Tag: Structural Reform

The Phrase “Structural Reform” Considered Harmful

Posted on by Brad DeLong
Preview of Fiscal Policy in the New Normal IMF Panel

The worst possible “structural reform” program is one that moves a worker from a low productivity job into unemployment, where they then lose their weak tie social network that allows them to get new jobs. They then get used to sitting in their sisters’ basement splaying video games and surfing the internet all day. “Structural reforms” are extremely dangerous unless you have a high-pressure economy to pull resources out of low productivity into high productivity sectors.

The view in the high councils of Europe is that, when there is a high-pressure economy, politicians will not press for “structural reform”: there is no obvious need, and so why rock the boat? Politicians kick every can they can down the road, and you can only try “structural reform” when unemployment is high–and thus when it is likely to be ineffective if not destructive.

I don’t think this view is correct. But this is the view–in Europe. This creates a very difficult political economy puzzle for Europe. I really do not have any sort of solution.

Quite possibly we should simply drop “structural reform”. Most of the time, “structural reform” means policies that reduce the size of unproductive sectors and in the process create significant numbers of substantial losers. That is why people call it “structural reform” rather than some other, more properly descriptive phase.

We can (almost) all get behind “reduce product market monopoly power”. We can (almost) all get behind “reduce NIMBYist constraints on land development”–provided, that is, we can agree which restraints are and which are not NIMBYist. Calling those part of the suspicious portmanteau of “structural reform” does not materially aid their cause. We should drop the phrase “structural reform” in the interest of clarity about just what we are planning to do.

Cf: http://www.bradford-delong.com/2016/08/must-read-very-nice-to-see-very-good-but-four-brief-whimpers-1-structural-reform-is-a-very-dangerous-thing-to-do.html

Must-read: Evan Soltas: “Is Pro-Business Reform Pro-Growth?”

Posted on by Brad DeLong

Must-Read: A very interesting and smart early cut at the data on “business climate” reforms and growth from the extremely-sharp young whippersnapper Evan Soltas:

Evan Soltas: Is Pro-Business Reform Pro-Growth?: “I came up a simple trick to identify reforms directly from the World Bank data…

…I calculate the rolling sum of all the increases in the [Business Climate] index that are larger than some threshold kappa, which I define as the 95th percentile of all annual changes…. This is, I think, a reasonable way of doing things: Even if you are distrustful of the index, as am I, if the World Bank says that your country is in the top 5 percent of reformers in some year, there’s probably something to that…. According to this measure, 36 percent of countries had at least one reform in my sample, the average reform entailed an 18-point increase in the index, and there are 109 reform years across countries….

Using data from the Penn World Table on output-side real GDP per capita at chained PPPs…. The latest batch of data covers up to 2012, and the World Bank data begins in 2004, so my analysis is limited to that time period…. Burkina Faso is not many times poorer than the U.S. only because it is many times easier to do business in the U.S. than in Burkina Faso…. To identify the causal effect, we should consider whether a country’s per-capita output rises after a reform relative to similar countries in the same year…. I [find I] can bound the effect of pro-business reforms quite precisely around zero, with a 95-percent confidence interval for the effect of a 10-point reform on the level of per-capita output of -1.4 percent to 3.5 percent. That is far away from the claim that such a reform could double per-capita output….

It’s reasonable to think that the effect of reforms on output lags the reform, but these results are unchanged when I include lags of the reform and drift components…. Another claim one might make is that the effects of reform are being obscured by differences in the path of output across regions or income groups (e.g., low-income countries)…. I can control for it by interacting region or income-group dummy variables with the year dummies…. What these tests show is that my results aren’t unduly sensitive to the manner in which I measure the effect of pro-business reforms….

The issue of pro-business reform is most relevant to developing countries with weak institutions, who face meaningful pressure from international organizations like the World Bank to implement them. Yet the data give little reason to believe that countries can raise per-capita output in any notable way by making it easier for entrepreneurs to do business. Pro-business reforms probably have very limited effects, if any, on economic growth within a reasonable time horizon. There still may be compelling reasons to do them…. More prosaically, there are important limits to my empirical analysis. If the impacts of these reforms only begin to manifest themselves more than five years later, for instance, I won’t be able to see that. Measuring longer-run effects will have to wait for more data….

