## 1. Regional Averages and Averages by Income Group

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---

### Heterogeneity of reform progress across LAC
- Regional averages mask significant heterogeneity across countries.
- Ratios of specific reform indexes presented relative to the United States to indicate whether a LAC country is more/less liberalized in a particular area.
- Country examples from the source:
  - Brazil: still has ground to cover in terms of trade and domestic financial liberalization.
  - Mexico: lags in labor and product market reforms.
  - Argentina, Chile, Mexico, Peru: particularly stringent employment protection legislation.
- Note: Indicators are comparable across countries within an area but not across different regulatory areas for the same country.

### Empirical drivers of reforms (literature summary)
- Da Silva et al. (2017):
  - Reforms more likely during deep recessions and when unemployment is high.
  - Distance from the frontier is an important determinant.
  - Presence of an IMF-supported program or other external conditionality facilitates reforms.
  - No clear link between fiscal policies and reforms.
- Prati, Onorato, and Papageorgiou (2013):
  - Some evidence that severe growth downturns are associated with subsequent reform upticks.
- Duval, Furceri and Miethe (2020):
  - Crises induce product and labor market reforms in Advanced Economies.
  - Reform convergence: tighter-regulation countries more prone to liberalize.
  - Reforms more likely when other countries undertake them and under external pressure (e.g., IMF-supported programs).
- Ciminelli et al. (2019):
  - During low growth periods, reversals in reforms are relatively common; recessions foster trade, labor market, and domestic financial liberalization, but banking crises are linked to reversals in domestic and external financial liberalization.

### Panel regression findings for LAC (fixed-effects)
- Key associations:
  - Changes in structural reform indices are negatively associated with past levels of the index (reforms less likely if significant liberalization has already occurred; higher levels associated with greater likelihood of reversals).
  - Reforms are negatively linked to a recession dummy (defined as periods with a negative output gap, trend output estimated using an HP filter).
  - IMF-supported programs are positively associated with reforms in LAC (especially domestic finance reforms) in specification (1); this positive association does not hold for the whole sample of countries.
  - No statistically significant association between total reforms and a crises dummy (Laeven and Valencia, 2020) in the LAC sample; when all countries are included, reforms are negatively associated with crises.
  - Domestic finance reforms are negatively related to the crises dummy for the sample of LAC economies.
  - Logit models (large reforms = one standard deviation changes) with country and time fixed effects: presence of an IMF-supported program increases the probability of a reform taking place by 13 percent in LAC countries (see Annex B in source).

