## _073014g

## Source details

**Canonical URL:** [_073014g](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_073014g.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_073014g.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_073014g.pdf.json)

---

### Executive summary — purpose and central questions
- Purpose: identify the macro-critical structural policy areas most relevant to the Fund’s member countries in the aftermath of the global financial crisis.
- Two central questions:
  - Should the Fund’s surveillance venture further into structural policies?
  - If so, how should the Fund do it?
- Overarching goal: prioritize structural policy areas for enhanced Fund surveillance consistent with Fund mandate and comparative advantage.

### Three selection criteria for enhanced Fund surveillance
- Macro-significant: the policy should be important for macro sustainability in the country context.
- Underemphasis: the policy should currently be under-emphasized by country authorities and other international agencies.
- Proximity: the policy should be reasonably proximate to the Fund’s existing capacities.

### Specific structural policies recommended for enhanced Fund surveillance
- Curtailment of rent-seeking.
- Reform of public sector accounting (move from liabilities to balance sheets).
- Utility regulation.
- Tax reform.
- Pension reform.

### Modalities to increase influence of Fund surveillance
- Practical examples: leverage Fund knowledge of practical country-level experience with policy change; address HR and organizational incentives so country experience is retrievable by country teams.
- Menus: present a menu of options rather than a single ‘optimal action’ to preserve government choice and reduce reactance.
- Partnerships: work with other institutions (World Bank, OECD, ILO) and orchestrate cross-agency task forces to leverage expertise and avoid duplication.
- Broader local engagement: engage domestic actors (local experts, parliament, civil society) to increase credibility and effectiveness.
- Meta-surveillance: promote domestic surveillance institutions (independent Fiscal Councils, effective utility regulators, central bank independence and profiles) to disseminate policy oversight.

### Rationale linking structural policies to macro sustainability
- Structural policies can produce financial unsustainability via persistent accumulation of unmatched liabilities (example: pension entitlement rules tied to a particular age rather than life expectancy).
- Structural policies can produce political unsustainability through persistent divergence of living standards from accepted norms (peer-country divergence or within-country divergence such as median income versus GDP).
- Two Fund roles: alert members to domestic vulnerabilities and alert the collective membership to emerging systemic risks.

### A. Curtailing the rent‑seeking sector — findings, rationale, judgment
- Findings:
  - Rent‑seeking: private returns massively exceed social returns, reducing growth and increasing inequality.
  - Examples: lobbying for protection, complex corporate tax avoidance by law firms, predatory patent litigation, “high‑frequency trading” (HFT).
  - HFT: “All gains to the practitioners of HFT have counterparts of losses to conventional market participants.”
  - Expansion driven by internationalization and deregulation; can augment measured GDP while reducing real incomes and increase demand for very highly qualified workers.
  - Rent‑seeking draws scarce intellectual talent away from technological and organizational innovation.
- Rationale for Fund engagement:
  - Curtailing rent‑seeking shifts resources to activities with higher social returns.
  - Fund precedent and comparative advantage in countering rent‑seeking (example: removal of import quotas).
  - National authorities often politically constrained; the Fund should estimate and reveal costs.
- Summary judgment:
  - Countering rent‑seeking often meets the three criteria (macro‑significance, under‑emphasis, proximity).

### B. Reforming public accounting: liabilities to balance sheets — findings, recommendation, judgment
- Findings:
  - Many governments report only liabilities; commercial practice reports both liabilities and assets.
  - Reporting only liabilities biases policy: governments reduce both sides of the balance sheet rather than adding assets to increase solvency.
  - Low global interest rates create an opportunity for coordinated increases in public investment that raise near‑term growth and long‑term productive capacity.
  - With proper accounting, increased public investment can enhance government solvency by improving the balance sheet.
- Policy recommendation:
  - Encourage governments to report changes in balance sheets in annual budgets urgently; accelerated implementation of the Government Statistics Finance Manual (GSFM) 2014 could facilitate reforms.
- Summary judgment:
  - Reforming public accounting meets the three criteria and is proximate to Fund macro functions.

### C. Utility regulation — findings, recommendation, judgment
- Findings:
  - Utility regulation affects private finance for infrastructure, fiscal subsidies, and reliability/pricing, thus influencing growth.
  - Politically sensitive; mis‑pricing often reflects mis‑regulation.
  - No single international agency consistently provides global expertise; Fund has focused on fiscal implications of mispricing while World Bank has contributed micro perspectives.
- Policy recommendation:
  - Fund should provide comparative and unified macro/allocative analysis, collaborating with other institutions rather than building a large independent pool of expertise.
- Summary judgment:
  - Utility regulation meets the three criteria in many contexts and offers clear Fund analytic value with institutional collaboration.

