structural changes less effective. Based on the approach by Bordon et al. (2016), the effect of better regulation may be reduced if the reform occurs during an economic slowdown.

The remainder of the paper is organized as follows: Section 1 briefly discusses the literature review; Section 2 describes the database and methodology used; Section 3 reports the baseline results for the structural determinants of the three supply-side channels and their impact on GDP growth; Section 4 discusses robustness exercises; and Section 5 considers how timing may influence how reforms affect growth. Section 6 narrows the focus to Serbia and quantifies the impact if the country were to close its structural gaps with the frontier. The final section spells out conclusions.

# **1. Literature Review**

The literature on structural reforms has been growing. With a sample of almost 60 countries, 32 of which were emerging markets (EMs), Lusinyan (2018)—to whom this paper is highly indebted— found that reducing entry barriers, especially the cost of starting a business, and trade tariffs boost capital deepening. Capital intensity is affected negatively by output volatility and positively by the availability of private credit and the latest technologies. Lusinyan (2018) identified a robust positive link between employment and pro-competition regulation. Changes in labor market regulation, however, are not closely related to the employment rate. Finally, efficiency is closely associated with both product and labor market indicators, but human capital does not have much of a role.

This paper departs from Lusinyan (2018) by focusing on ECA and expanding the structural indicators considered. The analysis highlights the role of human capital, as proxied by educational attainment, in economic growth in ECA. The supply-side framework is combined with the methodology developed in Bordon et al. (2016) to control for the interaction of structural changes with the economic cycle. This makes it possible to illuminate the effect of implementation gaps, which may undermine the effectiveness of reforms. While the literature is mainly concerned with labor market regulation, this analysis focuses on changes in regulatory quality.

Many studies have found that the long-run effects of structural reforms on output are strongly positive. For example, Egert (2018) studied the effects of structural reforms across the three channels on a large set of OECD and non-OECD countries. He found that lower barriers to entry and reduced state control of businesses improve productivity and the use of both capital and labor. Productivity is also affected by the degree of financial development. This is aligned with the findings of Biljanovska and Sandri (2018) and Elkhuizen et al. (2018). Based on a sample of 86 advanced and emerging countries, for instance, Biljanovska and Sandri (2018) demonstrated that structural reforms, including those of the banking sector, have positive effects on productivity growth. Similarly, this study finds that financial development has a positive impact on output growth, and the effect mainly works through capital deepening. In a literature review, Martins (2019) has highlighted the fact that investment in education is among the most critical ways to accelerate structural change—and thus aggregate productivity. In line with these findings, this analysis sheds light on the significant role of human capital and how it affects growth by favoring labor accumulation, productivity, and capital deepening. Also, recently, Rodriguez-Pose and Ketterer (2019) have instead focused on the impact that institutions and improvements in government quality have had for growth and in lagging regions of ECA. Also, IMF (2019), using a newly constructed database on structural reforms, finds that a reform push in areas including governance, domestic and external finance, trade, and labor and product markets could deliver sizable output gains in the medium term.

Timing has become a central issue in the literature on structural reforms. Based on a DSGE model, Eggertsson et al. (2014) first showed that during a crisis structural reforms do not increase output.

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