### Fixed-Effects Panel Regression — selected coefficients and statistics
- Columns correspond to: (1) Total Reforms LACAll, (2) Total Reforms LAC, (3) Domestic Finance LAC, (4) Product Market LAC, (5) Trade All, (6) Labor LACAll.
- Lagged level of index:
  - (1) -0.117*** (0.0315)
  - (2) -0.120*** (0.0216)
  - (3) -0.172*** (0.0480)
  - (4) -0.115** (0.0437)
  - (5) -0.221*** (0.0488)
  - (6) -0.107*** (0.0364)
- (GDP growth) t-1:
  - (1) -0.000282 (0.000911)
  - (2) -2.77e-05 (0.000191)
  - (3) 0.000776 (0.000737)
  - (4) 0.000848 (0.000781)
  - (5) -0.000582 (0.00234)
  - (6) -0.000212 (0.000297)
- Terms of Trade Change:
  - (1) -0.000136 (0.000660)
  - (2) 0.000382 (0.000230)
  - (3) 0.000644 (0.00201)
  - (4) -0.000494 (0.000729)
  - (5) 6.57e-05 (0.000729)
  - (6) 0.000326 (0.000405)
- (Terms of Trade Change) t-1:
  - (1) -0.00134 (0.000818)
  - (2) -0.000343 (0.000333)
  - (3) -0.00114 (0.000972)
  - (4) -0.000925 (0.00161)
  - (5) -0.000775 (0.00175)
  - (6) -0.000196 (0.000670)
- IMF program dummy:
  - (1) 0.0118*** (0.00397)
  - (2) 0.00255 (0.00239)
  - (3) 0.0234*** (0.00635)
  - (4) 0.00303 (0.00436)
  - (5) 0.0163** (0.00787)
  - (6) -0.00203 (0.00146)
- Recession dummy:
  - (1) -0.00484** (0.00222)
  - (2) -0.00333* (0.00178)
  - (3) 0.00289 (0.00349)
  - (4) -0.00870* (0.00448)
  - (5) -0.00687* (0.00380)
  - (6) -0.000163 (0.00117)
- Crises dummy:
  - (1) -0.00637 (0.00558)
  - (2) -0.00536*** (0.00169)
  - (3) -0.0267*** (0.00458)
  - (4) 0.00296 (0.00612)
  - (5) -0.00142 (0.0169)
  - (6) -0.00265 (0.00536)
- Constant terms:
  - (1) 0.0435*** (0.00980)
  - (2) 0.0507*** (0.00820)
  - (3) 0.110*** (0.0358)
  - (4) 0.0867*** (0.0317)
  - (5) 0.0809*** (0.0173)
  - (6) 0.0771*** (0.0261)
- Summary statistics:
  - Observations:
    - (1) 466
    - (2) 2,345
    - (3) 528
    - (4) 528
    - (5) 549
    - (6) 2,528
  - R-squared:
    - (1) 0.244
    - (2) 0.158
    - (3) 0.358
    - (4) 0.284
    - (5) 0.244
    - (6) 0.064
  - Number of countries:
    - (1) 16
    - (2) 90
    - (3) 16
    - (4) 16
    - (5) 90
    - (6) 16
- Notes: Driscoll-Kraay standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1

### Public support for reforms (Latinobarómetro 2003–2018 evidence)
- Broad support proxied by share agreeing/strongly agreeing with: “The market economy is the only system with which the country can become developed.”
- Findings:
  - Broad support for market liberalization across the region; support has remained fairly constant across 2003-2018.
  - Between a quarter to a third of respondents in several countries disagree or strongly disagree (significant skepticism).
- Support for specific areas:
  - Trade liberalization: generally low across the region, particularly in Central America and Mexico.
  - Finance and product market reforms (proxied by support for innovation and productivity): higher support, particularly in South American countries and Costa Rica.
- Implication: pockets of skepticism—especially on trade liberalization—underscore the importance of empirical assessment and consideration of distributional effects.

---

### 2. Share supporting innovation and productivity (2017)

### III.A. Quantifying the Effects of Structural Reforms: Growth, Employment, and TFP
- Method:
  - Local projection method estimating responses of real GDP, employment, and TFP to changes in the structural reforms index (SR).
  - Benchmark: country and time fixed effects, lagged dependent variables, lagged reform index, changes in commodities terms of trade.
  - Impulse responses for large changes (two standard deviations).
  - Sample: 16 LAC countries.
  - Note: only 25 instances of non-zero changes for the labor reform indicator in LAC.
- Effects on real GDP:
  - Reforms in LAC: positive effects on GDP reaching 2 percent after 5 years.
  - Domestic finance reforms: similar impulse response to overall reform index.
  - Product market reforms: positive effects that take longer; statistically significant after two years.
  - Trade reforms: effects somewhat larger than overall index, reaching close to 3 percent after 5 years.
  - Labor market reforms (LAC): effects on GDP not statistically significant (not reported to save space).
- Effects on employment:
  - Large changes in total reform index: increases in employment of about 2 percent after 5 years.
  - Product market reforms: statistically and economically significant increases in employment one year after implementation.
- Effects on TFP:
  - Total reform index: positive effect on TFP but imprecisely measured (wide confidence interval).
  - Trade reform index: positive effects statistically significant after two years, reaching about 1 percent after 5 years.
- Summary takeaway:
  - Structural reforms toward greater liberalization can have positive effects on output and employment in LAC, but benefits tend to take time to materialize. Evidence on TFP is positive but not precisely estimated.