### D. Tax reform — findings, suggested shifts, judgment
- Findings:
  - Tax policy fundamental to macro sustainability, distribution, and resource allocation; Fund has core expertise.
- Two suggested shifts:
  - From macro to structural: emphasize taxation’s implications for growth and distribution (e.g., revenue‑neutral changes to make income tax schedules more progressive; greater reliance on property taxes).
  - From national to systemic: greater focus on international aspects (base erosion and profit shifting) in cooperation with the OECD.
- Summary judgment:
  - Systemic tax reform with integrated revenue and allocative considerations meets the three criteria; scope for enhanced Fund leadership and partnership.

### E. Pension reform — findings, appropriate role, judgment
- Findings:
  - Pensions are major government liabilities and major household assets; political incentives bias toward excessive generosity.
  - Design choices shift risk: real defined benefits shift risk to the state; defined contribution schemes shift risk to households.
- Appropriate Fund role:
  - Quantify costs and present a range of alternatives, drawing on cross‑country reforms; partner with ILO, OECD where appropriate.
- Summary judgment:
  - Pensions meet the three criteria and Fund surveillance can add credibility and urgency.

### F. Inappropriate structural policy for enhanced Fund surveillance: labor market reform
- Findings:
  - Labor market reform is macro‑significant but fails under‑emphasis and proximity criteria: high context specificity and complex political/distributional tradeoffs.
  - Diverse national models and tradeoffs (Scandinavian “flexicurity”; German worker representation and firm‑specific skill investment; U.S./U.K. differing experiences).
  - The Fund “lacks the expertise to engage meaningfully” compared with universities and think tanks; labor reforms are “politically extremely sensitive.”
- Rationale for limited Fund role:
  - Fund should avoid extensive engagement except in severe macro‑sustainability cases; focus on macro policies that exacerbate labor outcomes.
- Summary judgment:
  - Labor market reform is not prioritized for substantial Fund surveillance despite macro‑significance.

### Mode of operation for structural surveillance — key adjustments
- Surveillance should end in effective influence; influence is enhanced by:
  - Practical examples: compile and make retrievable global country‑level practical experience; address HR incentives preventing sharing.
  - Menus of options: preserve choice, avoid “compliance” framing; insist only when maintenance of a policy risks macro‑unsustainability.
  - Partnership: orchestrate cross‑agency task forces and integrate macro analysis with other agencies’ allocative and distributional analysis.
  - Domestic engagement: engage local experts and a broad range of domestic actors to increase persuasion and credibility.
- When to “blow the whistle”: if structural advice is ignored and macro‑unsustainable risk mounts, public warning is appropriate but should be preceded by menus, partnerships, and domestic engagement.

### Illustrative country examples and salient numeric findings
- United States:
  - Problem: real GDP per capita rose substantially since 1970 while real median household income has been largely flat (Figure 1: Index 100=1970).
  - Financial sector profits grew to account for “nearly a third” of corporate profits; suggested rent‑seeking scale is macro‑significant.
- Euro‑area public investment and accounting:
  - Public investment declined from about 2.5 percent of GDP in the mid‑2000s to 2 percent in recent years.
  - Real public investment in Germany in 2012 was about unchanged relative to 2008; drops of more than 60 percent in Greece, Ireland and Spain; roughly 50 percent in Portugal; and 25 percent in Italy.
  - Youth unemployment in peripheral Eurozone reached “40–50 percent”; employment rates fell in Greece from “61.4 percent in 2007 to 51.3 percent in 2012” and in Spain from “66.6 percent to 56.2 percent” over the same period.
- Ghana since 2007:
  - Large wage‑bill increases following salary‑structure adjustments absorbed over two‑thirds of government revenue.
  - Quasi‑fiscal deficits of public enterprises from mis‑pricing and subsidies amplified macro fragility.
- Ethiopia:
  - Public investment raised to East Asian rates while taxation remained low; Fund surveillance emphasized scaling back public investment via debt sustainability ceilings.
  - Alternative menu to make high public investment macro‑consistent included raising domestic taxation from its current level of only 12 percent of GDP and options such as e‑savings, project finance, sovereign borrowing ring‑fenced for investment, and IBRD finance linked to project finance.
- South Africa:
  - Unemployment around 25 percent; income inequality (Gini of 0.68); youth unemployment around 40 percent.
  - Fund influence on labor and product market reforms has been limited.
- India:
  - Growth slid from near double‑digit rates to below 5 percent in recent years; rent‑seeking and governance dysfunction cited as major constraints.
  - Utility regulation and energy subsidies identified as “macro‑significant structural issue[s]” dragging on public finances.

### Resource implications and implementation modalities
- Extensions into selected structural policies and changes in modalities are not envisaged to require substantial additional resources.
- Additions “should not usually be particularly resource‑intensive”; there is scope for resource redeployment and use of partnerships and standing task forces to reduce need for extra Fund resources.
- Priority actions include building “a stock of well‑supported country experiences of policy change readily accessible to all staff.”

