Economic reforms is, in most places and most of the time, a long hard slog. The anual OECD report Going for Growth 2007, published this week, explains why structural reform is still necessary. Now in its third year, the latest report "highlights the weaknesses that are holding back OECD economies from raising material living standards". Some common priorities emerge:
For much of continental Europe the main focus is on improving labour market performance to reduce unemployment and lift labour force participation.
For lower-income countries, as well as in Japan and Switzerland, raising productivity is the main challenge. Priorities focus more on liberalisation of product markets, especially in network industries and in services.
English-speaking countries generally display good labour market performance but need to raise skill levels, in particular through improvements in secondary education.
Many EU countries need to strengthen higher-education systems to improve graduation rates and, in some cases, the quality of teaching and research.
The handout for journalists (PDF) provides a good summary. The Chapter 1 Overview (PDF) is available free online, as are the individual recommendations for each OECD country in Chapter 2's Country Notes. For the United Kingdom (PDF), the main priotities are to: (1) further reform disability benefit schemes, (2) improve the education achievement of young people, and (3) improve public infrastructure, especially for transport. One can hardly argue with those.
The report also looks at the political and economic impediments standing in the way of structural reforms. Today's Economist piece, The art of the possible, focusses on this issue - explaining how crises have often provided the impetus for structural reform:
The report's most disheartening conclusion is that reform must often wait for the sting of a crisis. This is borne out, it says, by the experiences of Britain in the late 1970s, the Netherlands and New Zealand in the 1980s and by Italy in the early 1990s. Governments seem more likely to loosen their product and labour markets when GDP is more than 4% below potential.
Policymakers may think this finding is of little use: calling forth catastrophe is an odd way of promoting prosperity. However, it does serve as a useful warning. Desperate times will make reform unavoidable. Better then, to carry it out during less painful interludes. One reason is that a full treasury can help to compensate the losers.
By the same token, it is much harder to carry out structural reforms at the same time as tightening the budget. That said, fiscal consolidation can pave the way for reform by setting aside some money in advance. In the 1980s, for example, Denmark and Ireland put their public finances in order before liberalising product markets and shaving the tax “wedge” between what workers take home and employers pay out.
In the report's introduction OECD Chief Economist Jean-Philippe Cotis welcomes buoyant Eurozone growth - but also warns it may lead to complacency over reform. “Governments should resist the temptation to ease up on reforms aimed at boosting productivity and creating more jobs”. Indeed they should resist - but who really expects that they will?