## Identifying Reform Priorities: The Role of Non-linearities

_IMF Working Papers, December 11, 2020_

## Source details

**Canonical URL:** [Identifying Reform Priorities: The Role of Non-linearities](https://www.imf.org/en/publications/wp/issues/2020/12/11/identifying-reform-priorities-the-role-of-non-linearities-49917)

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## Bibliographic details
- Authors: Klaus-Peter Hellwig
- Published: December 11, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513563909.001

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### Research question and approach
- Research question: Can countries improve their business climate through reforms in specific policy areas?
- Context: Kraay and Tawara (2013) regressed seven different business climate indices on 38 policy indicators and found little agreement across the seven linear models on which policy indicators matter most.
- Author’s approach: Revisit the same data but replace linear models with a Random Forest algorithm.
- Methodological note: Uses Random Forest and reports consensus across models and heterogeneous marginal effects across countries.

### Key findings
- Strong consensus across models on the importance ranking of policy indicators when using Random Forest.
- Consistently among the top ten contributors to a better business climate (no matter which business climate index is considered):
  - High recovery rates in insolvency proceedings (i.e., cents on the dollar for creditors).
  - Shorter border formalities for importers.
  - Shorter border formalities for exporters.
  - Low costs for starting a business.
- The marginal effect of reforms is heterogeneous across countries.
- Reform priorities depend on country specific circumstances.

### Policy implications and recommendations
- Prioritize reforms that raise recovery rates in insolvency proceedings to improve creditor outcomes.
- Reduce border formalities for both imports and exports to enhance business climate indicators.
- Lower costs for starting a business as a consistent reform priority across indices.
- Tailor reform sequencing and emphasis to country specific circumstances because marginal effects vary across countries.

### Data, scope, and keywords
- Data scope referenced: same dataset used by Kraay and Tawara (2013) of seven business climate indices and 38 policy indicators.
- Subjects: Economic sectors, Financial crises
- Keywords: Business climate, Random Forest, Shapley values, Structural reforms

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2020/12/11/identifying-reform-priorities-the-role-of-non-linearities-49917_