economic policy

Clinton frontrunner of structural reforms

HANK Paulson, former US treasury secretary and before that, Goldman Sachs banker, is one of a growing number of prominent Republicans who will be voting for Hillary Clinton in the upcoming US election.

It’s about the economics. He believes that Clinton has the experience and temperament to get the American economy back on track to operate at its full potential.

In an interview with CNBC last week, he pointed to the need for difficult structural reforms that, in his mind, have been evaded by the US government so far. Instead, economic policy since the great recession has relied heavily on easy money as interest rates hit historic lows and liquidity was pumped into the economy. There has also been some effort to use fiscal policy to stimulate the economy through government expenditure.

However, like many others, he thinks the real breakthrough requires the implementation of structural reforms. And thus it seems that across the globe, the consensus is that a reboot of economies is required. Even the world’s most advanced economy is not exempt from this policy prescription.

The economies of the world are going through a bad patch with too many countries creaking under poor governance, decaying infrastructure and low levels of productivity. There are few shining stars at the moment. Among major economies, only India comes to mind as a country enjoying a high level of economic performance.

The call for structural reform comes against this bleak context. Outside the US, eurozone economies, especially crisis-ridden ones such as Greece and Italy, have embarked on structural reforms at the urging of their creditors and European peers.

Emerging markets including SA have also been advised countless times to pursue measures such as labour market flexibility and competition policy to allow new entrants into the economy and thereby increase the size of the pie.

Structural reform is quite a broad term and its meaning often depends on the viewpoints and leanings of the institution or individuals calling for it. Paulson comes in from the right and so his focus is on opening up the economy to trade, reducing entitlements (social spending) and lowering taxes. Structural reforms tend to have a right-leaning ring to them, but there are left-oriented counterparts to the right’s urge to liberalise. The Obama administration would argue that its push to boost infrastructure raises the economy’s productivity and its potential. Measures to encourage “long-termism”, away from what Clinton calls quarterly capitalism, can also be seen as progressive structural reform.

If Clinton were to pursue structural reforms, as Paulson hopes, she would propel an economic policy theme that has struggled to gain traction. Sure, international bodies such as the Group of 20, the Organisation for Economic Co-operation and Development and the IMF have been calling for such reforms for a long time. US President Barack Obama spoke about the need for reforms, but his presidency is more associated with stimulus packages than fundamental changes.

If Clinton becomes a visible backer of structural reform, it would be good for a global economy facing stagnation. It could inspire other politicians to make tough economic choices beyond exhausted monetary and fiscal policies.

However, it remains to be seen whether such a reform agenda would be mired in ideology that serves elite interests, or if it would be a pragmatic response to boost growth in an inclusive manner. Should the US election go to the other candidate, the world will see a confused right-wing revolution with dire economic consequences for the US and the world. It’s a shame that the first woman to lead the US will be chosen not for her vision, but for being a safe pair of hands, but that is what the world needs right now.

Makhaya is CEO of Makhaya Advisory

This piece was first published in Business Day (27 September 2016)

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