1. STRUCTURAL REFORM PRIORITIES in emerging Europe and central Asia
Maksym Ivanyna, Joint Vienna Institute
The views expressed in this presentation are those of the authors and do not necessarily represent those of the Joint Vienna Institute (JVI) or JVI policy
Good afternoon. My presentation is about choosing structural reform priorities in the WB countries, which is a joint work with Norbert Funke, and still is a research in development.

2. Structural Reforms Boost Growth… But There Is Need To Prioritize
Hundreds of directions government can take
Reforms are costly politically and economically
Literature:
Reform indexes vs. growth
… or micro-studies of particular reforms
Look at the following scatter plot: x axis – log of output per capita, y axis – GCR index: a composite of over 100 structural reform indicators ranging from quality of institutions through labor and goods markets efficiency to innovation. The relationship between the two is strongly positive. The causal mechanisms have been established in research.
Here is WB. WB does not include Kosovo on this figure and in this analysis in general, because of data availability issues. Here is NMS, here is EU. Clearly, WB have a lot to do to catch up in terms of income. They also need to do a lot of progress in the structural reform.
Progress in str. reform is a way to go. But where to start, given the government resource constraints? It is certainly not too informative to advice to reform everything.. So what are the reform priorities?
We approach this question from two angles:
First, gaps in which reform areas are the largest? We compare WB with NMS and EU. The aggregate gap is large, it can be seen on the graph, but which areas are the biggest laggards? They could be the candidates to reform..
Second, which reform areas bring the biggest growth dividend? Is it better to close a large gap in an area, which is less growth-enhancing, then a small gap in a reform area, which affects growth more? We use growth regressions to tentatively rank reforms by their importance for growth.
Combining the two angles allows us to construct reform priorities for the WB. The larger is the gap, or the more important is the reform for growth, the higher is its priority.
Sources: World Economic Forum; IMF WEO, 2013.

3. This Paper: Link Between Macro Overview And Micro Studies
Reform gaps in the EE compared to “trend” (“normal”) level or other benchmarks
Growth regressions to rank reforms…
Assumption for consistency of ranking. Theoretical and empirical evidence
Large gaps + large impact on growth  high reform priority
Look at the following scatter plot: x axis – log of output per capita, y axis – GCR index: a composite of over 100 structural reform indicators ranging from quality of institutions through labor and goods markets efficiency to innovation. The relationship between the two is strongly positive. The causal mechanisms have been established in research.
Here is WB. WB does not include Kosovo on this figure and in this analysis in general, because of data availability issues. Here is NMS, here is EU. Clearly, WB have a lot to do to catch up in terms of income. They also need to do a lot of progress in the structural reform.
Progress in str. reform is a way to go. But where to start, given the government resource constraints? It is certainly not too informative to advice to reform everything.. So what are the reform priorities?
We approach this question from two angles:
First, gaps in which reform areas are the largest? We compare WB with NMS and EU. The aggregate gap is large, it can be seen on the graph, but which areas are the biggest laggards? They could be the candidates to reform..
Second, which reform areas bring the biggest growth dividend? Is it better to close a large gap in an area, which is less growth-enhancing, then a small gap in a reform area, which affects growth more? We use growth regressions to tentatively rank reforms by their importance for growth.
Combining the two angles allows us to construct reform priorities for the WB. The larger is the gap, or the more important is the reform for growth, the higher is its priority.
Sources: World Economic Forum; IMF WEO, 2013.

4. Reform Gaps Compared To “Normal” Level
Reform indicator k: How does country i compare to other countries?
Compare with “similar” countries:
EE vs. AE: unfeasible to close all gaps in medium run
… + all gaps are large: little information about priorities
→ Country i vs. “trend” or “normal” value
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

5. Reform Gaps Compared To “Normal” Level: Mechanics
Regression for each indicator k (i – country indicator):
𝐼 𝑖 𝑘 =𝛼+𝛽 𝑋 𝑖 + 𝜖 𝑖 ,
X – “structural” characteristics of a country: level of income/development, transition history, resource-richness, etc.
Then reform gap of country i in indicator k:
𝑔𝑎𝑝 𝑖 𝑘 = 𝐼 𝑖 𝑘 − 𝛼 − 𝛽 𝑋 𝑖
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

6. Reform Gaps Compared To “Normal” Level: Example of Poland, WEF Data
Reform areas:
1 - Institutions,
2 - Infrastructure,
4 - Health and Primary Education,
5 - Higher Education and Training,
6 - Goods Markets Efficiency,
7 - Labor Markets Efficiency,
8 - Financial Markets Development,
9 - Technological Readiness,
11 - Business Sophistication,
12 - Innovation.
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.
Measured in standard deviations from “trend”
Various benchmarks can be defined

7. Is It Important To Close All Large Gaps
Is It Important To Close All Large Gaps? Ranking Reforms By Importance For Economic Growth
Not all reform areas are equally growth-enhancing…
Rank reforms by importance:
Just ranking: no effect of a reform on growth…
Also cannot tell how big the difference between reforms is..
Consistency relies on one identifying assumption
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

