One of the reasons why my wife keeps me around is that I can reach things on upper shelves. She recently deployed me for that purpose to snag a container that was stored at the peak of our pantry. Something went horribly wrong, and I started a chain reaction that collapsed shelves and left the entire contents of the closet on the floor. After a pregnant pause, she suggested that the space was in need of structural reform.
Economies around the world may need structural reform to avoid collapsing under the weight of debt and demographics. But this year’s political outcomes will make it very difficult to implement the needed improvements.
Polarization was one of the themes we highlighted in our outlook for 2024. Increasing dissonance makes consensus more difficult to achieve, and that bodes ill both domestically and internationally. Unfortunately, our anticipation on this front has proven accurate.
Elections covering more than 60% of the world’s population were on the schedule this year. Most have already taken place, with voting underway for the last major event. Common threads have emerged: electorates are unhappy with the status quo, but their views are deeply divided on what needs to change. The wings of the political spectrum have gained, and the middle has shrunk.
This year’s political outcomes will make change very difficult to achieve.
The resulting dissonance will make it hard to address long-term economic challenges. This concern was highlighted in the latest World Economic Outlook (WEO) from the International Monetary Fund (IMF). Among the special topics covered in the October edition was “the social acceptability of structural reforms.”
To the IMF, policies in several key areas are in need of review:
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Pension programs. Increasing longevity has prompted consideration of higher retirement ages, to preserve labor force participation and to make room in government budgets for additional public investment. Populations, however, are understandably reluctant to work longer. Measures aimed at increasing retirement ages have been met with public outcry that has been expressed in the streets and at the ballot box.
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Trade. Organizations like the IMF are very much in favor of expanded global commerce. They see it as an avenue to increased standards of living, reduced poverty, and lower inflation. Trade has also, in spots, been blamed for the hollowing out of industry and the creation of permanent underclasses. Those dislocated have become disaffected, and they support protectionist policies. Industrial policy that favors local firms is on the rise.
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Product Market Regulation. A number of countries have sought to relax regulations surrounding selected industries, with electricity a particular focus. The hope has been to foster more innovation and competition that would lower costs. Instead, some of these efforts have increased prices and reduced service reliability.
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Immigration. The flood of newcomers welcomed by several countries last year has produced strains. Some steady flow of immigrants helps with the supply of labor and with the ability of an economy to innovate. But assimilation at such large scale is more difficult, and anxieties among domestic populations have risen. Incoming regimes in many countries have vowed to tighten border controls, which will limit economic potential.
- Employment Protection. Labor laws in many nations protect workers who are at risk from corporate restructurings or technological change. The advancing application of artificial intelligence is making these rules more valuable to more employees. Yet churn in the labor market can help ensure that human resources are applied in the most productive manner amid industrial change.
The IMF’s message seems to be that structural reform has been the victim of poor marketing, and not poor design. The October WEO recommends a series of strategies to improve social acceptance of reform measures. But deep political divides and the ease with which misinformation can spread will make this a steep uphill climb.
My next uphill climb is going to be on a step stool. My reach is not what it used to be; the IMF may need to come to grips with the same conclusion.
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© Northern Trust
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