Category Archives: Structural reforms

12/7/18: Romania’s Uneven convergence Path: 2007-2018

A new World Bank report, led by Donato De Rosa, covers Romania's reforms and economic development experience. Worth a read! |
"From Uneven Growth to Inclusive Development : Romania's Path to Shared Prosperity"

Quick summary:

  • "Romania’s transformation has been a tale of two Romanias: one urban, dynamic, and integrated with the EU; the other rural, poor, and isolated."
  • "Reforms spurred by EU accession boosted productivity ...GDP per capita rose from 30 percent of the EU average in 1995 to 59 percent in 2016."
  • "Today, more than 70 percent of the country’s exports go to the EU, and their technological complexity is increasing rapidly... the gross value added of the information and communications technology (ICT) sector in GDP, at 5.9 percent in 2016, is among the highest in the EU."
  • "Yet Romania remains the country in the Union with by far the largest share of poor people, when measured by the $5.50 per day poverty line (2011 purchasing power parity)".  More than 26% of country population lives below that poverty line, "more than double the rate of Bulgaria (12%)."

  • "While Bucharest has already exceeded the EU average income per capita and many secondary cities are becoming hubs of prosperity and innovation, Romania remains one of the least urbanized countries in the EU, with only 55 percent of people living in cities."
  • "Overall, access to public services remains constrained for many citizens, particularly in rural areas, and there is a large infrastructure gap, which is a drag on the international competitiveness of the more dynamic Romania and limits economic opportunities for the other Romania in lagging and rural areas."
The positive effects of Accession were frontloaded, when it comes to structural reforms:
  • "Romania was invited to open negotiations with the EU in December 1999.  Until Romania joined in January 2007, EU accession remained an anchor for reforms, providing momentum for the privatization and restructuring of SOEs and for regulatory and judiciary reforms."
  • "Output gradually recovered, and until 2008 the country enjoyed high but volatile growth... Unemployment was on a declining trend, but youth and long-term unemployment remained elevated. Skills and labor shortages became increasingly widespread. High inactivity persisted stubbornly, particularly among women. Gains in labor force participation were modest overall. ...Inequality increased further, as large categories of people—the Roma in particular—continued to be excluded from the benefits of growth."
  • "Although output has recovered since 2008, institutional shortcomings have compounded the effects of the crisis, contributing to significant setbacks in poverty reduction, and are again leading to macroeconomic imbalances."
  • "Fiscal consolidation during 2009–2015 has helped place economic growth on a strong footing. However, lack of commitment and underfunding for the delivery of public services and poor targeting of social programs have contributed to the negative income growth of the bottom 40 percent of the income distribution (the so-called bottom 40) in 2009–2015, with poverty remaining above pre-crisis levels, and inequality still among the highest in the EU."

26/5/16: European Reforms: Mostly "No Show" grades

An interesting heat map from Moody's covering the deteriorating pace of reforms in the euro area:

Source: @Schuldensuehner 

The key point is that under the monetary easing created by the ECB, Euro area sovereigns are all slacking off on reforms, especially more politically difficult reforms, such as product markets reforms (9 out of 11 states are in red, none in green), pensions & healthcare reforms and fiscal reforms (5 out of 11 are in read). The best performing countries are, bizarrely, Spain and Italy. Farcically, Ireland apparently does not require reforms to improve efficiency of public administration. Presumably, Moody's analysts never heard of tsunami of public waste unleashed by the likes of HSE and Irish Water.

Take it for what it is - a sketchy top-level view of the reforms landscape and give it a wonder: are ECB policies helping long term sustainability of European institutions or harming it?.. In 23 out of 60 point observations, the reforms have delivered so far 'no or limited progress' and only in 6 out of 60 point observations, the reforms have delivered 'substantial progress'. Go figure...

30/11/15: WarningSignals on Secular Stagnation Threats

The readers of this blog know that I have been covering the twin theses of Secular Stagnation (long-term trend in slowdown of global growth) consistently over recent years.

Here is an interesting summary of the theses and literature on it, with extensive references to this blog (among other sources):!Where-are-we-on-Secular-Stagnation/covf/565464fb0cf29e70f2253e70.

My own view summarised most recently here:

11/10/15: Tax Code Simplification and Deadweight Loss of Taxation

In a recent speech (see notes here), I discussed the need for tax reforms in Ireland and, specifically, for flattening of the income tax system.

Here is an interesting, albeit dated, paper on the subject of tax codes simplification as the tool for reducing the Deadweight Loss of compliance and improving tax compliance and enforcement:

H/T to @brianmlucey for the link.

10/10/15: IMF: "Honey, we’ve Japanified the World"

Much has been written this week about IMF’s World Economic Outlook and the belated catching up the IMF are performing to the reality of
  1. Faltering Emerging Markets, but improving Advanced Economies
  2. Flattening Global growth, but momentum recovery in the Euro area (that depends on the World demand for its exports); and
  3. Largely still-ignored, but nonetheless hanging like a dark shadow over the IMF's forecasts, secular stagnation.