*Source: EXECUTIVE SUMMARY and excerpts from 2014 TSR—STRUCTURAL POLICIES IN FUND SURVEILLANCE (July 30, 2014).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Purpose and central questions
- In the aftermath of the global financial crisis the priority of policymakers around the world is to revive economic growth. With limited scope for expansionary macroeconomic policies in many countries, boosting growth through ambitious structural reforms will be required.
- The Report addresses two crucial questions for future Fund surveillance:
  - Should the Fund’s surveillance work venture further into the domain of structural policies?
  - If so, how should the Fund go about it?
- Goal: identify the macro-critical structural policy areas most relevant to the Fund’s member countries in the aftermath of the crisis.

### Key findings about scope and approach for the Fund
- The Fund has deepened its surveillance of structural policies relating to the financial sector and should cautiously take on some additional structural issues.
- Going beyond the Fund’s well-practiced domain requires caution because the Fund lacks both the resources to acquire a wide range of expertise and the mandate that would justify large resource increases.
- Recommendation: selective addition of expertise on structural issues, with criteria based on consistency with the Fund’s existing mandate and likely value-addition to current national and international provision of expertise.
- The Fund should change its style of engagement to increase influence in structural areas: present options supported by country experience rather than concentrate on a single ‘optimal action’.

### Three criteria for selecting structural policies for enhanced Fund surveillance
- Macro-significant. In the context of the country the policy should be macro-significant in the sense that it should be important for macro sustainability.
- Underemphasis. The policy should currently be under-emphasized by the country authority and other international agencies.
- Proximity. The policy should be reasonably proximate to the Fund’s existing capacities.

### Specific structural policies recommended for enhanced Fund surveillance
- Curtailment of rent-seeking.
- Reform of public sector accounting.
- Utility regulation.
- Tax reform.
- Pension reform.

### Modalities to increase the influence of Fund surveillance
- Practical examples: leverage the Fund’s comparative advantage in knowledge of practical country-level experience with policy change.
- Menus: present a menu of options rather than a single optimal policy, preserving a degree of freedom of choice.
- Partnerships: work with other institutions where appropriate to leverage expertise and avoid duplication.
- Broader local engagement: engage domestic actors and promote domestic surveillance institutions to increase the Fund’s effectiveness.

### Meta-surveillance: promoting domestic surveillance institutions
- Fiscal Councils: promote the creation of independent Fiscal Councils (example: the Office of Budgetary Responsibility in Britain) that report directly to parliament and the general public.
- Utility regulators: encourage effective and independent regulatory institutions to reduce macroeconomic stress from badly run and heavily subsidized utilities.
- Central banks: encourage norms of independence and higher public profiles where appropriate to strengthen domestic surveillance and policy credibility.
- Objective: disseminate the virtues of policy oversight so the Fund becomes less necessary at the country level by encouraging a wide range of domestic institutions of surveillance.

### Rationale linking structural policies to macro sustainability
- Structural policies can produce financial unsustainability through persistent accumulation of unmatched liabilities (example: pension entitlement rules tied to a particular age rather than life expectancy).
- Structural policies can produce political unsustainability through persistent divergence of living standards from accepted norms (peer-country divergence or within-country divergence such as median income versus GDP).
- The Fund has two roles: alert members to vulnerabilities in their own economy, and alert the collective membership to emerging systemic risks to the global economy.

*Source: EXECUTIVE SUMMARY, July 30, 2014.*

### 19.      We defer discussion as to how the Fund should best engage on these issues until

### _073014g - 19.      We defer discussion as to how the Fund should best engage on these issues until

### Overview
- The chapter identifies five structural policies appropriate for Fund surveillance based on the Fund’s three criteria, noting that engagement would not be appropriate in every country nor necessarily require a major increase in in‑house capacity.
- The five areas selected are judged to offer potentially significant analytic value added and efficiency gains from policy reform in the current economic context. An example of a structural policy judged inappropriate for Fund surveillance is also provided.

### A. Curtailing the Rent‑Seeking Sector
- Findings
  - Rent‑seeking occurs where private returns massively exceed social returns, reducing growth and increasing inequality.
  - Examples include lobbying for protection, law firms engaged in complex corporate tax avoidance, predatory patent litigation, and “high‑frequency trading” (HFT).
  - HFT: “All gains to the practitioners of HFT have counterparts of losses to conventional market participants.”
  - Expansion of rent‑seeking has been driven by internationalization of business and deregulation; it can augment measured GDP while reducing real incomes and increase demand for very highly qualified workers, raising inequality.
  - Rent‑seeking draws scarce intellectual talent away from technological and organizational innovation.
- Rationale for Fund engagement
  - Curtailing rent‑seeking shifts resources from activities with social returns far below private returns to activities with higher social returns.
  - The Fund has historical precedent and comparative advantage: countering rent‑seeking was a core early activity of the Fund (e.g., removal of import quotas).
  - National authorities often find it politically difficult to tackle vested interests; the Fund’s role should be to estimate and reveal costs rather than duplicate contextual knowledge.
- Summary judgment
  - Countering rent‑seeking often meets the Fund’s three criteria: macro‑significance, under‑emphasis, and alignment with Fund expertise.

