3 percent after four years; effects larger in countries with large initial structural gaps.
  - Major domestic credit market reforms: raise output by up to 2 percent after four years.
  - Labor market reforms (employment): baseline effect appears statistically insignificant, possibly muted by high informality; labor deregulation can have distributional trade-offs and may depress the labor share of income if not designed with distributional protections.

### Reform complementarities, prioritization, packaging, and sequencing
- Bundling complementary structural reforms can:
  - generate more front-loaded output gains,
  - broaden political support,
  - mitigate the costs of individual reforms while amplifying gains from reform interdependency.
- Good governance is foundational and can enhance the effectiveness of business deregulation and external sector reforms.
- Trade and external finance reforms increase access to global input markets and competitiveness.
- Empirical finding on reform packages:
  - A package comprising governance, external sector, and business regulation reforms (first-generation reform package) can substantially increase output, especially in countries with large initial structural gaps.
  - In below-median first-generation-reform EMDEs, this package could raise output by about 4 percent in the first two years following implementation, rising to 7.6 percent after four years.
  - For above-median first-generation-reform economies, gains from further first-generation reforms are smaller, reflecting their stronger initial position and fewer complementarities.

### Policy considerations and caveats
- Labor market flexibility can promote efficiency but must be balanced against worker protection and distributional outcomes; labor market deregulation without a strong distributional lens can have significant negative effects on workers.
- Some reforms can initially increase emissions due to higher economic activity, potentially offsetting reductions from lower emissions intensity in early years.
- Structural reforms can reduce implementation risks for climate projects and attract private climate finance, and trade reforms can facilitate green technology transfers.
- Benefits from reforms may accrue unevenly across firms and workers; increased competition can depress wages at the lower end of the distribution and adverse effects may fall on less-productive small firms.

*Sources: IMF, World Economic Outlook; and IMF staff calculations.*

### 1. EMDEs with Below-Median

### 1. EMDEs with Below-Median 1st Generation Reform

### Reform sequencing and complementarities
- First- and second-order reform sequencing matters: an effective reform strategy involves structuring the reform agenda into first- and second-order priorities—first wave removes the most binding constraints to maximize gains from the second wave.
- Empirical findings:
  - Credit market deregulation can be more effective when preceded by major first-generation reforms, with additional output gains of up to 3 percent.
  - Labor market reforms raise employment impact when preceded by a major first-generation reform campaign by up to 1 percent on average in the first two years; the effect becomes insignificant after two years.
- Mechanisms and supportive evidence:
  - Governance (strong legal institutions) enhances gains from financial sector reforms.
  - Product market reforms can boost the effectiveness of labor market reforms.
  - Strong property rights serve as a precondition for benefits from financial and other reforms.
- Implementation note:
  - When implementing credit and capital market reforms, robust regulatory and supervisory frameworks are essential to safeguard financial stability.

### Interaction with limited macroeconomic policy space
- Context:
  - Policymakers often face multiple objectives (stable growth and prices, sustainable public finances, financial stability, external resilience) that intensify trade-offs when policy space is limited.
- Composite index and sample:
  - A time-varying synthetic index aggregates low growth, high inflation, high public and external debt, and exchange market pressure for a sample of 58 emerging markets.
- Reform impacts under acute policy trade-offs:
  - In economies with acute policy trade-offs, major governance, external sector, and credit market reforms can strengthen growth in the near term.
  - Reforming business regulation can help lift growth over the medium term.
  - Possible explanations: premium on government credibility in bad times; improved access to credit supports private sector adjustment; external sector reforms help tap foreign demand.
- Additional analysis:
  - Annex 4 examines interactions by type of shock (supply-led vs demand-led), fiscal stance, public-debt-to-GDP ratio, and degree of external market pressure.

