adjustment blow in some cases. Policy has thus dealt with the front-loaded timing of the potential losses of
reforms as well as the fact that costs of reform are often concentrated on particular groups. The reform
process had a fiscal cost, but it was limited and easily outweighed by the overall gains: concomitant with
the reforms, there was a sharp rise in the trade to GDP ratio and business R&D surged, boosting
productivity growth to among the highest in the OECD and the income-per-capita ranking improved from
the 15th place in the mid-1980s to the 8th currently. Not surprisingly, fiscal performance improved a lot as
well: the general government balance swung from a deficit peak in the early 1990s of more than 6% of
GDP into a surplus by 1998 and has staid in surplus since then, except in one year. Net debt will be
eliminated in 2006 and a net asset position will build up.
26. Clearly, for both countries the evidence is that the impact of major structural reforms was a major
improvement in fiscal performance. Yet, how to apportion the success between a strengthening in
budgetary institutions and better growth performance is unclear.
Structural reform in an empirical expenditure rule
27. Since the proof of the pudding is always in the eating, in this section we try to identify empirically
the impact of the structural policy stance on public expenditure, using some basic econometrics. The
assumption is that countries in which structural policy stances are geared towards greater market flexibility,
the efficiency of welfare systems will generally be higher and government involvement in the economic
process - be it through regulation or financial support - more effective. At the same time, potential output
would be higher and as a result, everything else equal, public expenditure would decline relative to
(potential) output. However, there may be short-run offsets in the form of upfront budgetary cost, such as
compensation schemes for people losing their job or rents, which tends to raise public expenditure on a
temporary basis.
28. The structural policy indicator capturing structural reform efforts referred to here is the one used
by Duval (2005). It is calculated as the sum of normalised OECD indicators in five fields (employment
benefits, tax wedges, employment protection legislation, retirement incentives and product market
regulation). They are displayed in Figure 5; a higher value corresponds to a tighter stance (more rigidity)
and vice versa, and a decline in the indicator suggests that “appropriate” structural reforms have been
implemented. Countries that stand out by relatively “tight” stances (high value of the indicator) are all
European countries. Some of these countries have also implemented major structural reforms in the past
decade (notably Spain, Sweden, Denmark, Belgium and the Netherlands), suggesting that poor initial
conditions are a good “predictor” of future structural reform (as confirmed by Duval, 2005). This is
encouraging and suggests some tendency towards global convergence, perhaps helped by the Lisbon
agenda.
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