In the aftermath of the financial crisis since 2008, the one tagline which keeps on bugging us is ‘structural reforms’. What are ‘Structural Reforms’ and why the hype around the world? As per The Economist, structural reforms mean changes to the way government works. To put this into context, let’s extrapolate by taking an example. Last year, the new President in Nigeria forced its ministers through a due diligence exercise before being appointed. This change makes it more difficult for bent politicians to award government contracts to their friends and relatives and to firms where they are themselves investors. For many countries, dire economic conditions, low productivity and high under employment cloud the outlook. Policymakers are increasingly jangling their nerves on the complementary role of structural reforms for high quality durable growth.
At every stages of economic development, countries face evolving growth challenges and at each stage a new set of reform priorities are needed to bolster growth. As per the International Monetary Fund (IMF), South Korea may be considered as a star of economic development. South Korea experienced a transition to advanced economy status by uplifting its per capita real GDP from $ 2000 in 1960 to around $ 25,000 in 2014. Its growth trajectory was mired with crises and recessions. However, policy makers turned these obstacles into opportunities. They implemented economic and structural reforms that bore subsequent productivity and growth payoffs.
China grew fast from 1980’s but now it is suffocating because of a lack of structural reforms. Its economic development was all about the country’s prowess as the ultimate producer. It enjoyed the commodity boom. Yet the producer model was not the everlasting economic model for sustainable growth. Excessive investment, income inequalities, debt laden companies/institutions and environmental degradation are causes for China’s economic deceleration. In order to reboot China’s economic growth, a number of reforms have been proposed by the Organisation of Economic Cooperation and Development (OECD). In the short run, the service sector in China is expected to open up to private investment and reducing the market share of state-owned enterprises. This endeavor should ensure that all firms compete on the same level field in respect of finance, regulation and taxation. In addition, China has embarked on nurturing the right skills for economic development. As such, China should boost public spending in education and should ensure equal opportunities for everyone.
Commitment to structural reforms is key to boost economic growth. Nowhere this commitment is more evident than in India. ‘More governance, less government’ is a powerful mantra which en-globes many aspects of structural reforms. It sets the tone top-down that government job is more of a facilitator in this new economic world. The country’s highly complex governance structure, which plagues decision making processes, has been dismantled. In addition, India has incentivised innovation and implementing reforms to education system and labor market in order to raise its competitiveness and productivity. ‘Start up India’ is an excellent initiative to promote the entry of small and medium-sized firms. Slowly but surely, it is expected to replace industry specific taxes by flat rate taxes. At this juncture, India should focus on decreasing public debt, revive bank lending and safeguard the stability of its financial sector. Ultimately, this will lead to improvement in business climate, raise its growth potential and increase in foreign investments.
Politicians know that structural reforms is the way forward. It enhances competition, foster innovation, and drive institutional change. However, structural reforms do not come without pain and immediate gains may take months and years to materialise. This pain shy away politicians as they are more interested in getting re-elected. The beauty of structural reforms are, the fruit will take time to come, but the flower portrays possibilities and promises.