### Broader payoffs beyond output
- Price and external resilience effects:
  - External sector reforms exert a downward impact on consumer prices of about 3.7 percent in the first two years following the reform, rising to 2 percent in four years.
  - In EMDEs facing acute policy trade-offs, governance reforms appear to increase net FDI inflows by about 1 percentage point of GDP on average in the near term.
  - Governance reforms are found to reduce sovereign spreads by more than 180 basis points on impact; the cumulative effect gradually decreases and becomes statistically insignificant.
- Package effects:
  - Impacts on prices, FDI, and spreads can be larger when reforms are implemented in packages in countries with large structural gaps.
- Notes on figures and samples:
  - Analysis of sovereign spreads covers the period 2012–20 and 73 EMDEs.
  - Panels using the policy trade-off index are restricted to 58 large emerging market economies.
  - T = 0 denotes the year of the shock; responses refer to a major historical reform (two standard deviations) with 90 percent confidence bands.

### Macrostructural reforms and the green transition
- Challenge:
  - EMDEs must support decarbonization without sacrificing income convergence; climate policies constrained by limited policy and political space and near-term growth concerns.
- Role of macrostructural reforms:
  - First-generation reform bundles can accelerate growth and create fiscal and political space to pursue the green transition credibly.
  - Governance reforms can foster stakeholder trust and reduce social resistance to the green transition.
  - Structural reforms can stimulate reallocation toward less-carbon-intensive sectors and improve the efficiency and carbon intensity of state-owned enterprises.
  - Reforms strengthen policy certainty and credibility, improving private sector response to green policy signals and attracting green FDI.
- Empirical green outcomes:
  - Macrostructural reforms help reduce emissions and energy intensity of output, while being associated with higher initial emissions through output growth.
  - Effects are stronger in countries with higher initial structural impediments, suggesting reforms alleviate constraints on green sectors more than brown sectors.
  - First-generation reform package can gradually facilitate diversification away from emissions-intensive sectors toward services, reducing emissions intensity of activity (local projection results available upon request; interpret with caution given short-term focus).
- Climate policy stringency and energy taxation:
  - Broad green policies and energy taxes appear to reduce GHG emissions intensity of GDP by decreasing energy consumption and facilitating transition to cleaner energy sources.
  - Green policies help attract investment in renewables and increase the share of renewables in the energy mix.
  - Output effects at the current level of green reform are modest and statistically insignificant; energy taxes show moderately positive (mostly insignificant) medium-term output effects, possibly via recycling revenues to productive public investments or targeted transfers.
  - Confidence bands around estimated effects are large, indicating cross-country variation and uncertainty.

### Key quantitative points and samples
- Additional output gains from credit market sequencing: up to 3 percent.
- Employment gain from labor market sequencing: up to 1 percent (first two years).
- External sector reforms’ impact on consumer prices: about 3.7 percent decline in first two years, rising to 2 percent in four years.
- Net FDI inflows increase from governance reforms: about 1 percentage point of GDP (near term) in economies with acute policy trade-offs.
- Sovereign spread reduction from governance reforms: more than 180 basis points on impact.
- Policy trade-off index sample size: 58 large emerging market economies.
- Full EMDE sample for some analyses: 125 EMDEs; sovereign spread analysis: 73 EMDEs.
- Green policy cross-country sample: 36 advanced economies and 127 emerging market and developing economies used for regional comparisons.

*International Monetary Fund*

### 1. Climate Policy Stringency

### 1. Climate Policy Stringency

### Effects of Climate Policy Stringency and Energy Taxes
- The analysis shows dynamic responses to major historical reforms (two standard deviations); t = 0 is the year of the shock. The shaded areas denote 90 percent confidence bands.
- Results for Energy Tax are based on a sample of 72 EMDEs, while results related to overall climate policy stringency are based on a sample of 125 EMDEs.
- The energy tax shock is measured as the change in the residual term from an equation that regresses the energy tax revenue-to-GDP ratio on current and past growth (1 and 2 lags).
- Key outcome variables examined in the figures and text:
  - GHG Emissions
  - GHG Emissions Intensity of GDP
  - Share of Renewables
  - Output
- For energy taxes, a “major historical change” is two standard deviations, equivalent to 0.7 percentage point of GDP in the energy tax revenues-to-GDP ratio (dashed line indicates statistical insignificance in some horizons).
- Findings:
  - Energy taxes and other green policies operating through price signals can reduce emissions and emissions intensity and increase the share of renewables.
  - Point estimates for output effects are insignificant for both top- and bottom-quartile reformers; however, they point to potentially larger positive effects in the medium term for top-quartile reformers.
- Measurement and data notes:
  - The energy tax shock construction and regression details are described in Annex 1, Section 1.2.
  - Sources: Climate Watch; Fraser Institute; IMF Climate Change Dashboard; IMF, World Economic Outlook; Our World in Data; World Bank; and IMF staff calculations.

