19. Reform Design Matters: The Role of Structural Policy Complementarities

A simple demonstration of this result is provided in Macedo and Oliveira Martins (2008).

Staehr (2005) and Wolf (1999) discuss the difference between reform levels and reform speed. In their econometric analyses reform speed is not associated to economic growth in transition economies. See also Iwasaki and Kumo (2019).

See also OECD (2002) on Romania.

Namely foreign owners; the literature finds that privatisation to foreign owners has better effects on firm performance than privatisation to domestic owners. See Iwasaki and Mizobata (2018), Estrin et al. (2009), and also section 5.2 in Bloom et al. (2012) regarding differences in management practices.

Defensive or reactive restructuring is based on shedding labour, cutting obsolete production lines, getting rid of non-productive assets, and so on, while strategic restructuring involves new investments and often requires financial intermediation.

Table 3 in Rocha (2015) provides some empirical evidence of such a complementarity link, in that the coefficient of the interaction term between price liberalisation and competition policy is positive and statistically significant.

The nine covered policy areas are price liberalisation, large-scale privatisation, small-scale privatisation, governance and enterprise restructuring, trade and foreign exchange system, competition policy, banking reform and interest rate liberalisation, securities markets and non-bank financial institutions, and infrastructure. The authors also present a 9 × 9 matrix with 36 potential bilateral policy interactions. For instance, large-scale privatisation can generate more returns if securities exchanges are developed, as this eases financing mechanisms (see column 1 line 8 in their Table 1); also, competition policy will benefit from banking sector reform, as this enhances entry mechanisms (column 6 line 7).

The level of complementarity displays a negative sign in the Macedo and Oliveira Martins (2008) growth regressions. As noted by the authors, in the context of transition high complementarity by itself does not necessarily lead to higher output growth. Indeed, transition is about shifting from a socialist system that, in some sense, had its own coherence but was totally rigid and distorted, towards a flexible market system (that also has a high complementarity). To make this structural change, not all reforms can be implemented at the same time. Reformers had to accept a less coherent system during the initial phase of the transition and the second-best costs associated with it. As the transition progresses and the average level of reforms continues to increase, at some point the complementarity index begins to increase.

The transition literature has emphasised the difference between first-stage (“liberalisation”) and second-stage (i.e. more “institutional”) reforms, sometimes noting that implementing the former stimulated the development of the latter. See, for example, Douarin and Mickiewicz (2017), Di Tommaso et al. (2007), and Havrylyshyn and van Rooden (2003).

In Chang et al. (2009) trade openness is measured as the ratio of trade to GDP adjusted for structural country characteristics; more specifically, this is the residual of a regression of the log of the ratio of exports and imports to GDP on the logs of area and population, and dummies for oil exporting and for landlocked countries. The authors use this variable as an attempt to strengthen the outcome-policy connection, as the volume of trade is an outcome measure related to trade policy, but not exclusively so.

Indeed, for n = 3, we have that \( \frac{\partial}{\partial {P}_1\partial {P}_2}\left({\left(\frac{1}{3}\sum {P_i}^{\eta}\right)}^{\frac{1}{\eta}}\right)=\left(1-\eta \right){\left(\frac{1}{3}\right)}^{1/\eta}{\left({P}_1{P}_2\right)}^{\eta -1}{\left({P_1}^{\eta}+{P_2}^{\eta}+{P_3}^{\eta}\right)}^{\frac{1-2\eta}{\eta}} \); all terms after (1 − η) are positive.

Notice however that a reverse causality argument is not totally clear-cut. High growth, actual or expected, can either generate pressure for reforms in some areas or generate circumstances where reforms are perceived as being not very necessary.