European View (2013) 12:153–159 DOI 10.1007/s12290-013-0254-6 ARTICLE
What are structural reforms? Bruno Macaes
Ó Centre for European Studies 2013
Abstract Policymakers are faced with a crucial choice between ameliorating the symptoms of existing economic problems and trying to address the causes of these problems. The latter goal is what explains the emergence and growing popularity of a relatively new idea: structural reform. What are structural reforms and what challenges do they face? We must start by understanding what the idea implies. First, it calls for a new approach, a general vision of the economy as an integrated system, where policy complementarities abound. Second, it expresses a certain understanding of the relationship between state and market, whereby the state has a foundational or institutional role but does not interfere with economic activity and economic agents. Third, structural reform is in many respects at odds with elements of our political systems, which face increasing challenges when fundamental economic change becomes necessary. Keywords Structural reforms Economic adjustment European Union Policy complementarity Labour market Political system Introduction We seem to have discovered a new political geography: the continent of structural reforms. It is around this idea that most of our political and economic debate is organised. More importantly, it is to this idea that we turn in search of a clear line of justification and, ultimately, of legitimacy for our political
B. Macaes (&) Gabinete do Primeiro Ministro, Rua da Imprensa a` Estrela 4, 1200 Lisbon, Portugal e-mail:
[email protected]
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arguments, a fact that should merit some serious reflection. What are structural reforms? How was the idea developed and in what directions will it evolve? This legitimising force is, first of all, a result of the connection between structural reforms and economic growth. At a time when most of the traditional policies to boost growth find themselves in crisis, all the weight of political optimism has been shifted onto structural reform, from which we expect all the growth that, to all evidence, cannot come from anywhere else. Such an association with the ultimate goal of economic policy helps to explain its current popularity, but structural reform is not simply an economic idea. In a momentous speech last summer, Draghi (2012) famously compared the euro to a bumblebee, arguing that only structural reforms can graduate the bumblebee into a real bee. Structural reforms offer the solution to all the problems facing the eurozone because they reintroduce flexibility where it has been eliminated by the impossibility of currency devaluation. In addition, they alone can produce regional convergence inside the European Union, now that both the common currency and European structural funds have seemingly failed to bring it about. The political elements are developed by those, like the influential columnist Crook (2012), who stress that structural reforms further social justice by eliminating unjustified privileges and sheltered sectors in the economy. Scott Minerd, chief investment officer at Guggenheim Partners, goes so far as to liken structural reform to the path of righteousness and virtue in a world of demonic temptation: In Goethe’s 1831 drama Faust, the devil persuades a bankrupt emperor to print and spend vast quantities of paper money as a short-term fix for his country’s fiscal problems. As a consequence, the empire ultimately unravels and descends into chaos. Today, governments that have relied on quantitative easing instead of undertaking necessary structural reforms have arguably entered into the grandest Faustian bargain in financial history. (Minerd 2012) It is not only Europe that the spectre haunts. In the US, Brooks (2012), an author famous for embracing new ideas, speaks of a ‘structural revolution’ which will replace once and for all the existing economic model, a model where structural economic problems are addressed by quick fixes—alternately tax cuts and the unsustainable welfare state. In China, where the risks facing the economy have been slowly building, the official line is that the real problem is a lack of structural reforms and that the issues cannot be solved through monetary expansion or fiscal stimulus. As the new premier Li Keqiang recently explained, ‘great market demand exists hidden within structural adjustment. We must pursue stable growth and structural adjustment with reform’ (WantChinatimes.com 2012). Brazilian Finance Minister Guido Mantega, nimbly moving between present and future, has announced that ‘structural changes are happening and bearing fruits which will be reaped very soon’ (Mello 2012). In a word, structural reform is one of a very small number of political ideas that may truly be said to be universal. Even when applied to different circumstances, the idea seems to mean more or less the same thing in the US, China, New Zealand, Sri Lanka and Pakistan.
