Growth‐equity trade‐offs in structural reforms
| Published date | 01 May 2021 |
| Author | Jonathan D. Ostry,Andrew Berg,Siddharth Kothari |
| Date | 01 May 2021 |
| DOI | http://doi.org/10.1111/sjpe.12265 |
Scott J Polit Econ . 2021;68:209–237. wileyonlinelibrary.com/journal/sjpe
|
209
1 | INTRODUCTION
The global recovery since the financial crisis has been weak and uneven, with fear of secular stagnation in ad-
vanced economi es and a slowdown in potential output g rowth in many emerging and develo ping economies. In
addition, the l ower bound on the nominal polic y interest rate and the buildup of pu blic debt after the crisis has
Accepted: 23 September 2020
DOI: 10 .1111/sjpe.1 2265
ORIGINAL ARTICLE
Growth-equity trade-offs in structural reforms
Jonathan D. Ostry1,2| Andrew Berg1| Siddharth Kothari1
The views exp ressed in this pa per are those of t he author(s) and d o not necessar ily represent t he views of the IMF, it s Executive Boa rd, or IMF
management . The authors a re grateful to Rom ain Duval and Dav ide Furceri for he lpful comment s, to Prakash Lo ungani and Ke Wang fo r their
review of count ry cases in th e paper, and to Yorbol Yakhs hilikov for super b research sup port.
1International Monetary Fund, Washington,
DC, USA
2Centre for Econ omic Policy Resear ch,
London, UK
Correspondence
Jonathan D. Ostry, International Monetary
Fund, Washingt on, DC, USA.
Email: jostry@imf.org
Abstract
Do structural reforms that aim to boost potential output
also change the distribution of income? We shed light on
this question by looking at the broad patterns in the cross-
country data coveri ng advanced, emerging-market, an d low-
income countries. Our main finding is that there is indeed
evidence of a growth-equity trade-off for some important
reforms. Financial a nd capital account liberalization s eem to
increase both growth and inequality, as do some measures
of liberalization of current account transactions. Reforms
aimed at strengthening the impartiality of and adherence
to the legal system seem to entail no growth-equity trade-
off—such reforms are good for growth and do not worsen
inequality. The results for our index of network reforms as
well as our measure of the decentralization of collective
labor bargaining are the weakest and least robust, poten-
tially due to data limit ations. We also ask: If some structur al
reforms worsen inequality, to what degree does this offset
the growth gains fr om the reforms themselves? While high er
inequality doe s dampen the growth benefits, the net effect
on growth remains po sitive for most reform indicators.
© 2020 Scottis h Economic Societ y. The International Mo netary Fund ret ains copyright and all o ther rights in the m anuscript of
this articl e as submitted for pu blication.
210
|
OSTRY eTal.
left little s pace for traditional monet ary and fiscal policy to b oost output and employment . In this environment,
there is growing in terest in structur al reforms (broadly defin ed to include all reforms tha t lead to a more efficient
allocation of re sources) to provide a durable f illip to economic growth .
A second worriso me trend is the widespread in crease in inequality seen wi thin many countries over the last
few decades. S ome inequality is an integ ral part of the incentive s tructure in a market-based econ omy. However,
rising inequal ity has a range of pernicio us social and politic al effects, inclu ding supporting th e recent rise in popu-
lism, isolation ism, and protectionism . Rising inequality mi ght have been tolerated duri ng the period of great mod-
eration but, i n a period of slow growth, supp ort for globalization and p ro-growth reforms has been w aning, with
rising inequal ity a contributing facto r. It is tempting to thi nk that if policy makers could sim ply get growth going,
inequality wo uld take care of itself. Unfo rtunately, recent work sug gests this is a dangerou s gamble—slow or frag-
ile growth and hi gh inequality seem to be two si des of the same coin, and durabl e growth at a healthy pace will
only be possibl e if growth itself become s more inclusive, likely requ iring policy intervent ion (Berg & Ostry, 2017;
Berg et al., 2018; Os try et al., 2019).
While there is a con sensus that struc tural reforms ca n increase growth a nd are therefore an imp ortant eleme nt
of the policy too lkit in the current environm ent, there is also a fear that c ertain reforms could fu rther exacerbate
inequality. Refor ms produce both “winners” a nd “losers,” and it is perhaps th e opposition of the losers th at make
reforms so diff icult to implement politica lly. As a senior European policy maker recently lamented: “We all kn ow
what to do; we just don' t know how to get re-electe d after we've done it.” Moreove r, if the losers from reforms a re
concentrated am ong those who are already le ss advantaged, then refor ms can indeed increase ine quality, which
in turn can redu ce the level and sustainabili ty of growth. More generall y, structur al reforms usually aim to allow
market forces to play a larger role. As suggested by many strands of the literature, they may therefore induce
greater inequa lity insofar as those membe rs of society best able to ta ke advantage of the greater role of ma rket
incentives tend to b e those with better init ial conditions.
To get a full picture of the economic impact of reforms requires a nested approach, one which can assess
the impact of ref orms on both growth and inequal ity. Such an approach is also esse ntial to allow for the possible
feedback from r eform-induced changes in in equality to growth (Os try, 2015). The total effec t on growth consists
of the direct effect th at reforms engender plus the indirect eff ect operating through the c hange in inequality. In
this paper we the refore ask the following q uestions: Do reforms e ntail a growth-equi ty trade-off? I n particular, do
reforms which increase growth also increase inequality and, through the increase in inequality, potentially dampen
the growth inc rease from the reform?
We adopt a macroecon omic frame to answer th ese questions. We use a cro ss-country approa ch covering data
from advanced, emerging-market, and low-income countries—the encompassing nature of our dataset speaks
to the global relevance of our results. We use two complementary methods—panel (growth and inequality) re-
gressions and an eve nt-study approach—to assess the a ggregate relation among grow th, inequality, and refor ms.
We also undert ake an overview of select count ry cases to illustrate a n umber of findings from the c ross-country
analysis.
We assemble a comprehensive dataset of reform indices, covering financial, institutional, and real reforms,
updating the dat aset put together by Ostr y et al. (2009). Financia l reforms include domes tic banking and securi ty
market reforms, as well as external capital market liberalization. We consider broa d institutional reforms to the
legal framework as well as real sector reforms including trade reforms, network reforms, and labor market re-
forms. For inequ ality, we use data from the Sta ndardized World Income Ine quality Database (So lt, 2009), which is
the best sourc e for consistent data on in equality for a wide ra nge of countries and for a lo ng time-series—esse ntial
for the analysis undertaken here.
Our overall fin ding is that some struct ural reforms do tend to give ris e to growth-equity tr ade-offs. However,
the fact that r eforms increase inequal ity should not be viewed as a r eason to abandon struc tural reforms or undo
reforms that have been undertaken. The net effect of reforms on growth remains positive for most reform
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