G20 Emerging Economies St. Petersburg Structural Reform Commitments: An Assessment September 2013 lights This assessment covers the new structural reform commitments made by the emerging economy members of the G20 at St. Petersburg. The reform commitments vary considerably across countries in number, specificity, objectives, degree of ambition, and alignment with reform priorities. The majority of the new commitments are in the financial sector, infrastructure, and social protection. Overall, there is an improvement in the assessability of the commitments and monitorability of their impact but there remains much room to make reform commitments more specific. Close to two-thirds of the new commitments are assessable. Reforms span all dimensions of strong, sustainable and balanced growth, but strong growth remains the dominant objective, with social inclusion next in line. The degree of ambition of the commitments in their respective policy domains ranges between medium and high, with one-half of the commitments showing high ambition. Commitments that primarily target strong growth typically have a higher degree of ambition than those aimed at other dimensions of growth. The alignment of the commitments with the overall structural reform priorities for strong, sustainable and balanced growth ranges between medium and high. About two-fifths of the commitments score high on alignment with reform priorities. Important policy gaps remain in several priority areas of structural reform, most notably in product and labor market reforms. This note has been prepared by World Bank staff. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work.
Introduction This note reviews the new structural reform commitments made by the G20 emerging economies as part of the St. Petersburg Action Plan. It forms part of an overall assessment of the G20 structural reform commitments, including those made by the G20 advanced economies, prepared jointly by the OECD and the World Bank. 1 The emphasis on the new commitments is meant to highlight the focus areas and strength of the incremental reforms undertaken by the G20 emerging economies. Yet structural reform is a continuous process and several reforms are underway in all G20 emerging economies. Implementation of the earlier structural reform commitments, made as part of the Los Cabos Action Plan, is ongoing and was assessed in a note prepared for the G20 meetings in April 2013. 2 Many of the new reforms extend or complement those initiated in the past. The assessment of the new St. Petersburg reform commitments in this note, therefore, needs to be seen in the context of the broader, continuing reform effort. The note evaluates the new reform commitments in terms of their assessability, contribution to the goals of strong, sustainable, and balanced growth, and degree of ambition and alignment with reform priorities. The assessment draws on inputs provided by the World Bank country teams based on their ongoing work and policy dialogue with the country. Number of reform commitments and areas of focus As part of the St. Petersburg Action Plan, thirty new structural reform commitments (excluding restated old commitments) have been made by nine of the ten emerging economy members of the G20. 3 China has not submitted new structural reform commitments and its effort remains focused on implementation of reform commitments made earlier, many of which are medium term in nature. The new commitments represent a 32 percent increase over the 95 structural reform commitments included in the Los Cabos Action Plan, most of which remain under implementation. As in the assessment of previous commitments, the analysis below classifies the new commitments into six policy domains: product market regulations; labor market regulations; financial sector reforms; taxation; human capital development; and a residual category of other policy areas (including infrastructure, R&D policies, public expenditure reform, social protection, and reforms in specific sectors such as agriculture, health, etc.). The vast majority of the new commitments (21 of 30) are concentrated in the financial sector and other policy areas (Table 1 and Chart 1). Of the latter, most relate to infrastructure and social protection. Three commitments are in product markets and two commitments each in taxation, labor markets, and human capital development. In the area of taxation, while there are only two new specific reform commitments, the medium-term fiscal strategies submitted by some countries do include intentions towards further tax reform (Box 1). Compared to the Los Cabos commitments, new commitments are somewhat less concentrated in the financial sector, emphasizing more some of the other reform areas (Chart 1). The new commitments vary considerably across countries in the coverage of the policy domains. In five countries (India, Mexico, Russian Federation, South Africa, and Turkey) the commitments span more than two policy domains. In other countries the commitments span between one to two policy domains. 1 See OECD/World Bank, Pursuing Strong, Sustainable and Balanced Growth: A Note on G20 Structural Reform Commitments, September 2013. 2 See OECD/World Bank, G20 Los Cabos Structural Reform Commitments: Interim Accountability Assessment, April 19, 2013, Annex 3 (G20 Emerging Economies: Structural Reforms for Strong, Sustainable and Balanced Growth). 3 While some commitments can be unbundled into components, the analysis in this note lists and assesses commitments as stated by the countries in their templates. 2
