What’s needed to lift growth over the longer term? Jonny Greenhill is Policy Director at the BIAC Secretariat. Dr Stephan Mumenthaler is Chair of the BIAC Economic Policy Committee, and Head Economic Affairs & Swiss Public Affairs, Novartis International AG The long road to recovery and the urgent need for reforms The world economy still hasn't broken free from the legacy of the 2008-09 financial and economic crisis. While US and UK growth looks encouraging, the euro area faces an increasing risk of stagnation, Japan struggles with the ‘third arrow’ of Abenomics, and China faces worryingly high levels of credit growth. Both trade and investment are still performing sluggishly and haven’t yet regained their pre-crisis levels. Youth unemployment remains exceptionally high in many euro area countries, standing at over 50% in Greece and Spain. In light of the weaker-than-expected growth, the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) have each lowered their global forecasts for 2014 and 2015, while the World Trade Organization (WTO) has revised downwards its global trade forecasts. In the words of OECD Secretary-General Angel Gurría, “the global economy remains stuck in the ‘repair shop’”. Faced with such risk and uncertainty in world markets, it is understandable that in recent years the private sector has repeatedly urged policymakers to make growth a top priority. Worryingly, however, the pace of policy actions across both product and labour markets in OECD countries has slowed over the past two years, and has been largely piecemeal. There may nevertheless be reason for more optimism as we enter 2015. At their recent meeting in Brisbane, G20 leaders set an ambitious goal to lift G20 GDP by more than 2% above the trajectory in the October 2013 IMF World Economic Outlook baseline by 2018. This would add more than USD 2 trillion to the global economy and potentially millions more jobs. To support growth in the short- to medium-term, the G20 recognizes the need for continued use of macroeconomic policy levers. But if we consider what’s really needed to secure strong and sustainable growth in the longer-term, we should expect policymakers to make a firm commitment to deep-rooted reforms. The G20 Brisbane Action Plan rightly states that “supporting short-term demand is a complement to, not a substitute for, the structural reforms that are needed to raise our growth potential”. But which reforms are needed, and how can they be achieved? Choosing the right reforms G20 countries have set forth their plans for nearly 1000 individual structural policy commitments. Each country needs to pursue its own agenda for reforms, recognizing that there isn’t any ‘one-size-fits-all’ approach. However, the ultimate objective for all countries should be the creation of productive societies and strong economic growth. OECD and IMF analysis of G20 countries’ growth strategies finds that “product market reforms aimed at increasing productivity are the largest contributor to raising GDP”. This has to be a priority. Economists were rattled by the news that total factor productivity growth in major markets of both labour and capital inputs – essential for raising prosperity – dropped below zero in 2013. In order to bolster growth and productivity, a comprehensive set of reforms is needed that will increase investment, boost trade, promote competition, foster innovation, strengthen skills, and make it easier for companies to hire. One of the major issues needing to be tackled is the regulatory burden facing companies. Regulation should facilitate, not impede, the ability of business to invest, trade, innovate, and hire. A survey carried out earlier this year by the Business and Industry Advisory Committee to the OECD (BIAC) found that over 70% of private sector respondents consider product market regulation among their top five national policy priorities for 2015, with the vast majority of respondents calling for the reduction of economy-wide and sector-specific regulatory burdens. In practice, this calls for reforms that reduce the scope of state intervention and public ownership, improve the transparency of regulation, and streamline permit and licensing systems. In advocating for reforms that will lead to more growth, policymakers often face intense concerns about the side-effects of such reforms – especially on income disparities. This issue is at the forefront of discussions on ‘inclusive growth’. Often the debate is overly-simplified as a tug-of-war between growth on one side and inclusiveness on the other. However, both can and should go hand-in-hand. Many structural reforms don’t negatively impact living standards; in fact, several actually help to reduce inequality. For instance, new OECD analysis finds that lowering labour taxation, promoting active labour market policies, and reducing regulatory barriers to domestic competition, trade and FDI, are found to lift incomes of the lower middle class in the long-term and thus help to narrow inequality in disposable incomes. And in cases where negative impacts are apparent, this shouldn't necessarily mean that those reforms be shelved; instead, it may be more appropriate to introduce flanking policies to offset (temporary) side-effects. Achieving reforms The difficult task now facing G20 countries is to implement the hundreds of structural reforms that they have identified in their growth strategies. G20 leaders have agreed to “monitor and hold each other to account” for the implementation of their growth strategies in the coming years, based on continued OECD-IMF analysis. However, we don’t expect this to be smooth-sailing. A recent BIAC survey is revealing in this respect. Private sector respondents perceive that only 4% of the OECD’s 2013 structural reform priorities for countries were fully implemented one year later, while over a third were considered to have not been implemented at all. There are many reasons that may explain why many structural reforms are not being implemented in the current period. These may include political economy factors or social concerns. Most probably the extremely expansive fiscal and monetary policies have also decreased the willingness of governments to tackle reforms, by alleviating the symptoms but without treating the underlying problems. Another possible reason may be shortcomings in regulatory policymaking procedures in many countries. The BIAC survey finds that consultation processes on new policies and regulations often appear insufficient, and this could undermine stakeholder support for new reforms. Only 32% of business respondents perceive that minimum periods for consultation are respected by the government, and nearly a quarter perceive that minimum periods are rarely respected. Furthermore, only 14% of business respondents consider that the allocated time for consultation is sufficient. Added to this, nearly a quarter of respondents state that it is rare for consultation documents to be easily accessible. It also appears that many governments do not make sufficient use of impact assessments to help make the case for reform. Over a third of business respondents states that partial regulatory impact assessments are rarely or never carried out by their governments. That figure even jumps to 66% when respondents are asked about full regulatory impact assessments. 2015 and beyond More than ever since the 2008-09 crisis, the G20 has now put structural reforms squarely at the centre of the global growth agenda. This is a welcome development. But governments shouldn't grow complacent, for the job is not nearly complete. Implementing the structural reforms in countries’ growth strategies is going to necessitate careful planning, analysis, consultation and communication over several years in order to make the case to citizens and stakeholders. Because in the end, only reforms that are properly implemented can yield their beneficial effects.
More than ever since the 2008-09 crisis, the G20 has now put structural reforms squarely at the centre of the global growth agenda