Structural Reforms Necessary, Politically Difficult

Tackle toughest reforms first

Set priorities, explain goals, implement

Populist backlash makes communication, good governance key to success

Structural reforms tackle the problems on the supply-side of an economy. Reforms to product markets aim to boost competition among firms, make it easier to start a business, and de-regulate industries like energy and transportation. Reforms to labor markets make it easier to hire and fire workers, and allow changes to unemployment benefits and employment taxes.

With low global growth, commodity prices falling, monetary policy losing steam, and few governments with ready cash to spend, many have to restructure often decades-old rules about how their economies operate to make them more productive.

In a speech last week in Frankfurt, Germany, the IMF’s Managing Director Christine Lagarde called for countries to move ahead with structural reforms sooner rather than later, as part of a three-pronged approach that includes fiscal and monetary policy measures.

“We need to combine structural reforms with the demand side, especially fiscal policy, to help offset the costs of supply-side reforms,” said Min Zhu, Deputy Managing Director of the IMF.

Tackle the tough reforms first

In a seminar on the political challenges to structural reforms held during the IMF-World Bank Spring Meetings in Washington, D.C., panelists tackled the rigors of implementing tough reforms to create jobs and increase growth.

“You have to undertake structural reforms before it’s too late,” said Mauricio Cárdenas, Colombia’s Minister of Finance. “In Colombia in 2012 we reduced payroll taxes by half and the results are amazing in terms of employment generated: 800,000 jobs.”

Cárdenas said countries need structural reforms when the standard, textbook reforms do not work. Colombia’s next wave of reforms includes revamping the tax code to make it more efficient, and to offset the loss in revenue from falling oil prices.

European politicians also face economic and financial problems that need structural reforms to get their economies back on track.

“We have high public and private sector debt, low productivity, and low inflation,” said Luis de Guindos, Spain’s Minister of Economy. “The only way forward is structural reforms to increase productivity and generate revenue to pay back the debt.”

In new research from the latest World Economic Outlook, the IMF said the sequence of reforms could make the difference between success and failure.

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