|Tariffs|0.00133<br>(-0.87)|0.00206<br>(1.10)|||||-0.00279**<br>(-1.79)||-0.0372***<br>(-1.80)|
|---|---|---|---|---|---|---|---|---|---|
|Openness||||||||-0.0006**<br>(-1.71)||
|**Pillar 8**||||||||||
|Women (%)||||||0.0227***<br>(2.64)|0.0159**<br>(1.77)|0.0193**<br>(1.89)|0.0134***<br>(1.37)|
|CBR||||||0.1501*|0.0732|0.0528|0.114|
|||||||(1.49)|(0.62)|(0.41)|(0.94)|
|**Pillar 9**||0.096***|0.097***|0.116***|0.065***|0.0313|0.025|0.015|0.0347|
|||(3.57)|(3.94)|(4.73)|(2.53)|(1.20)|(0.97)|(0.48)|(1.22)|
|**Pillar 11**<sup>**c**</sup>|-<br>0.005***|-<br>0.005***|-0.004***|-<br>0.006***|-0.006***||-0.001|-0.001|-0.001|
||(-3.00)|(-2.97)|(-2.07)|(-3.29)|(-3.65)||(-0.58)|(-0.39)|(-0.55)|
|**Pillar 12**|||0.0281***<br>(3.39)||0.0168***<br>(2.05)||0.0143***<br>(1.61)|0.0200*<br>(1.53)|0.0189*<br>(1.51)|
|EU|1.766***|1.731***|1.684***|1.712***|1.783***|0.850*|0.819**|0.865**|0.784*|
||(3.58)|(3.980|(3.68)|(3.74)|(3.91)|(1.40)|(1.70)|(1.91)|(1.54)|
|Time trend|Yes|No|Yes|Yes|Yes|No|Yes|No|No|
|Year effect|No|Yes|No|No|No|Yes|No|Yes|Yes|
|Constant|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Observations|433|393|396|396|351|266|257|259|257|
|Wald test|733.8|720.8|765.9|732.3|819.7|786.7|664.2|627.7|680.4|
|P-value|0.0000|0.0000|0.0000|0.0000|0.0000|0.0000|0.0000|0.0000|0.0000|

_Note t_ statistics in parentheses; * p<0.2, ** p<0.1, *** p<0.05 a In the current specification, the initial hypothesis that there is no cross-sectional dependence cannot be rejected: the Pesaran’s test of cross-sectional independence chi-sq is -0.997, with Pr. 1.68. The test cannot be performed with the full model because the panel is highly unbalanced. Bootstrap standard error is also used to assess the robustness of the estimates

> b Pillar 4: change in terms of trade (log)

> c Pillar 11: no. days to start a business

Financial development is also a determinant of capital deepening. The literature offers alternative measures for capturing different dimensions of financial development, most of which focus on financial deepening—the extent to which financial institutions increase the size and variety of financial services they offer. In this study, domestic credit to the private sector (% of GDP) is used as a proxy for financial development, which has a positive and robust impact on capital deepening. Robustness is conducted by using alternative and/or additional indicators, including credit market regulation (WEF). Greenwood et al. (2013) discussed the central role of financial development in economic growth. As countries adopt the world’s best financial practices, for example, the interest-rate spread would decline, lowering the cost of borrowing and allowing for capital deepening.

Finally, variables related to technological readiness (Pillar 12) also positively impact capital deepening because they measure a country’s agility in using technology to enhance productivity and the use of inputs.

The robustness of the results is tested through several alternative approaches (see Section 4). First, the system-general method of moments (system-GMM) is employed to address endogeneity bias of the lagged dependent and explanatory variables.<sup>9</sup> The results (Annex 2) show that most of the structural determinants of labor are statistically significant. Although parameter estimates are not directly comparable, results seem robust from a qualitative point of view. The robustness of the results is also tested by enlarging the data set to more countries (extended model, Annex 3).

> 9 The instrument set is limited to one lag. The one-step estimator is used.

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