Through its Mutual Assessment Process (MAP), the G20 is seeking to address macroeconomic imbalances that pose the risk of globally significant misallocation of capital, thereby threatening global growth prospects. But the “sustainability reports” produced by the International Monetary Fund on G20 economies flagged by indicators of imbalance agreed upon under the MAP, are replete with descriptions of structural factors in each economy that are at the root of macroeconomic imbalances.
These structural factors can include taxes, incentives, regulations, social programs, trade and competition, or other microeconomic policies or measures affecting the allocation of skills and resources in an economy. Because they affect public finances as well as the economic incentive to save, invest and consume, and, in the end, determine the sustainable growth rate of an economy, these structural factors affect the ability of the G20 to address the macroeconomic imbalances flagged by the MAP.
It is thus logical for the Mexican presidency to have made “economic stabilization and structural reforms as foundations for growth and employment” its number one priority. By raising the potential for future output and income growth, structural reforms can have beneficial macroeconomic impacts, such as reducing long-term unemployment, reducing the risk of inflation stemming from stimulative monetary policy or reducing the burden of private and public debt loads, in turn easing pressure among lenders to deleverage. Structural reforms can also help smooth the adjustments necessary in countries experiencing large external surpluses or deficits, where those adjustments are difficult or impossible to effect via nominal exchange rate appreciation or depreciation.
As useful as they are to support long-term growth and rebalancing, such reforms can generate social stresses. They often involve changing domestic political economy arrangements that have protected or supported incumbents against potential challengers — who are often younger, dynamic and innovative, but are unable to convert growth potential into jobs and income as a result of structural barriers.
These barriers are often deeply embedded in the specific institutions and political economy of each country and, therefore, it is not only difficult, but often undesirable to coordinate internationally the specifics of structural reforms. Reform must be from the bottom up, and accepted for its own sake in each country. Nevertheless, the importance of structural factors for strong, sustainable and balanced economic growth in each country — in which we all have a stake — means that international cooperative forums, such as the Organisation for Economic Co-operation and Development (OECD) or Asia-Pacific Economic Cooperation (APEC), are spending a lot of time and effort discussing and assessing each others’ structural policies through mechanisms such as checklists or peer review processes.
The reality is that the line between what are considered strictly “external” policies that can be coordinated across countries and “internal” policies that are not amendable to such beneficial coordination, has increasingly become blurred. Structural reforms in each country would make external coordination easier, and vice versa. Processes that encourage structural reform such as those in place at the OECD and within APEC should be encouraged by, and linked to, the G20 MAP, focusing on the structural impediments to resolving the imbalances highlighted by the MAP.
To be sure, in more dire economic times, governments that find structural reforms politically difficult to implement will be tempted to resort instead to continued monetary stimulus and/or continue to accumulate public debt at rates that, for many of them, are unsustainable. But the limits of the ability of monetary and fiscal stimuli to raise output are becoming increasingly evident. There is a need for more business-led growth instead.
Unfortunately, businesses in many G20 countries are now net lenders to the rest of the economy, in contrast to a more normal situation in which they borrow to invest in expectation of future growth in revenues. As I have argued in earlier commentaries, more G20 engagement with business and a more credible program of reforms focusing on removing barriers to productive business investment — which may, in some countries, mean introducing more robust corporate governance arrangements — would help clear up growth prospects and, thus, pave the way for a boost in business investment, which is so crucial to the global recovery.
A focus on structural reform does not mean abandoning the quest for strong social programs. Indeed, structural reforms are crucial to putting existing social safety nets, such as public pensions and health care, on a fresh footing — expanding in countries where gaps force households to save exceedingly, being made financially sustainable in countries where the public is increasingly less confident that these programs will be there for them in the future and, in turn, increasing public support for reforms.
In sum, the G20 should pay increasing attention to how it can advance its growth-oriented structural reform program, whether as part of the MAP or by creating a separate accountability track for it. While structural reform commitments by G20 members can and should be made very much “from the bottom up,” the important task is to elicit those commitments and, in general, to ensure a more central and rigorous place for structural reforms in support of the strong, sustainable and balanced growth, which the G20 has pledged to deliver.