The Role of Structural Reforms in Raising Economic Growth in Central America

IMF Working Papers, October 1, 2011

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Central America experienced moderate growth during the last decade, including in the years leading up to the global financial crisis, but the rate of convergence toward advanced country income levels has still been slow.
Forecasts imply that these trends will continue without further policy action.
Increasing the degree of structural efficiency by one standard deviation raises growth by ½ percent.
Implication: Central American countries could significantly increase their long-run growth rates by increasing the flexibility of markets and improving the quality of regulation.

Data sources used:
- Penn World Table, version 7.0
- A new IMF database on structural reforms
Econometric method:
- Cross-country panel regression of economic growth using System GMM
Factors captured in the analysis:
- Conditional convergence
- Factor accumulation
- Macro policies
- Structural efficiency (via a constructed broad index of efficiency)

Structural efficiency is a significant factor in explaining growth performance.
Policy levers highlighted:
- Increase flexibility of product and labor markets
- Improve quality of regulation
- Advance structural reforms to raise efficiency across markets

Subject: Commodity markets, Financial markets, Foreign exchange, Human capital, Labor, Macrostructural analysis, National accounts, Personal income, Purchasing power parity, Structural reforms
Keywords: Central America, Central America dummy, Commodity markets, Economic growth, Factor Accumulation, Financial Reform, financial system, financial system Index, growth performance, Human Capital, Personal income, product markets index, product markets market index, Purchasing power parity, Structural Reform, Structural reforms, System GMM, WP