The need to implement structural reforms to help overcome the new mediocre and address growth challenges is becoming increasingly urgent. But doing so isn’t easy. Reforms that have significant long-term payoffs often go against vested interests and populists pressures. This panel will explore how policymakers can overcome these obstacles as they seek to overhaul trade, improve labor and product markets, and undertake fiscal and financial-sector structural changes to invigorate economies.
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- Zhu Min, Deputy Managing Director, IMF
- Luis de Guindos, Minister of Economy and Competitiveness, Spain
- Mauricio Cardenas, Minister of Finance, Colombia
- Olfa Soukri Cherif, Member of Parliament, Tunisia
- Diana Farrell, JP Morgan Chase Institute
Moderator: Julia Chatterley, CNBC Europe
- Green vegetables, going to the gym, brushing our teeth: we all know we need to do it but don’t want to. Just like structural reforms.
- The world is in a place today where no one has much fiscal space, so structural reform is key to promote growth. We’re talking about deregulation and labour reform and the key issue is to support productivity growth. We’re facing a low growth environment. Structural reform is really a key driver of the global economy.
- Looking at the context of the 2008 financial crisis, the first injection was TARP. It set the conditions for what we had to do, which was financial reform and restructuring in the form of the Dodd-Frank bill. We also restructured the auto industry. A big lesson we learned from this experience is: don’t ever let a financial crisis go to waste. Instead, use crisis headwinds to implement needed change. In terms of the political economy context, the auto rescue was not popular at the time at all, yet now it is considered a major success. Structural reform was needed in the US and it was very successful.
Luis de Guindos
- Speaking from the experiences of Spain, we have learned that delivery and implementation is key in structural reform. Understand the IMF’s advice but appreciate delivery is much harder than giving advice. However, it is not true that governments that implement reforms necessarily lose elections. That was not true in Spain. Our party implemented reform and we are still the biggest party. Societies have matured much more on this issue than we usually think. For example, in Spain there was a big recession in 2012, with 600,000 jobs lost per year, the bank industry was in trouble, and we had competitiveness problem. Now in 2016, we are outperforming our competitors. Spain has been turned around quickly and the population acknowledges that. Although there were hardships, the Spanish people have acknowledged this effort we had to do.
- The union of the socialist party and podemos did make sure we didn’t get a majority in parliament. While this was a smaller backlash to structural reform than in Ireland for example, it makes it clear that the biggest enemy of structural reform is populism. In Europe that’s really the biggest problem.
- This is an important point. Societies have matured on this issue. People more and more realise structural reform is a must; people understand long term benefits versus short term costs.
- It is a big requirement for structural reform to be successful for all stakeholders to have an ongoing dialogue on achieving social benefits at the least possible cost to economy. Populism erodes support for the purposes of major structural reform and solid governance.
- Populism also always delays structural reform, which can be fatal to making progress. It is important you have some grandfather rules to protect certain people and then communicate properly.
Olfa Soukri Cherif
- Tunisia is a good example of how to implement structural reforms. It hurt but we had to do it. Tunisia even received the Nobel peace prize because we had this good dialogue with civil society and shared the same aims for the country. To achieve democracy we needed to implement reforms and create jobs. It was also important to have a gender and youth approach because unemployment affected those groups the most. The best pillar for structural reform is open communication. This is everyone’s concern.
Luis de Guindos
- There are several points to stress. First, its about implementing structural reform the sooner the better after arriving in office because the sooner positive results will show. It is much more difficult to do later when much political capital has been wasted. Second, the first reforms to implement should be the most difficult. In Spain we started two months after coming into office with very difficult labour reform and had major cuts to the budget. You also have to be aware vested interests are powerful and have lots of resources. They will try to mitigate as much as possible but such is life.
- What do we mean with structural reform? Any special measures that lie outside regular macro policy. For Colombia, structural reforms were an ongoing process, not a matter of one set of reforms taking place in a particular set of time. So far we have been successful in adopting timely reforms that have grown our economy. What keeps our economy going is structural reform. Of course there is political capital invested in reforms, but you also have political dividends when reforms start working. But, to be successful reforms have to be based on knowledge and facts, not instincts. It is therefore important to have strong governance with many different people thinking about this, academics, think tanks, etc., so that there is a stock of knowledge you can draw from to design the right reform. This is something you have to cultivate. Colombia’s next wave of reforms deal with what we see as the permanent shock of commodity prices. We need to change the structure of tax code to be more efficient and equitable and make things easier for companies outside the oil market. This comes after several years of continuous change. This is an ongoing process where we always have to do more and keep reforming. A core part of our reform was to add the concept of fiscal sustainability to our constitution. That means no one, not any part of the government, can take measures that go against that principle now. We need to shift our economy to grow on manufacturing, agriculture, and tourism, not oil and commodities, and get what we need in terms of revenue from inside the country with tax, not through exports.
- The example of Colombia actually goes to a common misconception about structural reform. It’s not about a big government coming in and fixing everything, then staying out of it again. While that does sometimes need to happen, its actually much more about building the ongoing mechanisms that respond to new changes, that continue long term structural reform that are isolated from populism.
- Actually what might be most important is having the leadership that is willing to invest in those reforms. Populism is the easiest path for a politician to take, but much harder is to say this will be difficult but will have results on the long term. In that sense it is clear the electorate in Colombia has matured and has understood that need.
- Structural reform is absolutely key today, but it is a political economy process. For that reason the IMF hosts consultations across all different countries and we help build the capacity of the government to implement reform. We also are doing much more on the social and equity elements of structural reform, making sure the potential losers are compensated. One example of that is how we now stress building social safety nets.