Argentina Brazil China India Indonesia Mexico Russian Federation Saudi Arabia South Africa Turkey Table 1: New structural reform commitments by policy domain and country Policy domain and reform commitment Product Market Regulations Align railway freight fares and diesel prices to market levels Improve regulatory environment for business Streamline license approvals for water, mining, and EIA Labor Market Regulations Scale up youth and public employment schemes Continue to implement active labor market policies Taxation Introduce new tax regime for SMEs to facilitate formalization Lower GHG emissions with carbon tax and other measures Human Capital Continue with implementation of Educational Reform Scale up university and technical education Financial Regulation Channel savings to productive projects through capital markets Reduce housing gap by improving access to mortgage financing Complete the adoption of Basel regulations Reduce financing costs and boost transparency in banking sector Further banking reform to improve credit access and competition Improve financial literacy and consumer protection Implement a new financial consumer protection framework Implement policies to increase domestic savings Continue implementation of Istanbul Finance Center Project Other Areas Implement Logistics Investment Program based on PPPs Expand Direct Benefit Transfers to improve targeting and efficiency Improve corporate governance and resolution of corporate distress Integrate national social security system Implement a System for Universal Access to Healthcare Present an Energy Bill to Congress for broad sector reform Improve transport infrastructure (roads, railways, PPPs) Complete Land Bridge Project and develop public transport network Increase housing stock and home ownership Alleviate energy constraint (increase generation, promote exploration) Increase domestic energy production and improve efficiency Enhance and expand availability of economic data 3
Number of commitments 45 40 35 30 25 20 15 10 5 0 Chart 1: Policy domains of ongoing and new reform commitments Product Markets Labor Markets Financial Sector Taxation Human Capital Other Areas Los Cabos St. Petersburg Box 1: Country tax reform indications under medium-term fiscal strategies China Accelerate and scale-up pilot project to replace business tax with VAT. India Expand tax base, improve collection administration, and enhance effort on indirect taxes. Indonesia Improve tax administration and align tax incentives with strategic economic activities. Mexico Increase efficiency of tax collection and evaluate special tax regimes. South Africa Review tax system to find opportunities to reduce waste. Turkey Renew income tax law to expand the tax base and reduce tax evasion. Assessability of reform commitments Overall, the assessability of structural reform commitments has improved but there is still much room for progress. About 63 percent of the new commitments are judged as assessable, with concrete policy actions and indicators to measure progress over time, compared to 50 percent in the case of the Los Cabos commitments (Chart 2 and Table 2). About 17 percent of the commitments remain formulated as general objectives with no precise policy actions, making it difficult to monitor implementation and attribute progress to specific policies. However, this proportion is much lower than the 40 percent of the Los Cabos commitments that were formulated as general objectives. The rest of the new commitments take the form of overarching strategies or plans. While such commitments have greater specificity than general objectives, they are still difficult to monitor as they contain a broad range of policies and programs of varying concreteness and typically cover long periods. 4
Number of Commitments 60 Chart 2: Assessability of ongoing and new reform commitments 50 40 30 20 10 0 Los Cabos St. Petersburg Assessable Strategy/Plan General objective Contribution to Strong, Sustainable, and Balanced Growth The new structural reform commitments have been assessed according to their expected primary and secondary contributions to the objectives of strong, sustainable, and balanced growth (SSBG). The new reforms span all dimensions of SSBG but strong growth remains the dominant objective (Table 3 and Chart 3). 4 Reforms aimed primarily at promoting strong growth through boosting productivity, efficiency, investment and innovation represent 48 percent of the new reform commitments. Promotion of balanced growth is the primary aim of 31 percent of the new reforms. Within this category, almost four-fifths of the reforms are primarily geared towards achieving more socially balanced growth that broadens participation in the growth process and in the sharing of the benefits of growth. These include actions aimed at promoting social inclusion and reducing poverty and inequality. Only about one-fifth of the reforms in the balanced growth category primarily aim at affecting the external balance. About 20 percent of the new commitments are primarily geared to the objective of sustainable growth (encompassing fiscal sustainability, financial stability, and environmental sustainability). Most of the new reform commitments that will contribute primarily to strong growth pertain to financial sector reform (Argentina, Mexico, Turkey) and infrastructure development (Brazil, Mexico, Russian Federation, Saudi Arabia, South Africa). Other reforms in this category include improvement of the business regulatory environment (Russian Federation, South Africa) and corporate governance (India) and human capital development (Brazil, Mexico). Commitments that are primarily aimed at promoting inclusive growth include reforms covering social protection (India, Indonesia), healthcare (Mexico), active labor market policies (South Africa, Turkey), and housing (Argentina, Saudi Arabia). Commitments that will primarily impact the external balance include measures to increase domestic savings and reduce dependence on energy imports (Turkey). Commitments aimed primarily at promoting sustainable growth include subsidy reform to improve fiscal sustainability (India); progress in the adoption of Basel regulations (Argentina) and improvement of financial literacy/consumer protection (Russian Federation, Saudi Arabia) to underpin financial stability; and carbon tax and other measures to promote environmental sustainability (South Africa). Beyond their primary impact, many of the reform commitments will have secondary impacts. Taking secondary impacts into account, almost all of the reform commitments will impact more than one objective of SSBG (Table 3). 4 In Table 3, the expected primary impact of the reform is marked by P and the direction of the expected impacts is indicated by (improvement), - (worsening), and (mixed). 5
