Financial Reforms, Financial Development, and Structural Change

This chapter explores the interrelationships between financial reforms, financial development, and structural change. More specifically, it considers the impact of financial reform on changes in labour productivity and whether liberalizing the functioning of the financial sector and lifting a number of regulations through financial reforms affect structural change and growth. In this chapter, structural change is defined as the contribution of labour reallocation across sectors to aggregate productivity growth and the difference-in-difference methodology is used to compare the evolution of productivity growth—and its different sources including structural change—before and after a financial reform. This evolution is also contrasted with cases in which financial reform is absent. Drawing on a sample of advanced and emerging market economies, the chapter shows that labour productivity accelerates following periods of intense financial reforms. The results generally suggest that financial reforms positively affect productivity growth, in part through the contribution of structural change.