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In order to assess the growth implications of policy complementarities, this paper applies second-best results to reform indicators. During the transition from central planning to EU integration, which corresponds to a policy cycle, a complementarity index based on structural indicators compiled by the European Bank for Reconstruction and Development (EBRD) decreases and then increases while the level of reforms tends to rise throughout. Corrected for initial conditions, the extent of macroeconomic stabilization and endogeneity, the level of reforms and changes in their complementarity are found to be positively related to output growth. The study uses panel data for 27 countries between 1989 and 2004.
This paper discusses the design of structural policies by relating second-best results and the complementarity of reforms. It computes a complementarity index based on structural reform indicators compiled by the EBRD for transition countries, assuming that the run-up to EU integration corresponds to a nearly complete policy cycle. Using econometric panel estimates, the level of reforms and changes in their complementarity are found to be positively related to output growth, corrected for endogeneity, and given initial conditions and the extent of macroeconomic stabilisation.
This paper discusses the design of structural policies by relating second-best results and the complementarity of reforms. It computes a complementarity index based on structural reform indicators compiled by the EBRD for transition countries, assuming that the run-up to EU integration corresponds to a nearly complete policy cycle. Using econometric panel estimates, the level of reforms and changes in their complementarity are found to be positively related to output growth, corrected for endogeneity, and given initial conditions and the extent of macroeconomic stabilisation.
Policy complementarities have often been overlooked in transition economies, leading to the exclusion or partial adoption of reforms. This paper examines the key determinants of successful transition strategies, and concludes that an approach exploiting complementary relationships and interactions between policies is most likely to result in a welfare improvement. Based on nine policy areas from the European Bank for Reconstruction and Development (EBRD) Transition Indicators database, composite indicators measuring reform implementation and complementarity are constructed. Panel data estimates for 30 countries over the period 1989 to 2012 demonstrate a positive association between improvements in reform complementarity and economic growth. Moreover, the effects are found to persist over time for up to two years after the initial policy change, and are robust to the inclusion of a wide range of control variables. Applying these findings to the case of Kazakhstan illustrates that comprehensive reforms to a targeted group of complementary policies generate sustained increases in output growth, whereas a partial reform strategy results in a loss of welfare.
Going for Growth is the OECD’s annual report highlighting developments in structural policies in OECD countries. It identifies structural reform priorities to boost real income for each OECD country and key emerging economies.
This volume examines the impact on economic performance of structural policies-policies that increase the role of market forces and competition in the economy, while maintaining appropriate regulatory frameworks. The results reflect a new dataset covering reforms of domestic product markets, international trade, the domestic financial sector, and the external capital account, in 91 developed and developing countries. Among the key results of this study, the authors find that real and financial reforms (and, in particular, domestic financial liberalization, trade liberalization, and agricultural liberalization) boost income growth. However, growth effects differ significantly across alternative reform sequencing strategies: a trade-before-capital-account strategy achieves better outcomes than the reverse, or even than a "big bang"; also, liberalizing the domestic financial sector together with the external capital account is growth-enhancing, provided the economy is relatively open to international trade. Finally, relatively liberalized domestic financial sectors enhance the economy's resilience, reducing output costs from adverse terms-of-trade and interest-rate shocks; increased credit availability is one of the key mechanisms.
While economists continue to debate whether particular economic policies, such as those referred to in Willliamson`s (1993) quot;Washington Consensus,quot; can spur growth in developing countries, this paper demonstrates that it is combinations of policies that are more critical for growth. Policy complementarity refers to the mutually reinforcing benefits of policies that create an environment that is conducive to investment and growth. Quantitative measures of policy complementarity are developed, and the study shows empirically, through both an outcomes-based probability framework and a standard regression analysis, that these complementarities are significant and robust in explaining growth outcomes over the period 1985-95.
This paper explores how fiscal policy can affect medium- to long-term growth. It identifies the main channels through which fiscal policy can influence growth and distills practical lessons for policymakers. The particular mix of policy measures, however, will depend on country-specific conditions, capacities, and preferences. The paper draws on the Fund’s extensive technical assistance on fiscal reforms as well as several analytical studies, including a novel approach for country studies, a statistical analysis of growth accelerations following fiscal reforms, and simulations of an endogenous growth model.
This report was prepared by a team led by Roberto Zagha, under the general direction of Gobind Nankani.