Blog Global Economy Needs Structural Reform
“All of us believe that structural reform is necessary, although to many it will be disagreeable,” said Richard W. Fisher, former Member, U.S. Federal Open Market Committee and former President and CEO, Federal Reserve Bank of Dallas.
The priority in the U.S. is to normalize monetary policy without threatening the recovery that has taken shape since the global financial crisis. “The U.S. is in a state of repair,” he said. “The Fed will need to move from uber-accommodative to highly accommodative.”
José Manuel Barroso, former President of the European Commission, reinforced his passionate views about the cohesion of the European Union, its ability to resist threats to its well-being, and the recognition among its 28 member-states to make significant structural changes.
“Don’t underestimate Europe’s capacity to reform,” he said. In particular, he identified the need to integrate digital and energy markets as well as tackle out-dated commercial and labor practices. But he was also aware that corporate elites and other beneficiaries of the status quo would resist reform.
Similarly in China, vested interests are also a major barrier to further liberalization, according to Michael Pettis, Professor, Guanghua School of Management, Peking University.
Successful policies build elite and vested interests that prevent the continuance of those policies, he said. China’s President Xi Jinping needs to defeat them in order to implement the next phase of liberalization – notably raising the proportion of household income-to-GDP.
Citing many historical precedents, Pettis said that China’s extraordinary GDP growth rates will subside as the country struggles with its large debt burden. Victory against the elites would prevent an economic collapse, but the best-case growth rate would be 3 - 4 percent.
In contrast, Dr. Duvvuri Subbarao, Distinguished Visiting Fellow, National University of Singapore Business School and former Governor, Reserve Bank of India, said “India is in a sweet spot.”
“There has been a remarkable turnaround during the past year,” he said. Expectations are high that Prime Minister Modi’s government will introduce radical change to boost growth, contain inflation, maintain a stable external sector and attract the USD1 trillion needed to develop the country’s infrastructure over the next five years.
2015 will be a robust year for Japan too, according to Hideo Hayakawa, Senior Executive Fellow, Economic Research Centre, Fujitsu Research Institute and former Executive Director, Bank of Japan.
The terms of trade are improving with a weaker yen, lower oil prices are helping manufacturers and there are signs that long-needed inflation is emerging.
“Japan could achieve 1.5 - 2 percent growth this year, which is well above its potential rate of 0.6 percent,” he said.
There was a clear consensus that structural reforms are necessary in most countries and, equally, confidence that a commitment to change is underway. Yet, institutional reform is insufficient to guarantee the long-term health of the economy.
Pettis warned about income inequality and the misallocation of savings; Barroso stressed that world trade agreements must be adhered to and strengthened.
The global economy is not on the critical list, but clearly its health cannot be taken for granted.