### B. Reforming Public Accounting: from Liabilities to Balance Sheets
- Findings
  - Many governments report only the liability side of public accounts; commercial enterprises present balance sheets of liabilities and assets.
  - This convention induces biases: governments reduce both sides of the balance sheet rather than adding assets to increase solvency, risking reduced solvency.
  - Global interest rates are likely to remain low for many years, creating an opportunity for coordinated increases in public investment that raise near‑term growth, stimulate private investment, and enhance long‑term productive capacity.
  - With proper accounting, increased public investment would enhance government solvency by improving the balance sheet.
- Policy recommendation
  - The Fund should consider encouraging governments to report changes in balance sheets in annual budgets as a matter of urgency; this may, but need not, precede full balance sheet presentation of public accounts.
  - Accelerated implementation of the Government Statistics Finance Manual (GSFM) 2014 could facilitate these reforms.
- Summary judgment
  - Reforming public accounting meets the three criteria: macro‑significant systemically and in national contexts, under‑emphasized, and proximate to the Fund’s core macro function.

### C. Utility Regulation
- Findings
  - Regulation of utilities affects the ability to attract private finance for infrastructure, the need for fiscal subsidies, and the reliability/pricing of utilities—thus influencing structure and growth.
  - Utility regulation is politically sensitive and still a relatively recent area of economic governance.
  - No single international agency has consistently provided global expertise; the World Bank has sometimes contributed from a microeconomic perspective and the Fund has focused on fiscal implications of mispricing.
  - Mis‑pricing often reflects mis‑regulation; authorities seldom analyze issues from a unified macro and allocative perspective.
- Policy recommendation
  - The Fund should provide comparative perspective and unified analysis, working in genuine and effective collaboration with other institutions (World Bank, OECD), without necessarily developing a large independent pool of expertise.
- Summary judgment
  - Utility regulation meets the three criteria: macro‑significant in some contexts, under‑analyzed, and an area where Fund analysis adds clear value while requiring institutional collaboration.

### D. Tax Reform
- Findings
  - Tax policy is fundamental to macroeconomic sustainability and affects distribution and resource allocation.
  - The Fund already has core expertise in tax policy but could shift emphasis in two respects.
- Two suggested shifts
  - 1) From macro to structural: place greater weight on taxation’s implications for growth and distribution (e.g., using revenue‑neutral changes to make income tax schedules more progressive and increasing reliance on property taxes).
  - 2) From national to systemic: increase focus on international aspects (e.g., base erosion and profit shifting). The OECD has taken the lead, but the Fund’s unique access and authority and Fiscal Affairs Department engagement could play a more prominent role in cooperation with the OECD.
- Supporting evidence and recent work
  - The Fund has research on tax composition and growth and on spillovers in international corporate taxation (examples cited in the source).
- Summary judgment
  - Systemic tax reform with integrated revenue and allocative considerations meets the three criteria: manifest macro‑significance; scope for enhanced Fund leadership and partnership with the OECD.

### E. Pension Reform
- Findings
  - Pensions are major government liabilities and major household assets; political incentives bias toward excessive generosity because costs materialize far in the future.
  - Example: reluctance to set retirement age relative to life expectancy.
  - Pension design choices shift aggregate and individual risk (e.g., real defined benefits shift risk to the state; defined contribution schemes shift risk to households and create individual market volatility risks).
- Appropriate Fund role
  - Quantify costs of current policies and present a range of alternatives lightly sketched, drawing on policy reforms from other countries.
  - Partnership with other institutions (ILO, OECD) is advised.
- Summary judgment
  - Pensions meet the three criteria: macro‑significant liabilities that are slow to mature and unlikely to be salient without Fund involvement; Fund surveillance would add credibility and urgency.

### F. An Inappropriate Structural Policy: Labor Market Reform
- Findings
  - Labor market reform is macro‑significant (e.g., peripheral Eurozone unemployment crises) but fails the Fund’s other two criteria.
  - Labor market policy is complex and highly context‑specific, requiring tradeoffs among short‑term allocative efficiency, long‑term firm‑specific skill investment, household security, and income distribution.
  - Diverse national models: Scandinavian “flexicurity”; German worker representation and firm‑specific skill investment; U.S. and U.K. contrasting recession experiences (U.S. labor‑shedding raised productivity; U.K. protected employment but saw reduced productivity).
- Rationale for limited Fund role
  - High context specificity and close links to political and distributional tradeoffs make a substantial Fund role inappropriate, though the Fund cannot be wholly disconnected from debates in severe cases.
- Summary judgment
  - Despite macro‑significance, labor market reform is not prioritized for substantial Fund surveillance due to lack of under‑emphasis and insufficient proximity to Fund expertise.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_073014g.pdf*

