Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
March 17, 2008
Policymakers the world over frequently grapple with the question of how countries can accelerate their rate of economic growth.
Harvard University's Philippe Aghion: Countercyclical fiscal policy is at least as important as structural policies in fostering growth (IMF photo)
IMF RESEARCH CONFERENCE
While there is no magic formula, countries often are urged to undertake structural reforms—policies that liberalize financial and product markets and reduce barriers to international trade.
An IMF conference held February 28-29, 2008—"On the Causes and Consequences of Structural Reforms"—served as a forum for experts conducting research on the determinants of reforms and the connection between various types of structural reforms and growth.
Simon Johnson, Director of the Research Department and Economic Counselor at the IMF, set the stage for the conference by noting that the papers presented would address three broad questions:
• What are the effects of reforms, particularly on economic growth?
• How do reforms interact with each other?
• What is the impact of democracy and pressure groups on reforms?
Johnson noted that the answers to these questions would be extremely helpful to the IMF in dispensing policy advice to member countries.
The conference also provided an opportunity to showcase a new database assembled by the Research Department on indicators of structural reforms. This database contains de jure—that is, officially sourced—indicators of trade, product markets, capital account, and domestic financial regulation, covering 91 countries for the period from 1973 to 2005. This database will be a valuable resource for researchers who want to investigate the impact of various types of structural reforms.
Effects of reforms
Several papers pointed to the beneficial effects of undertaking structural reforms. Thierry Tressel examined the effects of financial and trade reforms on the performance of manufacturing output across a number of countries. He found that financial sector reforms had two important effects: they
• improved the efficiency of financial intermediation by reallocating capital across sectors; and
• enhanced the resilience of economies to shocks.
Trade reforms resulted in faster output growth in export sectors, especially those that used more intensively imported intermediate inputs. Nauro Campos and Yuko Kinoshita reported evidence of a positive relationship between reforms, especially financial sector liberalization and privatization, and the ability of a country to attract foreign direct investment (FDI).
Thorsten Beck and Maria Soledad Martinez Peria examined the impact of increased foreign bank participation in the Mexican economy between 1995 and 2005 and found that it most likely led to a reduction in banking services and the quantity of loans to the poor.
Complementary reforms
Given that, with few exceptions, structural reforms appear to have had beneficial effects on the performance of the economy, it becomes important from a policy standpoint to know which reforms are conducive to others and whether there are complementary reforms—that is, reforms that reinforce the positive effects of other reforms.
Several papers in the conference addressed these issues. David Hauner and Alessandro Prati showed that trade liberalization was a significant leading indicator of both domestic financial liberalization and capital account liberalization—a result that was robust to different data frequencies and estimation methods.
Ashley Taylor also examined the interaction between trade liberalization and financial market liberalization, concluding that they have complementary effects on the average productivity of firms and the size of domestic producers. In addition, he pointed out that, if a country's domestic financial sector is already functioning efficiently, then the benefits of trade liberalization are attenuated.
Product market regulations
Another set of papers suggested that there are complementarities between product and labor market reforms. Wei Fang and Richard Rogerson showed that the way in which product market regulations affect the number of hours worked by individuals in the economy is similar to that of taxes on labor income or consumption.
Giuseppe Fiori, Giuseppe Nicoletti, and Stefano Scarpetta examined the joint impact of product and labor market reforms on employment in OECD countries showing that the beneficial effects of product market reforms are larger the greater the extent of labor market deregulation. They also presented some evidence suggesting that product market liberalization actually promotes labor market deregulation.
Philippe Aghion and Enisse Kharroubi considered the impact of countercyclical fiscal policy on economic performance in OECD countries. They found that output and productivity of sectors more dependent on external finance grew relatively faster in economies in which fiscal policy was more countercyclical, and concluded that countercyclical fiscal policy is at least as important as structural policies in fostering economic growth.
Political economy
Francesco Caselli and Nicola Gennaioli argued that, when a market for corporate control exists, reforms aimed at increasing product market competition encounter less political opposition. As a result, financial reforms may be used in the short-run to open the way to future product market deregulation.
Prachi Mishra and Antonio Spilimbergo found that democratic countries undertake more structural reforms than nondemocratic countries. Efraim Benmelech and Tobias Moskowitz studied the political economy of U.S. state usury laws in the 19th century. They showed that usury laws affected lending activity and that their strictness was correlated with political restrictions that excluded certain groups, concluding that usury laws were the outcome of the coercive power of private interests.
Former IMF First Deputy Managing Director Anne Krueger offered some insights at the conference luncheon on the benefits of undertaking structural reforms. She strongly supported wide-ranging reforms, particularly trade liberalization, as a way to raise growth rates and make economies more efficient.
Krueger noted that policymakers frequently ask what reforms they should undertake first and recommended as a reply: "Do whatever you can." She emphasized that policymakers should not postpone reforms until sufficient research on the likely effects of reforms is undertaken, as this could be taken as an excuse for delay.
