The short term effects of structural reforms and institutional improvements in OECD economies

Abstract

Using a panel of 37 OECD countries over the period 1990–2019, we examine the short to medium term effect of structural reforms and governance or institutional improvements on growth. Employing an updated OECD dataset on product and labor market regulation and governance indicators for the World Bank and after controlling for the endogeneity of reforms via the augmented inverse probability weighting (AIPW) method we find that it is governance or institutional improvements (such as on government effectiveness, regulatory quality and rule of law) that have positive growth effects on real GDP in most cases. Labour market reforms do have positive growth effects under specific conditions, i.e., at times of recession, better governance, low indebtedness, low trade openness, high employment rate and tight monetary policy. Product market reforms have negative growth effects at most times and states considered. However, we find that, countries with better governance quality and deregulated labour market can reap significant benefits from them.