### III.B. Do Initial Conditions Matter?
- State-dependent specification:
  - Indicator S_{i,t-1} partitions observations into “boom” (output gap positive) and “slump” (output gap negative) using HP-filtered trend GDP.
  - Allows different impulse responses conditional on state or on levels of other reform indexes.
- Effects by state:
  - Total reform index: little variation by state (boom vs. slump) for LAC sample.
  - Product market and trade reforms: effects on GDP somewhat larger when implemented in boom times.
- Complementarities / conditioning on other reforms:
  - Domestic finance reforms: positive effects on GDP even when trade liberalization is low or when labor markets are relatively rigid.
  - Trade liberalization: positive on GDP even when tariff reductions occur under relatively rigid employment protection; initial GDP gains can be higher when trade reform occurs under rigid employment protection legislation.
  - Product market reforms: positive and significant even when implemented under rigid employment protection legislation.
- Summary takeaway:
  - Positive payoffs of domestic finance reforms are not precluded by distortions in trade or labor markets; trade and product market reforms generally yield positive GDP effects under a range of initial conditions.

### III.C. Inspecting Mechanisms: Investment, FDI, Informality, and Confidence
- Investment:
  - Large changes in the total structural reforms index increase total investment (log real terms) by over 3.5 percent in a 5-year period.
  - Domestic finance reforms: on impact increases of over 2 percent; medium-term confidence interval widens and effects become not statistically significant.
- Foreign Direct Investment (FDI):
  - Reforms boost FDI, but effects economically small and only marginally statistically significant.
  - Product market reforms: statistically significant up to three years after reform; two standard deviation change linked to increase in FDI of a little more than 0.2 percent of GDP and a peak increase of less than 0.4 percent of GDP.
- Informality:
  - Informality rate defined as share of active workers not contributing to social security.
  - Changes in total reform index associated with a decrease in informality, but not statistically significant over medium-term.
  - Product market reforms: statistically significant reductions in informality but economically small—large reforms reduce informality by about one percentage point over 5 years.
- Business confidence:
  - Business confidence index from Haver Analytics used for a sample of 15 countries (includes advanced economies and emerging markets); comparable LAC-only data limited for Brazil, Chile, Mexico, Peru.
  - Overall effects of large reforms on business confidence: not statistically significant.
  - Labor (job protection) reforms: positive effects on confidence appearing two years after changes in the reform index.
  - Note: figure caption refers to "14 Economies" while text references a sample of 15 countries.
- Summary takeaway:
  - Investment is an important channel: large reforms raise investment by over 3.5 percent in 5 years.
  - FDI and informality channels show smaller magnitudes (FDI: ~0.2–<0.4 percent of GDP; informality: ~1 percentage point reduction over 5 years for product market reforms).
  - Business confidence gains are not immediate; labor reform effects on confidence appear with lag.

### III.D. Structural Reforms and External Trade
- Exports:
  - Reforms boost growth in real exports over the medium-term; trade liberalization effects on exports particularly prominent.
  - Product market liberalization (not shown) also increases real exports.
- Imports:
  - Reforms increase real imports; effect of trade reforms on imports takes somewhat longer to materialize.
- Effects on export and import to GDP ratios:
  - Conclusions hold when considering export and import to GDP ratios rather than levels.
- Growth accelerations:
  - Growth accelerations of exports and imports following reforms are larger than the acceleration of GDP growth.
- Export diversification:
  - Structural reforms contribute to export diversification.
  - Theil index for exports (measure of concentration) declines after reforms, especially after trade liberalization—consistent with high tariffs creating an anti-export bias that liberalization removes.
- Sectoral effects:
  - Aggregate reforms increase real value added in manufacturing and agriculture.
  - Effects on services value added are statistically not different from zero (reforms tend to favor tradable sectors).
  - Timing: manufacturing and agriculture value added effects significant 2-3 years after reforms.
  - Specific sub-index effects:
    - Manufacturing value added increases after trade and product market reforms.
    - Agricultural value added increases following domestic finance and trade liberalization.
    - Services value added increases following domestic finance and trade liberalization.