### 44.      Labor market reform is an active area of economic analysis in universities and think

### _073014g - 44.      Labor market reform is an active area of economic analysis in universities and think

### Challenges in labor market reform and the Fund’s role
- Labor market reform is "well-researched and highly complex" and the Fund "lacks the expertise to engage meaningfully" compared with universities and think tanks.
- Country authorities criticize the Fund for not cooperating with, or referencing, the work of other agencies.
- Political sensitivity:
  - Labor market reform is "politically extremely sensitive."
  - The Fund is "widely perceived as being unsympathetic to organized labor," which can be an impediment to reform.
  - Example: In one peripheral Eurozone country, Fund surveillance recommended a salary pact including "a substantial reduction in nominal wages." This intervention "provoked anger" and may have made reform more difficult; in a separate case Fund work was judged "relevant but not a key input."
- Causes of the peripheral Eurozone youth unemployment shock:
  - The extraordinary rise in youth unemployment in the peripheral Eurozone is "not due to sudden deterioration in labor market policies" but to the adoption of unconventional macroeconomic policies that the Fund would usually have discouraged.
  - Fiscal response has been pro-cyclical rather than counter-cyclical; not combined with expenditure switching policies.
  - Burden of adjustment placed on nominal wage reductions, which are "uncoordinated and therefore extremely slow" in contrast to coordinated real wage adjustments via exchange rate adjustment.
  - The Fund’s core role is to challenge these unconventional macroeconomic policies rather than to acquire expertise in labor market policies.
  - Analogy: the Fund’s role in orchestrating a depreciation of the CFA Franc after a decade of political resistance.

### The Fund’s mode of operation in surveillance of structural policies — key adjustments
- Opening proposition: Successful Fund surveillance "begins with pertinent analysis but it ends in effective influence." Surveillance that does not influence has failed.

A. The power of practical examples
- The Fund’s knowledge advantage is its "global practical experience" rather than academic theory.
- Country authorities are influenced by "dispassionate and detailed expositions of successful and unsuccessful policy reforms in broadly comparable countries."
- Problem identified: the Fund does not coherently organize this type of knowledge so it is not retrievable by other country teams; this is a "serious limitation on the effectiveness of surveillance."
- Root cause diagnosis: problem is HR incentives, not IT. Knowledge of country experience is a public good; individual staff and country teams have insufficient incentive to share.
- Country authorities view staff as over-inclined to produce econometric studies in "selected issues" papers that are career-advancing but "not valued by country authorities."

B. Propose a menu of options, not an optimal policy
- Influence is increased by preserving choice for advice recipients; reactance (people resisting loss of autonomy) matters.
- The Fund unavoidably exerts pressure through growth projections and through conditionality in formal programs.
- Country authorities disliked summary assessments of compliance in Article IV reports as "backward looking" and "somewhat demeaning."
- The concept of "compliance" is "fundamentally incompatible with the preservation of choice" and inappropriate for surveillance influence.
- Structural reform rarely has a unique solution; a range of viable approaches with different costs and benefits typically exists.
- The Fund should:
  - Insist when maintenance of a structural policy risks becoming macro-unsustainable.
  - Preserve freedom of policy choice by proposing a "menu of possible reforms" that would be sustainable.
  - Avoid venturing into politically contentious optimal-policy prescriptions unless macro-sustainability is at stake.

C. Partnership
- Structural issues often involve other international institutions (World Bank, OECD, ILO).
- The Fund is seen as reluctant to build "effective practical partnerships" with these institutions.
- The Fund’s macro analysis should be integrated with other agencies’ analysis of resource allocation and income distribution.
- Capacity constraints in other agencies are recognized as endogenous; the Fund can incentivize capacity-building by sharing privileged access through Article IV consultations.
- Proposal: the Fund should "orchestrate the development of cross-agency task forces on specific structural issues" as standing capacity for country teams.

D. Engagement with domestic actors
- Influence benefits from engaging a wide array of domestic actors, including local experts within and outside the civil service and parliaments.
- Example area where local insights matter: rent-seeking, because of its country-specific manifestations.

E. Benefits of the suggested approach
- If Fund structural advice is persistently ignored and macro-unsustainable risk mounts, the Fund has a responsibility to "blow the whistle" publicly.
- Whistle blowing is more likely to succeed if preceded by:
  - A menu of alternative options;
  - Partnerships with other agencies;
  - Engagement with a wide group of domestic actors.
- Surveillance should clearly explain why current policies pose unacceptable risks and suggest a menu of responses rather than a single preferred option.
  - The menu approach preserves government choice, avoids reactance, and enables government ownership of adopted reforms.
  - A wide range of policy choices that can avert crisis strengthens the Fund’s message that the current policy configuration poses unacceptable macro risk.

