## Appendix I: Reforms Data

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### Introduction and motivation
- Global recovery since the financial crisis described as "weak and uneven"; concern about "secular stagnation" in advanced economies and slowed potential output growth in many emerging and developing economies.
- Post-crisis constraints: lower bound on nominal policy interest rates and buildup of public debt, limiting traditional monetary and fiscal policy.
- Structural reforms defined as "all reforms that lead to a more efficient allocation of resources" and seen as a source of durable growth.
- Rising within-country inequality noted as a worrisome trend with links to political backlash (populism, isolationism, protectionism).
- Literature linkage: slow or fragile growth and high inequality are interlinked; durable inclusive growth likely requires policy intervention (Berg and Ostry, 2011, 2012; Ostry et al., 2014; Ostry, 2014).

### Scope, approach, and data
- Objective: Assess whether reforms entail an equity-efficiency trade-off (do reforms that increase growth also increase inequality and thereby potentially dampen growth).
- Coverage: Cross-country dataset including advanced, emerging-market, and low-income countries.
- Methods:
  - Panel regressions (growth and inequality).
  - Event-study approach.
  - Select country-case overviews.
- Reform indices update Ostry et al. (2009) and cover:
  - Financial reforms: domestic banking and securities market reforms; external capital market liberalization.
  - Institutional reforms: legal framework including "rule of law".
  - Real sector reforms: trade reforms, network reforms (electricity and telecoms competition/liberalization), labor market reforms including "collective bargaining".
- Inequality data: Standardized World Income Inequality Database (Solt, 2009).
- Measurement caveats:
  - Indices summarize complex phenomena and may not capture all relevant dimensions.
  - Inequality measurement across countries/time is difficult.
  - Labor and product market reform measures cover a narrow range (telecoms and electricity are a small fraction of the economy; decentralization of collective bargaining is only one aspect of labor market deregulation).
- Note: Agriculture reform index from IMF (2008) and Ostry et al. (2009) excluded here; authors report "no significant effects on either growth or inequality for our broad sample" for that index.

### Main empirical findings — overview
- Aggregate conclusion: Some structural reforms give rise to growth-equity tradeoffs; however, "the net effect of reforms on growth remains positive for most reforms indicators, even after considering the negative effect from increased inequality."
- Reform-specific summary:
  - Domestic financial deregulation: growth and inequality both increase after reforms (trade-off).
  - External capital account liberalization: growth and inequality both increase after reforms (trade-off).
  - One of two measures of current account reform: growth and inequality both increase after reforms (trade-off).
  - Basic institutional reforms (legal system and popular observance of the law): tend to increase growth with no adverse effect on inequality.
  - Network reforms (electricity and telecoms): results weakest and least robust; limited data may explain weak results.
  - Decentralization of collective labor bargaining: weakest and least robust results; unions can internalize adverse employment implications (Blanchard et al., 2013).
- Robustness notes:
  - Financial and external capital market liberalization have been previously found to increase inequality.
  - Growth effects from external financial liberalization are hard to establish in macro data unless capital flows are disaggregated.
  - Legal reforms often show important effects on longer-run growth with little distributional impact.
  - Goods trade liberalization: literature suggests impacts on inequality may undo some gains from trade (example cited: Antras et al., 2016 for the United States).

### Key quantitative results by reform category (selected coefficients and effects)
- All indices rescaled to lie between 0 and 1; effects frequently reported as change from median to 75th percentile; long run defined variably (tables report "long run (30 years)"; simulations use 50 years).

A. Domestic Finance Reforms
- Regression coefficients (Table 1 excerpts):
  - Domestic Finance (All Ctrys, Growth): 0.0630*** (std. err. 0.0146)
  - Domestic Finance (All Ctrys, Growth with controls): 0.0478*** (0.0149)
  - Domestic Finance (All Ctrys, Inequality): 0.0065* (0.0038)
  - Domestic Finance (LIC&MIC, Growth): 0.0633** (0.0261)
  - Domestic Finance (LIC&MIC, Growth with controls): 0.0210 (0.0263)
  - Domestic Finance (LIC&MIC, Inequality): 0.0137** (0.0058)
- Effect of reform (75–50 percentile) (Table 1):
  - Per capita GDP: 0.35 (All Ctrys)
  - Per capita GDP with controls: 0.25
  - Inequality (gini points): 1.57 (All Ctrys)
  - LIC&MIC: Per capita GDP 0.35; Per capita GDP (with controls) 0.09; Inequality 3.32
- Subcomponents (Table 2): Securities Market and Banking components both boost growth and inequality (examples):
  - Securities Market (All Ctrys Growth): 0.0339*** (0.0109)
  - Banking (All Ctrys Growth): 0.0446*** (0.0144)
  - Securities Market (LICs & MICs Growth): 0.0534** (0.0244)
  - Banking (LICs & MICs Growth): 0.0487** (0.0220)

B. Capital Account Liberalization
- Regression coefficients (Table 3 excerpt):
  - Capital Account Restrictions (All Ctrys, Growth): 0.0181 (0.0113) — positive but marginally insignificant
  - Capital Account Restrictions (All Ctrys, Inequality): 0.0075*** (0.0027)
  - Capital Account (LIC&MIC, Inequality): 0.0065** (0.0030)
- Effect of reform (75–50 percentile) (Table 3):
  - Per capita GDP: 0.20 and 0.16 in two specifications
  - Inequality (gini points): 3.84 (All Ctrys), 2.62 (LIC&MIC)
- Conclusion: increases inequality and has at best modest growth benefits; outcomes depend on mix of capital flows and institutional context.

C. Rule of Law (Law and Order, ICRG)
- Regression coefficients (Table 4):
  - Law and Order (All Ctrys, Growth): 0.0474** (0.0225)
  - Law and Order (All Ctrys, Inequality): 0.0043 (0.0043) — insignificant
  - Law and Order (LIC&MIC, Growth): 0.0622*** (0.0215)
  - Law and Order (LIC&MIC, Inequality): 0.0023 (0.0067) — insignificant
- Effect of reform (75–50 percentile) (Table 4):
  - Per capita GDP: 0.39 (All Ctrys), 0.61 (LIC&MIC)
  - Inequality (gini points): 1.73 (All Ctrys), 1.14 (LIC&MIC)
- Conclusion: legal-system improvements are very beneficial for growth and show no robust effect on inequality.