### Interaction with Macrostructural Reforms
- Main result: Green policies such as energy taxes are more effective at decarbonizing the economy when preceded by macrostructural reforms.
- Method:
  - EMDEs are sorted into two groups based on initial levels of first-generation reform indicators: bottom-quartile reformers (largest structural gaps) and top-quartile reformers (lowest structural gaps).
  - The first-generation reform index is the simple average of governance, external sector, and business regulation reforms.
- Findings:
  - Major changes in energy taxes yield substantial and rapid emissions and emissions intensity reduction effects in countries characterized by strong structural reform progress (top-quartile reformers).
  - Prior removal of structural impediments substantially enhances the effectiveness of green reforms by attracting investment in renewable energy sectors.
  - Complementarities: macrostructural reforms that improve the business environment, credibility, and implementation of policies amplify the economy’s positive response to green policy price signals.
- Statistical and sample notes:
  - The full sample for the conditional analysis is 72 EMDEs.
  - A similar exercise interacting the climate policy stringency indicator with macrostructural reform variables could not yield robust results due to strong correlation between the indicator and traditional macrostructural reforms and because amplification effects are likely stronger for price-signal policies such as energy taxation.

### Granular Reform Prioritization Framework (Illustrative)
- Purpose: Design country-specific structural reform strategy accounting for unique circumstances, policy priorities, and constraints; prioritize reforms when facing multiple objectives (stable growth and prices, external resilience).
- Framework mechanics:
  - Reforms are numerically scored according to impacts on several outcome variables using refined econometric estimates of dynamic impacts of disaggregated individual reforms on output, prices, and FDI inflows.
  - Policymaker types and weighting of objectives:
    - Policymaker facing acute policy trade-offs: weighs equally impacts on short- and medium-term growth, consumer prices (proxied by deviation of core inflation from its target), and external resilience (proxied by short-term FDI inflows).
    - Policymaker facing less acute policy trade-offs: prioritizes medium- and long-term growth impacts only.
    - Policymaker committed to the green transition: considers estimated impact of reforms on GHG emissions in addition to medium- and long-term growth.
  - The prioritization exercise results are shown in Table 1 (not reproduced here); the analysis was conducted using data from 58 emerging markets. Only reforms with impacts significant at the 10 percent level are included; impacts are ranked by quintiles.
  - Each aggregate reform is an average of its subcomponents; simultaneous implementation of subcomponents can reflect complementarities and typically yields larger macroeconomic impact than single granular reforms.

### Prioritization Results and Policy Intuition
- For countries facing acute policy trade-offs (growth, price stability, external resilience), the highest estimated-score reforms are:
  - Governance reforms that improve political stability and reduce corruption and bureaucratic costs.
  - Reforms leading to greater exchange rate flexibility.
  - Reforms leading to greater interest rate flexibility (removal of interest rate controls).
  - Measures that ease the movement of people.
- Rationale and expected effects:
  - Political stability establishes a safe, predictable environment for investment and productive business operation.
  - Exchange rate flexibility can correct imbalances (for example, an overvalued exchange rate), increase competitiveness, and allow monetary policy to focus on inflation after initial volatility; strong monetary policy credibility is critical.
  - Removal of interest rate controls enhances monetary policy transmission and reallocates resources toward more productive sectors after transition volatility.
  - Removal of trade barriers can curtail price pressures by allowing access to cheaper imports and enhance output via access to foreign demand.
  - Improving credit market regulations can alleviate financing constraints, enable productive reallocation in bad times, and strengthen monetary policy effectiveness.
  - Control of corruption and reduction of bureaucracy costs improve ease of doing business, increase medium-term growth, and boost FDI inflows.

