Structural reforms – promises and pitfalls

Structural reforms entailing interventions to deregulate labour and product markets can engender ex-ante long-term gains in terms of higher output and more jobs, but their short-run consequences cannot be ignored. This reminds one of the Keynesian dictum that in the long-run we are all dead.

The latest (model-based) conclusions based on an IMF evaluation (2016) are that, while there are likely to be ex-ante long-term gains in terms of higher output and more jobs, a lot depends on the state of the business cycle.[1] If structural reforms are pursued during a recession and periods of slow growth – as is the case now in some BRICS (Brazil, Russia, India, China, South Africa– it will worsen prevailing economic conditions by reducing output and employment that might persist for more than a year.

In the case of India, expected long-term gains from labour market reforms need to consider high short transition costs as noted above. As one study observes: ‘There is a fall in GDP, a rise in unemployment, and a fall in the share of formal firms in the first four to five quarters post labour market reform’ (Anand and Khera, 2016: 36, italics added).[2] If these results hold, the political ramifications are, to put it mildly, rather uncomfortable. Would an incumbent government seeking re-election be prepared to argue that ordinary citizens should suffer for a year or more because there will be a lot of gain after enduring such pain? As a former British (Harold Wilson) observed:a week is a long time in politics.

[1] IMF (2016) World Economic Outlook, April

[2] Anand, R and Khera, P (2016) ‘Macroeconomic Impact of Product and Labor Market Reforms on Informality and Unemployment in India’, IMF Working Paper No.16, The authors note that this can be mitigated by focusing on product market reforms.

 

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