Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies
Staff Discussion Notes, September 12, 2023
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- Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies
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Bibliographic details
- Authors: Zamid Aligishiev, Gabriela Cugat, Romain A Duval, Davide Furceri, João Tovar Jalles, Margaux MacDonald, Giovanni Melina, Futoshi Narita, Chris Papageorgiou, Carlo Pizzinelli
- Published: September 12, 2023
- Series: Staff Discussion Notes
- DOI: https://doi.org/10.5089/9798400247101.006
Summary
- Many emerging market and developing economies face a difficult trade-off between economic support and fiscal sustainability.
- Market-oriented structural reforms ease this trade-off by promoting economic growth and strengthening public finances.
- The empirical analysis in this note is based on 62 EMDEs over 1973-2014.
- Reforms are associated with sizeable and long-lasting reductions in the debt-to-GDP ratio mainly through higher fiscal revenues and lower borrowing costs.
- Effects are larger in countries with greater tax efficiency, lower informality, and higher initial debt.
- A model-based analysis elaborates on how fiscal gains can be enhanced when revenue windfalls associated with reforms are saved or channeled through higher public investment.
Key empirical findings
- Sample and period: 62 EMDEs over 1973-2014.
- Primary quantitative outcome: sizeable and long-lasting reductions in the debt-to-GDP ratio associated with market-oriented structural reforms.
- Principal transmission channels identified:
- Higher fiscal revenues.
- Lower borrowing costs.
Mechanisms and heterogeneity
- Reforms operate through both growth promotion and direct fiscal-strengthening effects.
- The magnitude of debt reduction effects is larger where:
- Tax efficiency is greater.
- Informality is lower.
- Initial debt is higher.
Model-based analysis and policy scenarios
- The model-based analysis examines how fiscal gains from reforms can be amplified by fiscal choices.
- Two policy uses of reform-related revenue windfalls are emphasized:
- Saving the windfalls (implying debt reduction).
- Channeling windfalls into higher public investment (implying potential growth returns and altered debt dynamics).
Policy implications and recommendations
- Market-oriented structural reforms can help reconcile short-term economic support with long-term fiscal sustainability by lowering debt-to-GDP ratios.
- Complementary policies that improve tax efficiency and reduce informality increase the fiscal payoff of reforms.
- Strategic use of reform-induced revenue windfalls—either saving them or directing them to productive public investment—can enhance fiscal gains.
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- Staff Discussion Note