- For countries with less acute trade-offs (focus on medium- and long-term growth):
  - Priority reforms: governance and business regulation improvements—particularly refining administrative requirements, streamlining administrative processes, and reducing bureaucratic costs.
  - Governance improvements (political stability, reduced corruption, strengthened rule of law) and, to a lesser extent, credit market regulation changes support medium- and long-term growth through increased confidence and lower cost of credit.

- For countries focusing on the green transition:
  - Energy tax and climate policies should be considered in conjunction with macrostructural reforms.
  - Climate policies can include GHG emissions reduction strategies, energy policies to decarbonize supply and/or curb demand, and measures introducing low-emissions practices and technologies to nonenergy sectors (for example, agriculture and land use).
  - Structural reforms—particularly in governance and business regulation—can amplify the impact of climate policies that rely on price signals such as energy taxation.
  - Other granular measures (not studied here) that can increase the effectiveness of energy taxation or carbon pricing include:
    - Electricity market liberalization
    - Removal of fossil fuel subsidies
    - Access to low-carbon alternatives, such as public transportation
  - Credit market regulations support the green transition by creating favorable financing conditions for green investment, including removal of barriers to credit access to facilitate green start-ups and investment in energy-efficient technologies.

- Measurement and significance note on prioritization:
  - Table 1 uses data from 58 emerging markets; only reforms significant at the 10 percent level are shown.

### Macroeconomic Impacts of First-Generation Structural Reform Packages
- Finding on front-loaded first-generation reforms:
  - In EMDEs with large initial structural gaps, implementation of a package of major first-generation reforms is estimated to have increased the level of output by about 4 percent in two years and by 8 percent in four years.
  - First-generation reforms can have positive output effects even amid acute policy trade-offs (for example, adverse supply shocks, high debt levels, exchange market pressure).
  - First-generation structural reforms can facilitate the green transition by reducing the emissions intensity of output, though they tend to increase overall emissions initially through higher output growth.
  - Only a package combining structural reforms and green reforms delivers a combination of higher output and lower overall emissions.

### Implementation, Sequencing, and Political Economy Considerations
- Front-loading gains is critical to generate social and political buy-in and pave the way for deeper transformations such as the green transition.
- Distributional effects:
  - Reform benefits may accrue unevenly across households, firms, and demographic groups; complementary policies (for example, transfers, reskilling, stronger social safety nets) may be needed to address adverse distributional impacts.
- Four-pronged approach to strengthen reform implementation:
  - Prioritize reforms that can yield up-front benefits to ease policy trade-offs and create momentum and policy space for deeper reforms, including the green transition.
  - Address distributional impacts of reforms to increase public buy-in; where fiscal space is available, provide targeted support to those adversely affected, including reskilling. For countries with limited fiscal space and administrative capacity, external assistance is critical.
  - Strengthen communication: clarity on timing and pace of reforms, early engagement with stakeholders, credible communication of benefits, and leveraging independent institutions and other stakeholders can help garner support and enhance credibility.
  - Build capacity: capacity building is paramount in low-income and fragile countries to reduce implementation risks and improve reform design and effectiveness.

### Complementary Policies and Global Context
- Other reforms that support growth and ease policy trade-offs include revenue mobilization, public finance management, and spending efficiency reforms to enhance fiscal space and reduce fiscal risks.
- Enhancing central bank credibility and independence and addressing financial stability risks improve monetary policy transmission and macroeconomic stability.
- Structural reform packages with gender considerations (for example, removing barriers to women’s participation) can deliver meaningful growth benefits over the medium to long term.
- Maintaining an open global trade system is important to support successful structural reforms and green reforms in EMDEs; avoiding a rise in protectionism is key to ensuring access to foreign inputs and technologies needed for green sector development and the green transition.