### Effects on Poverty and Inequality
- Measures: poverty headcount ratio at $3.20 a day (2011 PPP) and the Gini index.
- Findings:
  - No statistically significant effects for the total reforms index on poverty and inequality in the LAC sample.
  - Reforms to job protection legislation associated with statistically significant increases in both poverty and inequality over the medium-term:
    - Large changes in employment protection reforms index → increases in poverty rates of about one percentage point over five years.
    - Inequality increases by about 1 percent over the same period.
  - For full sample of countries, deleterious effects on inequality of the total reforms index are statistically significant but of similar magnitude to LAC results over the medium-term.
- Furceri and Rehman (2020): reforms can be linked to increases in the Gini index when countries have low intergenerational mobility and uneven access to opportunities; reported coefficients smaller than those for employment protection reforms in this study.
- Policy implication: consider mitigation measures—enhance access to opportunities and accompany job protection liberalization with worker protection (example: extend unemployment insurance schemes).

### Country Case Studies (Synthetic Control)
- Treated year defined as start of largest 5-year change in aggregate reform index.
- Selected cases and treated years:
  - Chile: 1983
  - Colombia: 1990
  - Mexico: 1986
- Predictors: investment to GDP ratio, population growth, secondary school enrollment, annual inflation, democracy dummy, level of reform index, GDP per capita in 1973 and the two years before reform.
- Main synthetic control results 10 years after reform:
  - Chile: real GDP per capita higher than synthetic control by 18.4 percent.
  - Colombia: real GDP per capita lower than synthetic control by 11.5 percent.
  - Mexico: real GDP per capita lower than synthetic control by 14.5 percent.
- Placebo analysis: effects statistically significant for Chile, not for Colombia and Mexico.
- Interpretation: heterogeneous outcomes reflect degree of reform advancement and country-specific factors (examples: earlier privatization, banking and bankruptcy laws in Chile; resource misallocation in Mexico; fiscal and external imbalances and crisis episodes in Colombia).

### Policy Implications and Conclusions
- Evidence: structural reforms have broadly positive macroeconomic effects across multiple dimensions in LAC.
- Political economy constraints:
  - Resistance when losses are concentrated among vocal groups and gains are diffuse.
  - Uncertainty over winners/losers creates status quo bias; distributional conflicts can delay reform (“war of attrition” logic).
  - Timing matters for electoral costs: reforms earlier in political cycle less likely to entail electoral costs; reforms the year before election associated with electoral costs.
  - Overall economic conditions matter: reforms implemented during strong economic activity typically not penalized by electorate.
- To foster sustainability of reforms, recommended mitigation measures:
  - Strengthen unemployment insurance and other social benefits when liberalizing labor markets.
  - Use the tax system to redistribute gains from reform, including scope to increase the role of progressive (non-linear) personal income taxes and enhance redistributive expenditure policies.

*Italic: Source — wpiea2020195-print-pdf*

### 1.  Regional Averages and Averages by Income Group

### 1. Regional Averages and Averages by Income Group

### Heterogeneity of reform progress across LAC
- Regional averages mask significant heterogeneity across countries.
- Ratios of specific reform indexes are presented relative to the United States to indicate whether a LAC country is more/less liberalized in a particular area.
- Examples highlighted:
  - Brazil still has ground to cover in terms of trade and domestic financial liberalization.
  - Mexico lags in labor and product market reforms.
  - Several countries have particularly stringent employment protection legislation including Argentina, Chile, Mexico, and Peru.
- Note: By the nature of the indicators, one cannot directly compare a country’s regulatory stance across different areas; comparisons must be made relative to other countries.