D. Tariff Liberalization (Tariff index)
- Regression coefficients (Table 5):
  - Tariff Reform (All Ctrys, Growth): 0.0385** (0.0158)
  - Tariff Reform (All Ctrys, Inequality): 0.0004 (0.0040) — insignificant
  - Tariff Reform (LIC&MIC, Growth): 0.0198 (0.0164)
  - Tariff Reform (LIC&MIC, Inequality): 0.0041 (0.0061) — insignificant
- Effect of reform (75–50 percentile) (Table 5):
  - Per capita GDP: 0.15 and 0.16 in two specifications
  - Inequality: 0.19 gini points (All Ctrys) — not significant in many specifications

E. Current Account Liberalization
- Regression coefficients (Table 6):
  - Current Account Restrictions (All Ctrys, Growth): 0.0240* (0.0131)
  - Current Account Restrictions (All Ctrys, Inequality): 0.0096** (0.0038)
  - Current Account Restrictions (LIC&MIC, Growth): -0.0020 (0.0140)
  - Current Account Restrictions (LIC&MIC, Inequality): 0.0095*** (0.0034)
- Effect of reform (75–50 percentile) (Table 6):
  - Per capita GDP: 0.12 and 0.12 in two specifications
  - Inequality (gini points): 2.83 (All Ctrys), 2.40 (LIC&MIC)
- Heterogeneity: interaction with corruption index (higher values = lower corruption) positive and significant — growth benefits depend on institutional environment.

F. Networks Reforms (telecom and electricity)
- Regression coefficients (Table 7):
  - Networks Reforms (All Ctrys, Growth): -0.0029 (0.0136) — insignificant
  - Networks Reforms (All Ctrys, Inequality): 0.0035* (0.0018)
  - Networks Reforms (LIC&MIC, Growth): -0.0121 (0.0126) — insignificant
  - Networks Reforms (LIC&MIC, Inequality): 0.0064** (0.0029)
- Effect of reform (75–50 percentile) (Table 7):
  - Per capita GDP: -0.03 and 0.06 in two specifications (small and not robust)
  - Inequality (gini points): 2.34 (All Ctrys), 4.31 (LIC&MIC)
- Heterogeneity: interaction with corruption positive and significant for LIC&MIC — in high-corruption settings network reforms may create extractive monopolies.

G. Collective Bargaining (labor market decentralization index)
- Regression coefficients (Table 8):
  - Collective Bargaining (All Ctrys, Growth): 0.0404 (0.0249) — not significant
  - Collective Bargaining (All Ctrys, Inequality): 0.0027 (0.0060) — not significant
  - Collective Bargaining (LIC&MIC, Growth): 0.0331 (0.0464) — not significant
  - Collective Bargaining (LIC&MIC, Inequality): 0.0116* (0.0063)
- Effect of reform (75–50 percentile) (Table 8):
  - Per capita GDP: 0.24 and 0.06 in two specifications
  - Inequality (gini points): 0.54 and 3.19 (LIC&MIC)
- Event-study: up-breaks (more decentralized bargaining) increase inequality without substantial growth effects; down-breaks reduce inequality without substantial growth effects.
- Caveat: index covers only one aspect of labor market reforms and is survey-based.

### Simulated total effects accounting for inequality (50-year horizon; ΔSR = median → 75th percentile)
- Method: combine growth and inequality regressions to compute direct steady-state growth effect and indirect effect via higher inequality (simulation over 50 years; tables also report "long run (30 years)").
- Representative simulation outcomes:
  - Domestic finance reforms:
    - Direct effect: long run per capita GDP increases by about 34 percent.
    - Indirect effect: increase in inequality reduces per-capita GDP by a modest amount.
    - Total effect: significantly positive after accounting for indirect effect.
  - Current account liberalization:
    - Indirect negative effect is about 65 percent of the direct effect — increase in inequality can undo a large part of the direct growth effect.
  - Capital account liberalization:
    - Total effect positive, but negative indirect effect about 50 percent of the direct effect.
- Interpretation and caveats:
  - Inequality dampens but does not necessarily eliminate the growth dividend from reforms on average.
  - Estimates subject to substantial uncertainty and represent average effects across countries; country-specific factors and reform details matter.

### Policy implications and recommendations
- Two central policy messages:
  1. Structural reforms affect both growth and equity; distributional impacts are often significant and not automatically remedied in practice.
  2. Distributional consequences do not justify reversing reforms or scaling down reform agendas because reforms still generate large positive growth effects net of distributional impacts.
- Recommended three-pronged approach to improve growth-equity tradeoffs:
  - Design reforms with distributional consequences in mind.
  - Put together reform packages that attempt to balance winners and losers across reforms.
  - Employ redistributive fiscal tools to mitigate adverse distributional effects ex post.
- Accompanying policies and sequencing highlights (Box 1 lessons):
  - Initial conditions matter: domestic financial development and financial inclusion are important preconditions for beneficial effects of capital account liberalization.
  - Business cycle considerations: reforms that entail fiscal stimulus (reduced labor tax wedges, increased active labor market spending) have larger output and employment effects during slack; employment protection and unemployment benefit reforms can be contractionary in weak demand periods and may increase inequality.
  - Fiscal redistribution measures: greater reliance on wealth and property taxes, more progressive income taxation, better targeting of social benefits, reduce tax expenditures favoring high-income groups.
  - "Trampoline" policies: active labor market policies (job counseling, retraining), hiring and wage subsidies targeted to low-wage workers and youth.
  - Education and inclusion: raise skill levels; improve quality of upper secondary/tertiary education in advanced economies; promote equal access to basic education in developing countries.
  - Other measures: improve property rights, labor mobility, and address informality to broaden reform payoffs and reduce adverse distributional consequences.
- Rationale: addressing distributional effects builds credibility that gains from reform will be broadly shared and can sustain political support; ignoring distributional consequences risks undermining support for reforms (Colantone et al., 2015; Rodrik, 2011).
- Clarification: authors do not advocate abandoning or rolling back reforms on distributional grounds; they urge credible mitigation and policy design.

