Secretary-General

Going for Growth 2012: Structural Reforms can Make the Difference

 

Remarks by Angel Gurría, OECD Secretary-General

 

Mexico City, 24th February 2012
(As prepared for delivery)

Ladies and Gentlemen,
It is a great pleasure to present the 2012 edition of Going for Growth here in Mexico.

Going for Growth is the OECD’s flagship report on structural policies. It is the place where we identify and review progress on five key priorities to boost long-term growth in each OECD country, but also in Brazil, China, India, Indonesia, Russia and South Africa (that is almost all of the non-OECD members of the G20). 

This analysis has been used extensively in OECD and IMF contributions to the Mutual Assessment Process of the G20 since the 2009 Pittsburgh Summit. Through Going for Growth, the OECD builds on its historical expertise, built-in knowledge and commitment to continuous learning to promote better policies for better lives.

The new edition of Going for Growth is being issued at a time of unusual global economic uncertainty, due to the unpredictable course economic policies could take in major economies over the next few years, not least in the euro area.

Worst-case outcomes can be avoided if monetary policy remains very supportive, sovereign debt and banking sector problems in the euro area are contained, and excessive fiscal tightening is avoided where it could proceed gradually, such as in the United States.

Emerging economies will continue to enjoy sustained growth rates, thus contributing to global recovery, provided they deal effectively with macroeconomic pressures, including inflation, and make progress in rebalancing demand, including through structural reforms.

But even under this rather benign scenario, without profound change, unemployment would stay high through 2013, there would be no prospect of recovering the output foregone with the crisis, and public budgets would remain on unsustainable paths in a number of G20 countries.

An upside scenario is possible, but it requires bold policy action, strong leadership and enhanced international co-operation. The combination of macroeconomic action, making the best use of available policy space, and country specific structural reforms can make the difference. Particularly in a context where fiscal and monetary ammunitions, at least in advanced economies, are virtually exhausted.
This is a message that our Organisation has been hammering out in the G20 framework for 3 years now. This study however, highlights two new important elements:

  • First, fears that reforms take too long to pay off or even entail short-term costs are exaggerated. Indeed some benefits could materialize even in the short term.
  • Second, that governments are now acting more forcefully than they did before or in the early stages of the crisis.

This reform momentum must be sustained.

Indeed our detailed review of structural reforms in individual G20 and OECD countries since the start of the crisis clearly shows that the pace of reforms has accelerated. This is good news.

Recent reform action has been spurred by the need to consolidate public finances and the financial pressure arising from mushrooming sovereign debt. This outcome is driven to some extent by euro area countries under EU/IMFprogrammes and more generally by countries on the European periphery.

In many of these countries, socially and politically sensitive reforms have been implemented in the areas of pension schemes, job protection and wage bargaining systems. These actions are important and ambitious.

For example, pension reform in Greece has reduced benefits for those retiring before 65 and retirement age has been indexed on life expectancy. In Spain, dismissal costs for workers on permanent contracts have been reduced and collective bargaining has been simplified and made more responsive to firm-specific conditions.

Take also product market reforms, which have been repeatedly proposed in previous Going for Growth reports for both OECD and non-OECD G20 countries alike.

Reducing undue barriers to competition can spur productivity growth, which in turn will help restore the external competitiveness of those European countries hit by the sovereign debt crisis. The Italian government has recently taken bold decisions in this realm: Liberalisation of a wide range of sectors appears to have begun in earnest with decrees opening sectors such as pharmacies, taxi services, notary services and others to greater competition, including actions in the energy sector. Important labour reforms are also being prepared.

Substantial gains from product market reforms could also be achieved in middle-income countries, where regulation is often more stringent and hampers entrepreneurship and firm dynamics.

For Mexico, where product market reforms feature prominently among Going for Growth priorities, we estimated that potential GDP gains from adopting best practices could reach almost 6 per cent in a 10-year horizon. The 2011 competition law is a welcome step in that respect. Also instrumental for future investment flows was the law on Public-Private Partnerships passed by Congress in December.

Mexico has also implemented far-reaching reforms since 2008 in another Going for Growth priority sector: Education. The system of selection of teachers has been revamped through the setting-up of a centralized exit exam. These reforms will help improve quality of education in Mexico and students’ learning outcomes, the economic benefits of which will be reaped by Mexico in the medium to long term.   

At this time of global economic uncertainty, priority should be given to policies that boost jobs.
Going for Growth reform priorities would not only boost growth but also jobs. This is absolutely essential!
The crisis has had a dire social cost. More than 200 million people are unemployed worldwide, and 45 million of them are in OECD countries (14 million more that before the crisis). The situation is especially dramatic if we look at youth unemployment, which now stands at about 20% on average and reaches almost 50 % in Spain. 

We must use every possible means to avoid the risk of a “lost generation”. Another vital step to deal with the unemployment surge is to reverse the steep rise in the number of people who have been unemployed for a year or more. Today, this concerns a third of unemployed workers in the US, meaning wasted resources and, worse: exclusion and poverty.

Structural policies recommended in Going for Growth can help alleviate the possibility that higher unemployment becomes entrenched in many countries.

We must ensure that ongoing fiscal consolidation efforts do not affect the active labour market policies, which would help job seekers find work more quickly. For instance, the decision by Spain to permanently increase resources in the public employment services and to facilitate placement of job-seekers by private agencies is to be welcome.

Growth-friendly tax reforms could also help strengthen a job-rich recovery, while also helping fiscal consolidation insofar as they are implemented in a way that raises tax revenue. These include removing tax expenditures and shifting the tax burden towards tax bases that are more conducive to higher employment and growth, such as real estate, consumption and environmental taxes.

Let me conclude with a clear message: fears that reforms may depress economic activity in the short run are overblown.

People ask themselves: When will reforms deliver? Or could reforms prolong the slump before they deliver?
At the current juncture, this is an entirely legitimate concern. The truth is that little is known about the short-term effects of reforms. However, our own research, gathered in a special chapter (chapter 4), fills this gap.

Drawing on 30 years of reform experiences in OECD countries across a broad range of structural policy areas, we are able to deliver a reassuring message: fears that reforms may depress economic activity in the short run are overblown. Indeed among the wide range of reforms we looked at, none was found to have had systematic adverse short-term effects in the past, while many quickly stimulated output and employment, while increasing trust.

So let me reiterate that now is the time to implement a broad package of reforms. Crises offer a unique opportunity to implement difficult reforms. Such opportunity should not be lost. In addition, our new analysis shows that broad packages of product and labour market reforms deliver larger and quicker benefits than a piecemeal reform agenda.

Timings for the implementation of reforms are critical to generate the necessary support and consensus for their approval, however, it is also crucial to accompany these reforms with an effective communication strategy. This is confirmed by our analysis on the political economy of reform, carried out in the past but even more valid today at a time in which confidence in policy action seems to be shaken in a number of countries. 

Ladies and Gentlemen,
The global economy could take on different paths in the coming months, if action by governments and leaders shows decisiveness, effectiveness and coordination. This requires the appropriate mix of macroeconomic policies, and structural reforms. They are necessary both to accelerate the exit from the deep phase of the crisis and to make longer term growth stronger, more sustainable, and more equitable.

This crisis has acted as a catalyst for reforms, sometimes unpopular, painful, or both. These efforts will pay off. Let’s keep up the reform momentum. On this note, let me thank Minister Meade for his hospitality and reiterate that we stand ready to continue to work with the Mexican government and its’ G20 Presidency with our expertise and technical advice in pursuit of Strong, Sustainable and Balanced growth. 

 

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