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The Mirage of Structural Reform

economy-economic-reformEvery economic program imposed on Greece by its creditors since the financial crisis struck in 2009 has been held together by a central conceit: that structural reforms, conceived boldly and implemented without slippage, would bring about rapid economic recovery. The European Commission, the European Central Bank, and the International Monetary Fund anticipated that fiscal austerity would be costly to incomes and employment – though they significantly underestimated just how costly. But they argued that long-delayed (and much-needed) pro-market reforms would result in a compensatory boost to the Greek economy.

Any serious assessment of the actual results produced by structural reforms around the world – particularly in Latin America and Eastern Europe since 1990 – would have poured cold water on such expectations. Privatization, deregulation, and liberalization typically produce growth in the longer term at best, with short-run effects that are often negative.

It is not that governments cannot engineer quick growth takeoffs. In fact, such growth accelerations are quite common around the world. But they are associated with more targeted, selective removal of key obstacles, rather than broad liberalization and economy-wide reform efforts.

The theory behind structural reforms is simple: opening the economy to competition will increase the efficiency with which resources are allocated. Open up regulated professions – pharmacies, notaries, and taxicabs, for example – and inefficient suppliers will be driven out by more productive firms. Privatize state enterprises, and the new management will rationalize production (and shed all the excess workers who owe their jobs to political patronage).

Read more: The Mirage of Structural Reform by Dani Rodrik – Project Syndicate

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