Market Reforms and Public Debt Dynamics in Emerging Market and Developing Economies

Author: Mr. Zamid Aligishiev, Ms. Gabriela Cugat, Mr. Romain A Duval, Davide Furceri, João Tovar Jalles, Ms. Margaux MacDonald, Mr. Giovanni Melina, Mr. Futoshi Narita, Mr. Chris Papageorgiou, and Carlo Pizzinelli

Market-oriented structural reforms promote economic growth and strengthening public finances. This note shows that reforms are associated with sizable and long-lasting reductions in the debt-to-GDP ratio, mainly through higher fiscal revenues and lower borrowing costs

Volume/Issue: Volume 2023 Issue 005

Publication date: September 2023

ISBN: 9798400247101

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Topics covered in this book

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Exports and Imports , Finance , Economics- Macroeconomics , Public Finance , Economics / General , Fiscal Policy , Debt Dynamics , Economic Regulation , Structural Reforms , Emerging Market Economies , Low-Income Developing Countries , market reform , reform impact , GDP ratio , government debt reduction , government policy response , Emerging and frontier financial markets , Debt reduction , Fiscal stance , Global , Asia and Pacific , Debt sustainability analysis

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Summary

Many emerging market and developing economies face a difficult trade-off between economic support and fiscal sustainability. Market-oriented structural reforms ease this trade-off by promoting economic growth and strengthening public finances. The empirical analysis in this note, based on 62 EMDEs over 1973-2014, shows that reforms are associated with sizeable and long-lasting reductions in the debt-to-GDP ratio mainly through higher fiscal revenues and lower borrowing costs. These effects are larger in countries with greater tax efficiency, lower informality, and higher initial debt. Moreover, a model-based analysis elaborates on how such fiscal gains can be enhanced when revenue windfalls associated with reforms are saved or channeled through higher public investment.