The lesson here is to beware the TED-talk version of development economics. Shortening the time it takes to incorporate a small business is not a substitute for deeper institutional reforms, such as those that support investment in human and physical capital, remove economic barriers that hold back women and ethnic or religious minorities, or improve transportation, power, and sanitation infrastructure. Easy pro-business reforms should not distract countries from pursuing changes that, while harder to make, we know to be richly rewarding in the long run.

I confess to being surprised: I am enough of a card-carrying neoliberal still to have expected modest positive effects…

Must-read: Mohammed El-Erian: “Is the Perfect Storm Over for Markets?”

Posted on by Brad DeLong

Must-Read: The great and the good of the non-insane wing of Global North Neoliberalism seem–or so I read it–to now be calling for a transition to a two-handed growth-supporting economic policy: fiscal expansion (by governments with ample fiscal space) and “structural reform”. Their hope, I think, is that “structural reform” will reassure those who otherwise make a profession out of panicking over government debt levels–even governments that issue reserve currencies, possess exorbitant privilege, and that have debt currently valued by the markets as more precious than rubies. Their hope, I think, is that fiscal expansion will produce fast enough growth to make that plus “structural reform” genuinely win-win, and that the promise of enough fiscal expansion will quiet those Keynesians who otherwise would vociferously oppose what they see as yet another round of upward redistribution under the guise of “structural reform”.

Ah. But what are these “structural reforms”? Federal and state action to make it much easier to build infill and up zone housing in greater San Francisco is the only thing I can think of that commands general and universal assent (and even there, the bulk of we greater San Francisco home owners are in opposition):

Mohamed A. El-Erian: Is the Perfect Storm Over for Markets?: “LAGUNA BEACH – Earlier this year, financial markets around the world were forced to navigate a perfect storm…

…The longer these disturbances persisted, the greater the threat to a global economy already challenged by structural weaknesses, income and wealth inequalities, pockets of excessive indebtedness, deficient aggregate demand, and insufficient policy coordination. And while relative calm has returned to financial markets, the three causes of volatility are yet to dissipate….

First, mounting signs of economic weakness in China and a series of uncharacteristic policy stumbles there…. Second, there are still legitimate doubts about the effectiveness of central banks, the one group of policymaking institutions that has been actively engaged in supporting sustainable economic growth…. Third, the system has lost some important safety belts, which have yet to be restored. There are fewer pockets of ‘patient capital’…. OPEC… has stepped back from the role of swing producer on the downside….

All this came in the context of a US economy that continues to be a powerful engine of job creation. But markets were not voting on the most recent economic developments in the US. Instead, they were being forced to judge the sustainability of financial asset prices that, boosted by liquidity, had notably decoupled from underlying economic fundamentals….

Durably stabilizing today’s markets is important… for a system… [with] too much financial risk… requires a policy handoff… more responsible behavior… transition from over-reliance on central banks to a more comprehensive policy approach that deals with the economy’s trifecta of structural, demand, and debt impediments…

Must-Read: Dani Rodrik: The Mirage of Structural Reform

Posted on by Brad DeLong

Must-Read: If you set out to take Vienna, take Vienna. If you want to balance the foreign exchange account, give people incentives to boost exports and cut back imports. Any economy that might suddenly need to balance its foreign exchange account needs to have a flexible currency–or partners who are willing to take steps to do the job themselves. Greece lacks both.

Dani Rodrik: The Mirage of Structural Reform: “If structural reforms have not paid off in Greece…

…it is not because Greek governments have slacked off…. Instead, the current disappointment arises from the very logic of structural reform: most of the benefits come much later, not when a country really needs them. There is an alternative strategy…. A selective approach that targets the ‘binding constraints’…. So, which binding constraints in the Greek economy should be targeted? The biggest bang for the reform buck would be obtained from increasing the profitability of tradables–spurring investment and entrepreneurship in export activities, both existing and new. Of course, Greece lacks the most direct instrument for achieving this–currency depreciation…. But… tax incentives to special zones to targeted infrastructure projects… an institution close to the prime minister that is tasked with fostering a dialogue with potential investors… [with] authority to remove the obstacles it identifies, rather than having its proposals languish in various ministries. Such obstacles are typically highly specific–a zoning regulation here, a training program there–and are unlikely to be well targeted by broad structural reforms…