### Country case insights (selected highlights)
- Broad-based reform cases:
  - Australia: large domestic finance reform in 1991 and large network reform in 1996; market Gini rose from 42 in 1991 to 47 in 2005; strong growth and redistributive policies helped mute political backlash.
  - Tanzania: Economic Recovery Program in 1986 and mid-1990s reforms; per capita GDP growth averaged almost 3 percent a year over 1985-2010; inequality declined over the period.
- Trade/domestic finance-focused cases:
  - China: trade and financial reforms from late-1980s; network push in 2001; capital account push in 2005; remarkable growth and large poverty reduction but dramatic increase in inequality (rural-urban and coastal-interior differentials).
  - Indonesia: financial deregulation in 1983 and 1988; private sector credit rose from about 10 percent of GDP in 1980 to almost 50 percent in 1990; growth picked up but inequality increased.
- Capital account/network-focused cases:
  - Czech Republic: early capital account liberalization in transition; growth and inequality increased; Gini in the 2000s was 7.5 points higher than in the 1990s.
  - Argentina: network reform in 1991 (ENTel privatization) led to massive job cuts concentrated among least-skilled workers; tariff declines favored segments used by the wealthy.

### Methodological notes and limitations
- Empirical strategy: system GMM dynamic regressions (five-year averages), event-study analysis of large reform episodes (breaks identified by algorithm); robustness checks performed.
- Index construction and coverage summaries (select):
  - Domestic Financial Liberalization index: average of six subindices coded 0–3; coverage starts 1973 (72 countries) and ends 2005 (91 countries).
  - Capital Account Reforms: index coded 0–100; coverage starts 1950 (60 countries), peaks 104 countries in 2007, ends 2013 (66 countries).
  - Law and Order (ICRG): coverage starts 1984 (114 countries) and ends 2013 (138 countries).
  - Current Account Reforms: coverage starts 1950 (60 countries), peaks 104 countries in 2007, ends 2013 (66 countries).
  - Network Reforms: indices coded 0–2; coverage starts 1960 (106 countries) and ends 2003 (107 countries).
  - Collective Bargaining Index (WEF): survey-based, values 1–7; coverage starts 1970 (32 countries) and ends 2010 (132 countries).
- Algorithm for finding reform episodes: series of steps using H_fwd3_C, H_prev3_C, SumNeg_fwd5 and thresholds (e.g., H_fwd3_C at least 20% of range) to identify robust break years.
- Limitations:
  - Indices are imperfect measures of reform detail and implementation.
  - Results are average effects and not definitive for any particular reform or country.
  - Some coefficients sensitive to controls and sample restrictions; data quality weaker for some indices (networks, collective bargaining).

*Source: Appendix I: Reforms Data and Box 1, wp1805.*

### Appendix I: Reforms Data _________________________________________________________ 40

### Appendix I: Reforms Data

### Introduction
- Global recovery since the financial crisis has been "weak and uneven," with concern about "secular stagnation" in advanced economies and slowed potential output growth in many emerging and developing economies.
- Constraints after the crisis include the lower bound on nominal policy interest rates and buildup of public debt, leaving limited room for traditional monetary and fiscal policy.
- There is growing interest in structural reforms (defined as all reforms that lead to a more efficient allocation of resources) to provide durable increases in economic growth.
- Rising within-country inequality over recent decades is highlighted as a worrisome trend, with links to political backlash (populism, isolationism, protectionism).
- Literature cited suggests slow or fragile growth and high inequality are interlinked; durable inclusive growth likely requires policy intervention (Berg and Ostry, 2011, 2012; Ostry et al., 2014; Ostry, 2014).

### Scope, approach, and data
- Objective: Assess whether reforms entail an equity-efficiency trade-off—i.e., whether reforms that increase growth also increase inequality and thereby potentially dampen growth.
- Coverage: Cross-country dataset including advanced, emerging-market, and low-income countries.
- Methods: Two complementary approaches:
  - Panel regressions (growth and inequality).
  - Event-study approach.
  - Overview of select country cases to illustrate cross-country findings.
- Reform indices assembled update Ostry et al. (2009) and cover:
  - Financial reforms: domestic banking and securities market reforms; external capital market liberalization.
  - Institutional reforms: legal framework including "rule of law".
  - Real sector reforms: trade reforms, network reforms (electricity and telecoms competition/liberalization), labor market reforms including "collective bargaining".
- Inequality data source: Standardized World Income Inequality Database (Solt, 2009).
- Note on indices and measurement limitations:
  - Indices summarize complex phenomena and may not capture all relevant dimensions.
  - Inequality measurement across countries/time is difficult.
  - Labor and product market reform measures cover a narrow range (telecoms and electricity are a small fraction of the economy; decentralization of collective bargaining is only one aspect of labor market deregulation).
- Footnote: Agriculture reform index used in IMF (2008) and Ostry et al. (2009) is excluded here; authors report "no significant effects on either growth or inequality for our broad sample" for that index.

### Main empirical findings
- Aggregate finding: Some structural reforms tend to give rise to growth-equity tradeoffs; however, "the net effect of reforms on growth remains positive for most reforms indicators, even after considering the negative effect from increased inequality."
- Reform-specific results (summary as reported):
  - Domestic financial deregulation: entails trade-offs between equity and efficiency, with both growth and inequality increasing after reforms.
  - External capital market liberalization: entails trade-offs between equity and efficiency, with both growth and inequality increasing after reforms.
  - One of two measures of current account reform: entails trade-offs between equity and efficiency, with both growth and inequality increasing after reforms.
  - Basic institutional reforms that strengthen the legal system and popular observance of the law: tend to increase growth with no adverse effect on inequality.
  - Network reforms index (competition/liberalization in electricity and telecoms): results are weakest and least robust, potentially due to data limitations.
  - Decentralization of collective labor bargaining: results are weakest and least robust; may not engender employment opportunities because unions can internalize adverse employment implications (Blanchard et al., 2013).
- Robustness and plausibility notes:
  - Financial and external capital market liberalization have been previously found to increase inequality.
  - Growth effects from external financial liberalization are hard to establish in macro data unless capital flows are disaggregated.
  - Legal reforms often show important effects on longer-run growth with little distributional impact.
  - Goods trade liberalization: literature suggests impacts on inequality may undo some gains from trade (example cited: Antras et al., 2016 for the United States); job displacement from trade can be hard to remedy in practice (Williams, 2016).

