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STRUCTURAL REFORMS AND MACROECONOMIC PERFORMANCE: INITIAL CONSIDERATIONS FOR THE FUND

November 2015

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  • The Staff Report prepared by IMF staff and completed on October 13, 2015

The report prepared by IMF staff has benefited from comments and suggestions by Executive Directors following the informal session on October 28, 2015. Such informal sessions are used to brief Executive Directors on policy issues and to receive feedback from them in preparation for a formal consideration at a future date. No decisions are taken at these informal sessions. The views expressed in this paper are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.

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  • Structural Reforms and Macroeconomic Performance: Country Cases.

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Front Matter Page

STRUCTURAL REFORMS AND MACROECONOMIC PERFORMANCE: INITIAL CONSIDERATIONS FOR THE FUND

October 13, 2015

Executive Summary

Structural policies have become a prominent feature of today’s macroeconomic policy discussion. For many countries, lackluster economic growth and high unemployment cloud the outlook. With fewer traditional policy options, policymakers are increasingly focused on the complementary role of structural policies in promoting more durable job-rich growth. In particular, the G20 has emphasized the essential role of structural reforms in ensuring strong, sustainable and balanced growth.

Against this backdrop, the 2014 Triennial Surveillance Review (TSR) called for further work to enhance the Fund’s ability to selectively provide more expert analysis and advice on structural issues, particularly where there is broad interest among member countries. The purpose of this paper is to engage the Board on staff’s post-TSR work toward strengthening the Fund’s capacity to analyze and, where relevant, offer policy advice on macro-relevant structural issues.

While there is already an extensive range of work underway across the Fund, this paper lays out considerations to help frame a more strategic approach on structural issues that would better support the range of macro-structural needs of member countries. In that regard, this paper does not signal a dramatic shift in the Fund’s agenda or coverage of structural issues; nor does it aim to provide a “how to” guide for advising countries on specific structural reforms. Instead, it focuses on “what” structural reforms are most likely to have macroeconomic implications, without attempting to do justice to the entire spectrum of issues that come under the structural reform umbrella.

To this end, the paper deploys a number approaches to identify reform areas most relevant across the membership.

  • The empirical analysis finds a broadly positive relationship between structural reforms and productivity—in short, structural reforms matter. Importantly, the potential payoff from different reforms varies across income groups. The results also suggest that the benefits of reform tend to become more pronounced when reforms are bundled together.

  • Given the need for care in interpreting the empirical findings, the paper also explores lessons from six country cases. Their reform experiences tend to reinforce the empirical findings and resonate with historical reform patterns. Moreover, these experiences hint at potential lessons for effective reforms, including the importance of strong ownership, the ability to sustain reforms, and the need for complementary macroeconomic and structural policies.

  • These findings, together with an initial assessment of country needs, point to differentiated structural reform priorities across different country groups, reflecting stages of development. Nevertheless, some common reform priorities emerge where there is likely to be more broad-based interest across the membership.

Looking ahead, the approach and priorities identified in this paper can help guide the Fund in supporting countries’ macrostructural policy needs. At an institutional level, the Fund’s operational efforts should be geared toward countries’ shared priorities. The Fund should continue to focus on structural reforms within its traditional areas of expertise—namely, fiscal structural and financial sector reforms. There are however other common priorities, outside of the Fund’s traditional areas of expertise yet within its mandate, and where there is likely to be broad-based demand across the membership. In such areas, the Fund may need to scale up its efforts to build in-house expertise. In areas where there is less likely to be widespread demand across the membership, the Fund should actively collaborate with and leverage other institutions’ expertise.

The goal is to develop a richer analytical foundation and range of tools—from within and outside the Fund—that country teams can leverage in their analysis and advice. Four complementary tracks of future work can help move this agenda forward: more systematically assessing country needs; ongoing analytical work; developing an analytical toolkit for staff; and developing modalities for inter-agency collaboration. This is not to say that Fund’s macrostructural analysis and advice in individual cases should be limited to those areas. Ultimately, Article IV consultations should always be country-specific.

Approved By

Siddharth Tiwari

Prepared by Strategy, Policy, and Review Department, in consultation with area and functional departments.