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History of the idea The concept of structural reform has its origins in the International Monetary Fund (IMF) and World Bank (WB) structural adjustment programmes. These programmes were introduced at the beginning of the 1980s, in what became a significant aggiornamento for both institutions, and one that would, incidentally, allow them to move closer together. The experience and results of the stabilisation programmes developed in the two decades prior to 1980 could be described as an internal contradiction between, on the one hand, adjustment lending by the IMF or the WB and, on the other, the fundamental economic structures and tendencies in the recipient countries. Thus, adjustment in the current account was generally a temporary phenomenon. Chile, to give but one example, had several stabilisation programmes even prior to 1982. The debt crisis of 1982 threw even deeper doubts over the efficiency and effectiveness of these adjustment processes, while making it considerably more difficult to find the resources necessary to pursue the same old strategy. The crisis demonstrated with renewed clarity that capital transfers to the developing world had to be followed by significant reforms in the economies of these countries. In the second half of 1981, Latin America was borrowing a billion dollars a week, mostly to pay off existing debt. This could not continue for long. However, the default formally announced by the Mexican government in August 1982 coincided with recessions in developed countries, sharply reducing tolerance for the easy strategy of trying to alleviate a debt crisis with more debt. When international loans dried up, the indebted countries were forced to replace the expensive industrial policies of the past with radically new ideas: trade liberalisation, privatisation and fiscal discipline. On both sides of the debt crisis, the need for a new strategy was now clear. International financing would have to be placed at the service of a new strategy of structural adjustment in the developing world. What was the crucial difference? This new strategy was meant to deliver results that were both definitive and irreversible. From the start, the drive towards definitive adjustment is revealing of a certain understanding of the relationship between the market and the state. The market is seen as a mechanism or structure that should be left to work without interference, but this mechanism can take many different forms, with historically unlimited varieties, leaving the state with the crucial role of electing the form that works the best. The idea of structural reform turns the market mechanism into a response to problems. It makes the market itself a policy, and this is a new idea in our political tradition. Structural reform abandons the belief that politics should correct or cancel out the results of the market process, but in its place a new political ambition is born: an attempt to act on the market as a whole, with the market understood as an integrated system or structure. For example, one may regard substantial current account imbalances as a sign that a country suffers from a ‘foreign exchange gap’ that can only be corrected by capital transfers, without which the recipient country will not be able to
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finance imports of capital and intermediate goods. Alternatively, one may see the causes of these imbalances in policy choices that aim to shelter particular sectors from international competition and discourage exports. The second interpretation leads more or less directly to the idea of structural reform. It is easy to find very similar examples in other areas. In the case of fiscal policy, the crucial distinction is the one between a strategy of expenditure compression and a strategy of expenditure reduction. The latter eliminates certain government roles or structures, ensuring that the previous levels of expenditure within these structures or roles cannot be recovered once the crisis is over. The same kind of contrast between the two types of solution for economic problems can help us to understand why joining a monetary union may perpetuate existing structural failures in a member country: if the monetary union enjoys lower levels of inflation, a country may benefit from lower interest rates, which provide a boost to economic activity and render the structural reforms it needs much less urgent, at least for a while. We have seen this dangerous dynamic play out in the eurozone. Structural reforms are meant to be a definitive response to economic problems. The idea is reminiscent of the famous Wittgenstein quote: the correct approach to philosophical problems is not to attempt to solve them but rather to dissolve them. In the first case, the problem remains, but its permanence is made tolerable by means of a theory or an explanation. In the second case, the problem simply disappears, or disappears as a problem. How can this be done? In philosophy, by changing the way one thinks. For economic problems, by changing the way an economy works. Analysis and choice have to be conducted within a much larger horizon, among different structures and different alternative visions, rather than by merely rearranging the elements within a single one of these structures. Interestingly, Wittgenstein seems to have been moved by something of an economic concern. A philosophical method which attempts to solve problems will be translated into a cacophony of different answers, one after the other, without the possibility of progress or agreement. Only a method which manages to eliminate problems will get us anywhere.
A view of the whole Let us look at what is probably the main problem of economic policy: unemployment. While active labour market policies may be limited and isolated, since their goal is to solve an unemployment problem, any attempt to eliminate the problem by means of structural reforms will have to be based on a much deeper transformation of the economic structure. To confuse the two methods by attempting to reform the economic structure in a limited and casuistic way will fail to deliver the desired results. Some resistance to structural reform is therefore fully justified when its scope is deliberately confined to addressing a
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limited number of failures and inefficiencies in the economic structure. In many cases, correcting a single failure will render the system as a whole less efficient. For example, by increasing labour market flexibility for temporary contracts without improving the flexibility of permanent contracts, the probability that temporary employees will become permanent is reduced, thereby reducing the incentives for investing in training and human capital for both firms and employees (Leiner-Killinger et al. 2007, 11). Thus, even if one segment of the labour market works better, the economy as a whole will be less efficient. Labour market failures have to be addressed in accordance with a vision of the whole that must include unemployment benefits, wage setting mechanisms, barriers to labour mobility, entitlements, minimum wage rules, working time arrangements, job security legislation, payroll taxes and skill acquisition. For example, when unemployment benefits discourage workers from seeking jobs, firms will have greater difficulty in hiring new employees on favourable terms, which by itself makes dismissal costs harder to bear (Coe and Snower 1997). The logic of the system even extends beyond the labour market considered in isolation: product market reforms are usually complementary to labour market reforms for the very simple reason that reducing available rents may reduce support for the labour market institutions which aim to capture them, including wages above the competitive level and barriers to entry.
