Look Beyond the Quick Fix!

By: Johnny Munkhammar

Most policymakers in Europe and the United States are now intensely focused on the shakiness of financial markets and the short-term economic prospects. Monetary and fiscal policy measures are, almost desperately, especially in the US, directed towards expansionism and short-term stimulus. It seems that Keynes was wrong in claiming that “in the long run we’re all dead”, since he himself is revived frequently, seemingly without an end.
In a turbulent situation, it is easy and understandable to focus on the short term, though it did not have to lead to harmful policies. But long-term economic success can only be achieved through a competitive institutional setting, which makes structural reforms to improve the institutions and systems important. And since short-term crises are often caused by harmful institutions, reforms can indeed make those less likely in the future too.
Indeed, the macroeconomic reforms undertaken in most OECD countries during the past decades have led to fewer crises. Independent central banks with a target of price stability and fiscal frameworks have created a much more sound macroeconomic setting. The stagflation of the 1970s is behind us. But this does not mean that the need to reform has disappeared. Every country can always improve, thanks to new knowledge and other countries paving the way.
Economic and social problems in a number of European countries show a need to reform, not least in Italy, France and Germany. Reforming is however often regarded as politically difficult. Jean-Claude Juncker, Prime Minister of Luxembourg, stated that: “We all know what to do, but we don’t know how to get re-elected once we have done it.” There are definitely opponents to reform – such as populist media, special interests and within the civil service. And reforms usually have a short-term cost, but larger long-term gains.
But it has proven possible to launch substantial free-market reforms in a number of OECD countries during the past decades. Governments have been able to pass the obstacles and change their countries, with great economic and social results. In fact, the results have often far exceeded expectations. Ireland, Spain, New Zealand, Australia, Sweden, Britain, Denmark, Estonia, the Netherland and Slovakia have come very far. And this offers lessons for policymakers.
The pessimism about the possibilities to launch substantial reforms is underpinned by a number of myths. One myth is that an economic crisis is needed to trigger reforms, but in fact, several countries have reformed without a crisis, particularly in the labour market. Another myth is that socially excluded people and the poor would lose from free-market reforms. But in fact, those groups have usually gained the most from reforms – in terms of higher employment and incomes.
A frequently mentioned point is that public opinion is against reforms, which is an excuse not to launch reforms. But this has been the case in most reforming countries initially, but as results have materialized, very few ever want the reforms undone. Sometimes, it is said that a country’s size, geographic position, culture or religion will determine whether it will reform or not – and is thus not within reach for politicians. Those factors may have an impact, but countries of all possible sizes, positions, cultures and religions have reformed.
There is sometimes agreement that countries have been able to reform in macroeconomics, trade and to an extent in product markets – which is true. But then it is claimed that areas like pensions, social security, education and health care are “unreformable”. There may be some claim to that – they have not been reformed to the same extent – but substantial things have happened in several countries in these areas too. They are simply not unreformable.
It is clear that the key to future prosperity, higher living standards and public welfare is structural reform. But for those that make the decisions – the politicians – the single most important factor is probably the political effects. Well, they can find comfort in the fact that in all of the mentioned reform countries, with the exception of Sweden, all the most reformist governments were re-elected, at least once. And naturally, the reformers will be mentioned in more positive ways in history books than those that did nothing.
A comparison of the most reformist countries reveals that there are several frameworks that facilitate the prospects of reform. A sound macroeconomic framework is one. Another is a Constitution that allows for institutional competition. And a third framework is a situation with at least some of the social partners taking a long-term responsibility rather than acting as a pure special interest. Transparent decision-making and political processes usually facilitates political decisions in the public interest too.
And for governments intent on reforming and getting re-elected, there are strategic lessons for success. They need a mandate, well-prepared proposals, a pragmatic attitude, decisiveness, substantial size of reforms, consistency in communication, speed, secure implementation and, last, win the story of the reforms afterwards. Naturally, this is complex and there are no easy ways, but reforming successfully is easier than commonly thought. And this is the long-term perspective we need, not the short-term fix.

Johnny Munkhammar is the author of The Guide to Reform (Timbro/Institute of Economic Affairs), Senior Fellow, European Enterprise Institute

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