### Policy implications and recommendations
- Two central policy messages:
  1. Structural reforms affect both growth and equity; distributional impacts are often significant and not automatically remedied in practice.
  2. Distributional consequences do not justify reversing reforms or scaling down reform agendas because reforms still generate large positive growth effects net of distributional impacts.
- Recommended three-pronged approach to improve growth-equity tradeoffs and restore credibility:
  - Design reforms with distributional consequences in mind.
  - Put together reform packages that attempt to balance winners and losers across reforms.
  - Employ redistributive fiscal tools to mitigate adverse distributional effects ex post (Box 1 referenced).
- Rationale:
  - Addressing distributional effects builds credibility that gains from reform will be broadly shared and can sustain political support for supply-enhancing policies.
  - Ignoring distributional consequences risks undermining support for reforms (Colantone et al., 2015; Rodrik, 2011).
- Clarification: The authors do not advocate abandoning or rolling back reforms on distributional grounds; rather, they urge credible mitigation and policy design.

### Literature context
- Most studies focus on two of the three variables (growth, inequality, reforms) at a time; few examine all three together.
- Existing literature summarized:
  - Trade liberalization and growth: Sachs and Warner (1995), Krueger (1997), Frankel and Romer (1999), Berg and Krueger (2003), Dollar and Kraay (2004).
  - Financial development and growth: Levine (1997, 2005).
  - Capital account liberalization: Quinn and Toyoda (2008).
  - IMF (2016): product and labor market reforms in advanced countries—finds reforms raise output in the medium term but short-term benefits may require complementary macroeconomic policies.
  - Ostry et al. (2009): in-depth analysis of reforms on growth using both panel regressions and event-study approach; forms an empirical foundation updated in the present study.
- Methodological complementarity:
  - Fabrizio et al. (2016) employs a different, more granular approach allowing country- and policy-specific design of reform packages; authors view that approach as complementary to their broad macro analysis.

*Source: Appendix I: Reforms Data, wp1805 - Appendix I: Reforms Data.*

### Box 1. Improving Growth-Equity Tradeoffs—Some Lessons from IMF Advice

### Box 1. Improving Growth-Equity Tradeoffs—Some Lessons from IMF Advice

### Overview
- Many structural reforms engender growth-equity tradeoffs; reforms need to be designed with distributional consequences in mind.
- Lessons focus on: role of initial conditions, sequencing of reforms, and accompanying policies that can strengthen growth effects while mitigating adverse distributional impacts.

### Role of initial conditions and sequencing of reforms
- Domestic financial institutions development is an important precondition to garner the gains of capital account liberalization for growth and equality (references in source).
- Fostering financial inclusion can increase growth and reduce negative distributional consequences of domestic financial deregulation (reference in source).
- Business cycle considerations for labor market reforms:
  - Reforms that entail fiscal stimulus (reduced labor tax wedges, increased active labor market spending) have larger output and employment effects during economic slack.
  - Reforms to employment protection and unemployment benefits have contractionary effects in weak demand periods and may increase inequality.
  - Policy implication: prioritize product market reforms and labor-market reforms that entail fiscal stimulus during slack; accompany other labor reforms with supportive macro policies or grandfathering/ delayed implementation.

### Accompanying policies
- Fiscal redistribution can mitigate distributional consequences without reducing growth when consistent with macro efficiency (reference in source).
- Policy measures suggested:
  - Greater reliance on wealth and property taxes, more progressive income taxation, better targeting of social benefits.
  - Reduce tax expenditures that benefit high-income groups to free resources for productive spending or cuts in marginal labor income taxes.
  - For many emerging and developing economies: improved revenue mobilization, well-targeted cash transfers, increased infrastructure spending.
- "Trampoline" policies: active labor market policies (job counseling, retraining), hiring and wage subsidies targeted to low-wage workers and youth.
- Education policies: raise skill levels; improve quality of upper secondary/tertiary education in advanced economies; promote equal access to basic education in developing countries.
- Policies to improve property rights, labor mobility, and address informality to broaden reform payoffs and reduce adverse distributional consequences.

### Data and methodology (summary)
- Dataset: de-jure and survey-based reform indices spanning financial and real sectors and institutional setup; many indices updated from Ostry et al. (2009).
- Key indices: domestic finance, capital account liberalization (Quinn methodology, AREAER), law and order (ICRG), tariff barriers (weighted average MFN tariffs normalized 0–1), current account restrictions (AREAER), network reforms (telecom and electricity competition/regulation), collective bargaining (WEF Global Competitiveness Report; higher values = more decentralized bargaining).
- All indicators rescaled to lie between 0 and 1; higher values imply more liberalized economies.
- Main empirical approaches:
  - Dynamic growth regressions (five-year averages) (equation 1) and dynamic inequality regressions (equation 2).
  - System GMM estimation, robustness checks, and event-study analysis of large reform episodes (breaks identified by algorithm).
- Long-run effects reported as percent change in per-capita GDP or gini points for moving reform index from median to 75th percentile; long run defined as 50 years in one formal definition and 30 years in reported table notes (source presents both definitions in different places; tables report "long run (30 years)").