The political process: difficult challenges As I have been arguing, the most decisive contrast is not that between economic problems and the solutions to these problems, but the contrast between two types of solution. If structural reform is defined as a general answer to economic problems, then it always appears as an alternative to the method of casuistic solutions. This means that support for structural reform is hampered by the difficulty with which one abandons well-known solutions for others which must remain, at the present moment, very uncertain or even doubtful. Moments of crisis are, in this respect, an almost indispensable opportunity. It is at these moments that existing solutions reveal themselves as fundamentally unable to solve problems. And yet every crisis of the economic structure is full of ambiguities: If those solutions have stopped working, should we blame their own failures or the appearance of external factors? Should they be abandoned or, on the contrary, pursued with even greater determination? How about the structural approach? How can we defend what has not yet been tried, what, in many cases, remains unknown? A policy devised in order to respond to a specific problem is obviously capable of mobilising its own public, meaning its own interest groups, which have been organised over a considerable period of time. More often than not, it is these very same groups that defended the current policy when it was first adopted. How can we expect that they will be willing to abandon it now, even at a moment of crisis when more radical solutions may be needed? One
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should keep in mind that a structural reform plan is very general and abstract. It is tantamount to a correction of the existing economic structure or perhaps even its replacement with a new one. Perhaps paradoxically, it is always much easier to adopt policies which aim to deal with a particular problem, thus appealing to those who suffer from this problem, than it is to make the problem disappear. Once it disappears, the political constituency built around it also disappears. For example, efficiency problems in a given industry may be dealt with by means of public subsidies capable of keeping this industry alive without really eliminating the problem. The alternative would be to try to raise efficiency levels in that industry. It is a rather unfortunate fact of political economy that the former solution is often a lot more popular than the latter. The political case for structural reforms is also structural. That is, it is not directed towards a specific audience; it does not appeal to interest groups. On the contrary, it can only succeed if it is not organised around interest groups, but this creates an acute political problem in the short term. To put it bluntly: it is not at all clear that we can find the same level of political support for a structural reform plan as we can find, by definition or default, for a plan for specific solutions, policies and programmes. A good deal of the problem is directly connected to the structure of our political institutions. Government is normally organised into different departments or ministries. Of course, this division is meant to be purely functional. It does not in itself affirm any political principle, as is the case with the separation of powers or party pluralism. All of these departments, agencies and ministries are supposed to pursue the common interest, as defined by the government as a whole. And yet, everyone who has been in government knows that this is not what happens most of the time, and perhaps naturally so. If a given reform is costly for a specific public, who exactly is supposed to represent the benefits accruing to everyone else? It is to be expected that an agriculture or education ministry, or a department of energy or commerce, will be predominantly concerned with problems in these specific areas rather than with problems that relate to the economic structure as a whole. In fact, it would be bizarre if a given ministry or department understood its mission as the constant and perpetual endeavour to denounce all the ways in which the specific interests of the areas it supervises are in contradiction with the general interest. This is ultimately the problem raised by the idea of structural reform. Because it is a novel idea, and also a novel political practice, we should not be too surprised that our political institutions still seem unprepared to explore all the possibilities it offers. For the present, it is still unclear in what direction we should be moving, even if the need to follow the idea of fundamental economic reform with new mechanisms and structures of political decision-making is now being felt more than ever.
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References Brooks, D. (2012). The structural revolution. New York Times, 7 May. Coe, D. T., & Snower, D. J. (1997). Policy complementarities: The case for fundamental labor market reform. International Monetary Fund Staff Papers, vol. 44, issue 1. Crook, C. (2012). Why Europe really must pursue ‘structural reform’. Bloomberg, 1 February. http://www.bloomberg.com/news/2012-0201/why-europe-really-must-pursue-structuralreform-clive-crook.html. Accessed 26 March 2012. Draghi, M. (2012). Speech at the global investment conference in London. 26 July. Leiner-Killinger, N., Lopez, V., Stiegert, R., & Vitale, G. (2007). Structural reforms in EMU and the role of monetary policy: A survey of the literature. European Central Bank Occasional Paper no. 66. Mello, D. (2012). Mantega diz que Brasil esta´ comec¸ando novo ciclo de forte expansa˜o econo´mica. Ageˆncia Brasil, 5 July. http://agenciabrasil.ebc.com.br/noticia/2012-07-04/mantega-diz-quepais-esta-comecando-novo-ciclo-de-forte-expansao-economica. Accessed 26 March 2012. Minerd, S. (2012). Beware the Faustian bargains of central banks. Financial Times, 21 August. WantChinatimes.com. (2012). China needs new economic, social model: People’s Daily. 7 December. http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20121207000061&cid=1102. Accessed 26 March 2012. Bruno Macaes is a senior policy advisor to the Portuguese prime minister. Prior to this appointment he taught political science in Seoul, Korea and in Berlin, Germany.
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