Thesis title: Essays on structural reforms in developing countries.

This page provides detailed information about my thesis, including the published chapters, the defense committee members, and an extended summary of the thesis.

Published chapters

Defense committee members

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Extended summary

This thesis analyzes three independent yet closely related studies that address issues regarding the macroeconomic effects of structural reforms in developing countries. The thesis examines the ability of structural reforms to stimulate labor productivity, reduce income inequalities, and the role of the International Monetary Fund (IMF) in promoting structural reforms in these countries.

In Chapter 1, we examine the impact of structural reforms on the growth of labor productivity by documenting the mechanisms through which these reforms foster such growth. This chapter has a triple objective: firstly, it seeks to document the channels through which structural reforms influence the growth of labor productivity; secondly, it analyzes the impact of reforms on productivity growth while considering initial conditions. Thirdly, the chapter suggests a sequencing strategy for reforms that policymakers could adopt. The chapter proposes new methodological approaches to consider both the dynamic effect of reforms on productivity growth and the issue of selection bias in structural reforms.By leveraging a sectoral database covering 35 developing countries (22 emerging economies and 13 low-income countries) over the period 1990-2014, and employing the local projection method as outlined by Jorda (2005), this chapter show that trade, domestic finance, and product market reforms significantly contribute to the growth of labor productivity. These results remain robust across alternative methods and specifications. Through documenting the primary mechanisms by which the examined reforms impact labor productivity growth, the findings indicate that reforms predominantly stimulate intrasectoral productivity growth rather than intersectoral productivity growth or structural change.

When conditioning the effect of reforms on labor productivity growth with the level of human capital, our results suggest that structural reforms foster structural change only in countries where the level of human capital is relatively high. These outcomes highlight the notion that market-oriented reforms alone are not capable of bringing about structural change in developing countries. To actualize this change, involving the mobility of workers between sectors exhibiting different productivity levels, it is imperative to implement complementary industrial policies. Indeed, high-productivity sectors require specific skills, and improving the level of human capital could provide the economy with a skilled workforce, thus facilitating the reallocation of workers from less productive firms exiting the market to more efficient new entrants. Furthermore, one unresolved aspect in the literature on structural reforms concerns the sequencing of reforms. Our findings suggest that an approach where trade (or product market) reforms precede domestic financial reforms leads to better outcomes in terms of labor productivity growth than the reverse approach of implementing reforms. In other words, our research underscores that states should adopt a reform strategy based on “gradualism” rather than a “big bang” approach where reforms are simultaneously implemented across all sectors. [Published in Journal of Productivity Analysis].

If structural reforms contribute to improving labor productivity, one of the sources of long-term economic growth, it is crucial to understand their implications in terms of income distribution and reducing income inequality. Thus, Chapter 2 focuses on the distributive effects of structural reforms in 64 developing countries over the period 1973-2014, with particular emphasis on financial reforms. The objective of this chapter is to analyze in detail the dynamic effects of financial reforms (both domestic finance and external finance), identifying the primary beneficiaries of these reforms while considering the structural characteristics specific to each studied economy. Moreover, a critical question regarding the adoption of reforms concerns their complementarity and the order of their implementation.

Using the local projection method and inverse probability weighted regression adjustment (LP-IPWRA) as outlined by Jorda and Taylor (2016), we show that financial reforms are associated with a significant reduction in income inequality. We confirm the robustness of this result by conducting robustness analyses that consider different identification strategies. Subsequently, we perform heterogeneity analyses by examining the effects of reforms on the incomes of households situated at the bottom, middle, and top of the income distribution. Our findings reveal that financial reforms increase the incomes of the most disadvantaged households while reducing those of the wealthiest households. Additionally, we delve into specific dimensions of financial reforms. The results indicate, on one hand, that among the dimensions of domestic finance reforms, only reforms targeting the liberalization of interest rate controls, credit restrictions, competition limits, and public ownership statistically contribute to reducing income inequality. On the other hand, the composition of external finance liberalization reforms is also important. Indeed, only reforms concerning capital inflow liberalization lead to a reduction in income inequality, whereas reforms liberalizing capital outflows result in increased income inequality. Finally, our results highlight that a reform strategy aiming to first liberalize the domestic financial sector before embarking on capital account liberalization is a strategy conducive to reducing income inequality. [Published in Open Economies Review].

The first two chapters analyze the beneficial effects of structural reforms on improving labor productivity growth and their capacity to reduce income inequality. Therefore, it is important to delve into the factors behind the adoption of these reforms. Thus, Chapter 3 examines the potential role of the International Monetary Fund (IMF) in promoting structural reforms in developing countries. This chapter holds crucial importance for developing countries, especially given the COVID-19 pandemic and the international context marked by the Russo-Ukrainian conflict. Indeed, the COVID-19 pandemic has caused a widespread deterioration of structural constraints, amplifying existing vulnerabilities for households, businesses, and the public sector. With a deteriorating social situation post-pandemic, it is urgent for developing countries to recover from the crisis. However, these countries have limited room for new fiscal and monetary stimulus measures to boost demand. In such circumstances, government structural policies are necessary to enable resource reallocation and stimulate productivity. Thus, international cooperation appears necessary, and the IMF’s contribution could play an important role in promoting reforms.

In order to fulfill their commitments to the IMF and maintain close ties with this institution to benefit from its role as a lender of last resort, countries can implement structural reforms that favor growth. The IMF imposes on its members the implementation of conditionality programs aimed at liberalizing markets in exchange for loans provided. These reforms help broaden the tax base and generate the necessary budgetary resources for re- paying IMF loans. In this chapter, we study which category of IMF conditionality contributes to promoting structural reforms in developing countries. We combine a rich set of data on IMF conditionality and structural reforms covering 64 developing countries over the period 1980-2014. By using the entropy balancing method and alternative identification strategies, the results show that IMF conditionality programs promote structural reforms in developing countries. We find that the effect of IMF conditionality can vary depending on the type of conditionality, the type of reform, the period, the initial level of structural reforms, and may depend on certain structural factors, such as the economic cycle, the quality of fiscal and monetary policy, the level of development, and institutional quality. Additionally, we highlight the spillover effects of IMF conditionality on trading partners and that IMF conditionality programs that are adhered to tend to have a more significant impact on structural reforms. Finally, we take into account national political constraints, and our results indicate that the positive effects of IMF conditionality programs in terms of adopting structural reforms depend on national partisan politics. Specifically, conditionality programs lead to a significant progression of structural reforms under left-wing governments. [ Published in Economics of Transition and Institutional Change].