Growth-Equity Trade-offs in Structural Reforms

IMF Working Papers, January 5, 2018

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There is evidence of a growth-equity tradeoff for some important structural reforms.
Financial and capital account liberalization seem to increase both growth and inequality.
Some measures of liberalization of current account transactions also appear to increase both growth and inequality.
Reforms aimed at strengthening the impartiality of and adherence to the legal system entail no growth-equity tradeoff—these reforms are good for growth and do not worsen inequality.
Results for the index of network reforms and the measure of decentralization of collective labor bargaining are the weakest and least robust, potentially due to data limitations.

When some structural reforms worsen inequality, higher inequality dampens the growth benefits from those reforms.
Despite this dampening effect, the net effect on growth remains positive for most reform indicators.

Analysis covers cross-country data across advanced, emerging-market, and low-income countries.
Weak and less robust results are noted for network reforms and decentralization of collective labor bargaining, with potential attribution to data limitations.

Policymakers should weigh potential distributional consequences when designing reforms that liberalize financial, capital account, and certain current account transactions.
Strengthening the impartiality of and adherence to the legal system can be pursued without a tradeoff against inequality.
Even when reforms raise inequality, the positive net growth effect for most reform indicators implies that complementary policies addressing distributional impacts may be warranted to share gains more broadly.

IMF Working Paper by Jonathan David Ostry, Andrew Berg, Siddharth Kothari (January 5, 2018).

Appendix I: Reforms Data
- Appendix I: Reforms Data (Markdown version)
- Appendix I: Reforms Data (PDF)