### Applying the approach — illustrative examples

A. United States: median income stagnation since 1970
- Problem statement:
  - Uniquely in the OECD, the United States has "persistently failed to provide a policy environment for rising median real incomes."
  - Real GDP per capita has risen substantially since 1970 while real median household income has been largely flat (Figure 1: Index 100=1970).
- Possible contributory factors (literature):
  - Skill-biased technical change, globalization, immigration, de-unionization, minimum wage policy.
- Rent-seeking as a relevant structural policy focus:
  - Growth in rent-seeking activities may deteriorate the mapping from GDP to real incomes.
  - According to Bureau of Economic Analysis data cited, profits of the financial sector grew to account for "nearly a third" of corporate profits; it is "implausible" that its services enhanced productivity by nearly 50 percent.
  - Legal sector practices have facilitated declining taxability of corporate profits and introduced predatory patent practices.
  - Expansion of rent-seeking increases demand for high talent and thus increases inequality.
- Assessment:
  - Rent-seeking "meets our three criteria" and has expanded to a scale likely to be macro-significant.
  - The Fund, as a neutral international actor, is "well-placed to inject the concept into domestic debates."
  - Fund engagement on rent-seeking with U.S. authorities "would be welcomed" and Fund input that could influence state-level policies is seen as "particularly valuable."

B. Southern Europe since 2008: exploding youth unemployment
- Facts and figures:
  - Youth unemployment rates in the peripheral Eurozone have "soared" over the Great Recession while rates in core countries have remained flat (Figure 2: Euro Area Core and Periphery, Youth Unemployment Rates (Percent)).
  - Youth unemployment rates of "40–50 percent" in the periphery are described as "undoubtedly radicalizing rates of unemployment" and fuelling support for anti-EU populist parties.
  - Core country aggregates: Germany, France and the Netherlands.
  - Peripheral country aggregates: Greece, Ireland, Italy, Portugal and Spain.
  - Commentary notes that employment rates fell in Greece from "61.4 percent in 2007 to 51.3 percent in 2012" and in Spain from "66.6 percent to 56.2 percent" over the same period (source: Wolfgang Münchau, Financial Times, April 27, 2014).
- Diagnosis:
  - Radical divergence in youth unemployment "cannot be accounted for by changes in labor-market policies" over recent years.
  - The divergence reflects inappropriate macroeconomic policies at the euro-area level: fiscal and monetary policy "failed to provide sufficient support to aggregate demand" amid substantial deleveraging in public, corporate, household and financial sectors.
  - Very low average inflation in the euro area and strength of the euro on FX markets mean necessary adjustments are delivered through slow real adjustments in the periphery rather than rapid nominal adjustments.
  - Labor-market policies in Europe are "not the cause of the divergence" and therefore "they are not the solution," though the Fund should continue to recognize and bring attention to labor-market functioning problems.
- Implication:
  - The Fund's role is to focus on macro-focused structural policies that could improve the situation rather than to assume primary responsibility for labor-market reform.

*International Monetary Fund — 2014 TSR—STRUCTURAL POLICIES IN FUND SURVEILLANCE (excerpts)*

### 70.      First, with long-term interest rates at historically low levels both in the core and in

### _073014g - 70.      First, with long-term interest rates at historically low levels both in the core and in

### Euro-area public investment, accounting, and fiscal space
- Public investment in the euro area declined from about 2.5 percent of GDP in the mid-2000s to 2 percent in recent years.
- The fall was driven by sharp declines in public investment in the periphery, while investment in the core countries has held up.
- Real public investment in Germany in 2012 was about unchanged relative to 2008, compared with drops of more than 60 percent in Greece, Ireland and Spain, roughly 50 percent in Portugal, and 25 percent in Italy.
- Observation: authorities from one peripheral euro area country considered that public investment in that country had been cut too much, notwithstanding the large budget deficit.
- Policy implication: if accounting practices that bias decisions against public investment persist, then reform of public sector accounting in Europe to include assets could be very important.
- Recommendation: the Fund could steer euro area governments and the EU Commission towards the proper presentation of public accounts and work with the European Commission to include the national balance sheet (or, at least, annual changes in the balance sheet) as part of the mandatory reporting under the European semester cycle.

### Divergences in youth unemployment and fiscal presentation
- Reforming public sector accounting meets the three criteria set out by the authors for addressing divergences in youth unemployment.
- European policymakers have underestimated the amount of fiscal space available at the euro area level; as a result fiscal policy has been unnecessarily contractionary with macro-significant consequences.
- Country authorities emphasize gross liabilities in budgetary policy decisions without reference to the asset side of the balance sheet.
- The Fund can add value by promoting presentation of general government non-financial assets and national balance sheets in surveillance.

