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Mr. Jonathan David Ostry, Mr. Andrew Berg, and Siddharth Kothari
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 covering advanced, emerging-market, and low-income countries. Our main finding is that there is indeed evidence of a growth-equity tradeoff for some important reforms. Financial and capital account liberalization seem 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 tradeoff—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, potentially due to data limitations. We also ask: If some structural reforms worsen inequality, to what degree does this offset the growth gains from the reforms themselves? While higher inequality does dampen the growth benefits, the net effect on growth remains positive for most reform indicators.
Mr. Jonathan David Ostry, Mr. Andrew Berg, and Siddharth Kothari

-series—essential for the analysis undertaken here. Our overall finding is that some structural reforms do tend to give rise to growth-equity tradeoffs. However, the fact that reforms increase inequality should not be viewed as a reason to abandon structural reforms or undo reforms that have been undertaken. The net effect of reforms on growth remains positive for most reforms indicators, even after considering the negative effect from increased inequality. We also find that the extent of the trade-off between growth and equity varies by reform type. A granular approach to the

reforms, how can politicians navigate the issue, and even manage to get re-elected given the risk of vocal opposition from the losers? Recognizing that structural reforms may generate growth-equity tradeoffs, Jonathan Ostry’s new paper analyzes the impacts of reforms on both growth and inequality. He finds that a lot depends on what type of reform is being considered. Domestic financial deregulation, external capital market liberalization, and some measures of current account reform increase both growth and inequality. But basic institutional reforms that, for

Mr. Jonathan David Ostry, Mr. Andrew Berg, and Siddharth Kothari

Front Matter Page Research Department Contents I. INTRODUCTION II. A REVIEW OF THE LITERATURE III. REFORMS DATA IV. GROWTH-EQUITY TRADE-OFFS: AN ASSESSMENT FRAMEWORK V. GROWTH-EQUITY TRADE-OFFS IN REFORMS: RESULTS A. Domestic Finance Reforms B. Capital Account Liberalization C. Rule of Law D. Current Account Liberalization E. Networks Reform F. Collective Bargaining Reforms G. Reforms, Growth, and Inequality: A Look at Country Cases VI. STRUCTURAL REFORMS, INEQUALITY, AND GROWTH: A SIMPLE CALCULATION VII. CONCLUSION

International Monetary Fund. Communications Department
Finance & Development, June 2018
IMF Research Perspective (formerly published as IMF Research Bulletin) is a new, redesigned online newsletter covering updates on IMF research. In the inaugural issue of the newsletter, Hites Ahir interviews Valeria Cerra; and they discuss the economic environment 10 years after the global financial crisis. Research Summaries cover the rise of populism; economic reform; labor and technology; big data; and the relationship between happiness and productivity. Sweta C. Saxena was the guest editor for this inaugural issue.
Ara Stepanyan and Jorge Salas
Spain’s structural reforms, implemented around 2012, have arguably contributed to a faster and stronger economic recovery. In particular, there is strong evidence that the 2012 labor market reforms increased wage flexibility, which helped the Spanish economy to regain competitiveness and create jobs. But the impact of these labor reforms on income inequality and social inclusion has not been analyzed much. This paper aims to shed light on this issue by employing an econometric decomposition procedure combined with the synthetic control method. The results indicate that the 2012 labor reforms have helped improve employment and income equality outcomes with no substantial impact on the overall risk of poverty. Nevertheless, the reforms appear to have induced a deterioration of average hours worked, in-work poverty, and possibly also of involuntary part-time employment.