IMF

IMF Survey : Structural Reforms Necessary, Politically Difficult

April 15, 2016

  • Tackle toughest reforms first
  • Set priorities, explain goals, implement
  • Populist backlash makes communication, good governance key to success

Reforms to the structure of a country’s economy to make it more productive and boost long-term growth are among the toughest to achieve, given opposition from vested interests, the rise of populism, and competing views about which reforms to undertake, when, and how.

Students protest labor reforms in Nice, France: changes to the structure of the economy can increase growth (photo: Sebastien Nogier/epa/Corbis)

Students protest labor reforms in Nice, France: changes to the structure of the economy can increase growth (photo: Sebastien Nogier/epa/Corbis)

IMF-WORLD BANK SPRING MEETINGS

Structural reforms tackle the problems on the supply-side of an economy. Reforms to product markets aim to boost competition among firms, make it easier to start a business, and de-regulate industries like energy and transportation. Reforms to labor markets make it easier to hire and fire workers, and allow changes to unemployment benefits and employment taxes.

With low global growth, commodity prices falling, monetary policy losing steam, and few governments with ready cash to spend, many have to restructure often decades-old rules about how their economies operate to make them more productive. 

In a speech last week in Frankfurt, Germany, the IMF’s Managing Director Christine Lagarde called for countries to move ahead with structural reforms sooner rather than later, as part of a three-pronged approach that includes fiscal and monetary policy measures.

“We need to combine structural reforms with the demand side, especially fiscal policy, to help offset the costs of supply-side reforms,” said Min Zhu, Deputy Managing Director of the IMF.

Tackle the tough reforms first

In a seminar on the political challenges to structural reforms held during the IMF-World Bank Spring Meetings in Washington, D.C., panelists tackled the rigors of implementing tough reforms to create jobs and increase growth.

“You have to undertake structural reforms before it’s too late,” said Mauricio Cárdenas, Colombia’s Minister of Finance. “In Colombia in 2012 we reduced payroll taxes by half and the results are amazing in terms of employment generated: 800,000 jobs.”

Cárdenas said countries need structural reforms when the standard, textbook reforms do not work. Colombia’s next wave of reforms includes revamping the tax code to make it more efficient, and to offset the loss in revenue from falling oil prices.

European politicians also face economic and financial problems that need structural reforms to get their economies back on track.

“We have high public and private sector debt, low productivity, and low inflation,” said Luis de Guindos, Spain’s Minister of Economy. “The only way forward is structural reforms to increase productivity and generate revenue to pay back the debt.”

In new research from the latest World Economic Outlook, the IMF said the sequence of reforms could make the difference between success and failure.

The timing and sequence also matter in de Guindos’ view.

“To implement structural reforms, the sooner you do it the better,” he said. “And you should first implement the most difficult reforms.”

He said the toughest ones for Spain to implement in 2012 were labor market reforms, including pensions. Reforms to professional services faced opposition from vested interests, a powerful force according to de Guindos.

Populism on the rise

Governments around the world face a popular outcry against changes to the economy.  

“The ascent of populism is pervasive,” said de Guindos. “The biggest challenge and enemy of structural reform is populism.”

Politicians need to communicate the goals and costs to the electorate, who in many cases are mature and understand there are trade-offs involved.  

“It’s not true that governments that implement structural reforms lose elections,” said de Guindos.

“Societies and electorates are mature; people realize structural reforms are a must and understand the short term costs and long term benefits,” said Zhu.

Governance

The populations’ faith in the overall governance, transparency and accountability matters to the success of reforms that often bring short-term costs, but will pay off in the long term. 

At the height of the global crisis in the United States, people were losing 700,000 jobs a month and the economy was under siege, according to Diana Farrell, CEO of the JPMorgan Chase Institute, a New York based think tank. The decision to restructure automaker General Motors had little public support.

“Aligning stakeholders to use headwinds as momentum for change was actually one of the biggest challenges,” said Farrell. “The President had a very clear story: shared sacrifice. Unions, investors, management; everybody felt the pain but the result went beyond what we hoped.”

Facing rising concerns from an anxious electorate, governments need to demonstrate leadership.

“To reinforce democracy we need to deliver economic success,” said Olfa Soukri Cherif, a member of parliament from Tunisia who serves on the government’s Finance Committee. “You can’t reap what you sow the same day; these reforms are for long-term economic development,” said Cherif.

In the wake of the global crisis, countries have their work cut out for them. Low-income countries could focus on agriculture, tariffs, and price liberalization reforms, according to Zhu. Emerging market economies could focus on banking sector reforms, telecommunications, transportation, and labor reforms. Advanced economies can focus on Research & Development, labor market reforms, and infrastructure.

Panelists agreed structural reforms were the way forward for countries to recover from the crisis and increase growth.



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