*Source: sdnea2023007 - 1. Climate Policy Stringency (IMF staff calculations and referenced data sources).*

### Box 1. A Gender Lens to Amplify the Impact of Structural Reforms

### Box 1. A Gender Lens to Amplify the Impact of Structural Reforms

### Rationale for a gender lens
- An intentional gender angle in the design of structural reforms amplifies their impact on sustainable and green growth.
- Policy reform packages tailored to address barriers to women’s economic empowerment can yield substantial macroeconomic gains, help close large and persistent job gaps faced by women in the developing world, and reduce gender inequality, including in the disproportionate impact of climate change on women.
- Gender gaps remain sizable in most emerging market and developing economies amid a rapid demographic transition, at a time when growth remains weak and employment rates are not large enough to absorb the fast-growing young population—posing a risk that the demographic transition disproportionately hurts women.

### Key facts and statistics
- Global female labor force participation stood at 47 percent in 2021, compared with 72 percent for men.
- Some countries’ gender indicators have improved greatly in short periods; example: Saudi Arabia’s female labor participation rate rose more than 38 percent (7.7 percentage points) between 2017 and 2022.
- An illustrative scenario for 128 emerging market and developing economies shows that measures that narrow gender participation gaps in each country by 5.9 percentage points—the average reduction in the top 5 percent of performers during 2014–19—could raise GDP by 7.7 percent on average across countries.
- Companies with more gender-balanced leadership reduced CO2 emissions 5 percent more than others (Altunbas and others 2021).
- Women remain overrepresented in the informal economy, carry a disproportionate care burden, and are underrepresented in leadership roles and as entrepreneurs.
- Gender gaps have closed in primary education in most countries but persist at secondary and higher levels, particularly in low-income countries.
- Financial access gaps remain, driven in part by women’s more limited access to collateral, unequal legal rights, and a substantial digital divide.

### Links between gender equality, macro outcomes, and the green transition
- Narrower gender gaps are linked to substantial growth and productivity gains, less income inequality, more resilient financial sectors, more diversified export bases, and better development (IMF 2022b).
- Increased participation of women in the labor market tends to improve matching efficiency between occupation and talent, boosting aggregate productivity (Hsieh and others 2019).
- Economically empowering women is correlated with greater climate action and more stringent climate policies; increasing women’s representation in national parliaments is associated with more stringent climate change policies and lower emissions (Mavisakalyan and Tarverdi 2019).
- Gender equality increases the variety of goods produced in a country, making it more resilient to shocks (Kazandjian and others 2016).
- Extra tax revenue collected due to women’s increased participation creates more fiscal room, including for green financing.

### How structural reforms can narrow gender gaps
- Gender gaps result from barriers, frictions, and social norms; policies can address these barriers.
- Evidence cited:
  - First-generation macrostructural reforms boost girls’ and boys’ secondary education enrollment in low-income countries and boost girls’ enrollment in tertiary education, particularly in emerging market economies.
  - Labor market reforms can boost female labor force participation, particularly after strong first-generation reforms.
  - Pro-competition product market policies can raise the share of female employment and reduce inefficiencies due to discrimination; increased competition can foster female entrepreneurship, contributing to aggregate GDP.
- Key barriers to identify and address when designing reform packages: limited access to education, health care, assets, finance, land, legal rights, and care services; household composition and social norms should be taken into consideration.

### Policy implications and recommendations
- Design pro-growth structural reform packages with gender in mind to amplify macroeconomic gains and facilitate the green transition.
- Anticipate the gendered impact when designing macroeconomic, structural, and financial policy packages.
- Address legal, financial, and care-service constraints to women’s labor market participation.
- Promote women’s representation in decision-making (e.g., national parliaments) to support more stringent climate policies.
- Leverage increased female participation to expand fiscal space for green financing.

