Structural Reforms Are Key to Sustained Growth, IMF Study Says

Boosting productivity key to raising living standards in emerging and developing economies

Structural reforms raise productivity by removing impediments to effective resource use

Reforms need to be calibrated to a country’s stage of development

Such a strategy would allow them to further narrow the gap in living standards with the advanced economies, a new IMF study says.

Despite clear progress in recent years, income levels of emerging market and developing economies are still far behind those of advanced economies, note the authors of Anchoring Growth: The Importance of Productivity-Enhancing Reforms in Emerging Market and Developing Economies. With a less favorable external environment and growing demographic challenges, continued strong economic performance in these countries will hinge on how well policymakers are able to unlock productivity growth by improving economic efficiency and a better allocation of resources in the economy.

Exactly how countries go about doing so will depend on their overall policy, business, and institutional environment, the study says, noting that the reform strategy will also depend on the economy’s stage of development, since reforms that generate gains in productivity at earlier stages of development may have a smaller payoff in the later stages.

“The scope for structural reforms remains considerable in most emerging market and developing countries, and recommendations tailored to where the country is located along the development path can help focus attention where potential productivity payoffs are likely to be larger,” the study says.

Recent gains

In many emerging market and developing economies, real GDP growth per capita picked up in the second half of the 1990s, and, since the mid-2000s, they—as a group—have been growing faster than advanced economies.

Growth over the past two decades was supported by a range of external factors—expansion of cross-country production chains, declines in transportation and communication costs, buoyed global trade, and easy financing conditions. However, domestic factors—such as structural reforms that gave greater play to market forces, better policymaking, and greater trade and financial openness—have also played an important role.

There are significant differences in the sources of growth across countries, the study notes. In some countries (for example, in Latin America), growth has been driven by increases in labor utilization. In others it is attributable to...