Reform complementarities and growth: Evidence and mechanisms

Abstract

When reforms of different policy areas are said to be complementary, the presence of one reformed area bolsters the effectiveness of reform of the other. We use the five areas of the Economic Freedom of the World (EFW) index over 2000–2017 to test for the impact of reform complementarities on real per capita income growth in up to 131 countries. Using a novel index for complementarity (Braga De Macedo & Oliveira-Martins, 2008, Econ. Transit.), we find robust evidence that pursuing broader reform packages is associated with an increase in annual growth by about 1.2%. Further analysis shows that the effect of complementarities operates largely through its positive impact on domestic investment.