The typical recipe for countries to improve their growth rate and escape high indebtedness is to reduce expenditure and implement structural reform. What do people use as evidence of structural reform working?
A rather positive view of structural reforms
In their recent Economic Policy Reforms 2016, Going for Growth Interim Report, the OECD reviews the main growth challenges faced by OECD and selected non-OECD countries and takes stock of the progress made since 2015 in the adoption and implementation of structural policy reforms to address these challenges.
The chapter 2 in particular reviews the main issues related to the short-term impact of structural reforms in different macroeconomic contexts and takes stock of existing theoretical and empirical studies. It lays out the case of reforms introduced in "normal" and "bad" times. It identifies the main channels through which structural reforms influence rather favorably short-term activity through consumption, investment and net exports. The chapter discusses
- Model-based assessments taken from studies that make use of Dynamic Stochastic General Equilibrium (DSGE) models for the analysis of specific reforms
- Empirical analysis based on aggregate or sectoral data. Look in particular at Bouis, R., O. Causa, L. Demmou, and R. Duval (2012), "How quickly Does Structural Reform Pay Off? An Empirical Analysis of the Short-Term Effects of Unemployment Benefits Reform", IZA Journal of Labor Policy 2012, 1:12.
- Empirical analysis based on micro studies. In this category, a recent paper that is not reviewed in the OECD report but in a VOX CEPR column on Eurozone rebalancing: Are we on the right track for growth? Insights from the CompNet micro-based data. Their results are "in line with the postulate that the crisis and ensuing structural policies may be generating ‘cleansing effects’." The author are cautious, however. "It is obvious that the evidence presented is still preliminary and only suggestive of the potential use of the dataset."
Look also at Bouis, R., O. Causa, L. Demmou, and A. Zdzienicka (2012), "The Short-Term Effects of Structural Reforms: An Empirical Analysis", OECD Economics Department Working Papers, No. 949. They conclude
This analysis indicates that the benefits from reforms typically take time to fully materialise. When significant effects are found in the short run, reforms seldom involve significant aggregate economic losses; on the contrary they often deliver some benefits. The absence of major depressing effects does not lend support to the view that reforms should be in general accompanied by substantial macroeconomic policy easing in order to deliver some short-term gains. Nevertheless, there is also tentative evidence that some labour market reforms (e.g. of unemployment benefit systems and job protection) pay off more quickly in good times than in bad times, and can even entail short-term losses in severely depressed economies.
A rather negative view of structural reforms
However, when Krugman sees influential people calling for structural reform as the universal answer to all economic problems, he gets angry. He considers that Structural Reform is the Last Refuge of Scoundrels. For Krugman, traditionally, structural reform was offered as an answer to the problem of stagflation, which makes a fair bit of sense according to him.
Dany Rodrik also opposes structural reforms notably in his paper Goodbye Washington Consensus, Hello Washington Confusion?. He argues that ``evidence has come a more skeptical reading of the cross-national relationship between policy reform and economic growth'' (Page 5).
Moreover, Acemoglu and Robinson (2010, chap 5) document that
The attempt to induce African countries to implement institutional reforms such as reducing distortions was not a success (van der Walle, 1993, 2000), mostly for the reason that international financial institutions (IFIs) did not take into account the political rationale for the inefficient policies they were trying to reform. The most dramatic example of this is discussed by Herbst (1990) and Reno (1998). They argued that attempts by IFIs to induce downsizing of the public sector, for example by closing down unprofitable parastatals, had played an important role in creating civil war in Sierra Leone and Liberia.