Are complementary reforms a “luxury” for developing countries?

- We investigate the impact of policy complementarities of reforms on growth.
- We use composite indicators of six policy levels and dispersion for over 100 countries.
- We found reforms and their complementarity to be positively related to growth.
- Policy complementarity is a stronger condition for growth in developing countries.
- Thus, policy complementarity is not a “luxury” for developing countries.

This paper investigates the impact of complementarity reforms on growth and how it depends on GDP per capita. Based on reform data for six policy areas compiled from various sources during the period 1994-2006 for over 100 countries, we compute composite indicators of reform level and complementarity. We provide qualitative justification for the existence of pair-wise complementarities among policy areas. We then use cross-section and panel data estimates to test the effect of reform level and complementarity on GDP per capita growth. We found reforms to be positively related and their dispersion (or the inverse of complementarity) negatively related to growth, controlling for initial conditions, monetary stability and other structural and institutional variables, as well as endogeneity of reform level and complementarity. We show that the effect of policy complementarity is a stronger condition for sustainable growth in developing than in advanced countries, to conclude that complementary reforms are not a 'luxury' for developing countries.