### Key empirical results — summary by reform category

A. Domestic Finance Reforms
- Regression coefficients (Table 1):
  - Domestic Finance (All Ctrys, Growth): 0.0630*** (std. err. 0.0146)
  - Domestic Finance (All Ctrys, Growth with controls): 0.0478*** (0.0149)
  - Domestic Finance (All Ctrys, Inequality): 0.0065* (0.0038)
  - Domestic Finance (LIC&MIC, Growth): 0.0633** (0.0261)
  - Domestic Finance (LIC&MIC, Growth with controls): 0.0210 (0.0263)
  - Domestic Finance (LIC&MIC, Inequality): 0.0137** (0.0058)
- Effect of reform (75–50 percentile) reported in Table 1:
  - Per capita GDP: 0.35 (i.e., 35 percent long-run increase) for All Countries (row shows "0.35")
  - Per capita GDP with controls: 0.25
  - Inequality (gini points): 1.57 (All Ctrys)
  - For LIC&MIC: Per capita GDP 0.35; Per capita GDP (with controls) 0.09; Inequality 3.32
- Subcomponents (Table 2): both Securities Market and Banking components boost growth and inequality.
  - Securities Market (All Ctrys Growth): 0.0339*** (0.0109)
  - Banking (All Ctrys Growth): 0.0446*** (0.0144)
  - Securities Market (LICs & MICs Growth): 0.0534** (0.0244)
  - Banking (LICs & MICs Growth): 0.0487** (0.0220)
  - Inequality coefficients: securities and banking positive; see table for exact values.
- Event-study: increases in growth and inequality following domestic finance reform breaks; conclusion: trade-off — higher growth accompanied by higher inequality, particularly in LICs and MICs.

B. Capital Account Liberalization
- Regression coefficients (Table 3 excerpt):
  - Capital Account Restrictions (All Ctrys, Growth): 0.0181 (0.0113) — positive but marginally insignificant (t≈1.6 reported in text)
  - Capital Account Restrictions (All Ctrys, Inequality): 0.0075*** (0.0027)
  - Capital Account (LIC&MIC, Inequality): 0.0065** (0.0030)
- Effect of reform (75–50 percentile) (Table 3):
  - Per capita GDP: 0.20 and 0.16 in two specifications
  - Inequality (gini points): 3.84 (All Ctrys), 2.62 (LIC&MIC)
- Conclusion: capital account liberalization increases inequality and has at best modest growth benefits; growth-inequality trade-offs depend on mix of capital flows (FDI vs short-term debt) and institutional context.

C. Rule of Law (Law and Order, ICRG)
- Regression coefficients (Table 4):
  - Law and Order (All Ctrys, Growth): 0.0474** (0.0225)
  - Law and Order (All Ctrys, Inequality): 0.0043 (0.0043) — insignificant
  - Law and Order (LIC&MIC, Growth): 0.0622*** (0.0215)
  - Law and Order (LIC&MIC, Inequality): 0.0023 (0.0067) — insignificant
- Effect of reform (75–50 percentile) (Table 4):
  - Per capita GDP: 0.39 (All Ctrys), 0.61 (LIC&MIC)
  - Inequality (gini points): 1.73 (All Ctrys), 1.14 (LIC&MIC)
- Conclusion: legal-system improvements are very beneficial for growth and show no robust effect on inequality — reforms can be growth-enhancing without adverse distributional effects.

D. Tariff Liberalization (Trade openness — tariff index)
- Regression coefficients (Table 5):
  - Tariff Reform (All Ctrys, Growth): 0.0385** (0.0158)
  - Tariff Reform (All Ctrys, Inequality): 0.0004 (0.0040) — insignificant
  - Tariff Reform (LIC&MIC, Growth): 0.0198 (0.0164)
  - Tariff Reform (LIC&MIC, Inequality): 0.0041 (0.0061) — insignificant
- Effect of reform (75–50 percentile) (Table 5):
  - Per capita GDP: 0.15 and 0.16 in two specifications
  - Inequality: 0.19 gini points (All Ctrys) — not significant in many specifications; NA reported in one row for LIC&MIC where not available.
- Conclusion: tariff reductions increase growth; reductions in tariffs do not appear to have a significant impact on inequality on average.

E. Current Account Liberalization (non-tariff current account restrictions)
- Regression coefficients (Table 6):
  - Current Account Restrictions (All Ctrys, Growth): 0.0240* (0.0131)
  - Current Account Restrictions (All Ctrys, Inequality): 0.0096** (0.0038)
  - Current Account Restrictions (LIC&MIC, Growth): -0.0020 (0.0140) — no clear growth benefit in restricted sample
  - Current Account Restrictions (LIC&MIC, Inequality): 0.0095*** (0.0034)
- Effect of reform (75–50 percentile) (Table 6):
  - Per capita GDP: 0.12 and 0.12 in two specifications
  - Inequality (gini points): 2.83 (All Ctrys), 2.40 (LIC&MIC)
- Additional heterogeneity: interaction with corruption index (higher values = lower corruption) is positive and significant — growth benefits of current account reforms depend on institutional environment (high corruption associated with lower or negative growth effects).

F. Networks Reforms (telecom and electricity)
- Regression coefficients (Table 7):
  - Networks Reforms (All Ctrys, Growth): -0.0029 (0.0136) — insignificant
  - Networks Reforms (All Ctrys, Inequality): 0.0035* (0.0018)
  - Networks Reforms (LIC&MIC, Growth): -0.0121 (0.0126) — insignificant
  - Networks Reforms (LIC&MIC, Inequality): 0.0064** (0.0029)
- Effect of reform (75–50 percentile) (Table 7):
  - Per capita GDP: -0.03 and 0.06 reported in two specifications (small and not robust)
  - Inequality (gini points): 2.34 (All Ctrys), 4.31 (LIC&MIC)
- Heterogeneity: interaction of network reforms with corruption positive and significant for LIC&MIC — in high-corruption settings network reforms may create extractive monopolies that fail to deliver efficiency gains.
- Conclusion: network reforms associated with higher inequality and no robust positive growth effect across the broad sample.

