Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005



market reforms the benchmark plays a significant role this is not supported for tax and labour
market reforms. Conversely, the political orientation has a significant impact in both variants of
the benchmark only for the labour reform regression. Low growth is speeding up reforms of the
tax system and financial markets in line with the crisis hypothesis. The insignificance of the EU
dummy could be due to the fact that the construction of the benchmark variable already covers
cross-border links related to European integration. The inclusion of business and consumer
sentiment indicators results only in few significant coefficients: business sentiment affects the
speed of reforms of labour markets and tax systems in a positive way.59

Overall, this picture is consistent with a view that reform trends have been more stable and
internationally linked for product and financial market reforms whereas in the realm of labour
market reforms and tax policies constant and internationally consistent unidirectional trends have
not materialized in the covered period.

Table 4: Dynamic reform model - baseline specifications

labour market

(Δ WEOLABOUR)

financial regulation
(Δ WEOFINANCE)

product market

(Δ WEOPRODUCT)

tax reform

(Δ WEOTAX)

reform indicator. (-1)

-0.330
(0.095)***

-0.176

(0.257)

0.406
(0.064)***

0.389
(0.144)***

0.141
(0.030)***

0.107
(0.048)**

-0.331

(0.176)*

-0.147

(0.283)

reform indicator.
squared (-1)

0.235
(0.091)***

-0.091

(0.139)

-0.383
(0.052)***

-0.411

(0.101)***

-0.106
(0.036)***

-0.081

(0.056)

0.227
(0.175)

0.064
(0.266)

reform indicator
divergence
benchmark (-1)

-0.032

(0.039)

-0.121

(0.177)

0.126
(0.029)***

0.149
(0.045)***

0.131
(0.024)***

0.172
(0.044)***

-0.005

(0.024)

0.032
(0.057)

GROWTH (-1)

0.029
(0.030)

-0.076

(0.077)

-0.388
(0.204)*

-1.026
(0.475)**

-0.013

(0.057)

0.026
(0.168)

-0.124
(0.054)**

-0.354
(0.131)***

FDI (-1)

0.0003
(0.0004)

-0.0009

(0.0006)

0.0001
(0.0008)

0.0002
(0.0008)

0.002
(0.0009)*

-0.009
(0.0020)

0.00002
0.0003

-0.00003

(0.0003)

EU member dummy

0.002
(0.003)

-0.005

(0.007)

0.025
(0.019)

0.030

0.043

0.002
(0.005)

-0.009

(0.015)

0.007
(0.005)

0.014
(0.010)

centre government

(-1)_____________________

-0.013
(0.003)***

-0.032
(0.006)***

-0.011

(0.021)

0.014
(0.031)

0.00002
(0.006)

0.013
(0.014)

-0.001

(0.005)

0.004
(0.008)

left government (-1)

-0.004
(0.002)**

-0.004

(0.003)

-0.007

(0.010)

-0.014

(0.014)

-0.006
(0.003)**

0.002
(0.006)

0.005
(0.003)*

0.005
(0.004)

CCONFST (-1)

0.0008
(0.001)

0.006
(0.008)

-0.003

(0.003)

-0.002
(0.002)

BCONFST (-1)

0.003

0.001

0.002

0.006

59 For labour market this supports the descriptive finding that a favourable economic situation smoothes reforms whereas for taxes he finding
stands in contrast to the descriptive results that the situation prior to tax reform tends to be relatively depressed.

152



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