The uncertainty surrounding world economic prospects for the coming year and beyond is unusually high. This is largely because the course economic policies will take in major OECD economies remains unclear. Worst­case outcomes can be forestalled provided monetary policy remains very supportive, sovereign debt and banking sector problems in the euro area are contained, and excessive fiscal tightening is avoided where there is room to proceed gradually, not least in the United States. But even then unemployment would stay high through 2013, there would be no prospect of recovering the output foregone with the crisis, and public budgets would remain on unsustainable paths across most of the OECD. Even under a more optimistic scenario, underpinned by a decisive resolution of the crisis in the euro area, the need to work off the divergence in cost competitiveness among member countries could still produce economic and political headwinds. On the other hand, failing to address such divergence would keep in place the fundamental imbalances that have led to the current crisis. More generally, growth needs to be lifted in most advanced economies and made more sustainable in most emerging markets.

Structural reform priorities to boost real incomes have been identified by the OECD through the Going for Growth analysis since 2005 for each OECD country and, starting with the 2011 edition, the BRIICS – Brazil, China, India, Indonesia, Russia and South Africa, key non-member countries with which the OECD works closely. This process provides a tool for governments to reflect on policy reforms that affect their residents’ long-term living standards. Going for Growth analysis has been used in the Mutual Assessment Process of the G20 since the 2008 Pittsburgh Summit.

The crisis has raised new policy challenges, but it has also made the necessity of structural reforms more apparent. This initial chapter of Going for Growth assesses progress that countries have made in structural reforms since the start of the crisis, covering the whole period 2007-11.The key political economy lesson emerging from the analysis is that the crisis and ensuing recession have acted as a catalyst for structural reforms, especially in OECD countries where reforms were most needed. In particular, the depth of the labour market crisis has provided an impetus for structural reforms aimed at raising labour utilisation. The need to consolidate public finances and the financial pressure arising from mushrooming sovereign debt have given another impetus to reform, with a clear acceleration of politically sensitive reforms designed to help lift potential growth, regain price competitiveness and restore fiscal sustainability, especially in some euro area countries.Going forward, priority should be given to boosting jobs in the context of ongoing fiscal consolidation. For now, there is a clear case for sheltering activation policies aimed at retraining displaced workers and encouraging return to work from fiscal consolidation efforts. And in countries that experience renewed economic set-backs it will be important to build on the lessons from the financial crisis in terms of policies that can help cushion the labour market and social impact of weak activity, such as making use of short-time working schemes. Tax reforms, not least a reduction in tax expenditures and a shift in the tax burden away from labour, could help kick-start the jobs recovery and assist fiscal consolidation. Product market reforms could also boost short-term growth, especially if implemented in sheltered sectors where the potential to quickly create jobs is relatively high, such as retail trade and professional services.

Not much is known about the short-term effects of structural reforms whose benefits are expected in the long term. It has been argued that some reforms could be detrimental at the current juncture, for instance if they further weakened aggregate demand. This chapter presents new empirical analysis drawn from 30 years of reform data from OECD countries. It shows that, while their benefits usually take time to fully materialise, structural reforms seldom involve significant losses and often deliver gains already in the short run. At the same time, though, some of them, such as unemployment benefit and job protection reforms, have smaller or even negative effects in depressed economies. Current conditions of wide remaining spare capacity, constrained macroeconomic policies and impaired fiscal positions in most OECD countries would put a premium on reforms that offer comparatively strong short-term gains in terms of facilitating the jobs recovery:In all countries, there is a case for sheltering resources devoted to active labour market policies from ongoing fiscal consolidation efforts. Strengthening job-search assistance and training can help job seekers find new jobs more quickly and ensure that those at risk of discouragement remain attached to the labour market.Growth-friendly tax reforms that shift the tax burden away from labour taxes could help strengthen the jobs content of a recovery, while also helping fiscal consolidation insofar as they are implemented in a way that raises tax revenue.A well-designed package of labour and product market reforms could help alleviate the potential transition costs of certain individual reforms. Supporting reforms with a well-functioning financial system and an effective communication strategy is another key for maximising short-term gains.

This chapter identifies inequality patterns across OECD countries and provides new analysis of their policy and non-policy drivers. One key finding is that education and anti-discrimination policies, well-designed labour market institutions and large and/or progressive tax and transfer systems can all reduce income inequality. On this basis, the chapter identifies several policy reforms that could yield a double dividend in terms of boosting GDP per capita and reducing income inequality, and also flags other policy areas where reforms would entail a trade-off between both objectives.

Macroeconomic crises and shocks often cause large and unforeseen income and employment losses. Such losses tend to be unevenly spread across the population, often with the greatest impact on the poor and most vulnerable sections of society. This chapter presents new OECD analysis of the types of policies that have helped to protect the most vulnerable from these losses in a wide group of OECD and emerging countries. These policies include pro-competitive product markets, openness to trade and foreign direct investment (FDI), low tax wedges on labour, a strong fiscal situation, generous unemployment benefits, strong unions, minimum wages and job protection. Some of these policies and institutions also benefit growth and jobs, thereby providing obvious avenues for reform. But others may involve trade-offs between short-term protection and other longer-term economic objectives. Finally, the chapter classifies OECD and emerging economies into four broad groups according to whether their institutional arrangements facilitate risk sharing through strong social protection or swift reallocation of labour and capital.