Much of the G20’s agenda following the global financial crisis has been focused on crisis response—on short-term crisis management and recovery. In the aftermath of a major crisis, economic stabilization of course is the first order of business. And the G20 has done reasonably well in that respect. But economic stabilization alone will not restore strong and sustained growth, as global growth faces deeper structural challenges.
In advanced economies, some of the structural weaknesses have accumulated over time, such as the labor market rigidities in Europe, the deficiencies in tax and expenditure structures and associated fiscal problems in a broad range of advanced economies, including the US, and the challenges arising from ageing populations. The global financial crisis has added to these challenges by causing supply-side disruptions that lower potential growth, including the destruction of capital stock, financial sector dislocations, and increases in structural unemployment—as well as adding to the fiscal woes. Challenges also arise from a changing pattern of competitiveness and comparative advantage as emerging economies increasingly penetrate global production and trade. So future growth in advanced economies will require not just supporting a recovery of demand but also a reallocation of resources to new sources of growth—new products, new services, new jobs.
Growth has also started to slow in the emerging economies that have been the driver of global growth. Emerging economies face their own challenges of structural reform in sustaining strong growth. For many, there is a substantial unfinished agenda of structural reform and much investment needed in infrastructure and human capital. Some are having to contend with the so-called “middle-income trap” that postulates a stalling of growth if economies, as they reach middle-income levels, fail to graduate from growth reliant on surplus/cheap labor and technology catch-up to one based on generating increases in productivity through innovation and human capital development. Some economies, notably China, face the challenge of effecting a shift in their growth model from external to domestic demand. All emerging economies need to adjust to an external environment marked by lower advanced economy growth and more volatile capital flows. Lower advanced economy growth means that emerging economies will have to look more to other emerging economies and their own domestic markets for growth.
Against this background, the G20 has increasingly recognized that restoring strong growth will require going beyond macroeconomic and demand management to implementing reforms that remove structural impediments to stronger and sustainable growth. There is also a growing recognition that not only are structural reforms essential for stronger growth, they are also key to addressing the jobs challenge, the rise in inequality, and the challenge of environmental sustainability.
Over the past year or so, attention to structural reforms in the G20 has increased. Members’ reform commitments have become stronger and more concrete. A system of peer review has been put in place, as well as an accountability system for monitoring implementation. The OECD and the World Bank support this process by providing an assessment of the reform commitments and of progress in implementation, with the OECD focusing on advanced economies and the Bank on emerging economies (half of G20 members are emerging economies). Last week the OECD and the World Bank released their joint report on the structural reform commitments made by G20 members at the St. Petersburg summit.
Structural reforms by G20 members have had a strong focus on the financial sector, spurred by the immediacy of repairing the sector where the crisis originated. Actions in the areas of infrastructure and social safety nets also have received more attention. Reforms in product market regulation and competition policies, labor market regulation, human capital, and taxation (all key areas of reform) have been much fewer.
How strong are the St. Petersburg structural reform commitments and how far do they go in their respective policy domains in addressing barriers to strong, sustainable and balanced growth? About one-half of the reform commitments of the G20 emerging economies score high on the degree of ambition.
The assessment of the reform commitments looks not only at the degree of ambition of the reforms within their specific policy domains but also at their alignment with the country’s overall structural reform priorities for strong, sustainable and balanced growth. This latter assessment is made with reference to a set of reform priorities based on the OECD and World Bank country teams’ analytic work and country policy dialogue. Assessed against these priorities, two-fifths of the reform commitments of the G20 emerging economies score high on alignment with reform priorities. This indicates that important policy gaps remain. Product and labor market reforms are among the most commonly unaddressed priority areas in the reform commitments.
Policy gaps also exist in other priority areas, including tax reform and human capital development. While infrastructure, social protection, and financial sector reform are receiving more attention, further action is needed in most countries. Overall, looking ahead, there is much room to raise the degree of ambition and improve the alignment of structural reform efforts.
How about the implementation of the reform commitments? Overall, only about a quarter of the structural reform commitments made by G20 members at last year’s Los Cabos summit are assessed as completed (it is too early to assess implementation of the St. Petersburg commitments). Most commitments are at different stages of implementation. This is not a bad start but there is a need for more vigor in implementation.
To conclude, the increased attention to structural reforms is a welcome refocusing of the G20 agenda on growth. The G20 has also taken a complementary initiative to study the availability of long-term investment financing and explore how it can be better catalyzed and leveraged, as investment is an important complement of structural policy reforms. To place structural reforms and investment in the context of integrated, coherent medium-term growth strategies, G20 Leaders at the St. Petersburg summit called on G20 members to submit comprehensive growth strategies next year as a basis for a deeper discussion and better coordination of the collective growth agenda. The World Bank will assist in the assessment of the growth strategies, working with partner institutions and building on its work on structural reforms. These are early but promising steps to develop a stronger and more systematic focus on structural reforms and the medium-term growth agenda in the G20.