Labor productivity growth effects of structural reforms: evidence from developing countries

Which structural reforms stimulate labor productivity growth in developing countries? This study examines this question by applying the local projections method of Jordà (2005) to a sample of 35 developing countries over the period 1990–2014. Our results show that financial, trade, and product market reforms contribute significantly to labor productivity growth. These findings remain robust across various methods, including local projections with inverse probability weighted regression adjustment (LP-IPWRA), instrumental variables (IV), and alternative specifications. The analysis of transmission channels suggests that these reforms primarily foster within-sector productivity growth by enhancing dynamic, productive, and allocative efficiency. However, we do not find robust statistical evidence that these reforms directly promote structural change. Our findings highlight the crucial importance of human capital for effective labor reallocation across sectors—a key driver of structural change. Finally, the study underscores the significant productivity gains from appropriate sequencing and complementarity between reforms, suggesting the value of a sequential approach in implementing structural reform policies.