*Prepared by Nina Budina, Diego Gomes, Jiajia Gu, Monique Newiak, Jorge M. Minero, and Marina M. Tavares.*

### Annex 2.  Empirical Framework

### Annex 2.  Empirical Framework

### Baseline empirical framework
- Method:
  - Employ the local projection (LP) method proposed by Jordà (2005) to estimate macroeconomic effects of structural reforms in a sample of 75 emerging markets and 50 developing economies over the period 2000–20.
  - Motivations: accurate impulse responses (Auerbach and Gorodnichenko 2012, 2013), no need for economic priors or dynamic restrictions (Plagborg-Møller and Wolf 2021), flexibility to estimate nonlinear effects.
- Baseline panel LP specification (equation (1)):
  - Dependent variable: 푦푦푖,푡 is the log of the variable of interest (e.g., output, investment, employment, labor productivity).
  - Model includes country fixed effects (훼훼푖) and year fixed effects (훾훾푡).
  - Coefficient of interest: 훽푘 captures the (cumulative) impact on 푦 following introduction of a given structural reform 푆푆푆푆푖,푡.
  - Controls: 푋푖,푡 includes lags of the dependent variable, past economic growth, and past reforms.
  - Two lags of the dependent variable and the shock series are included to control for autocorrelation, following Montiel Olea and Plagborg-Møller (2021).
  - Time and country dimensions indicated by 푡 and 푖; 푘 = 0,1,2, ...6.
  - Estimation via OLS; impulse responses for 훽푘 generated using Driscoll-Kraay (1998) robust standard errors.

### Robustness checks
- Address potential reverse causality and endogeneity of the decision to reform:
  - Control for the impact of all other reforms implemented simultaneously.
  - Control for past economic growth and expected growth.
  - Control for episodes of fiscal consolidation—defined as underway when the cyclically adjusted primary fiscal balance improves by at least 1.5 percentage points of GDP relative to the previous year (Alesina and Ardagna 2010).
  - Examine sensitivity across country groups: LICs vs EMs; fossil fuel exporters vs non-exporters.
- Empirical summary:
  - Annex Figure 2.1 shows results from alternative specifications and country groups are broadly consistent with and not statistically different from baseline.
  - Annex Table 2.1 presents baseline results for selected macroeconomic variables.

### Baseline local projection estimates for selected macroeconomic variables (Annex Table 2.1)
- Table note: “Up,” “Down,” or “None” indicates whether the estimated effect is positive, negative, or not clear; Star (*) denotes statistical significance at the 10% level or greater (i.e., the p-value less than 10 percent); ST and MT denote whether the effect is over the short (1–2 years) or medium term (3–4 years), respectively. All dependent variables are percent change, except net FDI Inflows (share of GDP, percentage point change).
- Selected entries (preserved exactly as in source table):
  - Employment: Governance — Up (ST-MT); Business Regulation — Up (ST-MT); External Sector — None; 1st Gen. Reform Package — None; Credit Market Reforms — Up (ST-MT); Labor Market Regulation — Up (ST-MT).
  - Labor Productivity: Governance — Up* (ST-MT); Business Regulation — Up (ST-MT); External Sector — Up* (MT); 1st Gen. Reform Package — Up* (ST-MT); Credit Market Reforms — Up* (MT); Labor Market Regulation — Down (ST-MT).
  - Investment: Governance — Up* (ST-MT); Business Regulation — Up* (ST-MT); External Sector — Up* (ST); 1st Gen. Reform Package — Up* (ST-MT); Credit Market Reforms — Up* (ST); Labor Market Regulation — Down* (MT).
  - Net FDI Inflows: Governance — Up* (ST-MT); Business Regulation — Up (MT); External Sector — Up (MT); 1st Gen. Reform Package — Up* (MT); Credit Market Reforms — Up* (ST); Labor Market Regulation — None.
  - Core CPI Index: Governance — None; Business Regulation — None; External Sector — Down* (ST-MT); 1st Gen. Reform Package — Down* (ST); Credit Market Reforms — Down* (ST-MT); Labor Market Regulation — Up (ST-MT).

