World Economic Outlook analysis: How can industrial countries overcome obstacles to structural reform?

• Pages: 104-106

Page 104

Structural reforms have generally been associated with the notion of increasing the role of market forces, including competition and price flexibility. The term is often used interchangeably with deregulation-that is, reducing the extent to which government regulations or ownership of productive capacity affects the decision making of private firms and households. This perception clearly reflects a broad global trend during the past two to three decades, when structural reforms often focused on replacing general, across-the-board restrictions on competition and entry by new firms with more targeted, less intrusive restrictions. This broad policy shift mirrored a variety of factors, including growing evidence that not only markets but also governments can fail because of problems such as asymmetric information, management and incentive problems, and the pernicious influence of vested interests on regulatory policies.

It would, however, be misleading to equate structural reforms with the goal of abandoning regulation altogether. Fundamentally, structural reforms aim at creating institutional frameworks and regulations that allow markets to work better. Some markets are prone to market failure or inefficiency. In these situations, well-designed government regulations can prevent less than desirable market outcomes.

Labor markets, tax systems lag others

There is broad consensus about the benefits of reforming tax systems and liberalizing product and labor markets, the trade system, and the financial sector. However, the WEO's research revealed that in all the Page 105 countries included in the study (see box, page 106), some sectors were more likely to undergo more reform than others (see chart, this page). Substantial reforms were recorded in the financial sector, selected product markets, and international merchandise trade, where the very nature of the policy environment has changed in many countries. In contrast, minor reforms were made in labor markets and tax systems.

What explains these differences? The research team's basic hypothesis was that they reflect differences in political viability. An important reason for this could be that the benefits of reforms tended to materialize over time while the costs they inflicted were immediate. More generally, some groups in society often lose out from structural...