Identifying Reform Priorities: The Role of Non-Linearities

23 Pages Posted: 26 Jan 2021

See all articles by Klaus-Peter Hellwig

Klaus-Peter Hellwig

International Monetary Fund (IMF) - Fiscal Affairs Department

Date Written: December 2020


Can countries improve their business climate through reforms in specific policy areas? Kraay and Tawara (2013) find that the answer depends on how we measure the business climate. When regressing seven different business climate indices on 38 policy indicators, they find little agreement among the seven models as to which of those policy indicators matter most. I revisit this puzzle using the same data but replacing their linear models with a Random Forest algorithm. I find a strong consensus across models on the importance ranking of policy indicators: No matter which business climate index is considered, the top ten contributors to a better business climate always include high recovery rates in insolvency proceedings (i.e., cents on the dollar for creditors), shorter border formalities for both importers and exporters, and low costs for starting a business. I show that the marginal effect of reforms is heterogeneous across countries and document how reform priorities depend on country specific circumstances.

JEL Classification: O43, G20, G33, H54, C11, F10

Suggested Citation

Hellwig, Klaus-Peter, Identifying Reform Priorities: The Role of Non-Linearities (December 2020). IMF Working Paper No. 2020/278, Available at SSRN:

Klaus-Peter Hellwig (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

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