8. Ranking Reforms By Importance For Economic Growth: Mechanics
Suppose, data generating process for economic growth is:
𝑔 𝑖 =𝛼+ 𝛽 0 𝑋 𝑖 + 𝛽 1 ∆ 𝐼 𝑖 1 +…+ 𝛽 𝐾 ∆ 𝐼 𝑖 𝐾 + 𝜖 𝑖
Unfeasible to run such regression:
Not all indicators observable/measurable; not enough countries/observations
Instead, run separate growth regression for each indicator:
𝑔 𝑖 = 𝛽 𝑘 ∆ 𝐼 𝑖 𝑘 + 𝜖 𝑖
where g and ΔI adjusted for X, and by inverse of standard deviation
βk is inconsistent… What about comparing beta’s across indicators?
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

9. Ranking Reforms By Importance For Economic Growth: Mechanics
Proposition P1. Let 𝛽 𝑙 and 𝛽 𝑚 be the OLS estimates of (3) for indicators l and m correspondingly, where 𝛽 𝑙 and 𝛽 𝑚 – are the true parameter values from (2). Then:
𝛽 𝑙 > 𝛽 𝑚 ↔ 𝑝𝑙𝑖𝑚 𝑛→∞ 𝛽 𝑙 > 𝑝𝑙𝑖𝑚 𝑛→∞ 𝛽 𝑚 , under the following assumption:
Assumption A1: Structural reform indicators that are more growth-enhancing (higher beta) are more correlated with other growth-enhancing indicators.
A sufficient (but not necessary) condition for Assumption A1 to hold for any l and m is Cov( 𝛽 𝑘 , ∆𝐼 𝑘 )>0: on average governments do more progress in more growth-enhancing areas.
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

10. Assumption A1: Theory And Evidence
Assumption A1 is not testable because beta’s are not observed
Consistent with theory:
If on average governments maximize economic growth, …
Cost of reform is concave in reform progress over a period…
… and depends positively on the current state of reform
Supportive empirics:
Correlation in progress in two reform areas decreases with difference in their importance
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

11. Ranking Reforms By Importance For Economic Growth: Empirics
g – average real GDP per capita growth in
Sample: all countries, also by income group
X – log GDP per capita, RR dummy, Emerge ECA dummy, SSA dummy, OECD HIC dummy
Reform areas:
1 - Institutions,
2 - Infrastructure,
4 - Health and Primary Education,
5 - Higher Education and Training,
6 - Goods Markets Efficiency,
7 - Labor Markets Efficiency,
8 - Financial Markets Development,
9 - Technological Readiness,
11 - Business Sophistication,
12 - Innovation.
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

12. Combining Reform Gaps and Growth Regressions: Reform Priorities
E.g. if distribution is normal: -0.5 gap means country is worse than 70% of the sample…
Similar with growth regression coef.
Why combine?
Linear relationship between g and ΔI is likely approximation
Cost of reform depends on size of a gap
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

13. Structural Reform Priorities: Example of Poland
Reform areas:
1 - Institutions,
2 - Infrastructure,
4 - Health and Primary Education,
5 - Higher Education and Training,
6 - Goods Markets Efficiency,
7 - Labor Markets Efficiency,
8 - Financial Markets Development,
9 - Technological Readiness,
11 - Business Sophistication,
12 - Innovation.
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

14. Structural Reform Priorities: Example of Poland
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

15. Financial Markets Development
Structural Reform Priorities At A Disaggregate Level: Example of Poland
Infrastructure
Financial Markets Development
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

16. Structural Reform Priorities In Emerging ECA
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

17. Structural Reform Priorities: Accounting For Uncertainty
Reform gap and growth regression coefficient estimates are uncertain
Jointly used in assessing reform priorities
Way to construct confidence intervals – bootstrapping:
Poland
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.

18. Conclusions Simple procedure to prioritize structural reforms
Heterogeneity among Emerging ECA… Institutions, infrastructure, health and primary education, goods market efficiency stand high in most countries
Important to look at disaggregate level..
Caveats:
No effect of reform on growth, only ranking
Even for ranking, need for assumption A1
No reform sequencing or bottlenecks
Potential misjudgments in country-specific circumstances
Let us start with the gaps. Here they are in all countries, except Kosovo, for which we do not have the data. The gaps are in ten main broad areas of the GCR. Grey bars are gaps compared to NMS, violet bars are gaps compared to EU.
First thing to note, is that compared to NMS, some countries in some areas have closed the distance over the transition period – gaps are close to zero or even small positive. Still, most of the gaps are negative. If compared to EU, all gaps in all countries are negative and mostly large – a lot of space for progress.
Another thing to note is that there are regional differences in the structural reform progress:
Montenegro and to some extent Macedonia compare relatively favorably with NMS – many gaps are close to zero, only few gaps large.
Results of Albania, BiH, and Croatia are somewhat mixed – they perform well in some areas, while in others they are significantly behind. For example goods and labor market efficiency in Croatia; or infrastructure and fin. Markets development in Albania, BiH
Serbia generally faces more formidable challenges – most gaps even compared to NMS are large
Looking at particular reform areas, gaps in all countries, including MCD and MNE if compared to EU, are large in institutions, infrastructure, fin. Markets development, and especially innovation and business sophistication.
Should WB hit where gaps are the largest? It also depends on whether closing the gap brings a sufficiently large growth dividend.
Our growth regressions indicate that for middle income countries benefit more from progress in institutions, fin. Market development (including soundness of fin. System), and infrastructure. Innovation and business sophistication are more important for high income countries.