### Addressing nonlinearities in reform effects
- Two-step extension of baseline to account for initial conditions and broad-state nonlinearities:
  1. Interaction with initial conditions:
     - Augment equation (1) with interaction term between the reform shock and initial condition 퐼퐼푖,푡 to assess how reforms interact with initial structural and green reform gaps and size of policy trade-offs (equation (2)).
  2. Smooth state-dependent effects:
     - Modify equation (1) following Auerbach and Gorodnichenko (2012) to allow reform multipliers to vary across broad states (e.g., recession vs boom; fiscal expansion vs contraction) using a smooth transition function 퐹(푍푖,푡) with form:
       - 퐹(푍푖,푡) = exp (−훾훾푍푖,푡) / [1 + exp (−훾훾푍푖,푡)], 훾훾 > 0.
     - 퐹(푍푖,푡) normalized to have zero mean and unit variance; probability of being in one of two states varies between 0 and 1.
     - Other states, including fiscal expansion and contraction, are controlled for using 훾훾 = 1.5, consistent with the literature (see IMF 2019).
- Advantages of equation (3)/smooth transition approach:
  - Directly test differences in reform multipliers across several states without interacting each dependent variable with broad-state measure.
  - Generates impulse responses that are more stable and precise by allowing multipliers to change smoothly across a continuum of states.
- Estimation: Equations (2) and (3) estimated as equation (1) using Driscoll-Kraay (1998) standard errors.

### Policy Trade-off (PT) Index (Annex 3 summary)
- Purpose: Synthetic index to capture multiplicity of macroeconomic constraints—low growth, persistently high inflation, exchange market pressures—facing many EMDEs amid high debt and interest rates.
- Construction:
  - Principal component analysis for 58 large EMs (data limitations for full sample).
  - Highest weight assigned to inflationary pressures, followed by growth slowdown (growth deviation from its long-term average, entering with a negative sign, so a positive value implies a growth slowdown), debt vulnerabilities (level of debt and debt deviation from its long-term average), and external vulnerabilities (external debt deviation from its long-term average and exchange market pressure index).
- Historical evolution and projection:
  - The index has been steadily increasing since the early 2000s, with notable surges during the 2008–09 global financial crisis and the COVID-19 pandemic in 2022 (Annex Figure 3.1, panel II).
  - Although some leveling off is expected in the coming years, the index its projected to remain at historically high levels over the medium term.
- Factor loadings (Annex Figure 3.1, panel I — preserved exactly as listed):
  - Inflation deviation from 10-year average (percent): 34.2
  - Growth deviation from 10-year average (percent): 18.9
  - Public debt ratio: 16.7
  - Public debt ratio deviation from 10-year average: 14.0
  - Public external debt ratio deviation from 10-year average: 12.2
  - Exchange market pressure*: 4.3
- Caveats:
  - PT index does not incorporate information about level of policy variables (e.g., policy rates or extent of fiscal consolidation already deployed).
  - Combines stock variables (debt ratios) with conjunctural variables (growth, inflation, exchange market pressures).
  - Data-driven construction makes it not straightforward to precisely pin down which indicators drive index evolution.
- Empirical observation:
  - In several countries, acute policy trade-offs (PT index) coexist with deep structural gaps—evident where PT index and certain structural gaps are large (above median values) (Annex Figure 3.1, panels III and IV).

