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The impact of structural reforms on growth in Latin America and the Caribbean: an empirical estimation

Listed author(s):
  • Escaith, Hubert
  • Morley, Samuel A.

Summary Since the mid-1980s, most Latin American and Caribbean countries have adopted a package of structural reforms and there has been a good deal of curiosity about the effect of these reforms on growth. Thanks to influential theoretical models incorporating market openness and to a number of empirical studies, there is a fairly widespread consensus in the literature that in general this effect has been positive. Yet, there appear to be serious methodological problems in the econometric analysis that has been used. This paper presents an evaluation of the impact of trade and capital account liberalization, tax and financial sector reform and privatization, starting from a statistical model estimated using data collected for 17 countries of the region for the period 1970-1996. In line with the literature, the results show that growth was responsive to investment in physical as well as in human capital. Furthermore there is evidence of a positive feedback between the level of education and capital formation. The results also strongly support the positive contribution to growth of a stable macroeconomic environment. In the aggregate, the reforms did not have a significant direct impact on the growth rate, because the different individual components of the reform package have offsetting effects. Tax reform has a positive and lasting impact on growth; capital account reform also raises the growth rate, but only up to a certain point. The other reforms, in particular trade reform, do not seem to have a robust or significant impact on the growth rate, beyond the effect they may have through the other variables in the model. On the contrary, the speed of reform matters a lot, and the more rapid the process of reform, the slower the growth rate. The impact of macroeconomic or investment variables seems to be much more homogeneous across countries than the output response to structural reforms. A direction for future work would be to acknowledge this heterogeneity and attempt to identify why countries differed in their response to reforms, using more appropriate econometric procedures. Resumen La mayoría de los países de América latina y del Caribe adoptó programas de reformas estructurales a partir de la mitad de los años ochenta; la evaluación de los efectos que tuvieron estos programas sobre el crecimiento ha despertado mucho interés. Bajo la influencia de una fuerte corriente teórica en favor de la apertura, y gracias a los resultados de varios estudios empíricos, se ha definido un consenso bastante amplio entorno al efecto positivo de las reformas. Sin embargo, la metodología usada en estos estudios empíricos padece de varios problemas. Este trabajo presenta una evaluación propia de los impactos de la liberalización de las cuentas comerciales y de capital, de las reformas tributarias y financieras y de la privatización, en base a un modelo estadístico usando datos de 17 países de la región para el período 1970-1996. Conforme a los resultados obtenidos en otros estudios, los resultados muestran que el ritmo de crecimiento respondió muy favorablemente a la inversión, tanto en capital físico como en su componente humano. Además, se observó que educación e inversión se potencian mutuamente. Los resultados demuestran claramente la contribución positiva de la estabilidad macroeconómica para el crecimiento. En término general, las reformas no tuvieron un efecto significante sobre el crecimiento, ya que sus diferentes componentes demostraron tener impactos contrarios. La reforma tributaria tiene una influencia positiva y creciente, mientras que el efecto positivo de la liberalización de la cuenta de capital es más limitado. Las otras reformas, en particular la liberalización comercial, no han tenido efectos observables y significativos sobre el crecimiento, más allá de los que tuvieron en otras variables claves ya incorporadas en el modelo. En contraste, la velocidad con cual se ejecutan las reformas es muy importante; lo más rápido el proceso, lo menor la tasa de crecimiento. El efecto de las variables macroeconómicas y de la inversión parece ser mucho más homogéneo entre los países que lo fue la respuesta del crecimiento a las reformas estructurales. Una dirección para futuras investigaciones sería de reconocer esta heterogeneidad y usar metodologías estadísticas más adecuadas para identificar porqué los países han diferido en su respuesta a los programas de reforma.

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Paper provided by Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL) in its series Macroeconomía del Desarrollo with number 1.

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Date of creation: Nov 2000
Handle: RePEc:ecr:col037:5331
Note: Includes bibliography
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  1. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  2. Vittorio Corbo & Jaime de Melo & James Tybout, 2015. "What Went Wrong with the Recent Reforms in the Southern Cone," World Scientific Book Chapters,in: Developing Countries in the World Economy, chapter 2, pages 21-54 World Scientific Publishing Co. Pte. Ltd..
  3. Durlauf, Steven N & Johnson, Paul A, 1995. "Multiple Regimes and Cross-Country Growth Behaviour," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(4), pages 365-384, Oct.-Dec..
  4. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 407-437.
  5. Easterly, William & Loayza, Norman & Montiel, Peter, 1997. "Has Latin America's post-reform growth been disappointing?," Journal of International Economics, Elsevier, vol. 43(3-4), pages 287-311, November.
  6. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-183, May.
  7. Edwards, Sebastian, 1998. "Openness, Productivity and Growth: What Do We Really Know?," Economic Journal, Royal Economic Society, vol. 108(447), pages 383-398, March.
  8. Leamer, Edward E, 1985. "Sensitivity Analyses Would Help," American Economic Review, American Economic Association, vol. 75(3), pages 308-313, June.
  9. McAleer, Michael & Pagan, Adrian R & Volker, Paul A, 1985. "What Will Take the Con out of Econometrics?," American Economic Review, American Economic Association, vol. 75(3), pages 293-307, June.
  10. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-963, September.
  11. 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.
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