Structural reforms and fiscal sustainability: evidence from emerging market and developing economies

Abstract

We examine the impact of market-oriented structural reforms on fiscal sustainability in 62 Emerging Market and Developing Economies (EMDEs) over the period 1973–2014. This paper aims to assess whether such reforms contribute to reducing debt-to-GDP ratios and improving fiscal outcomes. Our empirical analysis finds that market-oriented reforms are associated with a sizable and long-lasting reduction in the debt-to-GDP ratio – approximately 4 percentage points within 4 years following a significant deregulation episode – primarily through higher GDP growth, increased tax revenues, and lower borrowing costs. These effects are more pronounced when reforms are implemented under strong business cycle conditions and in countries with greater tax efficiency, lower informality, and higher initial debt levels. Overall, our findings suggest that structural reforms can play a crucial role in enhancing fiscal sustainability by simultaneously promoting economic growth and reducing public debt burdens.