Beyond the gloom, reforms bode well for growth

Mon Sep 19, 2011 10:05am EDT
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By Alan Wheatley, Global Economics Correspondent

PARIS (Reuters) - Largely unnoticed by markets riveted by the drama of the day, more and more countries are successfully implementing complex, politically treacherous reforms needed to raise their long-term economic growth rates.

Trying to change the habits of decades to fend off a crisis is a thankless task. Ministers are unlikely to be in office long enough to reap the fruits of their work, and any proposals to postpone the retirement age or make it easier to hire and fire risk bringing disgruntled voters out on to the street.

Just ask Greece, which faced demands on Monday from international lenders that it shrink its public sector in return for emergency aid. Or Ireland and Portugal, where governments have been kicked out of office after bowing to creditors' demands for austerity and changes to the economic fabric.

With little fiscal and monetary room for maneuver, governments under pressure from markets have an added incentive to look at the nuts and bolts of how their economies work to try to stimulate growth.

But change in many cases was under way before the global financial crisis. A prime example is Germany's successful drive to free up its job market, part of a strategy for restoring competitiveness eroded by joining the euro zone at a high real exchange rate.

Through increased flexibility in pay and working hours, manufacturers were able to retain skilled staff who would otherwise have been laid off and so could respond quickly when demand from China and other emerging markets revived.

"There's more appetite for reform today than there was 10 years ago. That's for sure," said Romain Duval, head of the structural surveillance division at the Organization for Economic Cooperation and Development, a Paris-based grouping of 34 industrial democracies.

"Whether that can translate into tough reforms being implemented is a different issue. Obviously we're always disappointed that governments aren't doing more. But I'd be more optimistic today about the prospect for structural reform than I would have been 10 years ago," Duval added.   Continued...