Transcript Microeconomic Reforms, Macroeconomic Impacts

Microeconomic Reforms,
Macroeconomic Impacts
Lessons from Experience
Manuela Ferro
Manager
Country Economics, OPCS
The World Bank
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Outline
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Relevance of structural reforms
I.
Product and factor market reforms
III. Political economy considerations
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I. Relevance of Structural Reforms
• Structural reforms are intended to increase flexibility and
competition leading to
=> increased productivity
=> greater ability to absorb shocks
• “Rigid economies” take longer to recover from negative
shocks, and take less advantage of favorable external
conditions
• The functioning of factor and product markets is largely
determined by features of factor market institutions and
product market regulations
• Many of these reforms supported (with technical advice
and/or financing) by the World Bank
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I.
Relevance of Structural Reforms
(contd)
• Identifying critical reforms for growth
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No clear methodology
“Washington consensus” (macro)
Cross-country regressions
Delving below the surface – shadow-prices
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II. Product and Factor Market Reforms
• Structural reforms that helped reduce the price level
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Telecommunications deregulation – all over the world,
including least developed countries
• Structural reforms that have helped spur productivity
growth and private investment
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Removal of barriers to entry and exit – Latin America, India
(Schumpeterian creative destruction)
Competition policies and regulator to restrict monopolies and
cartels – US, UK, Australia, EU countries, Pakistan
Strengthening law and order – Peru
Strengthening property rights – Thailand, Albania, India,
Peru, Azerbaijan, Pakistan
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II. Product and Factor Market Reforms
(contd)
• Structural reforms that helped reduce fiscal and
quasi-fiscal deficits
Banking sector reforms – Pakistan, Turkey
Public enterprise restructuring – India, Indonesia
Privatization – Poland, Pakistan
Subsidy reform, e.g. targeting energy subsidies –
Indonesia, Pakistan
 Tax policy and administration reforms – Spain,
Portugal, India
 Pensions reform – Croatia, Khazakstan, Chile,
China, Morocco
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Pensions Reforms
• Governments around the world have enacted or
are currently considering fundamental structural
reforms of their Social Security pension
programs.
• The key feature of these reforms is a shift from a
pure pay-as-you-go, tax-financed system, in
which taxes on current workers are primarily
distributed to current retirees, to a mixed system
that combines pay-as-you-go benefits with
investment-based personal retirement accounts
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Bank assistance on pensions reform
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Bank experience with Pension Reforms
– key lessons
• Bank involvement often prompted by concerns about fiscal
sustainability
• 87% of projects with pension components were rated satisfactory by
the Bank’s Independent Evaluation Group
• Long-term reform results varied across countries, depending on depth
of analyses, initial conditions, institutional capacity, and political
commitment
• Reforms often contributed to long-run fiscal sustainability, but had
significant short-term fiscal costs
• In many countries with multi-pillar systems, pension funds are
insufficiently diversified and coverage has increased only marginally
• Secondary objectives of funded pillars—to increase savings, develop
capital markets, and improve labor flexibility—remain only marginally
realized, and require broader capital market reforms/deepening, and9
macroeconomic stabilization, prior to pension reforms
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Macroeconomic stability necessary
condition for pensions reform
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Many countries had high budget deficits when
pensions reform introduced
(overall budget deficit as % of GDP)
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Many countries that chose multi-pillar reforms
had poorly developed financial sectors
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III. Political Economy Considerations
• Broad consensus among economists that structural
reforms increase welfare in the long run
• But often stiff resistance to reforms, due to
perceived short-term costs by segments of society
that may be minority, but are well organized
(agricultural policy in EU, labor unions)
• Politicians often discount the future at a higher rate
than society at large
• Some governments/societies may place higher
emphasis on equity vs efficiency
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III. Political Economy Considerations
(contd)
• How do reforms often happen in practice?
Crisis:
 economic policies no longer viable, high costs
of inaction, weaker opposition to reforms
 Many examples: US and UK in late 1970s,
India post 1991, financial sector reforms in
East Asia in late 1990s
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III. Political Economy Considerations
(contd)
• Why is telecom reform advancing so
rapidly around the world?
Positive impact (falling relative prices
following deregulation) takes place within
the short run, often benefiting incumbent
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III. Political Economy Considerations
(contd)
• Creating public support for reform often
requires both creating public awareness of
the costs of inaction (e.g. pensions
reform), and of the benefits of reform
• It may require compensating some social
groups (grandfather clauses, etc)
THANK YOU
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Selected Bibliography
Leiner-Killinger et al (2007), Structural Reforms in EMU and the Role of Monetary
Policy; A Survey of the Literature, European Central Bank.
Hausman, R.,D. Rodrik and A. Velasco (2004), “Growth Diagnostics,” Harvard
University.
Loyaza, N. et al (2005) Regulation and Microeconomic Dynamics: A Comparative
Assessment for Latin America, The World Bank.
Rodrik, D. (2004), “Rethinking Growth Policies in the Developing World,” Harvard
University.
Rodrik, D. (September 2003), “Growth Strategies,” Harvard University.
Independent Evaluation Group, The World Bank, various sectoral and country reports
The World Bank Group, World Development Report, several issues
Williamson, John (2002). “Did the Washington Consensus Fail?” Outline of Remarks
at CSIS. Washington DC: Institute for International Economics, November 6.
Williamson, John (2000). “What Should the World Bank Think About the Washington
Consensus?” World Bank Research Observer. Washington, DC: The International
Bank for Reconstruction and Development, Vol. 15, No. 2.
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