Contents

  • CONTRIBUTORS

  • LIST OF ABBREVIATIONS

  • INTRODUCTION

  • THE POLICY CONTEXT

  • STRUCTURAL REFORM PATTERNS & STYLIZED FACTS

  • ASSESSING THE IMPACT OF STRUCTURAL REFORMS

    • A. Steady Reform Trends

    • B. Large-Scale Reform Episodes

    • C. ‘Waves’ or Bundling of Reforms

    • D. Interpret with Care

  • SELECTED COUNTRY EXPERIENCES

  • REFORM NEEDS AND OPERATIONAL PRIORITIES

    • A. Member Countries’ Current Reform Needs

    • B. The Fund’s Operational Focus on Structural Reforms

  • IMPLICATIONS AND NEXT STEPS

  • ISSUES FOR DISCUSSION

  • REFERENCES

  • BOXES

    • 1. Basis for Fund Engagement on Structural Issues

    • 2. Overview of the Fund’s Recent Analytical Work on Structural Issues

    • 3. The Wider Literature on Structural Reforms—What Have We Learned So Far?

    • 4. Structural Reforms and External Resilience

  • FIGURES

    • 1. Trend and Projected Growth

    • 2. Unemployment Rate

    • 3. TFP Growth

    • 4. Evolution of Potential Output Growth and its Components

    • 5. Medium-Term Growth Projections

    • 6. Monetary and Fiscal Policy Space

    • 7. Trends in Selected Structural Reform Indices

    • 8. Structural Reform Breaks, All Countries

    • 9. Trade Reforms

    • 10. Financial Sector Reforms

    • 11. Factors Contributing to GDP

    • 12. Average 5-year TFP Growth Rates Before and After Reform Waves

    • 13. Reforms Followed by Declines in Productivity

    • 14. Importance of Structural Reforms for Macroeconomic Performance

    • 15. Priority Structural Reforms for Member Countries

    • 16. Structural Reforms with Highest Productivity Payoffs within Each Country Group

  • TABLES

    • 1. TFP Growth Gains from Different Types of Structural Reforms between Country Groups

    • 2. Average Medium-Term TFP Growth Gain After Breaks

    • 3. Productivity Gains from Different Structural Reforms

  • ANNEXES

  • I. Recent Macrostructural Analytical Work at the Fund

  • II. Defining and Measuring Structural Reforms

  • III. Empirical Approach & Results

  • IV. Survey Methodology & Results

Contributors

Prepared by SPR’s Macrostructural team, comprising Swarnali Ahmed, Freddy Rojas Cama, Irineu de Carvalho Filho, M. Astou Diouf, Christian Gonzales, Minsuk Kim, Annette Kyobe, Karen Ongley (co-lead), Chris Papageorgiou (co-lead), Michael Perks, Hajime Takizawa, Evridiki Tsounta, Xin Cindy Xu. Sanjaya Panth and Taline Koranchelian provided general guidance.

The country case studies—Armenia, Australia, Malaysia, Peru, Tanzania, and Turkey—were prepared in collaboration with area departments.

The team is also grateful for additional assistance and inputs from SPR colleagues (Greg Basile, Alexander Culiuc, Ilse Peirtsegaele, Jiemin Ren, Chad Steinberg, and Joanna Zaffaroni), as well as area and functional departments in compiling information on recent Fund-wide analytical work on structural issues, and respondents to the survey of Fund mission chiefs.

List of Abbreviations

AMs

Advanced Market economies

AML/CFT

Anti-Money Laundering/Combating the Financing of Terrorism

DSGE

Dynamic stochastic general equilibrium

EMs

Emerging Market economies

EMDCs

Emerging Market and Developing Countries

GPA

Global Policy Agenda

ILO

International Labor Organization

IMF

International Monetary Fund

LIDCs

Low-Income Developing Countries

NPLs

Non-Performing Loans

OECD

Organization for Economic Cooperation and Development

PRGT

Poverty Reduction and Growth Trust

QE

Quantitative Easing

R&D

Research and Development

REER

Real Effective Exchange Rate

REO

Regional Economic Outlook

TFP

Total Factor Productivity

TSR

Triennial Surveillance Review

ULC

Unit Labor Cost

UMP

Unconventional Monetary Policy

WEO

World Economic Outlook

ZLB

Zero Lower Bound

Structural Reforms and Macroeconomic Performance - Initial Considerations for the Fund
Author: International Monetary Fund