Table 2: Assessability of new structural reform commitments Country/reform commitment Assessable Strategy/Plan General Objective Argentina Channel savings to productive projects through capital markets Reduce housing gap by improving access to mortgage financing Complete the adoption of Basel regulations Reduce financing costs and boost transparency in banking sector Enhance and expand availability of economic data Brazil Scale up university and technical education Implement Logistics Investment Program based on PPPs China India Align railway freight fares and diesel prices to market levels Expand Direct Benefit Transfers to improve targeting and efficiency Improve corporate governance and resolution of corporate distress Indonesia Introduce new tax regime for SMEs to facilitate formalization Integrate national social security system Mexico Continue with implementation of Educational Reform Further banking reform to improve credit access and competition Implement a System for Universal Access to Healthcare Present an Energy Bill to Congress for broad sector reform Russian Federation Improve regulatory environment for business Improve financial literacy and consumer protection Improve transport infrastructure (roads, railways, PPPs) Saudi Arabia Implement a new financial consumer protection framework Increase housing stock and home ownership Complete Land Bridge Project and develop public transport network South Africa Streamline license approvals for water, mining, and EIA Scale up youth and public employment schemes Lower GHG emissions with carbon tax and other measures Alleviate energy constraint (increase generation, promote exploration) Turkey Continue to implement active labor market policies Implement policies to increase domestic savings Continue implementation of Istanbul Finance Center Project Increase domestic energy production and improve efficiency 6
Country/reform commitment Argentina Channel savings to productive projects through capital markets Reduce housing gap by improving access to mortgage financing Complete the adoption of Basel regulations Reduce financing costs and boost transparency in banking sector Enhance and expand availability of economic data Brazil Scale up university and technical education Implement Logistics Investment Program based on PPPs Table 3: Contribution of new structural reform commitments to SSBG objectives Strong Sustainable Balanced Productivity, efficiency, innovation China India Align railway freight fares and diesel prices to market levels Expand Direct Benefit Transfers to improve targeting and efficiency Improve corporate governance and resolution of corporate distress Indonesia Introduce new tax regime for SMEs to facilitate formalization Integrate national social security system Mexico Continue with implementation of Educational Reform Further banking reforms to improve credit access and competition Implement a System for Universal Access to Healthcare Present an Energy Bill to Congress for broad sector reform Russian Federation Improve regulatory environment for business Improve financial literacy and consumer protection Improve transport infrastructure (roads, railways, PPPs) Saudi Arabia Implement a new financial consumer protection framework Increase housing stock and home ownership Complete Land Bridge Project and develop public transport network South Africa Streamline license approvals for water, mining, and EIA Scale up youth and public employment schemes Lower GHG emissions with carbon tax and other measures Alleviate energy constraint (increase generation, promote exploration) Turkey Continue to implement active labor market policies Implement policies to increase domestic savings Continue implementation of Istanbul Finance Center Project Increase domestic energy production and improve efficiency Fiscal Financial stability /- Environmental External balance Social inclusion (reduction of poverty, inequality) 7
Number of Commitments Chart 3: Reform commitments by primary objective and policy domain 6 5 4 3 2 1 0 Significance of reform commitments The significance of the new structural reform commitments for SSBG has been assessed on the basis of two criteria: the degree of ambition of the commitment within its own policy domain; and the alignment of the commitment with the country s overall structural reform priorities for SSBG. The first criterion evaluates how far each commitment goes in addressing obstacles to SSBG within its specific policy domain. The second criterion evaluates the commitment s alignment with priorities in the country s overall structural reform agenda for SSBG. The latter assessment is made with reference to the three key priorities for structural reform identified for each country in the World Bank s note on structural reforms prepared for the April 2013 G20 meetings. 5 The note proposed that countries consider these priorities in formulating their new reform commitments. These priorities, based on the work of World Bank country teams and their policy dialogue with the country, are summarized in Annex Table 1. A score of high, medium, or low has been assigned to each reform commitment against the above two criteria (Table 4). 5 See Annex 3 of OECD/World Bank, G20 Los Cabos Structural Reform Commitments: Interim Accountability Assessment, April 19, 2013. 8
