Politicians Avoid Structural Reforms Because They Last Longer Than Their Mandate

Croatia’s entry into the European Union is undoubtedly one of the most significant political, social, and economic events since independence.

Membership in an elite political club demands more than it gives, and thus the frequent public obsession that Croatia will receive a magic wand to solve all problems upon entering the EU is a mere delusion. The elite club expects its members to behave as the name suggests: responsibly, competently, and qualitatively, to be a worthy partner, rather than constantly appearing with problems and seeking help. Each member of the elite club has its own issues to resolve and typically has no time for others’ problems. Croatian politicians should not primarily engage in general social topics and fill newspaper columns with them, but rather focus on the serious task of reviving the economy. In doing so, they should not concern themselves with whom to grant subsidies, assistance, loans, guarantees, and the like, but with structural reforms that would enhance the competitiveness of the entire economy.

Reducing the Excessively High Standard Why is there so little writing and speaking about structural reforms? The reason is simple: no one wants to bear the burden of change and lower the current standard, no matter how unrealistic it may be. Every entrepreneur intuitively knows what to do when business starts to decline. His great advantage is that he can do it quickly and knows why he is doing it. Politicians, on the other hand, avoid structural reforms (reducing social costs for the economy) whenever they can, until the problem escalates to the point where there is no other solution. They do not want to become unpopular during their mandate due to structural reforms and implement reforms for some other government that may come after them. Structural reforms take several years, and then it takes several more years to see the results; there are no quick solutions. The Organization for Economic Cooperation and Development has been publishing a report annually for years, detailing the structural reforms undertaken in OECD member countries to create conditions for promoting competitiveness and economic growth. The economic crisis has shown that the response of politicians and economic policy makers to implement structural reforms is much greater during and after the crisis than it was before the financial crisis (2008). This is a consequence of the search for a formula that will stimulate economic growth.

Taxes and Education Sometimes it can be heard or read that it would be much easier to reduce public debt if we were to grow economically or that it would be much easier to implement structural reforms if we were to grow economically, etc. Unfortunately, in reality, it works such that politicians, as bearers of economic policy, do not want to hear about structural reforms while the economy is growing; when a crisis breaks out and there is no growth, then the phrase that structural reforms are difficult to implement is extended.
What are the structural reforms to promote competitiveness? For example, tax reforms that are conducive to economic growth can strengthen the labor component important for recovery and can also assist in fiscal consolidation if they increase tax revenues. Reducing the tax burden includes increasing the productivity of the tax administration, directing the tax burden towards a tax base that less burdens employment and economic growth, such as taxing real estate and final consumption, and introducing environmental taxes.
It is essential to increase labor productivity, for which the recommendation is to improve and reform the education system. In this context, it is also important to reduce labor taxation, postpone effective retirement ages, reform the temporary incapacity for work scheme (sick leave), and strengthen active labor market policies. Active policy is considered to increase resources for assistance in actively seeking jobs, as well as training for the unemployed and schemes for subsidizing the creation of new jobs. One of the labor market measures implemented in two-thirds of OECD countries to mitigate job losses is reduced working hours.
To increase labor productivity within a generation, it is important to reform the education system and invest in human capital. There is a long list of proposals for education reform that would not fit in this article, but economic policy makers can find it at www.oecd.org. Structural measures are known, tested in practice over the last five years of crisis, and lessons have been learned, so it is known which reform achieves the best results; the only thing left is to make a decision to initiate structural reforms and start implementing them, which the Croatian economy needs as a desert needs water.

written by Dr.sc. Ante Žigman
senior advisor in the Office of the Governor of the HNB
and senior lecturer at ZŠEM