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The Aggregate Impact of Micro Distortions: Complementarities Matter

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  • Raphael Bergoeing

    (University of Chile)

  • Norman V. Loayza

    (The World Bank)

  • Facundo Piguillem

    (EIEF)

Abstract

We explore how developmental and regulatory impediments to resource reallocation limit the ability of developing countries to adopt technologies: an efficient economy quickly innovates; but when the economy is unable to fully use resources liberated by closing firms, or when policy distortions deter firm dynamics, then technological adoption becomes sluggish, and growth is reduced. Our theory accounts for 75% of the income (GNI) gap between Latin America and the U.S. Half of this simulated gap is explained by the barriers individually, the other half by their complementarity. Thus, the benefits from market reforms are largely diminished if distortions, developmental as well as regulatory, are not uniformly eliminated.

Suggested Citation

  • Raphael Bergoeing & Norman V. Loayza & Facundo Piguillem, 2010. "The Aggregate Impact of Micro Distortions: Complementarities Matter," EIEF Working Papers Series 1003, Einaudi Institute for Economics and Finance (EIEF), revised Feb 2009.
  • Handle: RePEc:eie:wpaper:1003
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