Macroeconomic policies and structural reform

327 Pages·1998·12.6 MB·English

by  OECD

OECD PROCEEDINGS
Macroeconomic Policies
and Structural Reform
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960,
and which came into force on 30th September 1961, the Organisation for Economic
Co-operation and Development (OECD) shall promote policies designed:
- to achieve the highest sustainable economic growth and employment and a rising
standard of living in Member countries, while maintaining financial stability, and
thus to contribute to the development of the world economy;
- to contribute to sound economic expansion in Member as well as non-member
countries in the process of economic development; and
to contribute to the expansion of world trade on a multilateral, non-discriminatory
basis in accordance with international obligations.
The original Member countries of the OECD are Austria, Belgium, Canada,
Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the
United Kingdom and the United States. The following countries became Members subse
quently through accession at the dates indicated hereafter: Japan (28th April 1964),
Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973),
Mexico (18th May 1994), the Czech Republic (21st December 1995) and Hungary
(7th May 1996). The Commission of the European Communities takes part in the work of
the OECD (Article 13 of the OECD Convention).
© OECD 1996
Applications for permission to reproduce or translate all or part of this
publication should be made to:
Head of Publications Service, OECD
2, rue Andre-Pascal, 75775 PARIS CEDEX 16, France.
FOREWORD
On 18-19 January 1996, the OECD Economics Department convened an interna
tional conference on "Interactions between Structural Reform, Macroeconomic Poli
cies and Economic Performance", as part of the follow-up programme of work on
the OECD fobs Study. This volume of the conference proceedings contains the
papers presented at the conference and summarises the discussions that took
place.
Since the early 1980s, OECD Member countries have adopted a policy strategy
that pursues macroeconomic stability and structural reforms designed to improve
the functioning of markets. While inflation is now low, fiscal positions have deterio
rated, prospects for long-run growth have not improved, unemployment has
increased, particularly in Europe, and there are concerns about inequality and living
standards. OECD countries thus face challenges to which the policy response has
been insufficient. The conference sought to assess why this has been so, and to
provide a wide spectrum of opinion about how to meet these challenges. In particu
..
lar, it sought to identify and assess the cost and benefits of structural reform, the
nature of the political resistance to it, and how macroeconomic policies interact i
with change in structures and institutions designed to promote trade and growth.
This proceedings volume, published on the responsibility of the Secretary
General of the OECD, is intended as a contribution to the ongoing, policy debate on
how to achieve faster growth from which all sections of society benefit and to which
they can contribute.
TABLE OF CONTENTS
Opening remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
List of participants ............................................. I I
Session I: The Benefits of Structural Reform for Economic Performance
Combatting Unemployment: Is Flexibility Enough?
Richard Jackman, Richard Layard and Stephen Nickell 19
Comments by Werner Roger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
General discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
The Macroeconomic Effects of Financial Sector Reforms:
an Overview of Industrial Countries
Palle Andersen and William White. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Annex: The "Credit Channel" view. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Comments by Alan Winters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
General discussion .......... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 103
Trade Liberalisation and Economic Performance
Jan Haaland and Victor Norman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 105
Appendix: Model and Reference Case . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 119
Comments by Nicholas Vanston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 123
General discussion ............................................. 127 ~
MACROECONOMIC POLICIES AND STRUCTURAL REFORM
Session II: Interaction among Macroeconomic Policies and Structural Reform
Structural Reforms and their Implications for Macroeconomic Policies
Hans Gersbach and George Sheldon . . . . . . . . . . . . . . . . . . . . . . . . . . .. 131
Comments by Richard Jackman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 169
Macroeconomic Policy in the Presence of Structural Maladjustment
Robert Gordon ............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 173
Comments by Robert Ford . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 205
Substitutabilities vs Complementarities between Structural and
Macroeconomic Policies
Jean-Paul Fjtoussi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 209
Comments by Flemming Larsen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 229
Long-run Macroeconomic Effects of Fiscal Consolidation and Increased
Competition in Europe
Werner Roger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 237
Appendix: Selection of Parameter Values for European Wage Rule
and the Mark-up? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 257
Comments by Palle Andersen. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 263
General discussion of session II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 269
Session III: The Key Challenges and Priorities for the OECD '!'"
in Pursuit of Improved Structural Reform
Labour Market Implications of Changing Corporate Governance in Japan
Masaru Yoshitomi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 273
Comments by Yutaka Imai ....................................... 297
Tax Reform in the United States: Prospects and Potential Effects
Alan Auerbach ............................................. 30 I
Appendix: The Auerbach-Kotlikoff Simulation Model? ................ 315
Structural Reform in OECD Countries: Critical Interactions with the Rest
of the World
Alan Winters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 317
~ Concluding discussion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 341
OPENING REMARKS
by
Kumiharu Shigehara
Head of Economics Department, OEeD
It is a great pleasure for me to welcome you all to this international conference
on Interactions between Structural Reform, Macroeconomic Policies and Economic
Performance. I would like to explain the background to this conference and to give
some guidance on the arrangements.
