Wealthy nations like Australia appear unable or unwilling to embrace structural reform to reshape their economies and boost productivity.
The world economy has a growth problem. According to the International Monetary Fund’s (IMF) October 2024 World Economic Outlook (WEO), growth in most economies is expected to remain “feeble” over the medium term. Structural headwinds, including population ageing, weak investment and historically low productivity growth threaten to leave advanced economies in particular trapped in a low-growth regime. In Australia, for example, aside from a brief pandemic- era surge, our productivity performance has been lacklustre since the global financial crisis (GFC), with productivity growth in the pre-pandemic decade the lowest in 60 years.
Developed nation policymakers are also confronting looming challenges in the form of further demographic change and the energy transition. Then there’s the potential for upheaval triggered by the emergence of artificial intelligence as a transformative general-purpose technology.
So much for the diagnosis, what about the prescription? The IMF says governments should embrace structural reform — which it defines as updating the rules and policies that shape how an economy operates — to strengthen market signals, improve resource reallocation and thereby boost productivity. A related definition says structural reform comprises policies that fundamentally change the way an economy is organised, usually by increasing the role of competitive markets in the economy. For example, via product market deregulation and/or labour market liberalisation.
Reluctance to reform
Unfortunately, many governments increasingly seem either unable or unwilling to deliver such reforms. The WEO reports that the number of reform episodes has fallen across most measures and country groups. Implementation rates over the past three decades in several key reform areas have been low, and even when policy changes were implemented, they were frequently accompanied by public resistance (strikes, protests, riots) which, in many cases, either required a winding back of scope or jeopardised their sustainability. Overall, the WEO notes the pace of reform efforts has more than halved since the GFC. The same decline has been identified in other studies. While in Australia, major reform arguably stalled before the GFC, and more recent high-profile attempts such as carbon pricing have ended in failure or reversal.
Why is reform so politically difficult? Mainly because it creates winners and losers. Moreover, losses typically show up earlier and tend to be more concentrated among smaller groups — which are easier to politically mobilise — while gains tend to arrive later and are distributed more widely.
That might mean reform has a better chance when introduced as part of a larger package of measures that could mitigate some of the associated costs, including any politically challenging shifts in income and wealth — say, by pairing efforts to increase labour market flexibility with more generous benefits. Yet, the greater the number of measures needing to be “sold” to voters, potentially the greater the political difficulty in getting them all implemented.
Timing is everything
Recent research finds that reforms implemented during recessions often have inferior, sometimes negative, effects on growth and unemployment compared to those implemented during expansions. Yet, in practice, governments often pursue reform during recessions, perhaps because a sense of crisis forces them to act. Some may recall the famous 1986 judgement from The Economist magazine — “Australia is one of the best managers of adversity in the world... and the worst manager of prosperity”. Paradoxically, governments often reform when their chances of success are lower.
Staying with timing, the studies also find that while there is persuasive evidence reform generates a positive payoff in terms of higher productivity growth, this reward arrives with a lag of up to four years. Hence, reforms undertaken a year or two before an election can trigger a voter backlash as the payoff fails to arrive in time to offset immediate costs. Viewed in that context, Australia’s three-year federal election cycle looks distinctly unhelpful.
Public disenchantment
The WEO also cites evidence suggesting voters’ beliefs and perceptions about reform are critical in determining social and political acceptance. It follows that misinformation and misperceptions can have significant adverse consequences, a risk potentially heightened by social media. The IMF prescription is for improved communication to inform voters of the costs of failing to reform and provide evidence about likely outcomes. However, to make this messaging credible, it needs to be supported by an institutional framework that includes trusted independent institutions (Australia’s Productivity Commission receives the IMF tick of approval). If governments fail to build trust and deliver a consensus around the case for change, voters may remain sceptical about motives, impacts, promises of mitigating or compensatory measures, and the authorities’ ability to deliver reform successfully and sustainably.
One final complication, cited by a recent survey of reform experience, is that in advanced economies, much of the “low-hanging fruit” from the introduction of market signals has already been picked. That leaves higher-hanging fruit, where the rewards are potentially smaller, more uncertain and harder to attain.
In Australia, for example, commentators often look back longingly to the “golden age” of reform in the 1980s–’90s. But the big efficiency gains secured from floating the dollar and dismantling elevated levels of protectionism are no longer available. As a result, contemporary reform advocates can be tempted to over-promise on the size of potential benefits, risking future disenchantment.
Summing up, the research suggests an “ideal” approach to the growth challenge might involve a government introducing structural reform at the start of its term and during an economic upswing — “fix the roof while the sun is shining”. Reform measures would be part of a broader package designed to offset any adverse consequences and would only be implemented after the authorities had worked hard to communicate their case, built trust and secured a broad mandate.
And in Australia, a longer parliamentary term would probably help, too.
This article first appeared under the headline ‘Head in the Sand’ in the December 2024/January 2025 issue of Company Director magazine.
AICD chief economist Mark Thirlwell GAICD has had more than 30 years focusing on the international political economy at the Bank of England, JPMorgan, Austrade, Export Finance Australia and the Lowy Institute.
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