Identifying Reform Priorities: The Role of Non-linearities

December 11, 2020

Preview Citation

Format: Chicago

Klaus-Peter Hellwig. Identifying Reform Priorities: The Role of Non-linearities, (USA: International Monetary Fund, 2020) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Can countries improve their business climate through reforms in specific policy areas? Kraay and Tawara (2013) find that the answer depends on how we measure the business climate. When regressing seven different business climate indices on 38 policy indicators, they find little agreement among the seven models as to which of those policy indicators matter most. I revisit this puzzle using the same data but replacing their linear models with a Random Forest algorithm. I find a strong consensus across models on the importance ranking of policy indicators: No matter which business climate index is considered, the top ten contributors to a better business climate always include high recovery rates in insolvency proceedings (i.e., cents on the dollar for creditors), shorter border formalities for both importers and exporters, and low costs for starting a business. I show that the marginal effect of reforms is heterogeneous across countries and document how reform priorities depend on country specific circumstances.

Subject: Economic sectors, Financial crises

Keywords: Business climate, Random Forest, Shapley values, Structural reforms

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/278
Stock No:

WPIEA2020278
ISBN:

9781513563909
ISSN:

1018-5941

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