Institutionally, this conference is part of the follow-up work, which Ministers
asked the Organisation to carry out upon the completion of the 1994 OEeD Jobs
Study. This work proceeds on two tracks. One deals with the establishment of
country-specific policy recommendations, aiming to adapt and flesh out the general
policy recommendations contained in the Jobs Study so as to fit to the specific
conditions that prevail in individual OEeD countries. This work is beginning to see
the light of day in the form of chapters dedicated to this issue in OEeD country
surveys.
The other track of the follow-up work to the Jobs Study consists of a number of
so-called thematic reviews. These are in-depth studies of particular issues dealt
with in the Jobs Study but where it was felt that analysis should be taken further. Let
me just mention that thematic reviews are currently being prepared for the OEeD
Ministerial Meeting in May on active labour market policies; the role of and interac
tion between tax and transfer systems; and, the role of technology in affecting
labour market outcomes. The fourth thematic review deals with the topic of this
conference, that is the interactions between structural reform, macroeconomic poli
cies and economic performance.
The issue of macro-structural interactions is not a new one to the OEeD. To
give but one example, this was something the Economics Department discussed in
its publication "Assessing Structural Reform - Lessons for the Future" which was
published in 1994. In addition to summarising OEeD countries' experience with
structural reform over the 1990-93 period, we drew out ten lessons for future
structural reform. Time is short here, so let me mention just lesson 10 which in ~
MACROECONOMIC POLICIES AND STRUCTURAL REFORM
headline form read: There can be synergies between structural reform and the
macroeconomic environment.
Despite much work on macro-structural interactions both at the OECD and
elsewhere, our knowledge remains incomplete. For us to live up to our role as policy
advisors, we need to be able to give better answers to the questions which policy
makers are faced with when trying to implement and refine the OECD policy
strategy which was adopted in the early 1980s. It will be recalled that this strategy
had a medium-term focus and aSSigned to macroeconomic policies the primary role
of providing a stable macroeconomic environment through price stability and
sound fiscal positions. Structural policies, on the other hand, were to enhance the
efficient working of economies and improve the allocation of resources.
Countries have made varying progress along this path. Most progress has been
achieved in reforming financial markets, on the structural side, and on moving
towards price stability, on the macroeconomic side. However, there has so far been
little if any progress in restoring health to public finance, and structural reforms in
labour and product markets have been insufficient to prevent a significant rise in
unemployment, particularly in Europe. At the same time, financial markets have
sometimes been characterised by highly volatile behaviour.
Against this background, I hope this conference will take us further in at least
two areas of concern to policy makers. The first is the documentation that structural
reform is useful. For policy makers, it is important to be able to demonstrate that
appropriate reform can improve economic performance. This is so because reforms
usually involve short-term costs and only bring benefits in the longer run. Moreover,
the benefits are often spread thinly over large segments of the population whereas
the costs are concentrated on more narrow groups who have a clear incentive to
resist reform. As policy advisers, we are therefore in the business of having to
supply the arguments needed to convince sceptical electorates of the need for
reforms.
Secondly, the conference should take us further in the discussion of how to
implement the policy strategy and, in particular, how policy interactions can help or
hinder implementation. Several issues are of interest here. One relates to the
appropriate sequencing of structural reforms. An intriguing aspect of this is that the
optimal sequencing may be different from an economic and a political view. For
example, the sequencing which may look economically efficient in the sense of
reducing transition costs and achieving the benefits as quickly as possible may not
be the sequencing which maximises the political momentum behind reform and
gives the best chances of advancing reform on a broad front.
Another issue is what role macroeconomic policies should play in the imple
mentation of structural reform. It can be argued - and is indeed argued in some of
~ the papers we have in front of us - that macro policies should aim to smooth the
MACROECONOMIC POLICIES AND STRUCTURAL REFORM
way for structural reform. For example, in order to gain acceptance of reform, policy
makers may promise that macro policy will react quickly to take up any slack
developing as a result of reform. Alternatively, the view might be that only when the
situation is really desperate and macro policies look absolutely un-yielding is it
possible to gain sufficient political momentum for structural reform.
Finally, structural policies also have an important role to play in facilitating the
conduct, and in improving the outcome, of macro policies. For example, the combi
nation of financial de-regulation and lack of structural adjustment in European
labour markets may sometimes have acted to increase interest rate premia and the
cost of capital, discouraging business investment. Higher interest rates have also
spilled over into budget balances. As another example, the costs of disinflation in
the 1980s in terms of both the duration and the magnitude of the necessary
increase in unemployment was higher in those countries which had not put in place
the appropriate labour and product market reforms. As a third example, one might
wonder whether the effectiveness of monetary policy in Japan has been undermined
by the less developed state of capital markets, at a time when the transmission of
monetary policy through the banking channel has been weakened by balance-sheet
problems. People may well disagree on the relative importance of the three exam
ples, but they illustrate the type of impacts that structural conditions may have on
the macroeconomic environment and policies.