G. Collective Bargaining (labor market decentralization index)
- Regression coefficients (Table 8):
  - Collective Bargaining (All Ctrys, Growth): 0.0404 (0.0249) — not significant
  - Collective Bargaining (All Ctrys, Inequality): 0.0027 (0.0060) — not significant
  - Collective Bargaining (LIC&MIC, Growth): 0.0331 (0.0464) — not significant
  - Collective Bargaining (LIC&MIC, Inequality): 0.0116* (0.0063)
- Effect of reform (75–50 percentile) (Table 8):
  - Per capita GDP: 0.24 and 0.06 in two specifications
  - Inequality (gini points): 0.54 and 3.19 (LIC&MIC)
- Event-study evidence:
  - Up-breaks (more decentralized bargaining): no substantial growth effect but increase inequality.
  - Down-breaks (more centralized bargaining): no substantial growth effect but decrease inequality.
- Caveat: collective bargaining index covers only one aspect of labor market reforms and is survey-based; results should be interpreted with caution.

### Cross-cutting findings and policy implications
- Trade-offs vary by reform type:
  - Domestic finance: raises growth but increases inequality; stronger effect on inequality in LICs and MICs.
  - Capital account and current account liberalization: tend to increase inequality; growth benefits modest and conditional on institutions and flow composition.
  - Rule of law improvements: robustly pro-growth and do not increase inequality.
  - Tariff liberalization: increases growth without clear average effect on inequality.
  - Network reforms and labor-market decentralization: limited growth benefits in broad sample, associated with higher inequality (especially in LICs and MICs).
- Institutional and country-specific conditions matter:
  - Pre-existing financial sector development, financial inclusion, law and order, and corruption levels condition the equity-efficiency outcomes of reforms.
  - Sequencing and accompanying policies (fiscal redistribution, active labor market policies, education, property rights, infrastructure) can strengthen growth outcomes and mitigate inequality increases.
- Empirical strategy notes:
  - Results based on system GMM dynamic regressions and event-study around large reform breaks; robustness checks performed; some coefficients sensitive to controls and sample restrictions.
  - All indices rescaled 0–1; effects frequently reported as change from median to 75th percentile; long-run impacts reported in tables.

*Source: Box 1, "Improving Growth-Equity Tradeoffs—Some Lessons from IMF Advice", wp1805.*

### Appendix II.

### Appendix II.

### G. Reforms, Growth, and Inequality: A Look at Country Cases

- Objective:
  - Examine whether panel regressions and event studies—showing many reforms raise both growth and inequality—are reflected in narrative country histories and political discourse.
  - Group countries into three categories: (i) broad-based reform efforts in many areas; (ii) big push on domestic finance or trade; (iii) strong push on capital account liberalization or network reforms.
  - Reform dates chosen by combining indices of structural reforms and event studies.

- Methodology note:
  - Figure 12 plots growth and inequality before and after reform breaks for country cases.
  - The event study and regression evidence underpin the case studies and are used to identify reform episodes.

- Broad-based reforms — selected country cases:
  - Australia:
    - Reforms: domestic financial sector reforms (1980s–1990s), comprehensive trade liberalization (late-1980s through the 1990s), overhaul of collective bargaining.
    - Event study identified: large domestic finance reform in 1991 and large network reform in 1996.
    - Outcome: steady growth; synthetic control evidence shows post-reform output outperformed peers (Adhikari et al., 2016).
    - Distributional outcome: market Gini rose from 42 in 1991 to 47 in 2005.
    - Political response: concerns noted but muted by strong growth and extensive redistributive policies (Conley, 2004; Greenville et al., 2013).
  - Tanzania:
    - Reforms: Economic Recovery Program in 1986 (trade and exchange rate liberalization); mid-1990s reforms focused on finance, labor markets, privatization.
    - Outcome: per capita GDP growth averaged almost 3 percent a year over 1985-2010; higher than past growth and peers.
    - Distributional outcome: inequality declined over the period—unusual relative to many broad-based reform cases. Success in diversifying into labor-intensive manufacturing is a possible explanation; debate continues (Atkinson and Lugo, 2014).
    - Caveat: Treichel (2005) notes limited improvements in social and poverty indicators outside Dar es Salaam despite strong macro performance 2001–2007.
  - Other broad-based reform examples (not detailed in narrative): India (mid-1990s); Uganda (1990-95); Costa Rica (1990s); Ghana (late-1980s); Mozambique (mid-1990s); Rwanda (early 1990s).

- Trade-focused and/or domestic finance-focused reforms — selected country cases:
  - China:
    - Reforms: trade liberalization and domestic financial sector reforms starting late-1980s; network reforms and capital account opening came later (event study: network push in 2001; capital account push in 2005).
    - Expected impacts from empirical evidence:
      - Large initial growth impact from trade and financial sector reforms.
      - Inequality should increase, and impact likely rises over time as later reforms proceed.
    - Outcome: remarkable growth and large poverty reduction; dramatic increase in inequality with rural-urban and coastal-interior differentials (Yang, 1999; Tsui, 1996).
    - Policy implication: as capital account liberalization proceeds, distributional impacts grow and steps (redistribution and other measures) will be needed to contain adverse impacts, including on growth.
  - Indonesia:
    - Reforms: financial deregulation in two stages—abolition of most bank lending controls and ceilings on deposit rates at state banks in 1983; changes to bank borrowing/lending controls and entry norms in 1988.
    - Financial deepening: private sector credit as percent of GDP increased from about 10 percent in 1980 to almost 50 percent in 1990.
    - Outcome: growth picked up markedly between 1988 reforms and Asian crisis; hailed as a “miracle” performer.
    - Distributional outcome: inequality increased. Mechanism described by Jayadev (2005): rapid urban growth financed by abundant credit moved labor away from agriculture and low-skilled work; decline of sectors employing low-skilled workers exacerbated wage differentials.
    - Note: progress on financial inclusion was slower; Indonesia lags Asian peers on inclusion.