### Empirical drivers of reforms (literature and summary)
- Empirical findings from cited studies:
  - Da Silva et al. (2017): Reforms are more likely during deep recessions and when the unemployment rate is high; distance from the frontier is an important determinant; presence of an IMF-supported program or other external conditionality facilitates reforms; no clear link between fiscal policies and reforms.
  - Prati, Onorato, and Papageorgiou (2013): Some evidence that severe growth downturns are associated with subsequent reform upticks.
  - Duval, Furceri and Miethe (2020): For Advanced Economies, crises induce product and labor market reforms; reform convergence (tighter-regulation countries more prone to liberalize); reforms more likely when other countries undertake them and under external pressure (e.g., IMF-supported programs).
  - Ciminelli et al. (2019): During periods of low growth, reversals in reforms are relatively common; effects vary by reform area; recessions foster trade, labor market, and domestic financial liberalization, but banking crises are linked to reversals in domestic and external financial liberalization.

### Panel regression findings for LAC (fixed-effects)
- Changes in structural reform indices are negatively associated with past levels of the index.
  - Interpretation: reforms are less likely if significant liberalization has already occurred; higher levels of the index are associated with greater likelihood of reversals.
- Reforms are negatively linked to a recession dummy (defined as periods with a negative output gap, trend output estimated using an HP filter).
- IMF-supported programs are positively associated with reforms in LAC countries (especially domestic finance reforms) in specification (1); this positive association does not hold for the whole sample of countries.
- No statistically significant association between total reforms and a crises dummy (Laeven and Valencia, 2020) in the LAC sample; when all countries are included, reforms are negatively associated with crises.
- Domestic finance reforms are negatively related to the crises dummy for the sample of LAC economies.
- Logit models for large reforms (one standard deviation changes) with country and time fixed effects:
  - Average partial effects indicate the presence of an IMF-supported program increases the probability of a reform taking place by 13 percent in LAC countries (see Annex B).

### Fixed-Effects Panel Regression Table (selected coefficients and statistics)
- Columns correspond to: (1) Total Reforms LACAll, (2) Total Reforms LAC, (3) Domestic Finance LAC, (4) Product Market LAC, (5) Trade All, (6) Labor LACAll (as labeled in source).
- Coefficients (standard errors in parentheses):
  - Lagged level of index:
    - (1) -0.117*** (0.0315)
    - (2) -0.120*** (0.0216)
    - (3) -0.172*** (0.0480)
    - (4) -0.115** (0.0437)
    - (5) -0.221*** (0.0488)
    - (6) -0.107*** (0.0364)
  - (GDP growth) t-1:
    - (1) -0.000282 (0.000911)
    - (2) -2.77e-05 (0.000191)
    - (3) 0.000776 (0.000737)
    - (4) 0.000848 (0.000781)
    - (5) -0.000582 (0.00234)
    - (6) -0.000212 (0.000297)
  - Terms of Trade Change:
    - (1) -0.000136 (0.000660)
    - (2) 0.000382 (0.000230)
    - (3) 0.000644 (0.00201)
    - (4) -0.000494 (0.000729)
    - (5) 6.57e-05 (0.000729)
    - (6) 0.000326 (0.000405)
  - (Terms of Trade Change) t-1:
    - (1) -0.00134 (0.000818)
    - (2) -0.000343 (0.000333)
    - (3) -0.00114 (0.000972)
    - (4) -0.000925 (0.00161)
    - (5) -0.000775 (0.00175)
    - (6) -0.000196 (0.000670)
  - IMF program dummy:
    - (1) 0.0118*** (0.00397)
    - (2) 0.00255 (0.00239)
    - (3) 0.0234*** (0.00635)
    - (4) 0.00303 (0.00436)
    - (5) 0.0163** (0.00787)
    - (6) -0.00203 (0.00146)
  - Recession dummy:
    - (1) -0.00484** (0.00222)
    - (2) -0.00333* (0.00178)
    - (3) 0.00289 (0.00349)
    - (4) -0.00870* (0.00448)
    - (5) -0.00687* (0.00380)
    - (6) -0.000163 (0.00117)
  - Crises dummy:
    - (1) -0.00637 (0.00558)
    - (2) -0.00536*** (0.00169)
    - (3) -0.0267*** (0.00458)
    - (4) 0.00296 (0.00612)
    - (5) -0.00142 (0.0169)
    - (6) -0.00265 (0.00536)
  - Constant terms:
    - (1) 0.0435*** (0.00980)
    - (2) 0.0507*** (0.00820)
    - (3) 0.110*** (0.0358)
    - (4) 0.0867*** (0.0317)
    - (5) 0.0809*** (0.0173)
    - (6) 0.0771*** (0.0261)
- Summary statistics:
  - Observations:
    - (1) 466
    - (2) 2,345
    - (3) 528
    - (4) 528
    - (5) 549
    - (6) 2,528
  - R-squared:
    - (1) 0.244
    - (2) 0.158
    - (3) 0.358
    - (4) 0.284
    - (5) 0.244
    - (6) 0.064
  - Number of countries:
    - (1) 16
    - (2) 90
    - (3) 16
    - (4) 16
    - (5) 90
    - (6) 16
- Notes: Driscoll-Kraay standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1