Now, with some time lapsed over all that media circus, let’s take a look at hard numbers.

Here is the breakdown of IMF changing forecasts.

First up, World real GDP growth forecasts. How did these evolve over the recent years?

Yep, that’s right. Back in October 2012, IMF was projecting 2015 growth to come in at 4.418%. This gradually fell back to 3.847% forecast in October 2014. This week outlook for 2015 full year global economic growth is 3.123%. All along, the IMF has been signing praise to structural reforms, ownership of various programmes (IMF-run programmes) and monetary policies efforts. Year after year, after year cheerleading the world to ‘next year things will be great’. Do observe how every forecast starts with the premise that "next year, there will be an uptick in growth". And the end game is 1.295 percentage points lower growth outrun for 2015 in October this year than back in  October 2012.

Guess what, every year from 2015 on, current forecast shows lower growth than that expected in the earliest WEO report containing such a forecast.

Ditto for the Advanced Economies, as shown in the chart below

Things are no better for the Euro area, despite the already low aspirations that the IMF had for the common currency area from the start:

And for the Emerging Markets - ditto.

You wonder how on earth can these 'rosy forecasts --> ugly reality' picture can be consistent with IMF ever-expanding 'sustainable' lending to the states in trouble? It doesn't, of course, for IMF growth projections simply do not support the lending the Fund is doing. Instead, it is the efforts of the Central Banks at printing money to monetise debt that make this pile of Government-backed junk 'sustainable' for now.

Now, 2010-2011 were pretty awful years overall for the global economy. Still, it managed to squeak out 4.828% average rate of growth in these gloomy days. Now, we have a global recovery, and volumes of structural reforms written, re-written and re—re-written. IMF is now virtually running half the planet and majority of Government are obligingly ‘owning’ their programmes. Beyond, we have tens of trillions of printed/minted/QEd/instrumented/engineered debt and cash instruments flooding the markets.

And yet:

  • In 2015-2020, per IMF latest projections, Global economic growth is going to be lower than 2010-2011 average in every year.
  • The same is true for the Advanced economies;
  • The same is true for the Euro area; 
  • The same is true for the Emerging Markets.

Actually, the rot has been ongoing since 2012. Here is the cumulative growth that has been achieved (through 2014) and is forecast to be achieved (from 2015 through 2020) since 2010 across the main regions:

You can’t make this up: even with the Euro area contained within it, Advanced Economies group outperforms Euro area group by almost 3/4rs.

The chart below slices the same data slightly differently, by looking at cumulative growth the IMF projected for 2015-2017 period.

Abysmal? You bet.

Based on 2010-2011 average, we should see Global economy expanding by 15.2% over the three years of 2015-2017. Instead, IMF projects growth of 10.86%. Advanced economies should grow by 7.4% based on 2010-2011 averages, but current forecast implies growth of 6.58%. Euro area economy should grow by 5.6% based on 2010-2011 averages, but current outlook implies growth of 4.87%. Emerging Markets should be growing by 22.1% under 2010-2011 average rates, and are now projected to expand by 14%.

Amidst all this, talking about Governments around the world ‘owning’ more reforms, as the IMF continues to do might be as close to Einstein’s famous dictum about insanity as one can get.

In the entire IMF review of the Western Hemisphere (that includes NAFTA states), there is only one, cursory mentioning of the phrase “secular stagnation” even though the entire WEO database published by the Fund screams it from every data set imaginable. But there are plenty of mentions in the WEO and the Fiscal Monitor and the GFSR for the need for the Euro area to harmonise more. Presumably because all this harmonisation before has not led us to where we are today - running an economy that is growing by margins statistically pretty darn indistinguishable from zero. There are admonitions by the IMF for the Emerging Markets to get onto the bandwagon of structural reforms too. Because the IMF prescriptions have worked so well in Europe, the dynamism of the continent is now overwhelmingly... err... what's the word here?... suffocating?..

Truth is, folks, we are now all Japanified. Time for the IMF to catch up with that trend and think up real reforms, such as

  • Dealing with debt overhangs not by bleeding households and companies dry, but by restructuring these, 
  • Dealing with slacked investment and enterprise creation not by shoving more cheap funds into the banks, but by using monetary firepower (the little that is still left floating around) to free households from debt and giving them lower taxation burdens, while providing proper risk and tax treatment of debt,
  • Dealing with excessive policies harmonisation and coordination by encouraging the states to take the route to greater financial, fiscal and economic management independence, and
  • Promoting not the divisive, Us-vs-Them types of quasi-regional trade deals recently welcomed by the IMF under the US-led TPP and TTIP, but inclusive trade negotiations under the WTO umbrella.

Because, as Japan's example has taught us so far, Japanification can't be cured by printing presses and fiscal stimuli. And it is sure as hell can't be cured by the IMF 'structural reforms'...