Juan Jimeno_Discussant comments_IMF OECD WB Conference Sept 2020

Pareto improving structural reforms (Gilles Saint-Paul)

Discussion by Juan F Jimeno 3rd OECD-IMF-WB Conference on Structural Reforms: Improving the income distribution effect of market reforms in a post-Covid world 24-25 September 2020

An old question: Why we don’t see more structural reforms • Three hypothesis (assuming benefits > costs)

• Well-known costs and benefits but losers have more political power or cannot be compensated • Well-known costs in the short run but uncertain benefits in the long run • Costs and benefits uncertain or not visible in the political process

• Empirical evidence (OECD, 2009, Bertola, 2017, ECB WP, 2017 and 2018, Khemani (WB), 2017) • • • •

Political factors Economic factors Management of the reform In Europe: the impact of EMU

• GSP: Compensation to losers is feasible under distortionary taxation

Context for the comments • A theory paper • Very timely as it focuses on income distribution in a world with • Increasing dislike of inequality • In needs of increasing redistribution (more so after the Covid19 shock)

• Partial/General equilibrium analysis • Without a proper quantitative exercise/empirical counterparts for parameters

• My assessment • How interesting are the economic mechanisms highlighted in the model?

• Is it useful for empirics?

• How useful/relevant are the conclusions to guide economic policy?

Redistributing gains of structural reforms under distortionary taxation (I) • Two main ingredients • Product market deregulation lowering P in some sectors → Labour reallocation • Distortionary taxation: Either proportional taxation on firms’ revenues or on labour income

• Main results • Conditions under which a Pareto improving combination of Deregulation and Taxation is feasible.

• Extensive and intensive margin in deregulation • In some cases, Pareto-improving deregulation in some sectors may need increase regulation in other sectors.

• The role of heterogeneity at determining net profits (inclusive of costs of distortionary taxation) of Pareto improving structural reforms

Redistributing gains of structural reforms under distortionary taxation (II)

• Five comments

• Economy at the Production Possibilities Frontier with MRS ≠ MRT (Deregulation: MRT → MRS. It underscores gains from structural reforms.

• Costless reallocation. It underestimates costs of structural reforms • Welfare analysis without a proper welfare motive for regulation (Bertola).

Efficiency-improving role of regulations.

• Different coalitions for deregulation and for (progressive) taxes. May need to go beyond “traditional taxation” (considering negative income tax/Universal Basic Income) • Dynamics. Short-run/Visible costs vs. Long-run/Uncertain benefits.

• It can be addressed with debt.

• But then issues about debt dynamics, fiscal space, and so on. An additional constraint for Pareto-improving compensations

Redistributing gains of structural reforms in a populist, post-COVID19 world (I) • Before COVID19 • Structural reforms 2.0. Focus shifted from p-w flexibility-enhancing to productivity-enhancing reforms • Populism: Political fragmentation, disregard of the economic expertise • Reform fatigue. New issues at the top of the economic agenda (climate change, de-globalization)

• (Permanent?) Consequences of COVID19 • • • • •

More labor reallocation (at least in the interim) More inequality More political fragmentation Less fiscal space A vindication of the role of experts (also in Economics?. Economic expert committees everywhere. Real policy influence may vary across countries)

Redistributing gains of structural reforms in a populist, post-COVID19 world (II) • Focus on productivity • EU resolution on the constitution of National Productivity Boards (September 2016, following the five presidents’ report) • 9 countries (including Spain and Italy) without appointing one yet • France: Very good report form an excellent team of academics-public sector economists • Germany: Appointment of the Council of Economic Experts. Report delivered in November 2019 • Impact of these reports on the policy agendas remains to be seen

Redistributing gains of structural reforms in a populist, post-COVID19 world (III) • About compensations (beyond Political Economy constraints) • The role of supra-national institutions (https://wol.iza.org/articles/unemployment-and-the-role-of-supranationalpolicies) • New opportunity: EU Next Generation Fund • Implementation (“From the Muses to the Theater”). How to make compensations more visible • Many things to compensate for: labor market reforms (+automation), pension reforms (+population ageing), environmental taxes,…

• Individual accounts (beyond taxes). Put the money directly on citizens’ pockets • The EU approach: The Social Pillar (delivering “rights” to citizens, but resources only to Governments)

Concluding remarks • On GSP paper • Relevant question. Interesting results • Overall, support for the political viability of structural reforms • Still, additional costs and benefits of structural reforms beyond the model

• On the near future of Structural Reforms • A new window of opportunity?

• Strengthening of economic (more inequality) and political (more political fragmentation) constraints?

• Need of a change of paradigm about implementation (of both reforms and compensations)?