Getting into Higher Gear: Why Structural Reforms Are Critical for Revving Up Global Growth

IMF Blog, July 25, 2016

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Getting into Higher Gear: Why Structural Reforms Are Critical for Revving Up Global Growth

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Bibliographic details

• Authors: David Lipton
• Published: July 25, 2016

Overview and context

• Author: David Lipton
• Date: July 25, 2016
• Core point: Almost a decade after the start of the global financial crisis, the world economy has not achieved escape velocity.
• IMF forecast highlighted in the piece:
  • Global growth of 3.1 percent in 2016
  • Global growth of 3.4 percent in 2017
• Main challenge cited: increased economic and political uncertainty, including from the impact of the Brexit vote.
• Policymakers have used fiscal stimulus and appropriately accommodative monetary policy, but a lasting recovery remains elusive.
• Central argument: The world’s largest economies need more structural reform to boost productivity and revive growth; this theme was emphasized at recent G-20 meetings.

Guiding Framework for Structural Reforms (three key considerations)

• Consideration 1 — Level of development:
  • In advanced economies: reforms that foster innovation are likely to yield the greatest productivity pay-off.
  • In emerging markets: reforms that improve the way markets function are likely to matter more.
• Consideration 2 — Position in the business cycle:
  • The weaker the economy, the more important it is to choose reforms that support both short-term and long-term growth.
  • Example: Infrastructure investment boosts growth today through investment and job creation and boosts future growth by improving productive capacity.
  • Note on labor market deregulation: In good times it can increase hiring; in poor outlooks it can lead to short-term job losses because layoffs become easier.
• Consideration 3 — Macroeconomic policy space:
  • Demand support can be critical to enhance the impact of structural reforms and to offset possible short-term costs of supply measures (e.g., support for those who become unemployed because of deregulation).
  • Structural reforms can also help increase macroeconomic policy space:
  • Labor and product market reforms that increase competition and lower prices can create space for monetary easing.
  • Reforms that boost medium-term growth increase tax revenue, which—together with higher output—will lower the ratio of public debt to GDP over time and increase fiscal space today.

IMF policy focus and country-level recommendations

• Advanced economies:
  • Emphasis on measures that raise both short- and medium-term growth.
  • Specific recommendations include:
  • Increase public spending on infrastructure investment in Australia, Canada, and Germany.
  • Reforms to broaden full-time employment opportunities for women in Canada, Germany, Japan, Korea, the UK, and the US.
  • Where policy space is limited (example: Italy), recommend product market deregulation to raise investment, employment, and output without short-run budgetary costs.
  • Tax simplification and broadening measures in the U.S. can reduce inefficiencies and generate revenues to finance other high pay-off (but costly) reforms.
• Emerging markets:
  • Focus on reforms that can deliver near-term payoffs given weaker conditions and limited fiscal space.
  • Specific recommendations include:
  • Better management of public investment processes in India.
  • Product market reforms in China.
  • Labor market reforms in South Africa.
  • Address trade and FDI impediments in Brazil, India, and Indonesia.
  • Governance of public institutions and other institutional reforms.
  • Where fiscal space is limited or consolidation is necessary, encourage adjusting the composition of fiscal policy to make it more growth-friendly.

Policy implementation and synergies

• G-20 members are making new structural reform commitments ahead of the Hangzhou Summit.
• To maximize impact:
  • Implement reforms as part of a comprehensive policy package with demand and supply policies complementing each other.
  • Support reforms with policies that cushion those who may suffer short-term costs.
  • Ensure reforms deliver inclusive benefits so they "need to benefit not just some, but all."

David Lipton, July 25, 2016

Content in this bundle

• Staff Note for the G 20—A Guiding Framework for Structural Reforms; IMF Policy paper; March 31, 2016
  • Staff Note for the G 20—A Guiding Framework for Structural Reforms; IMF Policy paper; March 31, 2016 (Markdown version)
  • Staff Note for the G 20—A Guiding Framework for Structural Reforms; IMF Policy paper; March 31, 2016 (PDF)
• 072216a — Executive Summary
  • 072216a — Executive Summary (Markdown version)
  • 072216a — Executive Summary (PDF)

References

• عربي
• forecast
• April 2016 World Economic Outlook
• structural reforms