Structural Reforms And The G20 Economies: Promises And Pitfalls

Iyanatul IslamThe G20 Leaders Declaration at the Toronto Summit (June 2010) endorsed an ambitious agenda of ‘structural reforms’ cutting across both labour and product markets that would lift global output significantly, create ‘tens millions more jobs’, sustain poverty reduction and reduce global imbalances significantly.[1] The latest (18-19 April, 2013) Communique of Finance Ministers and Central Bank Governors of the G20 sustains this commitment to structural reforms.[2]

The promises of significant employment and growth dividends  of structural reforms is influenced by the OECD’s Going for Growth template in which wide-ranging policy initiatives that cut across product market regulations, labour market regulations, financial regulations, taxation, human capital and other areas unlock the growth potential of countries under review. The OECD makes it clear that not all the proposed reforms apply to all countries with equal force at all times.[3]

The proposed labour market regulations under the OECD’s Going for Growth template are worth highlighting. The suggested regulatory changes that are applicable to a range of countries include:  (a) reform of (disability) benefit schemes (b) reform of unemployment insurance scheme (c) reforms to reduce labour restrictions on labour mobility (d) reforms to reduce minimum cost of labour (e) reforms to the wage bargaining system (f) strengthening policies to promote female labour force participation (g) improving incentives for formal labour force participation. Some of these initiatives, such as (c), (f) and (g) are clearly desirable; others are more contentious and are likely to weaken labour market institutions.

The OECD maintains that ‘…fears that reforms may depress economic activity in the short run are overblown’.[4] Yet, this proclamation overlooks the caveats that are associated with the OECD’s internal research. An OECD Economics Department Working Paper includes the following qualifications in its summary of findings: ‘This analysis indicates that the benefits from reforms typically take time to materialize….there is also tentative evidence that some labour market reforms (e.g. unemployment benefits and job protection) pay off in good times than in bad times, and can even entail short-term losses in severely depressed economies’ (italics added).[5] An IMF study on labour market policies in advanced economies also notes some of these concerns.[6]

Furthermore, the OECD study does not discuss the issue of quality of employment, since the impact of reforms is measured in terms of two aggregates: GDP growth and the employment rate. It is, of course, possible for the employment rate to increase, but the quality of new jobs created to decline.

There are also adverse distributional consequences associated with labour market and related reforms. In the case of the UK, one study commissioned by the Financial Times concluded that the current welfare benefit reforms will hit the poorer northern region five times harder than richer south.[7] An IFS study draws attention to ‘…a £20 billion cut to the social security budget by 2015- 16 (that will affect) the vast majority of … working- age households and this inevitably tends to hit lower income households hardest’. The study then ‘…estimates the implications of these kinds of factors for the path of income poverty now and in future’. The projections are quite stark. A sharp rise in child poverty (based on a relative income standard) of six percentage points is anticipated between now and 2020. This will apparently negate all the reductions in child poverty attained during the 2000s.[8]

In sum, structural reforms might hold a good deal of promise in the long-run, but their short-run and distributional consequences cannot be discounted. It is not, of course, possible to make the transition to the long-run without negotiating the short-run; neither does it make much sense to focus only on ex-ante aggregate benefits without considering the distribution of such benefits. A balanced policy discourse on structural reforms should focus on both its promises and pitfalls.



[2] The G20 Communique of Finance Ministers and Central Bank Governors (18-19 April, 2013) note that: ‘We will continue to implement ambitious structural reforms to increase our growth potential and create jobs’. See the communique at http://www.g20.org/events_financial_track/20130418/780961081.html

[3] OECD (2010) ‘Pursuing Strong , Sustainable and Balanced Growth: the Role of Structural Reforms’, October, Paris, p.3

[4] OECD (2012) ‘Going for Growth 2012: Structural Reforms can Make the Difference’, Remarks by Secretary-General, 24 February

[5] Bouis, R et al (2012)  ‘The Short-term Effects of Structural Reforms: An Empirical Analysis’, OECD Economics Department Working Papers, No.949, 26 March

[6] Blanchard, O, Florence, J and Loungani, P (2013) ‘Labour Market Policies and IMF Advice in Advanced Economies During the Great Recession’, March, IMF Staff Discussion Note, SDN 13/02

[7] Financial Times, 11 April, 2013, http://ig.ft.com/austerity-audit/. As the Financial Times concludes: ‘Cuts to welfare payments will hit the local economies of northern towns and cities as much as five times as hard as the Conservative heartland southern counties, according to research commissioned by the Financial Times into the impact of austerity.’

[8] The focus of the study is on Northern Ireland, but results for the UK as a whole are also reported. See Institute for Fiscal Studies : IFS (2013) Child and Working-Age Poverty in Northern Ireland from 2010 to 2020, IFS Report R78, Executive Summary, http://www.ifs.org.uk/comms/r78.pdf

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