The descriptive evidence on recent reform patterns presented in this paper suggests that
EU (including euro area) countries typically have undertaken more comprehensive and far-
reaching labour market reforms than other OECD countries over the past decade. However, this
conclusion needs to be qualified in several ways. Different reform intensities between EU and
non-EU countries need to be seen in the light of greater need for reform in the former. As well,
EU countries - with the exception of a few small ones - have shown no particular ability to carry
out needed reforms in areas where political resistance is normally strong (with the exception of
retirement schemes where impending fiscal pressures are particularly large in EU countries).
Furthermore, in the more specific case of EMU countries, there appears to have been a slowdown
in the reform process after the formal advent of the euro - though this could reflect the prior race
to qualify for EMU.
In line with theoretical priors, there is some evidence that top reformers (Denmark,
Finland or the Netherlands) started their reform programmes with relatively favourable fiscal
positions and made only limited efforts to improve them during their reform years. Conversely, in
a number of EU countries where only few reforms have been implemented during the past decade,
the state of public finances was initially poor and major fiscal adjustment efforts were made,
especially during the run-up to EMU (Greece, Italy, Spain).
Nonetheless, the usual problem with descriptive evidence is that it is difficult to identify
with any confidence the drivers behind the observed patterns of structural reform. This issue is
likely to be even more acute here given the existence of feedback effects of structural reforms on
the fiscal balance. Therefore, multivariate probit and linear analysis is carried out for 21 OECD
countries over the period 1985-2003 in order to explore the influence of fiscal positions and fiscal
adjustment processes on structural reforms, controlling for a number of other potential influences
on the propensity to undertake reforms. The focus is on the major reforms made in labour and -to
a lesser extent- product markets over the past two decades.
The upshot of the analysis is that many of the “usual suspects” indeed do seem to
determine the pace of structural reform, such as going through an economic crisis and more
broadly experiencing high unemployment. Small countries are also found to have a greater
propensity to undertake reforms, possibly reflecting lower risks of short run economic slack
and/or lower product market rents and thus lower public support for existing institutions aimed at
capturing them. As expected, there is also robust evidence that a sound fiscal balance helps.
Conversely, fiscal adjustment is found to hinder the structural reform process. There is also more
tentative evidence that the latter effect may be greater for countries that pursue fixed exchange-
rate regimes or participate in a monetary union such as EMU, and therefore have little or no
monetary autonomy. Possible extensions to this work include the incorporation of a number of
additional control variables into the analysis, such as demographic or political factors. Moreover,
the relationship between the reform process and the fiscal balance runs in both directions, and
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