Identifying Structural Reform Gaps in Emerging Europe, the Caucasus, and Central Asia

IMF Working Papers, March 30, 2017

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Paper compares structural indicators for 25 countries in Emerging Europe, the Caucasus, and Central Asia with:
- a generic country with similar characteristics that is 40 percent richer, and
- a country with the average EU income.
Uses data from the World Economic Forum’s Global Competitiveness Report as an example.
Focuses on (approximate) comparisons between countries and does not attempt to establish the link between structural reforms and growth.
Approach can be applied to other indicators and at a more granular level.

Improvements are particularly crucial in the areas of:
- institutions,
- financial market development,
- infrastructure,
- goods and labor market efficiency,
- areas related to innovation.
For the more ambitious goal of reaching average EU income, reform needs are correspondingly larger.

Empirical comparisons rely on structural indicators from the World Economic Forum’s Global Competitiveness Report.
The methodology emphasizes cross-country (approximate) comparisons rather than causal identification of reform effects on growth.
Tests are conducted for changes in empirical specifications.

Quality of structural indicators may limit inference.
Possible non-linearities in relationships between indicators and outcomes.
Potential for reform complementarities that affect the interpretation of single-indicator gaps.

Target reform priorities where gaps are largest: institutions, financial sector development, infrastructure, market efficiencies, and innovation-related areas.
Larger and more comprehensive reforms are required to achieve average EU income relative to a 40 percent richer comparator.
Methodology can inform prioritization of reforms and be applied to other indicator sets or more granular (subnational or sectoral) analyses.