World Bank releases paper on growth acceleration triggered by reforms

This paper proposes a quantitative model of firm dynamics with endogenous innovation to study growth acceleration episodes triggered by reforms.

World Bank has released a policy research working paper on "The dynamics of development: innovation and reallocation", the 53-page paper is written by Buera, Francisco J. and Fattal Jaef, Roberto N., and is available in English on World Bank's website.

This paper proposes a quantitative model of firm dynamics with endogenous innovation to study growth acceleration episodes triggered by reforms.

The authors find that reforms removing barriers to firm entry lead to persistent growth in TFP and declining average firm size, as in the experience of successful post-communist transitions. Reforms that reverse resource misallocation result in more protracted paths of TFP and rising average firm size, as in the experience of non-communist growth accelerations.

When calibrating the reforms to data from Chile's and China’s growth accelerations, the model can replicate the macro and firm-level features of these episodes.