### Public support for reforms (Latinobarómetro survey evidence)
- Overall support proxied by share agreeing/strongly agreeing: “The market economy is the only system with which the country can become developed.”
- Findings:
  - Broad support for market liberalization across countries in the region.
  - Support has remained fairly constant across the period 2003-2018.
  - A significant share of the population—between a quarter to a third of respondents in several countries—express skepticism regarding the role of reforms (disagree or strongly disagree with the statement).
- Support for specific reform areas:
  - Support for trade liberalization is generally low across the region, particularly in Central America and Mexico.
  - Support for finance and product market reforms (proxied by support for innovation and productivity) is higher than support for trade integration, and particularly high in South American countries and Costa Rica.
- Implication: While broad support exists, significant pockets of skepticism—especially on trade liberalization—make empirical assessment of reform effects particularly relevant.

_ Source: wpiea2020195-print-pdf - 1.  Regional Averages and Averages by Income Group _

### 2.  Share supporting innovation and productivity (2017)

### 2.  Share supporting innovation and productivity (2017)

### III.A. Quantifying the Effects of Structural Reforms: Growth, Employment, and TFP
- Methodology:
  - Local projection method estimating responses of real GDP, employment, and total factor productivity (TFP) to changes in the structural reforms index (SR).
  - Benchmark specification includes country and time fixed effects, lagged dependent variables, lagged reform index, and changes in the commodities terms of trade.
  - Impulse responses presented for large changes in the reform indexes (two standard deviations).
  - Sample: 16 LAC countries in the dataset.
  - Note: There are only 25 instances of non-zero changes for the labor reform indicator in LAC.

- Effects on real GDP:
  - Reforms in LAC countries have positive effects on GDP reaching 2 percent after 5 years.
  - Domestic finance reforms present similar impulse response to the overall reform index.
  - Product market reforms: positive effects on GDP that tend to take longer to materialize and are only statistically significant after two years.
  - Trade reforms: effects somewhat larger than the overall index, reaching close to 3 percent after 5 years.
  - Labor market reforms: effects on GDP for the LAC sample are not statistically significant (not reported to save space).

- Effects on employment:
  - Large changes in the total reform index associated with increases in employment of about 2 percent after 5 years.
  - Product market reforms: statistically and economically significant increases in employment one year after implementation.

- Effects on total factor productivity (TFP):
  - Total reform index: positive effect on TFP but imprecisely measured (wide confidence interval).
  - Trade reform index: positive effects statistically significant after two years, reaching about 1 percent after 5 years.

- Summary takeaway:
  - Structural reforms toward greater liberalization can have positive effects on output and employment in LAC, but benefits tend to take time to materialize. Evidence of positive effects on TFP exists but is not precisely estimated.

### III.B. Do Initial Conditions Matter?
- State-dependent specification:
  - Indicator S_{i,t-1} partitions observations into “boom” (output gap positive) and “slump” (output gap negative) based on HP-filtered trend GDP.
  - Allows different impulse responses conditional on state (boom vs. slump) or conditional on levels of other reform indexes (above/below sample median).

- Effects by state of the economy:
  - For total reform index: little variation by state (boom vs. slump) for LAC sample.
  - For product market and trade reforms: effects on GDP somewhat larger when implemented in boom times.

