IMF calls for structural reforms to boost productivity, long-term growth

18 Apr 2016


The International Monetary Fund's steering committee on Saturday urged member countries to boost "growth-friendly" spending, even as it said the Fund should explore new lending tools to help deal with slowing global growth.

The steering committee's recommendations are based on an IMF survey report that calls for reforms to the structure of a country's economy to make it more productive and boost long-term growth.

The survey, however, points out that these are among the toughest to achieve, given opposition from vested interests, the rise of populism, and competing views about which reforms to undertake, when, and how.

Structural reforms tackle the problems on the supply-side of an economy. Reforms to product markets aim to boost competition among firms, make it easier to start a business, and deregulate industries like energy and transportation.

It also wants reforms to labour markets to make it easier for companies to hire and fire workers, and allow changes to unemployment benefits and employment taxes.

IMF managing director Christine Lagarde said that although markets look calmer, the outlook was still fraught with downside risks from weak demand, a potential UK exit from the European Union and low oil and commodity prices.

"There was not exactly the same level of anxiety but I think there was an equal level of concern, and a collective endeavor to identify the solution and the responses to the global economic situation," Lagarde told a news conference.

Echoing sentiments from the G20 statement, the 24-member International Monetary and Financial Committee (IMFC) said countries should "refrain from all forms of protectionism and competitive devaluations, and to allow exchange rates to respond to changing fundamentals."

"Downside risks to the global economic outlook have increased since October, raising the possibility of a more generalized slowdown and a sudden pull-back of capital flows," the IMFC said in its statement.
The committee said a more "forceful and balanced policy mix" was needed to stimulate growth and avoid deflation and emphasized that monetary policy alone was not enough.

"Growth-friendly fiscal policy is needed in all countries," it said, adding that accommodative monetary policies should continue in several advanced economies and structural reforms should be implemented with policies that support demand and help displaced workers.

Swiss National Bank chairman Thomas Jordan said he thought the need for more fiscal stimulus and structural reforms in Europe, Japan and China was finally sinking in with policymakers

European politicians also face economic and financial problems that need structural reforms to get their economies back on track.

''We have high public and private sector debt, low productivity, and low inflation,'' said Luis de Guindos, Spain's minister of economy. ''The only way forward is structural reforms to increase productivity and generate revenue to pay back the debt.''

In its latest World Economic Outlook, the IMF said the sequence of reforms could make the difference between success and failure. The timing and sequence also matter in de Guindos' view.

''To implement structural reforms, the sooner you do it the better,'' he said. ''And you should first implement the most difficult reforms.''

He said the toughest ones for Spain to implement in 2012 were labour market reforms, including pensions. Reforms to professional services faced opposition from vested interests, a powerful force according to de Guindos.

Governments around the world face a popular outcry against changes to the economy.  ''The ascent of populism is pervasive,'' said de Guindos. ''The biggest challenge and enemy of structural reform is populism.''

Politicians need to communicate the goals and costs to the electorate, who in many cases are mature and understand there are trade-offs involved. ''It's not true that governments that implement structural reforms lose elections,'' said de Guindos.

The IMFC also called on the Fund to review its lending tools "to explore ways to strengthen its approach to helping members manage volatility and uncertainty - including through financial assistance, also on a precautionary basis."

The statement gave membership backing to Lagarde`s campaign for a stronger global financial safety net - a broader set of precautionary financing tools such as IMF credit lines that would reduce reliance on costly reserves for many emerging markets.

The panel, chaired by Mexican central bank governor Agustin Carstens, also said that a new formula for the Fund`s voting shares, due for completion by October 2017, is likely to increase the share of emerging market and developing countries.

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