Can Reform Waves Turn the Tide? Some Case Studies using the Synthetic Control Method

Abstract

A number of advanced economies carried out a sequence of extensive reforms of their labor and product markets in the 1990s and early 2000s. Using the Synthetic Control Method (SCM), this paper implements six case studies of well-known waves of reforms, those of New Zealand, Australia, Denmark, Ireland and Netherlands in the 1990s, and the labor market reforms in Germany in the early 2000s. In four of the six cases, GDP per capita was higher than in the control group as a result of the reforms. No difference between the treated country and its synthetic counterpart could be found in the cases of Denmark and New Zealand, which in the latter case may have partly reflected the implementation of reforms under particularly weak macroeconomic conditions. Overall, also factoring in the limitations of the SCM in this context, the results are suggestive of a positive but heterogenous effect of reform waves on GDP per capita.

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Notes

  1. 1.

    We have tried to examine the reform impact on alternative outcome variables such as total factor productivity, employment rate, and female labor participation rate. However, we did not obtain meaningful results because given the volatility in these outcome variables, we were unable to find synthetic units that could provide sufficiently good pre-treatment fit for the treated countries. In addition, we would like to focus on the impact of reforms on overall economic performance.

  2. 2.

    Campos and Kinoshita (2010) use the synthetic control method to analyze the impact of financial reforms on FDI inflows, as a robustness check of their regression results.

  3. 3.

    Abadie and Gardeazabal (2003) use the approach to assess the negative impact of the violent conflict in the Spanish Basque Country on economic growth. Abadie et al. (2010) use it to estimate the impact of a large anti-tobacco initiative in California on the per capita sales of cigarettes, the impact of the terrorist attacks on electoral outcome (Montalvo 2011); the effects of relaxing restrictions on home equity lending on retail spending by households (Abdalah and Lastrapes 2012); the impact of natural disasters on economic growth (Cavallo et al. 2013); the effect of civil conflict on economic growth (Dorsett 2013); the impact of nutrition policies on dietary behavior and childhood obesity (Bauhoff 2014); the effect of immigration laws on demographic composition (Bohn et al. 2014); the impact of decrease in police enforcement on traffic fatalities and injuries (DeAngelo and Hansen 2014); and the impact of major natural resource discoveries on economic growth (Smith 2015).

  4. 4.

    See Abadie, Diamond, Hainmueller (2015) for details on the comparison of SCM and traditional regression techniques.

  5. 5.

    The firms may also make their decision in advance, in anticipation of the reforms. In either case, the anticipation effects make it difficult to identify the effective treatment date.

  6. 6.

    See Appendix V in Abadie and Gardeazabal (2003) for details.

  7. 7.

    Calculated using “in space” placebo experiments. See, for instance, Abadie et al. (2015). The dynamic p-value indicates the likelihood of obtaining an estimate at least as large as the one obtained for the treated unit at each post-reform period analyzed. The placebo experiment graphs for each of the treated countries are provided in the Appendix (Figs. 7, 8, 9, 10, 11 and 12).

  8. 8.

    We acknowledge that in the case of Ireland, the synthetic control method may not be able to disentangle the effects of other developments in the 1990s that may have contributed to the success of the reforms, such as a favorable external environment and rising confidence of international investors associated with financial globalization and its EU membership.

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Acknowledgments

The authors would like to thank Ashvin Ahuja and Melesse Tashu for comments. The views expressed in this paper are those of the authors and cannot be attributed to the IMF or its member countries. Any remaining errors are ours.

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Correspondence to Bibek Adhikari.

Appendix: Figures for placebo experiments

Appendix: Figures for placebo experiments

Fig. 7
figure7

New Zealand (1991)

Fig. 8
figure8

Australia (1994)

Fig. 9
figure9

Netherlands (1994)

Fig. 10
figure10

Denmark (1994)

Fig. 11
figure11

Ireland (1994)

Fig. 12
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Germany (2003)

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Adhikari, B., Duval, R., Hu, B. et al. Can Reform Waves Turn the Tide? Some Case Studies using the Synthetic Control Method. Open Econ Rev 29, 879–910 (2018). https://doi.org/10.1007/s11079-018-9490-3

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Keywords

  • Structural reforms
  • Synthetic control method
  • Liberalization
  • Labor and productivity market reforms
  • Growth

JEL Classification

  • E02
  • J08
  • O40
  • O43