The aggregate impact of micro distortions: complementarities matter

We explore how developmental and regulatory impediments to resource reallocation limit the ability of developing countries to adopt technologies: an efficient economy quickly innovates; but when the economy is unable to fully use resources liberated by closing firms, or when policy distortions deter firm dynamics, then technological adoption becomes sluggish, and growth is reduced. Our theory accounts for 75% of the income gap between Latin America and the U.S. Half of this simulated gap is explained by the barriers individually, the other half by their complementarity. Thus, the benefits from market reforms are largely diminished if distortions, developmental as well as regulatory, are not uniformly eliminated