What Are Structural Policies?

• Author: Khaled Abdel-Kader
• Position: an Economist in the IMF's External Relations Department.

Back to Basics

Economics can get out of whack for a variety of reasons. Policymakers, in turn, have a number of ways to try to fix them, depending on what is wrong.

For example, when prices are rising too fast and consumers and businesses are buying at a rate that exceeds an economy’s underlying ability to produce goods and services—that is, overall demand is growing too fast—policymakers can take steps to reduce demand. Similarly, during economic downturns, when businesses and consumers close their wallets—aggregate demand is shrinking—governments can take steps to encourage them to open their pocketbooks or substitute government spending for diminished private spending. Such government actions are called demand management or stabilization policies.

Sometimes an economy’s problems are deeper and longer lasting than excessive or inadequate demand, usually as a result of government policies or private practices that impede efficient and fair production of goods and services—that is, supply. Fixing such problems can require changes to the fabric of the economy, called structural policies.

Stabilization policies are important in the short run, because it is easier to alter the various components of overall demand for a short time than it is to make a country’s resources more productive. Stabilization policies include taxing and spending actions (see “What Is Fiscal Policy?” F&D, June 2009) and changes to interest rates and the money supply (see “What Is Monetary Policy?” F&D, September 2009).When longer-term, structural changes are required to improve aggregate supply, governments must address specific impediments. This may involve the core structure of the economy, such as how prices are set, how public finance is conducted, government-owned enterprises, financial sector regulation, labor market rules and regulations, the social safety net, and institutions.

The recent financial and sovereign debt crises triggered calls for bold structural policies in several euro area countries, while declining growth in many developed and developing countries pointed to a need for fiscal, financial, institutional, and regulatory reforms to enhance productivity and raise growth and employment. Structural policies not only help raise economic growth; they also set the stage for successful implementation of stabilization policies.

Dealing long term

Structural policies can zero in on a number of areas.

Price controls: Prices in free markets reflect the...