### Rent-seeking and competitiveness in the euro-area periphery
- Rent-seeking activities depress productivity and international competitiveness and hinder macro-significant intra-euro-area adjustment.
- Reducing rent-seeking can ease pressure for downward nominal wage adjustment as a way to improve competitiveness within the euro area.
- The Fund can provide evidence and advice on rent-seeking to support reform-minded politicians and civil servants; engagement with domestic actors with local knowledge is crucial.
- Suggested approach: identify and measure the costs of rent-seeking and present a menu of practical examples of what has worked and not worked elsewhere to persuade policymakers.

### Ghana since 2007: unsustainable structural policies (episodes and lessons)
- Episode 1: A huge program of spending on infrastructure, education, public institutions and enterprises aimed to “stay in the pack” with peers (Korea, Malaysia and Singapore) but led to unsustainable populist macro policies, prolonged economic decline, military interventions, and unmet aspirations.
- Despite later embracing sound policies, Ghana remained far behind peers in per capita income and living standards.
- Episode 2: Since 2007 the most severe bout of macro instability included mounting fiscal pressures, rising inflation and renewed currency instability over the last two years.
- Fund-supported programs earlier delivered macro stability, rapid growth, better social indicators, and improved business climate; reforms included budgetary and exchange rate policies, dismantling price and exchange controls, exchange and trade liberalization, privatization, and repair of the financial sector.
- Key structural weaknesses not fundamentally addressed: underlying growth of government liabilities, public wage policy, and structural balance sheet problems of key public enterprises in the energy and utilities sectors—these have become potent macro-significant sources of fragility and main triggers of renewed macro instability.
- After the onset of oil revenues the authorities introduced major salary-structure adjustments aimed at equity and fairness rather than aligning compensation with productivity and efficiency; consequence: the wage bill has ballooned to the point where it is absorbing over two-thirds of government revenue and is a threat to sound fiscal policy, with government resorting to external borrowing to finance the deficit.
- Quasi-fiscal deficits of public enterprises amplify risks due to mis-pricing of utilities, subsidies and inadequate regulation.
- Policy questions posed: could the Fund have (1) given greater attention to public sector reform and regulation of private participation in utilities, (2) offered a menu of options for public discussion with clear objectives supporting long-term fiscal sustainability, and (3) used global examples and persuasion to build public support for difficult reforms?
- General point: these reforms, while difficult, build economic resilience and bolster long-run macro sustainability where the Fund could legitimately use all its tools to exercise influence.

### Ethiopia: public investment push and alternative surveillance approach
- Ethiopia raised the share of public investment in GDP to East Asian rates while still having African savings rates, creating significant risk of macro imbalance.
- The Fund’s surveillance dialogue in Ethiopia is based on debt sustainability analysis imposing a ceiling on the present value of public sector debt payments and has led to a single policy recommendation: scale back public investment.
- The Fund’s supporting analysis emphasized the theory of ‘crowding out’ of private investment and domestic bank credit use for public investment, rather than practical country examples, and did not appear to engage closely with other international actors or a wide range of domestic actors.
- Result: Fund surveillance in Ethiopia appears to have triggered severe reactance and the Fund is very far from being an influential actor.
- Alternative Fund approach proposed: eschew a single recommended policy and instead develop a menu of alternative ways to make high public investment macro-consistent, including:
  - Raising domestic taxation from its current level of only 12 percent of GDP.
  - Raising and switching domestic savings from dysfunctional forms (e.g., accumulation of livestock) through e-savings arrangements.
  - Temporarily squeezing private investment without impairing long-run growth if resources are deployed for essential complementary infrastructure (notably power generation).
  - Designing public investment projects to be eligible for project finance.
  - Considering sovereign borrowing if ring-fenced for investment, and potential for IBRD finance linked to project finance.
- Practical illustration: e-savings have become important in Kenya; the Fund could bring in partner agencies where feasible.

### Balance sheet approach vs. focus on gross liabilities
- Ghana and Ethiopia illustrate advantages of adopting a balance sheet approach instead of focusing only on increments to gross liabilities.
- Both governments had large increases in gross liabilities; Ethiopia matched liabilities with productive assets (notably electricity generation), whereas Ghana borrowed to finance increases in recurrent public spending (e.g., public sector wage hikes).
- Using only deficits to critique these different policies exaggerated the dangers of one and understated those of the other.

### South Africa: limits of Fund involvement in labor market reform
- South Africa: stable, relatively sophisticated emerging market economy with a record of macroeconomic stability; past labor market protections tied to the apartheid system proved unsustainable.
- Unemployment is around 25 percent and income inequality (Gini of 0.68) is one of the highest in the world today; youth unemployment is around 40 percent.
- Fund surveillance has had mixed influence: convergence on macroeconomic policy boosted market confidence and influence, but advice on structural issues—labor and product market reforms including wage bargaining, labor taxation, and trade unions—has had limited influence, not progressing much beyond analysis and recommendations into significant policy actions.
- Conclusion: labor market reform is a structural area where the Fund is not strategically well-positioned to be effective because issues are complex, deeply embedded, and insider stakeholders resist change.
- Menu of two options for the Fund:
  - Option 1: Exclude formal discussion and advice on labor and employment issues but report authorities’ views candidly in Surveillance to focus attention on authorities’ own policies.
  - Option 2: Provide concerted support, with expert groups, to seek a negotiated domestic solution and to catalyze financing for it if needed, analogous to financing macro-policy adjustments.

