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WHAT CAN governments do to power economic growth? Most economists believe that governments need to help markets work efficiently: enforcing contracts, resolving insolvencies, hooking up firms to the power grid, and the like. The World Bank has an annual ranking of how efficient governments are: the latest tables were released in October. In many countries governments make it tough to do business: in Madagascar it can take a business well over a year to get electricity. The Economist often recommends “structural reform” as one cure for economic ills. But what exactly do we mean?
At its simplest, structural reforms imply changes to the way the government works. It is helpful to look at an extreme example, such as Ukraine, to understand this. Ukraine’s economy is in a mess: it is one of the world’s most corrupt countries. But it is trying to improve. For instance, in recent months the government has forced its ministers to declare their financial interests. That will make it more difficult for bent politicians to award cosy government contracts to firms in which they are investors. The hope, instead, is that contracts will be awarded to the most efficient firm, which will improve the quality of public services and lower their cost. The government has also scrapped bizarre loopholes in its procurement rules, which are a massive source of corruption. Until recently, there was a law that prevented the supplier of circus-animal feed to the government from being open to proper scrutiny. Meanwhile, gas prices for consumers—which are heavily subsidised—are being raised over the next few years to save the government money.
But most structural reforms are more subtle. Take Italy. Matteo Renzi, the Italian prime minister, has promised all sorts of change. Labour markets have become a little more flexible: firms can now hire up to 20% of their workforces on fixed-term contracts of up to three years. And energy prices have fallen: the government is helping to reduce electricity prices for small and medium-sized companies in an attempt to make them more competitive. France needs to follow suit. Today, for instance, it is illegal to sell aspirin—a pretty harmless drug—in the majority of French supermarkets. The French government is planning to simplify labour laws: it is loosening rules governing "works councils" (organisations representing workers) in companies. It also wants to force people claiming unemployment benefit to be seeking jobs more "actively"—it reckons the requirements are too slack at the moment.
The question, though, is quite how important structural reforms are, particularly when an economy is struggling. Tackling Ukrainian corruption is laudable, but an investment programme would also help its economy. Increasing gas prices too fast will do more harm than good, squeezing consumers’ incomes yet further. In Italy, investors may be just as scared by its massive—and possible unsustainable—debt burden as they are by its sclerotic labour market. And much of the euro zone is crying out for quantitative easing, where the central bank buys government bonds. Structural reforms are necessary to ensure growth in the long term. But in the short term, more drastic action may also be required.
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