- Complementarities / conditioning on other reforms:
  - Conditioning domestic finance reforms on the level of trade liberalization:
    - Domestic finance reforms have positive effects on GDP even when the economy is relatively more closed (lower trade liberalization index).
  - Conditioning domestic finance reforms on the level of employment protection liberalization:
    - Domestic finance reforms have positive effects on GDP even when labor markets are relatively rigid.
  - Trade liberalization effects:
    - Positive on GDP even when tariff reductions occur under relatively rigid employment protection legislation.
    - In the first few years after trade reform, GDP gains can be higher when reform takes place under rigid employment protection legislation.
  - Product market reforms:
    - Effects are positive and significant even when implemented in periods of rigid employment protection legislation.

- Summary takeaway:
  - Positive payoffs of domestic finance reforms are not precluded by distortions in trade or labor markets. Trade and product market reforms generally yield positive GDP effects under a range of initial conditions.

### III.C. Inspecting Mechanisms: Investment, FDI, Informality, and Confidence
- Investment:
  - Large changes in the total structural reforms index increase total investment (in log real terms) by over 3.5 percent in a 5-year period.
  - Domestic finance reforms: on impact increases of over 2 percent; over the medium-term confidence interval widens and effects are no longer statistically significant.

- Foreign Direct Investment (FDI):
  - Reforms boost FDI, but effects tend to be economically small and only marginally statistically significant.
  - Product market reforms: statistically significant up to three years after reform, with a two standard deviation change in the reform index linked to an increase in FDI of a little more than 0.2 percent of GDP and a peak increase of less than 0.4 percent of GDP.

- Informality:
  - Informality rate defined as the share of active workers not contributing to social security.
  - Changes in the total reform index associated with a decrease in informality, but not statistically significant over the medium-term.
  - Product market reforms: statistically significant reductions in informality, economically small—large reforms reduce the informality rate by about one percentage point over 5-years.

- Business confidence:
  - Business confidence index from Haver Analytics used for a sample of 15 countries (includes advanced economies and emerging markets); comparable data for business confidence in Brazil, Chile, Mexico, and Peru were limited for LAC-only analysis.
  - Overall: effects of large reforms on business confidence are not statistically significant.
  - Reforms to job protection legislation (labor reforms): positive effects on confidence that take time to materialize and become apparent two years after changes in the reform index occur.
  - Note: Figure caption refers to "14 Economies" while text references a sample of 15 countries.

- Summary takeaway:
  - Investment is an important channel: large reforms raise investment by over 3.5 percent in 5 years.
  - FDI and informality channels show smaller economic magnitudes (FDI: ~0.2–<0.4 percent of GDP; informality: ~1 percentage point reduction over 5 years for product market reforms).
  - Business confidence gains from reforms are not immediate; labor reform effects on confidence appear with lag.

### III.D. Structural Reforms and External Trade
- Exports:
  - Reforms boost growth in real exports over the medium-term.
  - Trade liberalization effects on exports are particularly prominent.
  - Product market liberalization (not shown) also increases real exports.

- Imports:
  - Reforms increase real imports as well.
  - The effect of trade reforms on imports seems to take somewhat longer to materialize.

*Source: wpiea2020195-print-pdf - 2.  Share supporting innovation and productivity (2017)*

### conclusions also hold when we consider the export and import to GDP ratios rather than the

### wpiea2020195-print-pdf - conclusions also hold when we consider the export and import to GDP ratios rather than the

### Effects on Exports and Imports
- Growth accelerations of exports and imports following reforms are larger than the acceleration of GDP growth.
- Figures report effects on real exports and real imports with shaded area as 90 percent confidence interval for Driscoll-Kraay standard errors.

### Export Diversification
- Structural reforms appear to contribute to export diversification.
- The Theil index for exports (a measure of concentration) declines after reforms, especially after trade liberalization.
- The decline in the Theil index supports the argument that high tariffs introduce an anti-export bias in some sectors, which liberalization appears to remove.
- Figures report effects on export concentration (Theil index) with shaded area as 90 percent confidence interval for Driscoll-Kraay standard errors.