### Reforms under duress (Annex 4 summary)
- Research question: Whether output gains from reforms accrue even during adverse macroeconomic shocks and which reforms to implement during bad times.
- Key empirical findings:
  - First-generation reform package:
    - Can raise output by up to 2 percent in four years during demand-led recessions (instances when growth and inflation are low compared with averages).
    - Has much larger effects of 5 percent during supply-constrained downturns—when growth is low and inflation is high—suggesting greater effectiveness when supply constraints drive the downturn (Annex Figure 4.1, panel I).
  - Domestic credit reforms:
    - Output-enhancing when initiated during demand-led recessions, more so than in supply-led recessions.
    - Example: major credit market reforms could raise output by 1 percent on impact and up to 2 percent in four years during demand-led recessions (negative growth and falling inflation), amid easing of lending constraints and lowering of borrowing costs (panel II).
  - High public debt environment:
    - First-generation reform package can raise output above baseline by up to 3 percent on impact and 4.6 percent after four years when public debt is high (panel III).
  - High exchange market pressure (EMP):
    - First-generation reform package appears to have strong near-term output effects—up to 5.6 percent one year after the reform package’s implementation—even under high EMP (panel IV).
  - Fiscal stance interaction:
    - Fiscal contractions may amplify—by up to 2 percent on impact—the growth effect of domestic credit market reforms (panel V).
    - During fiscal expansion, growth effect of credit market reforms appears significant only over time.
- Notes on identification and samples:
  - Demand- and supply-led recessions identified in the spirit of Ghassibe and Zanetti (2022): demand-led associated with negative growth and falling inflation; supply-led characterized by negative growth and rising inflation.
  - EMP index = sum of nominal exchange rate depreciation and reserve outflows (scaled by base money) (see Tanner 1999).
  - Analyses on public debt and EMP restricted to selected large emerging markets due to data limitations.
  - Fiscal policy stance defined using realized government consumption expenditure deviations between IMF April WEO (current year) and IMF October WEO (previous year).

### Structural reforms and inclusive growth (Annex 5 summary)
- Focus: Impact of structural reforms on (1) education and (2) labor force participation.
- Main findings and caveats:
  - First-generation reforms support long-term growth by accelerating human capital formation.
  - In LICs, first-generation reforms boost girls’ and boys’ secondary education enrollment; they boost girls’ enrollment in tertiary education, particularly in EMs.
  - Labor market reforms, following first-generation reforms, can enhance labor force participation—particularly among women—in the short and medium term.
  - Cautions: results do not imply causal interpretation due to possible omitted variable bias, endogeneity, and multicollinearity; specific channels were not empirically disentangled.
- Suggested channels (plausible explanations preserved from source):
  - Governance reforms: better channel public resources to education and create stable environment conducive to higher education.
  - Trade reforms: increase workers’ exposure to more productive foreign firms, fostering competition and technological advancement, raising returns to education.
  - Business regulatory reforms: encourage entrepreneurship and adoption of advanced technologies, motivating higher-skilled labor.
  - Labor market reforms: facilitate formalization, improve working conditions, promote fair practices, reduce discrimination—boosting participation.
- Empirical evidence (Annex Figure 5.1):
  - Responses reported to a major historical reform (two standard deviations); solid line component indicates statistical significance at the 90 percent level.
  - Panel sample sizes:
    - Panel 1 (1st Generation Reform on Secondary Enrollment): 116 countries (68 EMs and 48 LICs).
    - Panel 2 (1st Generation Reform on Tertiary Enrollment): 64 countries (39 EMs and 25 LICs).
    - Panels 3 and 4 (Labor Market on Female/Male LFP): sample of 124 EMDEs.
  - First-generation reforms index = simple average of governance, external sector, and business regulation reforms.
  - Definitions: EMs = emerging markets; EMDEs = emerging market and developing economies; LFP = labor force participation; LICs = low-income countries.
- Overall inference:
  - Structural reforms appear to have significant and transformative long-term impacts by supporting human capital formation and bridging gender gaps in education and labor markets, thereby catalyzing sustainable increases in aggregate productivity and long-term growth in EMDEs.

*Source: sdnea2023007 - Annex 2. Empirical Framework (IMF staff calculations and figures as presented in the source).*

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### IMF and Multilateral Reports Cited
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*Structural Reforms to Accelerate Growth, Ease Policy Trade-offs, and Support the Green Transition in Emerging Market and Developing Economies — Staff Discussion Note No. SDN/2023/007*

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_Source: https://www.imf.org/-/media/files/publications/sdn/2023/english/sdnea2023007.pdf_