## How Reform Can Aid Growth and Green Transition in Developing Economies

_IMF Blog, September 25, 2023_

## Source details

**Canonical URL:** [How Reform Can Aid Growth and Green Transition in Developing Economies](https://www.imf.org/en/blogs/articles/2023/09/25/how-reform-can-aid-growth-and-green-transition-in-developing-economies)

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## Bibliographic details
- Authors: Christian Ebeke, Florence Jaumotte
- Published: September 25, 2023

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### Context and challenge
- Many emerging market and developing economies face threats to economic growth and limited policy space due to high inflation, rising debt, and balance of payments pressures.
- Challenges intensified during the pandemic and by Russia’s war in Ukraine, increasing risks of slower growth, constrained capacity to support vulnerable populations, and substantial social instability.
- These economies must balance participation in global efforts to reduce carbon emissions with the need to preserve growth and jobs.

### Key findings on reform effects
- Economy-wide reforms that overhaul institutions and regulations for businesses and people can produce rapid gains even under severe economic strains if reforms are properly prioritized and sequenced.
- First-generation reforms—targeting governance, business regulation, and external integration—promote domestic and foreign investment and enhance labor productivity.
- In economies with significant structural impediments, first-generation reforms can boost output levels by up to 4 percent in two years and up to 8 percent in four years.
- Historical illustrations cited:
  - Georgia’s business regulation streamlining and fiscal reform in 2005.
  - Senegal’s comprehensive overhauls to improve governance, business regulation and external integration put in place in 2014-18.

### Structural impediments addressed by reforms
- Weak governance driven by government ineffectiveness, political instability, and corruption.
- Excessive regulation that makes it difficult to open and run a business, particularly in low-income countries.
- Limits on trade, notably through controls on foreign exchange and access to foreign capital.
- Restrictions in credit markets and labor markets.

### Interaction with the green transition
- First-generation reforms are essential both to generate the growth needed to support the green transition and to facilitate the shift to low-carbon activities.
- Green policies, especially energy taxation, achieve better decarbonization outcomes after first-generation reforms that make the economy more responsive to price signals.
- Governance reforms can:
  - Make policy more predictable, increasing private-sector incentives to direct capital to green investments.
  - Reduce implementation risks for climate projects and attract more financing from abroad.
- Reducing barriers to creating businesses enables private investment in new green sectors.
- Lowering trade barriers expands access to low-carbon technology and facilitates critical technology transfers for less technologically advanced countries.
- First-generation reforms alone are insufficient: faster growth can increase emissions, so stringent green reforms—energy taxation, regulations, and green investments—are necessary to significantly reduce the emission intensity of economic activity.
- Combining first-generation and green reforms enables reductions in overall emissions while supporting growth.

### Policy implications and recommendations
- Prioritize, sequence, and bundle reforms to address the most binding constraints to economic activity first (governance, business regulation, trade and access to foreign capital).
- Frontload reform packages to deliver visible gains quickly, helping overcome resistance to major changes and build public support, including for the green transition.
- Pair structural reforms with stringent green measures (energy taxation, regulations, green investments) to ensure growth does not increase emissions and to reduce emission intensity over time.
- Use governance improvements to lower implementation risk and attract foreign financing for climate projects.
- Reduce barriers for business creation and trade to enable private-sector-led investment in low-carbon technologies and sectors.

*This blog reflects research by Nina Budina; Christian Ebeke; Florence Jaumotte; Andrea Medici; Augustus Panton; Marina M. Tavares; and Bella Yao (IMF staff).*

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## References

- [new staff discussion note](https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2023/09/21/Structural-Reforms-to-Accelerate-Growth-Ease-Policy-Trade-offs-and-Support-the-Green-538429?cid=bl-com-SDNEA2023007)
- [Georgia](https://www.imf.org/en/Publications/CR/Issues/2016/12/31/Georgia-Staff-Report-for-the-2006-Article-IV-Consultation-Third-Review-Under-the-Poverty-19240)
- [Senegal](https://www.imf.org/en/Publications/CR/Issues/2019/01/28/Senegal-Staff-Report-for-the-2018-Article-IV-Consultation-and-Seventh-Review-Under-the-46553)

_Source: https://www.imf.org/en/blogs/articles/2023/09/25/how-reform-can-aid-growth-and-green-transition-in-developing-economies_