### India post-2010: sharp growth slowdown and role of rent-seeking
- India slid from near double-digit growth rates during much of the past decade to below 5 percent over the past couple of years; these relatively low rates of growth are not sustainable.
- Causes cited: combination of external and domestic factors including prevarication on structural reform despite Fund surveillance warnings, investor confidence damaged by policy uncertainty from political maneuvering, and ongoing governance dysfunction.
- Consequence: brake on building consensus for critical reforms to raise potential output (for example, reducing barriers to inflows of FDI and executing infrastructure projects in key sectors, including energy).
- Rent-seeking: authorities in India have a considerable way to go in facing down rent-seekers; rent-seeking activities weigh on growth of potential GDP and exacerbate income inequality.
- Policy gap: rent-seeking has not attracted sufficient attention from the Fund or other international agencies, in part because Indian authorities often preferred to address such structural issues domestically.

*Source: _073014g - 70.      First, with long-term interest rates at historically low levels both in the core and in*

### 93.      The regulation of utilities is another macro-significant structural issue for the Indian

### _073014g - 93.      The regulation of utilities is another macro-significant structural issue for the Indian

### Regulation of utilities and energy subsidies (paragraphs 93)
- The regulation of utilities is identified as a "macro-significant structural issue for the Indian economy."
- Structural problems in the power sector and in the allocation of natural resources are blamed for slow progress in addressing infrastructure and supply-side constraints.
- Energy subsidies "continue to drag on the public finances."

### Limitations of surveillance and policy influence (paragraphs 94–95)
- Structural policies and policy consistency are important for confidence and avoiding divergence.
- Detecting the right policies is insufficient when policymakers have different priorities; Fund surveillance may not influence timely action if there is no imminent short-term crisis.
- In meetings with Indian authorities, the Fund "met considerable resistance" to proposals for the Fund to take on some structural issues.
- The Fund favors a "menu approach," which would likely meet with less resistance than a single policy action.
- Examining structural issues in India as part of standard Fund surveillance across many countries is expected to attract less controversy.

### Conclusions and resource implications (paragraphs 96–101)
- The Great Recession induced a sharp drop in global private investment.
- With fiscal positions severely constrained, "there is little scope for macroeconomic stimulus."
- Global growth is expected to be weak for several more years; thus structural policies are a natural avenue to restore growth and employment.
- Most structural reforms take time to have an effect, but persistent low growth means the lag is "not a reason for not doing reforms."
- The Fund's mandate limits its role in encouraging and assisting structural reforms:
  - The Fund "does not have the remit to offer general purpose economic policy advice."
  - On a reasonable interpretation of its core function of guarding macroeconomic sustainability, some structural policies are pertinent because poor structural policies can cumulate to political and financial crises, and good structural policies can avoid or remedy such crises.
- Pertinence is necessary but not sufficient for Fund involvement:
  - Some structural policies (e.g., the quality of education) are "too far removed from the Fund’s core expertise."
  - Other policies (e.g., fiscal and financial reform) are central to macroeconomic sustainability and long part of Fund expertise; the Fund has a vital role both at the country level and systemically.
- Structural policies suggested as feasible and useful extensions given closeness to current expertise:
  - pension reform;
  - utility regulation;
  - tax reform;
  - the curtailment of rent-seeking;
  - the reform of public sector accounts to add assets to liabilities and so move from deficits to balance sheets.
- The reform of public sector accounts could be useful in particular countries and helpful systemically in raising global growth.
- Suggested changes in modalities to increase Fund surveillance influence: "practical examples, menus, partnerships, and broader local engagement."

### Resource implications and implementation modalities (paragraph 101)
- Neither the extension into selected structural policies nor the change of modalities is envisaged to require substantial additional resources.
- Additions "should not usually be particularly resource-intensive," and there is considerable scope for resource redeployment.
- Building "a stock of well-supported country experiences of policy change readily accessible to all staff" should be a core Fund function; this requires redeployment from activities perceived by staff as career-advancing but not perceived by country authorities as useful.
- Effective ongoing partnerships with other agencies and standing task forces on selected structural issues would "radically reduce the need for extra Fund resources" while increasing Fund-led surveillance influence.
- The emphasis on structural policies arises because traditional Fund work on countering inflationary biases has become less important and "looks likely to remain so for several years."

*2014 TSR—STRUCTURAL POLICIES IN FUND SURVEILLANCE, INTERNATIONAL MONETARY FUND*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_073014g.pdf_