On the organisation of the conference, let me say the following. We have three
half-day sessions to discuss ten papers and to draw up policy conclusions. This
means we have a heavy programme in front of us. The three papers to be presented
in this morning's session focus on the effects of structural reform on economic
performance, on the time frame over which these effects occur and the factors which
may accelerate the benefits and reduce the transitional costs. In the afternoon
session, we will move on to discuss interactions between macro and structural
policies on the basis of four papers which focus mainly on Europe and its
unresolved structural unemployment and budgetary problems. In the session
tomorrow morning, we will aim to identify the main challenges for the future by
region and in the global context. Before wrapping up the discussion of the previous
day, we shall consider reform issues that are of specific importance in Japan and the
United States, and the last of the ten conference papers to be presented before the
concluding debate will provide us a useful reminder that further liberalisation of
international flows of goods, services and capital has to play an important role in
the structural reform process. This process is far from being completed with many
opportunities to the mutual benefit of trading nations still remaining unexploited.
LIST OF PARTICIPANTS
PaIIe S. Andersen, Senior Economist, Bank for International Settlements
Mr. Andersen has been with the BIS since 1982 and prior to that was Head of
Division in the OECD. He has also been associated with the Reserve Bank of
Australia, first as a visiting scholar and later as Head of the Research Department.
Alan J. Auerbach, Professor and Director, Robert D. Burch Center for Tax PoJjcy
and PubJjc Finance
Mr. Auerbach is currently Robert D. Burch Professor of Economics and Law,
and Director of the Burch Center at the University of California, Berkeley. Formerly
Professor of Economics and Law at the University of Pennsylvania, and Chairman of
the Economics Department at Penn from 1988 through 1990. He has served as
Deputy Chief of Staff of the US Joint Committee on Taxation in 1992 and as a
consultant to the US Treasury in the formulation of its 1984 tax reform proposals.
He has also consulted the OMB, the Finance Ministry of Sweden, the New Zealand
Treasury, the OECD, the IMF and the World Bank on issues of taxation, and
appeared frequently as an invited witness before committees of the House and
Senate on a variety of topics. His profeSSional affiliations include Research Associ
ate of the National Bureau of Economic Research since 1978, an elected Fellow of
the Econometric Society in 1986, and he served as an elected member of the
Executive Committee of the American Economic Association from 1992 through
1994.
Alan Budd, Chief Economic Advisor, H.M. Treasury
Mr. Budd has been Chief Economic Adviser to Her Majesty's Treasury since
1991. Before that he was Economic Adviser to Barclays Bank. Between 1974 and
1988 he was at the London Business School where he was Professor of Economics
and Head of the Centre for Economic Forecasting. He started his professional career
as a Lecturer in Economics at Southampton University. He followed that by a period
in the early 1970s as an Economic Adviser at the Treasury. He has been a visiting
Professor at Carnegie-Mellon University in Pittsburgh and at the University of New
South Wales in Sydney. He is Deputy Chairman of the Economic Policy Committee
of the OECD. --.!....U
MACROECONOMIC POLICIES AND STRUCTURAL REFORM
Jean~Paul Fitoussi, University Professor at the fnstitut d'etudes politiques de
Paris and Secretary general of the Association internationale des sciences
economiques
Mr. Fitoussi's research focuses on the theories of inflation, unemployment,
foreign trade and the role of macroeconomic policies. He is author of a number of
major books in these areas. As President of the Observatoire fran<;ais des conjunc
tures economiques, and founder and member of an international economic policy
group within this institution, he has made numerous written contributions to the
current economic policy debate, notably on issues of European economic
integration.
Robert Ford, Counsellor for Macroeconomic Policy, OECD
Mr. Ford joined the Bank of Canada Research Department in 1982. In 1988 he
joined the OECD Economics Department as a Senior Economist. Between 1992 and
1995 he was a senior Economist and Deputy Division Head in the Research Depart
ment of the IMF before returning to the OECD Economics Department in his current
post.
Hans Gersbach, Professor, University of Heidelberg
Mr. Gersbach has been Full Professor at the University of Heidelberg since
August 1995 after having been Associate Professor at the University of Basel in
Switzerland. In 1992 he was Research Project Manager in the McKinsey Global
Institute in Washington DC. Before that he was Assistant Professor of economics at
the University of Basel and visiting scholar at the University of California in Los
Angeles. After he had completed his doctoral thesis he also worked with McKinsey
& Co. in Switzerland.
Robert J. Gordon, Stanley G. Harris Professor in the Social Sciences, North
western University
Mr. Gordon has been at Northwestern University since 1973. His research
focuses on differences in economic behaviour among Europe, Japan and the United
States, and on changes in US economic performance over the past century. He is a
Research Associate of the National Bureau of Economic Research and a Research
Fellow of the Centre for Economic Policy Research (London). He is a Guggenheim
Fellow, a Fellow and Treasurer of the Econometric Society, and a senior adviser to
the Brookings Panel of Economic Activity. He is co-founder and from 1978 to 1994
co-organiser of the International Seminar on Macroeconomics. In 1995-96 he has
served on a national commission to assess the accuracy of the US Consumer Price
Index.
Yutaka Imai, Head of Country Studies Division, OECD
Mr. Imai joined the OECD Secretariat in 1975. Throughout his career at the
LlL OECD he has worked in different capacities in the Department of Economics,