- Capital account liberalization and network reforms — selected country cases:
  - Czech Republic (transition economy example):
    - Reforms: early liberalization of capital account in transition; FDI liberalized early 1990s; most capital transactions de jure liberalized by September 1995; OECD accession in December 1995.
    - Outcome: growth and inequality increased, as in other transition economies.
    - Critique: some observers argue underperformance on growth and worse distributional outcomes because of excessive focus on pro-market reforms (e.g., capital account opening) while neglecting legal framework and corporate governance (Svejnar, 2001).
    - Statistic: In the Czech Republic, the Gini coefficient in the 2000s was 7.5 points higher than in the 1990s—three times more on average than for other Central European transition economies.
    - Note: transition economies excluded from regression analysis because inequality increases related more to wholesale transition than specific reforms.
  - Argentina:
    - Event study identifies a large network reform in 1991, likely reflecting 1990 privatization of Empresa Nacional de Telecomunicaciones (ENTel).
    - Immediate macroeconomic impact: massive job cuts at ENTel, abrupt adjustment disproportionately affected least-skilled workers who generally could not find jobs.
    - Tariff effects: rates fell faster in commercial and long-distance segments used by the wealthy than in local tariffs used by the poor (Galperin, 2005).
    - Broader literature: network liberalizations (transportation, telecommunications) in developing countries, particularly Latin America, often contribute to income inequality via job losses of low-skilled workers, price increases, declines in real output for some groups, and benefits accruing to powerful/wealthy actors (Auriol, 2005; McKenzie and Mookherjee, 2003).

### VI. Structural Reforms, Inequality, and Growth: A Simple Calculation

- Question:
  - What is the total effect of reforms on growth after accounting for higher inequality induced by reforms, given evidence that higher inequality may reduce growth (Ostry et al., 2014 and 2016)?

- Approach:
  - Combine results from separate growth and inequality regressions.
  - Definitions and expressions (as given in the text):
    - Change in reform index from median to 75th percentile denoted ΔSR.
    - Direct steady-state increase in log per-capita GDP: γ1 ΔSR − β1 (from equation (1)).
    - Steady-state increase in Gini coefficient: γ3 ΔSR − β2 (from equation (2)).
    - Indirect effect on per-capita GDP via inequality (steady state): γ2 − β1 γ3 ΔSR − β2, where γ2 is coefficient on inequality in growth regression.
    - Total effect on growth = direct effect + indirect effect.
  - Note on rounds:
    - Higher-round feedback effects (third and beyond) are ignored because growth is usually statistically and economically insignificant in the inequality regressions; results are broadly similar if growth is excluded as a regressor in the inequality equation.
  - Implementation in figures:
    - Figures report long run results over 50 years via simulation: direct effect assumes inequality constant; indirect effect simulates change in Gini using inequality regression and applies growth regression inequality coefficient to get the indirect effect.

- Key quantitative findings from the simulations (50-year horizon; change from median to 75th percentile):
  - Domestic finance reforms:
    - Direct effect: long run per capita GDP increases by about 34 percent.
    - Indirect effect: increase in inequality reduces level of per-capita GDP by a modest amount.
    - Total effect: significantly positive after accounting for indirect effect.
  - Current account liberalization:
    - Indirect negative effect is about 65 percent of the direct effect—indicating the increase in inequality can undo a large part of the direct growth effect.
  - Capital account liberalization:
    - Total effect is positive, but the negative indirect effect is about 50 percent of the direct effect.

- Interpretation and caveats:
  - Increase in inequality dampens, but does not necessarily eliminate, the growth dividend from reforms on average.
  - Estimates are subject to substantial uncertainty and represent average effects across countries.
  - The effect of a reform in any particular country depends on country-specific factors and reform details not fully captured by the indices.

### VII. Conclusion

- Main conclusions:
  - Structural reforms generally boost growth; this confirms the consensus.
  - Many reforms also create distributional effects that can reduce growth.
  - The growth-equity tradeoff varies across reform types:
    - Financial and capital account liberalization: tend to increase both growth and inequality.
    - Some measures of current account liberalization: similar pattern.
    - Broad institutional reforms strengthening legal impartiality and adherence: good for growth and do not worsen inequality.
    - Collective bargaining decentralization: may increase inequality without raising growth (results tentative).
    - Network liberalization (electricity and telecoms): seems to yield insignificant growth payoffs but may increase inequality (results tentative; data quality weaker).
  - Accounting for inequality matters for assessing the total growth effect of reforms.

- Policy implications and recommendations:
  - Results support a structural reform agenda while emphasizing that:
    - Specific reform packages need to be designed with distributional consequences in mind to gain support and deliver enduring broad-based benefits.
    - Redistributive policies play a complementary role in undoing adverse distributional effects engendered by structural reform.
  - Policymakers who care about both growth and distribution should be concerned about reform-induced inequality, especially where inequality is already high and popular support for globalization and supply-side reforms is waning.

- Limitations:
  - The approach estimates average effects using comprehensive but imperfect measures of reform and inequality.
  - Results are suggestive of patterns in the data but are not definitive for any particular reform or country.

