Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
If this week’s World Bank and IMF spring meetings were distilled into three core messages, they would probably be: low growth, high debt and unprecedented global upheaval. That is a difficult trio to overcome. Stimulating growth often requires a jolt of public investment or tax cuts. But the coffers of many advanced and developing economies are already stretched. With trade wars brewing, aid budgets shrinking and debt-restructuring talks stalling, global catalysts for growth and financing are also dwindling.
Among the levers that remain for policymakers to boost economic activity and cut costs are some useful domestic reforms that also happen to be deeply unpopular. This includes rowing back government subsidies, raising state pension ages and enacting land and tax reforms. In the past, the IMF has been accused of being too “neoliberal” in recommending these remedies for member states struggling with weak growth and rising debt. They are, after all, easier said than done.
Emerging and low-income countries spend 1.5 per cent of GDP on average on energy subsidies. Reducing these payments can free funds for investment and growth. But as protests in Kenya and Nigeria over recent years have demonstrated, removing them is not easy. Pension spending will also become unsustainable as life expectancies increase. That is unless legal retirement ages also go up. Tell that to middle-aged workers. Cutting red tape in planning systems can support a building boom, but new developments irk environmentalists and existing homeowners.
What to do? An analysis of successful reforms in the IMF’s Fiscal Monitor, released on Wednesday, offers some clues. First, governments should avoid shock therapy: this can stoke mistrust and is harder for households and businesses to adjust to. Colombia, for instance, successfully managed to phase out petrol subsidies over a two-year schedule. Carefully targeted compensation mechanisms are also effective. In Australia, reforms in 2009 involving a phased increase in the pension age were balanced with a rise in old-age benefits, particularly for low-income retirees. The UK government is implementing a scheme for households near new or upgraded electricity grids to receive discounts on their energy bills.
Beyond creatively designed policies, timing and communication matters. High-growth periods are good opportunities to pass difficult reforms, as they help to cushion their effects. Clarity over the trade-offs, and efforts to garner support across opposition groups and civil society organisations, also help. For instance, Uruguay has been able to steadily raise its retirement age, in part, by framing the adjustment as a way to sustain other benefits and finances. Last year Uruguayans even voted to reject a proposal to reduce the retirement age and raise pension payments.
Alluding to wannabe reformist politicians in 2007, then prime minister of Luxembourg Jean-Claude Juncker is quoted saying: “We all know what to do, but we don’t know how to get re-elected once we have done it.” It is easy to empathise with the so-called “Juncker curse”. Enacting tough reforms is particularly difficult when governments lack political majorities. But it is, after all, their job to find a way.
It is easier to find recent examples of politicians snubbing hard, long-term policies for low-hanging fruits, or denying trade-offs and engaging in political “cakeism”. But when governments have been bold, innovative and honest, growth-enhancing and debt-reducing reforms have been possible. Right now, for many economies, that is also looking like the surest path to prosperity.
Source link