### Sectoral Effects of Reforms
- Changes in the aggregate index of reforms lead to increased real value added in manufacturing and agriculture.
- Effects on real value added in services are statistically not different from zero, suggesting reforms tend to favor tradable sectors.
- Timing: effects on manufacturing and agriculture value added tend to be significantly different from zero 2-3 years after the reforms are implemented.
- Specific reform sub-index findings:
  - Manufacturing value added increases after trade and product market reforms.
  - Agricultural value added tends to increase following domestic finance and trade liberalization.
  - Services value-added tends to increase following domestic finance and trade liberalization.
- Figures show effects on agriculture, manufacturing, and services value added with shaded area as 90 percent confidence interval for Driscoll-Kraay standard errors.

### Effects on Poverty and Inequality
- Using poverty headcount ratio at $3.20 a day (2011 PPP terms) and the Gini index:
  - No statistically significant effects for the total reforms index on poverty and inequality in the LAC sample.
  - Reforms to job protection legislation are associated with statistically significant increases in both poverty and inequality indicators over the medium-term.
    - Large changes in the employment protection reforms index lead to increases in poverty rates of about one percentage point over five years.
    - Inequality increases by about 1 percent over the same period.
  - For the full sample of countries, the deleterious effects on inequality of the total reforms index are statistically significant but remain of similar magnitude to LAC results over the medium-term.
- Furceri and Rehman (2020) report reforms can be linked to increases in the Gini index when reforming countries have low intergenerational mobility and uneven access to opportunities; coefficients reported by those authors are smaller than the ones presented here for employment protection reforms.
- Policy implication: need to consider mitigation measures to reduce potential negative effects of reforms, including measures to enhance access to opportunities and accompanying job protection liberalization with measures that protect workers (example: extending unemployment insurance schemes).

### Country Case Studies (Synthetic Control Method)
- Method: synthetic control to construct counterfactuals matching pre-intervention outcome and determinants; treated year is start of largest 5-year change in aggregate reform index.
- Selected case studies and reform start years:
  - Chile: 1983
  - Colombia: 1990
  - Mexico: 1986
- Predictor variables used: investment to GDP ratio, population growth, secondary school enrollment, annual inflation, a democracy dummy, the level of the reform index, and GDP per capita in 1973 and the last two years before the reform started.
- Main synthetic control findings 10 years after reform:
  - Chile: real GDP per capita higher than the synthetic control by 18.4 percent.
  - Colombia: real GDP per capita lower than the synthetic control by 11.5 percent.
  - Mexico: real GDP per capita lower than the synthetic control by 14.5 percent.
- Placebo analysis: effects of structural reforms are statistically significant for Chile, but not for Colombia and Mexico.
- Interpretation: heterogeneous results highlight the influence of the degree of advancement of structural reforms and other country-specific factors (examples discussed include earlier advancement of privatization, banking, and bankruptcy laws in Chile; resource misallocation in Mexico; fiscal and external imbalances and crisis episodes in Colombia).

### Policy Implications and Conclusions
- Evidence suggests structural reforms have had broadly positive macroeconomic effects on a number of dimensions in LAC countries.
- Political economy factors constrain reforms:
  - Resistance when losses are concentrated among vocal groups and gains are diffuse.
  - Uncertainty over who will gain or lose creates status quo bias.
  - Distributional conflicts can delay reform following “war of attrition” logic.
  - Timing matters for electoral costs; reforms implemented earlier in the political cycle are less likely to entail electoral costs; reforms implemented the year before the election are associated with electoral costs.
  - Overall economic conditions matter; reforms implemented in periods of strong economic activity typically are not penalized by the electorate.
- To foster sustainability of reforms, adopt policies to mitigate adverse distributional effects:
  - Strengthen unemployment insurance and other social benefits when liberalizing labor markets.
  - Use the tax system to redistribute gains from reform, including scope to increase the role of progressive (non-linear) personal income taxes and enhance redistributive expenditure policies.

*Italic: Source — wpiea2020195-print-pdf*

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_Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020195-print-pdf.pdf_