*Source: Appendix II from the IMF working paper (wp1805 - Appendix II).*

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### Appendix I: Reforms data — indices, construction, and coverage
- Domestic Financial Liberalization
  - Source: Abiad et al. (2008), following the methodology in Abiad and Mody (2005), based on various IMF reports and working papers, central bank websites, and others.
  - Details: The index of domestic financial liberalization is an average of six subindices. Five of them relate to banking: (i) interest rate controls, such as floors or ceilings; (ii) credit controls, such as directed credit and subsidized lending; (iii) competition restrictions, such as limits on branches and entry barriers in the banking sector, including licensing requirements or limits on foreign banks; (iv) the degree of state ownership; and (v) the quality of banking supervision and regulation, including power of independence of bank supervisors, adoption of Basel capital standards, and a framework for bank inspections. The sixth subindex relates to securities markets and covers policies to develop domestic bond and equity markets, including (i) the creation of basic frameworks such as the auctioning of T-bills, or the establishment of a security commission; (ii) policies to further establish securities markets such as tax exemptions, introduction of medium and long-term government bonds to establish a benchmark for the yield curve, or the introduction of a primary dealer system; (iii) policies to develop derivative markets or to create an institutional investor's base; and (d) policies to permit access to the domestic stock market by nonresidents. The subindices are aggregated with equal weights. Each subindex is coded from zero (fully repressed) to three (fully liberalized).
  - Coverage: Starts in 1973 with 72 countries. Ends in 2005 with 91 countries.
- Capital Account Reforms
  - Source: Based on the methodology in Quinn (1997) and Quinn and Toyoda (2008), drawing on information contained in the Fund's AREAER.
  - Details: Indicators measuring the intensity of legal restrictions on residents' and nonresidents' ability to move capital into and out of a country. Index originally coded from zero (fully repressed) to 100 (fully liberalized).
  - Coverage: Starts in 1950 with 60 countries, peaks with 104 countries in 2007. Ends in 2013 with 66 countries.
- Law and Order
  - Source: Political Risk Service Group, International Country Risk Guide data.
  - Details: Two measures, each sub-component equals half of the total. The "law" sub-component assesses the strength and impartiality of the legal system, and the "order" sub-component assesses popular observance of the law.
  - Coverage: Starts in 1984 with 114 countries. Ends in 2013 with 138 countries.
- Current Account Reforms
  - Source: Based on the methodology in Quinn (1997) and Quinn and Toyoda (2008), drawing on information contained in the Fund's AREAER.
  - Details: An indicator of non-tariff barriers to current account transactions. The index represents the sum of two sub-components, dealing with restrictions on trade in visibles, as well as in invisibles (financial and other services). It distinguishes between restrictions on residents (receipts for exports) and on non-residents (payments for imports).
  - Coverage: Starts in 1950 with 60 countries, peaks with 104 countries in 2007. Ends in 2013 with 66 countries.
- Network Reforms
  - Source: Based on national legislation and other official documents.
  - Details: Simple average of the electricity and telecom markets sub-indices, which are constructed, in turn, from scores along three dimensions. For electricity, they capture: (i) the degree of unbundling of generation, transmission, and distribution; (ii) whether a regulator other than government has been established; and (iii) whether the wholesale market has been liberalized. For telecom, they capture: (i) the degree of competition in local services; (ii) whether a regulator other than government has been established; and (iii) the degree of liberalization of interconnection changes. Indices are coded with values ranging from zero (not liberalized) to two (completely liberalized).
  - Coverage: Starts in 1960 with 106 countries. Ends in 2003 with 107 countries.
- Collective Bargaining Index
  - Source: World Economic Forum, Global Competitiveness Report.
  - Details: Based on surveys conducted in the countries. This index is based on the answer to the question “Wages in your country are set by a centralized bargaining process (=1) or up to each individual company (=7)”.
  - Coverage: Starts in 1970 with 32 countries. Ends in 2010 with 132 countries.

### Appendix II: Algorithm for finding reform episodes — variables and steps
- Definitions (computed for every country, reform, year triplet):
  - H_fwd3_C: The highest level of reform index over the next 3 years minus the current level of the reform index. This tells us: what is the maximum reform that has taken place over the next 3 years.
  - H_prev3_C: The highest level of the reform index over the previous 3 years minus the current level of the reform index. If this is large, it tells us that we are in a point where reforms have been reversed recently as the reform index was high in the past but is low now.
  - SumNeg_fwd5: Compute the difference between the reform index today and the next day. Now sum over all negative values of this difference variable over the next 5 years. If this is large in absolute value, it tells us that a lot of negative reform periods happened in the future, indicating reform reversal.
- Algorithm steps to identify breaks:
  1. Biggest reform period—find the highest value of the variable H_fwd3_C for each country, reform pair (as long as that year saw some positive reform) and consider this to be a break i.e. find the year(s) for which a country saw the largest increase in the reform index over the next three years.
  2. Rule out temporary low points—rule out the above if H_prev3_C is more than half of H_fwd3_C indicating that the reform reversal in the previous 3 years is more than half the maximum reform that has taken place in the next 3 years.
  3. If observation gets ruled out, find a new break based on step 1.
  4. Rule out reforms which were reversed in the future—rule out if SumNeg_fwd5 is greater than half of H_fwd3_C i.e. rule out if the negative reforms over the next 5 years was more than half the maximum increase in reforms.
  5. If observation gets ruled out, find a new break based on step 1.
  6. Economic criteria—for each country only consider the first break found above (if multiple were found). Then only consider breaks in which H_fwd3_C was at least 20% of the range of the reform variable (i.e. 20% of the difference between the highest and lowest value that the reform variable takes across all countries).

### Appendix III: Country classification by income group
- HICs (Advanced)
  - Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Korea, Republic of, Luxembourg, Malta, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Taiwan Province of China, United Kingdom, United States
- HICs (others)
  - Antigua and Barbuda, Bahamas, Bahrain, Barbados, Bermuda, Brunei, Equatorial Guinea, Kuwait, Macao, Oman, Puerto Rico, Qatar, Saudi Arabia, Trinidad &Tobago, United Arab Emirates
- MICs
  - Algeria, Angola, Argentina, Belize, Bhutan, Bolivia, Botswana, Brazil, Cameroon, Cape Verde, Chile, China, Colombia, Congo, Republic of, Costa Rica, Cuba, Djibouti, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Fiji, Gabon, Grenada, Guatemala, Guyana, Honduras, India, Indonesia, Iran, Iraq, Jamaica, Jordan, Kiribati, Lebanon, Lesotho, Libya, Malaysia, Maldives, Mauritius, Mexico, Micronesia, Fed. Sts., Mongolia, Morocco, Namibia, Nicaragua, Palau, Panama, Paraguay, Peru, Philippines, Samoa, Seychelles, South Africa, Sri Lanka, St. Kitts & Nevis, St. Lucia, St.Vincent & Grenadines, Sudan, Suriname, Swaziland, Syria, Taiwan Province of China, Thailand, Tonga, Tunisia, Turkey, Uruguay, Vanuatu, Venezuela,
- LICs
  - Afghanistan, Bangladesh, Benin, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Comoros, Congo, Dem. Rep., Cote d`Ivoire, Eritrea, Ethiopia, Gambia, The, Ghana, Guinea, Guinea-Bissau, Haiti, Kenya, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nepal, Niger, Nigeria, Pakistan, Papua New Guinea, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, Tanzania, Togo, Uganda, Vietnam, Yemen, Zambia, Zimbabwe

*Source: wp1805 - REFERENCES (IMF Working Paper content).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp1805.pdf_