Political Economy of Structural Reforms

"New IMF research — focused specifically on emerging markets and developing economies — shows how structural reforms can raise productivity and generate enormous economic gains.

These changes are the key to achieving higher growth over the medium and long-term."

–Kristalina Georgieva, IMF Managing Director

Making the Case for Reform

IMF research shows that a major broad-based reform push in the area of governance, trade, finance product and labor market could raise output by as much as 7% over 6 years, providing a big boost to jobs and economic growth at a time when the global economy is slowing down. But is it possible to implement far-reaching reforms without paying a price at the ballot box?

Opening Remarks:

David Lipton, First Deputy Managing Director, IMF

Speakers:

Alberto Alesina, Professor of Political Economy, Harvard University

Paschal Donohoe, Finance Minister, Ireland

Felipe Larrain, Finance Minister, Chile

Luca Visentini, General Secretary of the European Trade Union Confederation

Martin Wolf, Chief Economics Commentator, Financial Times

Key Points:

Reform priorities. While panelists agreed that the goal is to achieve sustainable growth, there were different views on reform priorities. Alesina called for reforms to focus on labor market flexibility, trade liberalization, pensions, and social mobility, while Visentini underscored the need for reforms focused on social protection and wage inequality. As Pereira and Visentini noted, reforms should prepare the economy and society to challenges ahead. Donohoe highlighted that reform design is not neutral but reflect social values and political judgments.

Reform implementation. Timing, allocation of benefits, as well as the public narrative are important considerations in reform implementation. Donohoe noted that the political and economic cycle matter, as the ability to make the case for reform are greater during economic booms. Larrain underscored the importance to present the benefits and the need for change in a constructive narrative. In this sense, Donohoe and Pereira, and Visentini emphasized the crucial role of social dialogue.

Political-economy challenges. Panelists noted the challenges associated with the political process in approving reforms, highlighting possible electoral costs to the incumbent. Alesina stressed the problem with vested interests and lobbies blocking reform. Donohoe noted that the absence of political consensus may overwhelm the reform agenda. In this sense, reform implementation may call for a mix of legislation and regulation, as noted by Larrain.

Chapter 3: Reigniting Growth in Emerging Market and Low-Income Economies: What Role for Structural Reforms?

The pace of structural reforms in emerging market and developing economies was strong during the 1990s, but it has slowed since the early 2000s. Using a newly constructed database on structural reforms, this chapter finds that a reform push in such areas as governance, domestic and external finance, trade, and labor and product markets could deliver sizable output gains in the medium term. A major and comprehensive reform package might double the speed of convergence of the average emerging market and developing economy to the living standards of advanced economies, raising annual GDP growth by about 1 percentage point for some time. At the same time, reforms take several years to deliver, and some of them—easing job protection regulation and liberalizing domestic finance—may entail greater short-term costs when carried out in bad times; these are best implemented under favorable economic conditions and early in authorities’ electoral mandate. Reform gains also tend to be larger when governance and access to credit—two binding constraints on growth—are strong, and where labor market informality is higher—because reforms help reduce it. These findings underscore the importance of carefully tailoring reforms to country circumstances to maximize their benefits.

Facing the Tides: Managing Capital Flows in Asia

Large and volatile capital flows can be disruptive and pose a central challenge for Asian economies. These flows can trigger swings in exchange rates, which in turn can amplify the effect of external financial shocks. This work analyzes the Asian policy approaches to manage capital flows.

Roadmap to Central Bank Risk Management

While the importance of a risk management function in central banks is now widely recognized, the level of maturity observed varies significantly, mainly due to the lack of international standards and technical capacity. This talk will discuss a modular approach to progressive development of risk management practices at central banks.

Governor Talks: Peru: Inflation Targeting in a Dollarized Economy

Speaker: Mr. Julio Velarde, Governor of the Central Reserve Bank of Peru

Moderator: Mr. Alejandro Werner, Director of Western Hemisphere Department

Governor Talks: Chile: Autonomy, Credibility and Communication of Central Banks

Speaker: Mr. Mario Marcel Cullell, Governor of the Central Bank of Chile

Moderator: Mr. Alejandro Werner, Director of Western Hemisphere Department

STAFF DISCUSSION NOTES

Strengthening the Euro Area : The Role of National Structural Reforms in Building Resilience

Publication Date: June 17, 2019

Cross-country differences in economic resilience—in an economy’s ability to withstand and adjust to shocks—remain significant in the euro area. In part, the differences reflect the lack of a national nominal exchange rate as a mechanism to adjust to shocks.