Staff Background Paper for the G20 Surveillance Note - Priorities for Structural Reforms in G20 Countries
Policy Papers, July 22, 2016
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- Published: July 22, 2016
- Series: Policy Papers
Core findings
- Structural reforms can provide a powerful lift to growth—both in the short and the long term—if they are well aligned with individual country conditions, including an economy’s level of development, its position in the economic cycle, and its available macroeconomic policy space to support reforms.
- The larger a country’s output gap, the more it should prioritize structural reforms that support growth in the short term and the long term—examples cited include product market deregulation and infrastructure investment.
- Macroeconomic support can make reforms more effective by bringing forward long-term gains or alleviating short-term costs; where monetary policy is over-burdened, domestic policy coordination can enhance effectiveness.
- Fiscal space, where it exists, should be used to offset short-term costs of reforms; where fiscal constraints are binding, budget-neutral reform packages with positive demand effects should take priority.
- Some structural reforms can themselves help generate fiscal space—for example, IMF research finds that by boosting output, product market deregulation can help lower the debt-to-GDP ratio over time.
- Formulating a medium-term plan that clarifies the long-term objectives of fiscal policy can help increase near-term fiscal space.
Policy recommendations by country grouping
- Advanced economies:
- Shift public spending toward infrastructure investment (Australia, Canada, Germany, United States (US)).
- Promote product market reforms (Australia, Canada, Germany, Japan, Korea, Italy).
- Promote labor market reforms (Canada, Germany, Japan, Korea, United Kingdom (UK), US).
- Implement fiscal structural reforms (France, UK, US).
- Where there is fiscal space, lowering employment protection is recommended (Korea).
- Emerging markets (EMs):
- Raise public investment efficiency (India, Saudi Arabia, South Africa).
- Implement labor market reforms (Indonesia, Russia, Saudi Arabia, South Africa, Turkey).
- Implement product market reforms (China, Saudi Arabia, South Africa) to boost investment and productivity within tighter budgetary constraints.
- Ease barriers to trade and FDI to boost investment and productivity (Brazil, India, Indonesia).
- Strengthen governance and other institutional reforms (China, South Africa).
- Where policy space is limited, adjust the composition of fiscal policy to create space to support reforms (Argentina, India, Mexico, Russia).
- Commodity-exporting EMs facing acute challenges (Brazil, Russia, Saudi Arabia, South Africa):
- Rebuild fiscal buffers urgently.
- Implement product market and legal reforms to improve the business climate and investment.
- Pursue trade and FDI liberalization to facilitate diversification.
- Promote financial deepening to boost credit flows.
Inclusiveness and macrofinancial resilience
- Targeted social spending expansions are recommended toward vulnerable groups (Mexico).
- Increase social spending for the elderly poor (Korea).
- Upgrade social programs for the nonworking poor (US).
- Measures to bolster macrofinancial resilience include:
- Expanding the housing supply (UK).
- Resolving the corporate debt overhang (China, Korea).
- Coordinating a national approach to regulating and supervising life insurers (US).
- Reforming monetary frameworks (Argentina, China).
Implementation guidance and sequencing
- Prioritize reforms that deliver both near-term demand support and long-term potential growth when output is below potential.
- Use available fiscal space to support reforms’ short-term costs; where fiscal space is constrained, prefer budget-neutral reform packages with positive demand effects or adjust fiscal composition to free resources.
- Coordinate monetary and domestic policies when monetary policy alone is becoming over-burdened.
- Pursue reforms that also help generate fiscal space over time (for example, product market deregulation that boosts output and lowers debt-to-GDP over time).
- Clarify long-term fiscal objectives through medium-term plans to increase near-term fiscal space.
Staff Background Paper for the G20 Surveillance Note - Priorities for Structural Reforms in G20 Countries, July 22, 2016