1. 1 Microeconomic Reforms, Macroeconomic Impacts Lessons from Experience Manuela Ferro Manager Country Economics, OPCS The World Bank Manuela Ferro Manager Country Economics, OPCS The World Bank

2. 2 Outline I.Relevance of structural reforms I.Product and factor market reforms III. Political economy considerations The World Bank

3. 3 I. Relevance of Structural Reforms Structural reforms are intended to increase flexibility and competition leading to => increased productivity => greater ability to absorb shocks “Rigid economies” take longer to recover from negative shocks, and take less advantage of favorable external conditions The functioning of factor and product markets is largely determined by features of factor market institutions and product market regulations Many of these reforms supported (with technical advice and/or financing) by the World Bank The World Bank

4. 4 I.Relevance of Structural Reforms (contd) Identifying critical reforms for growth  No clear methodology  “Washington consensus” (macro)  Cross-country regressions  Delving below the surface – shadow-prices The World Bank

5. 5 II. Product and Factor Market Reforms Structural reforms that helped reduce the price level  Telecommunications deregulation – all over the world, including least developed countries Structural reforms that have helped spur productivity growth and private investment  Removal of barriers to entry and exit – Latin America, India (Schumpeterian creative destruction)  Competition policies and regulator to restrict monopolies and cartels – US, UK, Australia, EU countries, Pakistan  Strengthening law and order – Peru  Strengthening property rights – Thailand, Albania, India, Peru, Azerbaijan, Pakistan The World Bank

6. 6 II. Product and Factor Market Reforms (contd) Structural reforms that helped reduce fiscal and quasi-fiscal deficits  Banking sector reforms – Pakistan, Turkey  Public enterprise restructuring – India, Indonesia  Privatization – Poland, Pakistan  Subsidy reform, e.g. targeting energy subsidies – Indonesia, Pakistan  Tax policy and administration reforms – Spain, Portugal, India  Pensions reform – Croatia, Khazakstan, Chile, China, Morocco The World Bank

7. 7 Pensions Reforms Governments around the world have enacted or are currently considering fundamental structural reforms of their Social Security pension programs. The key feature of these reforms is a shift from a pure pay-as-you-go, tax-financed system, in which taxes on current workers are primarily distributed to current retirees, to a mixed system that combines pay-as-you-go benefits with investment-based personal retirement accounts The World Bank

8. 8 Bank assistance on pensions reform The World Bank

9. 9 Bank experience with Pension Reforms – key lessons Bank involvement often prompted by concerns about fiscal sustainability 87% of projects with pension components were rated satisfactory by the Bank’s Independent Evaluation Group Long-term reform results varied across countries, depending on depth of analyses, initial conditions, institutional capacity, and political commitment Reforms often contributed to long-run fiscal sustainability, but had significant short-term fiscal costs In many countries with multi-pillar systems, pension funds are insufficiently diversified and coverage has increased only marginally Secondary objectives of funded pillars—to increase savings, develop capital markets, and improve labor flexibility—remain only marginally realized, and require broader capital market reforms/deepening, and macroeconomic stabilization, prior to pension reforms The World Bank

10. 10 Macroeconomic stability necessary condition for pensions reform The World Bank

11. 11 Many countries had high budget deficits when pensions reform introduced (overall budget deficit as % of GDP) The World Bank

12. 12 Many countries that chose multi-pillar reforms had poorly developed financial sectors The World Bank

13. 13 III. Political Economy Considerations Broad consensus among economists that structural reforms increase welfare in the long run But often stiff resistance to reforms, due to perceived short-term costs by segments of society that may be minority, but are well organized (agricultural policy in EU, labor unions) Politicians often discount the future at a higher rate than society at large Some governments/societies may place higher emphasis on equity vs efficiency The World Bank

14. 14 III. Political Economy Considerations (contd) How do reforms often happen in practice? Crisis:  economic policies no longer viable, high costs of inaction, weaker opposition to reforms  Many examples: US and UK in late 1970s, India post 1991, financial sector reforms in East Asia in late 1990s The World Bank

15. 15 III. Political Economy Considerations (contd) Why is telecom reform advancing so rapidly around the world? Positive impact (falling relative prices following deregulation) takes place within the short run, often benefiting incumbent The World Bank

16. THANK YOU16 III. Political Economy Considerations (contd) Creating public support for reform often requires both creating public awareness of the costs of inaction (e.g. pensions reform), and of the benefits of reform It may require compensating some social groups (grandfather clauses, etc) The World Bank

17. 17 Selected Bibliography Leiner-Killinger et al (2007), Structural Reforms in EMU and the Role of Monetary Policy; A Survey of the Literature, European Central Bank. Hausman, R.,D. Rodrik and A. Velasco (2004), “Growth Diagnostics,” Harvard University. Loyaza, N. et al (2005) Regulation and Microeconomic Dynamics: A Comparative Assessment for Latin America, The World Bank. Rodrik, D. (2004), “Rethinking Growth Policies in the Developing World,” Harvard University. Rodrik, D. (September 2003), “Growth Strategies,” Harvard University. Independent Evaluation Group, The World Bank, various sectoral and country reports The World Bank Group, World Development Report, several issues Williamson, John (2002). “Did the Washington Consensus Fail?” Outline of Remarks at CSIS. Washington DC: Institute for International Economics, November 6. Williamson, John (2000). “What Should the World Bank Think About the Washington Consensus?” World Bank Research Observer. Washington, DC: The International Bank for Reconstruction and Development, Vol. 15, No. 2. The World Bank