Structural Reform
Structural reform refers to changes in the institutions and policies that shape the long-run performance of an economy, as distinct from measures that affect short-run demand. Structural reforms aim to raise potential output, improve the functioning of markets, and enhance the resilience of the economy.
Scope of Reforms
Structural reforms cover a wide range of areas. Product market reforms reduce barriers to entry and to competition, including the liberalisation of regulated industries and the reduction of state control. Labour market reforms change the rules governing employment, wages, and bargaining. Tax reforms alter the structure of taxation to improve incentives and to raise revenue efficiently.
Other reforms include those to the financial system, to the business environment, to education and training, and to the public sector. The specific reforms appropriate for a country depend on its circumstances, including the constraints on growth and the nature of the market failures to be addressed.
Objectives
The objectives of structural reform include raising productivity and potential output, increasing employment, and improving the resilience of the economy to shocks. Reforms can also serve distributional objectives, for example by broadening access to markets and to opportunities.
The assessment of reforms must consider their effects on efficiency and on distribution, and the trade-offs involved. Reforms that raise aggregate output may create losers as well as winners, and the design of reforms must address the transitional costs and the distributional consequences.
Sequencing and Political Economy
The sequencing of reforms matters, since the effects of some reforms depend on the presence of others. Complementary reforms, undertaken together, can have larger effects than the sum of their individual effects, while reforms undertaken in isolation may be less effective.
The political economy of reform is a central consideration, since reforms often create concentrated costs and diffuse benefits, making them difficult to implement. The design of reforms must address the opposition of those who stand to lose, through compensation, phase-in, and communication, and must build coalitions in support.
Evidence
Evidence on the effects of structural reform is mixed and context-dependent. Reforms to product and labour markets have been associated with higher employment and productivity in some cases, but the effects vary with the design of the reforms and with the economic environment.
The evaluation of reforms is complicated by the difficulty of constructing counterfactuals and by the long horizons over which effects materialise. The evidence informs the design of reform programmes and the assessment of their likely effects, while acknowledging the uncertainty involved.
Product Market Reform
Product market reforms aim to increase competition by reducing barriers to entry, liberalising regulated industries, and reducing state control. Measures include the removal of unnecessary licensing requirements, the opening of network industries to competition, and the reform of public procurement.
The effects of product market reform include lower prices, higher productivity, and greater innovation, as competitive pressure forces firms to improve. The evidence on these effects is generally positive, though the magnitude varies with the design of the reforms and the characteristics of the sectors affected.
Labour Market Reform
Labour market reforms change the rules governing employment, wages, and bargaining. Measures include changes to employment protection, to the level and duration of unemployment benefits, and to the structure of collective bargaining.
The effects of labour market reform on employment and unemployment are debated. Reforms that increase flexibility may reduce structural unemployment but can also increase insecurity and inequality. The design of reforms must balance the objectives of employment, equity, and stability, and the effects depend on the broader institutional context.
Tax Reform
Tax reform alters the structure of taxation to improve incentives and to raise revenue efficiently. Measures include broadening the base, reducing rates, and shifting the balance between different taxes.
The evaluation of tax reform considers the effects on incentives to work, to save, and to invest, as well as the distributional consequences. The optimal structure of taxation reflects the trade-offs between equity and efficiency and the constraints imposed by the mobility of different tax bases.
Financial and Institutional Reform
Reforms to the financial system aim to improve its efficiency and resilience, including measures to strengthen supervision, to improve resolution frameworks, and to enhance the transparency of financial institutions. Institutional reforms address the quality of governance, the rule of law, and the effectiveness of the public sector.
These reforms are often complementary, with the effects of one depending on the presence of others. The design of reform programmes must consider the interactions among measures and the sequencing that best supports the achievement of the objectives.