Going for growth?

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?

Comments

[Lafayette]

NE: "Indeed they should resist - but who really expects that they will?"

Silly me, perhaps.

I sense (or would like to think) that the seriousness of the present situation in Europe has had its effect. People, smart people, that is, feel that the time has comme for change.

The two most reactionary nations of Europe, France and Germany, have begun to understand that labor regulation and widespread featherbedding of public jobs cannot go on any further. Merkel represents a sea change in political thinking and she is smart enough to understand that she cannot do everything she would like to do ... namely because her countrymen (and women) wont follow.

We must therefore look to the upcoming elections in France. Should the socialists pass, then all bets are off. They haven't the foggiest notion of how a modern economy works. They are all from the dirigiste school of politicking and will simply continue the present immobility by changing as little as possible and assuring that their constituency continue to be sheltered against the winds of change.

Segolen Royal's political platform shows NO fundamental change of labor regulation. In fact, she will seek to consolidate the 35-hour week which has plunged French productivity to new depths since imposed in the early 1990s.

Should the right be elected in France, it is entirely possible that Sarkozy will break with the immobility of its present President and take some long needed risks to change the economic equation. Time will tell.

The problem with France is ... er, the French. A young politician of the right, who was so dynamic in the 1970s that they called him the "bulldozer", he too wanted to change things. That man was Jacques Chirac.

Chirac’s new slogan, once in power as President, became, “Politics is the art of the possible”. He has spent the past ten years doing absolutely nothing except looking Presidential. Perhaps reforming France politically is impossible? He should know. He failed to do it.

If the French do not want change, then Europe is in for a good many years of economic muddling through. There will be no consensus between France and Germany, once the EU's dynamic-duo, for change that might jump-start reform throughout Europe. Which is why this Presidential election is a lot more important than some might think.

[jon livesey]

I think we've seen this movie before, have we not? Structural reform in the UK didn't really get the support of the public - not just the "smart people" - until the IMF were in the house, fingering the silverware and wondering how much the crown jewels would fetch. It was only when Maggie could say "there is no alternative" that people gave up on assuming that there had to be an alternative to reform, if only Labour could find it. I don't think this is really an issue of economics so much as human psychology. People wait until they are fat to explore a healthy diet, and they wait until their credit cards are being refused before they put themselves on a budget.

I think that the danger for Europe is that the crisis is a long way off, because Europe can live off its fat for while. While waiting to see if a crisis arrives, individual European nations may find themselves drifting towards more dynamic markets outside Europe, leading to less European integration, not more.

[Lafayette]

jl: "I think that the danger for Europe is that the crisis is a long way off, because Europe can live off its fat for while."

This may be the case for the UK. The Brits are still pouring into France buying up cheap residences, with money from the sale of their UK home. They are welcome, mind you, because the French are unable or do not want to put in the effort to rebuild much of the "France profonde" where the English are settling.

But, the case in France is dangerous. The troglodytes in the suburbs are rioting every now and then out of desperation. Youth has lost its hope in the future.

The situation is really quite dire and living off its fat is what France has already been doing for 15 years. Germany and well.

We shall see, in the upcoming elections, if the French still believe the nonsense of the socialists (who helped create the present mess with silliness like the 35-hour week), or not. The Germans barely snapped back from the idiot-left in their last elections. Perhaps this is the ineluctability of center-ground politics around which democracies tend to swing between the left and the right?

Stay tuned ...

[thinktank]

International Institute of Management (IIM) released a new report warning about the U.S. economic risks. The report:
1. Uncovers the forces behind Feb 27th stock market meltdown and the Chinese reaction to the outlook of U.S. Economy.
2. Forecasts the future behavior of U.S. and global markets.

Med Yones, the author of the white paper, warns against costly policy mistakes and provides a detailed analysis of the economic, social and geopolitical risks facing the United States

The complete text of the report is available at:

http://www.iim-edu.org/u.s.economyrisks/

[Arthur Eckart]

The U.S. economy had a quick and massive "Creative-Destruction" process from 2000-02 that made Information-Age firms more efficient and freed-up resources for emerging industries. The U.S. had slow growth from 2001-03, after the mild 2001 recession. However, real growth was around 4% for three years, in the mid 2000s, and has slowed recently, since the Fed is attempting to achieve a soft-landing, e.g. roughly 2 1/2% real growth. U.S. actual output generally slightly exceeded potential output in the mid and late '90s and U.S. actual output has generally been slightly below potential output in the early and mid '00s. Consequently, the U.S. had a slight economic boom/bust cycle. The Fed targets the general price level. Asset prices are only residuals. The U.S. has gained the most in the foreign economic boom and will lose the least in the foreign economic bust, because of monetary, fiscal, and globalization policies. The U.S. is in position to increase output through exports. So, actual output may rise to and slightly exceed potential output over the next few years. Also, I may add, many people underestimate the benefits of globalization, particularly in the U.S., which has less restrictive policies than its major trading partners. Basically, U.S. consumers benefit directly from cheaper imports, Older U.S. producers benefit from greater foreign competition, which raises productivity or keeps prices low. Newer U.S. producers benefit from the freed-up resources of older U.S. producers. So, more new high value products can be created and produced. It's a virtuous cycle that benefits U.S. consumers and producers. Globalization tends to increase the economic pie, e.g. through the Law of Comparative Advantage. However, the U.S. benefits more, in part, because of relatively less restrictive globalization policies.

[Arthur Eckart]

Also, I may add, export-led economies have been financing much, if not all, of the U.S. war in Iraq and those economies will end up paying for much of the war.

[Arthur Eckart]

A precipitous fall in the U.S. dollar will make U.S. exports cheaper and U.S. imports more expensive. Consequently, the U.S. will have inflationary growth, while export-led economies will have slower growth or recessions. The U.S. will tighten the money supply, while export-led economies will ease their money supplies. Nonetheless, U.S. trade deficits will become much smaller. U.S. bond prices should fall. So, export-led economies will lose in the U.S. bond market. If those economies shift into U.S. stocks or physical assets, they'll pay premiums. The adjustment is inevitable, whether it takes place slowly or suddenly.

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