Bleak World Economic Outlook – Is There a Role for Structural Reform?
In October 2019, the International Monetary Fund (IMF) released its World Economic Outlook (WEO) which serves as an integral element of the Fund’s surveillance of economic developments and policies in its member countries, of developments in international financial markets, and of the global economic system. The WEO projects global growth at 3.0 percent for 2019, its lowest level in a decade.
This lower level of economic growth comes against the backdrop of weak trade and industrial production, the decline in world foreign direct investment (FDI) in 2018, heightened geopolitical tensions, the trade war between the United States (US) and China, uncertainties surrounding Brexit and climate related events.
On the bright side, the IMF projects a slight uptick in global growth to 3.4 percent in 2020 on the back of a projected improvement in economic performance in a number of emerging markets in Latin America, the Middle East, and emerging and developing Europe. However, the fund recognises that healthier economic growth in 2020 can be undermined by a projected slowdown in China and the US and the risks from climate change. Furthermore, should unrest continue or even spread in the Middle East and parts of Latin America, global growth is likely to be hampered.
Some of the more obvious policy priorities put forward by the IMF to support global growth include undoing trade barriers and reining in geopolitical tensions. According to the Fund, such actions can significantly boost confidence, rejuvenate investment, halt the slide in trade and manufacturing, and raise world growth. However, one of the bolder prescriptions was that countries, particularly developing economies and low-income developing countries, should simultaneously undertake structural reforms to raise productivity, resilience, and equity.
Structural reforms involve measures that seek to enhance the institutional and regulatory framework in which businesses and ordinary citizens operate. Essentially, they should be designed to ensure that an economy is better able to realise its growth potential in an inclusive way, in other words, in a way that does not disproportionately harm the least well-off. Critical to this process is ensuring that reforms help to increase productivity, investment and employment. In some instances, structural reforms require countries to have sufficient fiscal and monetary space to undertake the necessary adjustments. However, in most Caribbean countries which are constrained by limited fiscal and monetary flexibility, a more nuanced approach to undertaking structural reform would be required.
In my last article, I highlighted the fact that in the World Bank’s Ease of Doing Business Report, no Caribbean country ranks in the top 50 and only two are ranked in the top 100 out of 190 economies surveyed. As I indicated then, this Report ranks countries on the basis of the ease with which persons are able to start a business, access credit and trade across borders among other factors. Given the poor ranking of Caribbean countries in these areas, key to structural reform for us would be modernising and enhancing the business environment which are critical to economic dynamism. According to the IMF, the overall business environment can also be improved through regulations supporting more flexible labour markets, a simpler tax system or less red tape.
Furthermore, there are other potentially low-hanging fruits that Caribbean countries can harvest to promote structural reform. In this vein, reform would involve improvements in public service delivery whereby governments will rely increasingly on automation and electronic platforms to enhance access to and the delivery of its services in areas such as customs and the filing and payment of taxes. Reform should also involve measures aimed at further incentivising innovation and production in sectors such as industry and agriculture which are largely performing below their potential, but nevertheless remain vital to the overall health of our economies.
Finally, during bad times, structural reforms have the potential to help countries to weather economic storms. On the flipside, during good times, structural reforms have the potential to assist countries to be more competitive and to flourish.