The Time is Nigh: How Reforms Can Bring Back Productivity Growth in Emerging Markets

IMF Blog, December 18, 2013

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The Time is Nigh: How Reforms Can Bring Back Productivity Growth in Emerging Markets

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Bibliographic details

• Authors: Era Dabla-Norris, Kalpana Kochar
• Published: December 18, 2013

Context and central argument

• Authors: Era Dabla‑Norris, Kalpana Kochar
• Date: December 18, 2013
• (Version in Español)
• Core point: The era of remarkable growth in many emerging market economies fueled by cheap money and high commodity prices may very well be coming to an end. Structural factors and reduced incentives for reform during the “good times” have weakened previous growth engines, making it essential for governments to pursue reforms to raise productivity—the foundation of sustainable growth and rising living standards.

Wanted: A second generation of reforms

• Objective: Increase competition and improve market functioning so emerging market economies can “climb the technology ladder” from cheap, low‑margin goods to more value‑added manufacturing and modern services (transportation, distribution, information and communication technology).
• Goal: Encourage resource reallocation from lower productivity activities (for example, agriculture) toward higher value‑added manufacturing and more modern services.

Real sector reform — priority policy actions

• Improve the business environment:
  • Reduce administrative burdens.
  • Simplify regulations.
  • Strengthen competition.
  • Cut red‑tape.
  • Rationale: Heavy regulation discourages international participation and limits knowledge transfers from abroad.
• Remove labor market distortions and rigidities:
  • Target rigid hiring and firing rules and employment protection regulations that encourage proliferation of small, informal, and less productive firms.
  • Encourage movement from informal to formal sector and from low‑productivity to high‑productivity sectors and new activities.
  • Provide a safety net to protect workers during adjustment.
• Liberalize foreign direct investment:
  • Remove regulations limiting foreign direct investment that hinder technology adoption, reduce competition, prevent technology transfers, and hamper entry of new firms.
  • Expected outcome: Productivity gains for the economy as a whole.

Financial sector reform — priority policy actions

• Ease financial restrictions:
  • Remove interest rate ceilings and controls on credit.
  • Introduce stronger regulatory and supervisory frameworks to curb unsound financial market practices.
  • Expected effect: Allow capital to flow to higher‑return uses while minimizing systemic risks.
• Develop local capital markets:
  • Focus on developing local currency bond markets to increase financing availability for long‑term and innovative investments.

Human capital and infrastructure

• Invest in people’s skills:
  • Rationale: OECD scores in reading, mathematics, and science show large gaps between emerging and advanced economies, indicating significant payoffs from investing in higher education.
• Address infrastructure deficits:
  • Many emerging market economies have deficient transportation and communications networks and limited energy generation capacity despite progress in areas such as telecommunications.
  • Policy levers: Reform regulatory environment for infrastructure and promote public‑private partnerships to attract private investment.
  • Expected benefits: Better roads, railways, ports, and airports improve firms’ ability to connect to domestic and foreign markets, increasing competitiveness, efficiency, productivity, and growth.

Implementation challenges

• Political economy constraints:
  • Resistance from vested interests that benefited from the status quo.
  • Difficulty of adopting reforms during lower growth and tighter government fiscal positions.
  • A weak fiscal position makes it harder to fund compensation for those who lose from structural reforms.
  • Governments with limited political capital may prioritize reducing debt and deficits over structural reforms.
• Determinant of outcomes:
  • How emerging market economies reconcile competing interests to implement necessary reforms will determine their future prospects.

Source: IMF blog page — "The Time is Nigh: How Reforms Can Bring Back Productivity Growth in Emerging Markets", Era Dabla‑Norris and Kalpana Kochar, December 18, 2013.

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• Staff Discussion Note
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  • Staff Discussion Note (PDF)