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Relative returns to policy reform - evidence from controlled cross-country regressions

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  • de Castro Alxandre Samy
  • Goldin, Ian
  • Pereira da Silva, Luiz A.

Abstract

The authors aim at contributing to understand the dispersion of returns from policy reforms using cross-country regressions. The authors compare the"before reform"with"after reform"GDP growth outcome of countries that undertook import-liberalization and fiscal policy reforms. They survey a large sample (about 54) of developing countries over the period 1980-99. The benefits of openness to trade and fiscal prudence have been extensively identified in the growth literature, but the evidence from simple cross-section analysis can sometimes be inconclusive and remains vulnerable to criticism on estimation techniques, such as identification, endogeneity, multi-colinearity, and the quality of the data. The authors use a different analytical framework that establishes additional controls. First, they construct a counterfactual control group. These are countries that-under specific thresholds-did not introduce policy reforms under scrutiny. Second, the authors also try to use the most appropriate variable of policy reform, for example, exogenous changes in import-tariffs instead of the endogenous sum of all trade flows. Third, the authors try to base the before-after reform comparison on the most accurate date for the beginning of a policy reform period (instead of comparing averages over fixed intervals of time). Once these controls are set, they explain the difference between average GDP growth rates during the country-specific post and the pre-reform periods, relative to the average GDP growth of the relevant control group. The explanatory variables in the regressions include the standard growth-regression controls. The results are the following: 1) With a better measurement and timing of the policy reforms, the growth effect (the"returns on reform") is generally smaller than in previous papers. 2) There is evidence of contingent relationships between policy and growth, corresponding to the country's size, its export profile, and its governance. 2) Within the group of policy reformers, some countries have exhibited a relatively weaker growth response. Overall, the findings suggest that more accurate measurement and definition of the timing of reforms does not strengthen the significance of the effects of reforms on GDP growth. In fact, the effects are weaker than indicated in most cross-section studies. This suggests that the policy implications to be derived from these relationships should be treated with even more caution than previously thought.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2898.

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Date of creation: 31 Oct 2002
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Handle: RePEc:wbk:wbrwps:2898

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Keywords: Environmental Economics&Policies; Trade Policy; Public Health Promotion; Economic Theory&Research; Health Monitoring&Evaluation; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Economic Theory&Research; Achieving Shared Growth; Environmental Economics&Policies; Trade and Regional Integration;

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References

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  1. Eric M. Engen & Jonathan Skinner, 1992. "Fiscal Policy and Economic Growth," NBER Working Papers 4223, National Bureau of Economic Research, Inc.
  2. Foroutan, Faezeh, 1998. "Does membership in a regional preferential trade arrangement make a country more or less protectionist?," Policy Research Working Paper Series 1898, The World Bank.
  3. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages S103-26, October.
  4. Rodrik, Dani, 1998. "Where Did all the Growth Go? External Shocks, Social Conflict and Growth Collapses," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1789, C.E.P.R. Discussion Papers.
  5. Harrison, Ann, 1991. "Openness and growth : a time series, cross-country analysis for developing countries," Policy Research Working Paper Series 809, The World Bank.
  6. Ben-David, Dan, 1993. "Equalizing Exchange: Trade Liberalization and Income Convergence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(3), pages 653-79, August.
  7. Wacziarg, Romain, 2000. "Measuring the Dynamic Gains from Trade," Research Papers, Stanford University, Graduate School of Business 1654, Stanford University, Graduate School of Business.
  8. Reinhart, Carmen & Tokatlidis, Ioannis, 2005. "Before and After Financial Liberalization," MPRA Paper 6986, University Library of Munich, Germany.
  9. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
  10. Philip R. Gerson, 1998. "The Impact of Fiscal Policy Variableson Output Growth," IMF Working Papers 98/1, International Monetary Fund.
  11. William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
  12. Faezeh Foroutan, 1998. "Does Membership in a Regional Preferential Trade Arrangement Make a Country More or Less Protectionist?," The World Economy, Wiley Blackwell, vol. 21(3), pages 305-335, 05.
  13. Francisco Rodriguez & Dani Rodrik, 1999. "Trade Policy and Economic Growth: A Skeptic's Guide to Cross-National Evidence," NBER Working Papers 7081, National Bureau of Economic Research, Inc.
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Cited by:
  1. Jililian, Hossein & Kirkpatrick, Colin & Parker, David, 2003. "Creating the Conditions for International Business Expansion: The Impact of Regulation on Economic Growth in Developing Countries - A Cross-Country Analysis," Development Economics and Public Policy Working Papers, University of Manchester, Institute for Development Policy and Management (IDPM) 30554, University of Manchester, Institute for Development Policy and Management (IDPM).

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