November 8^th, 2019

The Macroeconomic Effects of Structural Reforms in Developing Countries

João Tovar Jalles – Economist at Conselho das Finanças Públicas | Portuguese Public Finance Council (joint work with Gabrielle Ciminelli, Davide Furceri and Giovanni Melina)

ABSTRACT

The paper estimates the dynamic macroeconomic effects of structural reforms on output, employment and productivity in a sample of developing countries, and explores how these vary with prevailing macroeconomic conditions and policies. We apply a local projection method to a new dataset of major country- and country-sector-level reform shocks in various areas of labor market institutions, product market regulation, financial and trade liberalization over the past four decades. In the medium run, structural reforms can help lift income and employment levels. Domestic finance reforms implemented when economic conditions are strong are associated with an increase in output that is twice as large as the that estimated for the baseline—unconditional—reform. Trade reforms are associated with a slow but non-negligible increase in output. Labor market reforms generally have positive macroeconomic effects. Finally, product market reforms have statistically significant, although rather small, effects on output. These materialize at a quicker pace relative to other reforms. These findings suggest that prioritizing and sequencing reforms can prove particularly useful for optimizing their beneficial effects on macroeconomic outcomes.

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