Table 4: Significance of new structural reform commitments Country/reform commitment Argentina Channel savings to productive projects through capital markets Reduce housing gap by improving access to mortgage financing Complete the adoption of Basel regulations Reduce financing costs and boost transparency in banking sector Enhance and expand availability of economic data Brazil Scale up university and technical education Implement Logistics Investment Program based on PPPs China India Align railway freight fares and diesel prices to market levels Expand Direct Benefit Transfers to improve targeting and efficiency Improve corporate governance and resolution of corporate distress Indonesia Introduce new tax regime for SMEs to facilitate formalization Integrate national social security system Mexico Continue with implementation of Educational Reform Further banking reform to improve credit access and competition Implement a System for Universal Access to Healthcare Present an Energy Bill to Congress for broad sector reform Russian Federation Improve regulatory environment for business Improve financial literacy and consumer protection Improve transport infrastructure (roads, railways, PPPs) Saudi Arabia Implement a new financial consumer protection framework Increase housing stock and home ownership Complete Land Bridge Project and develop public transport network South Africa Streamline license approvals for water, mining, and EIA Scale up youth and public employment schemes Lower GHG emissions with carbon tax and other measures Alleviate energy constraint (increase generation, promote exploration) Turkey Continue to implement active labor market policies Implement policies to increase domestic savings Continue implementation of Istanbul Finance Center Project Increase domestic energy production and improve efficiency Degree of ambition within policy domain Alignment with overall structural reform priorities Low 9
Number of commitments Number of commitments The degree of ambition of the new reform commitments within their respective policy domains ranges between medium and high (Chart 4 and Table 4). Overall, one-half of the commitments score high on this significance criterion. Reform commitments relating to infrastructure (including energy) and social protection programs which are classified under other areas of reform in Chart 4 score the highest on the degree of ambition (Chart 4). Overall, 75 percent of commitments in other areas score high. In the case of the financial sector, 44 percent of the commitments score high. Commitments in the remaining four policy areas are much fewer in number and, in the case of labor markets and human capital development, also marked by a lower degree of ambition. 14 Chart 4: Degree of ambition of reform commitments within policy domain 12 10 8 6 4 2 0 Product Markets Labor Markets Financial Sector Taxation Human Capital Other Areas Low Commitments that are aimed primarily at the objective of strong growth (through improved productivity, efficiency, investment and innovation) show on average a higher degree of ambition than those aimed at the other SSBG objectives. One-half of such commitments score high on the degree of ambition within their policy domains (Chart5). This reinforces the focus on strong growth in the structural reform effort: compared to sustainable or balanced growth, not only is strong growth the primary objective of the largest number of reform commitments but those commitments are also characterized by a higher degree of ambition. Chart 5: Degree of ambition of reform commitments by reform objective 16 14 12 10 8 6 4 2 0 Productivity, efficiency, innovation Fiscal sustainability Financial stability Environmental sustainability Low External balance Social inclusion 10
Priority policy areas covered The alignment of the new commitments with the country s overall structural reform priorities for SSBG also ranges between medium and high (Table 4). About 40 percent of the new commitments score high on alignment with key reform priorities, less than the proportion of commitments that score high on the degree of ambition within their specific policy domains. 3 Chart 6: Priority reform areas covered by new commitments 2 1 0 Argentina Brazil China* India Indonesia Mexico Russian Federation Saudi Arabia South Africa Turkey * No new commitments submitted. While the new commitments have medium-to-high alignment with priorities in the structural reform agenda for SSBG, several priority areas are not addressed by these commitments. Compared to the three priority areas identified earlier in the year for consideration in formulating the new reform commitments (Annex Table 1), the new commitments that countries have actually made in most cases cover only one of the identified priority areas (Chart 6). Only three of the G20 emerging economies have made new commitments spanning more than one of these priority areas. This indicates that important policy gaps remain. Specific reform priorities and policy gaps vary across countries. Product and labor market reforms are among the most commonly unaddressed priority areas in the new reform commitments. Policy gaps also exist in other priority areas, including tax reform and human capital development. While infrastructure and social protection have received more attention, further action is needed in some countries to address infrastructure gaps and improve the quality and sustainability of public services. Overall, looking ahead, there is much room to improve the alignment of structural reform efforts with priorities for SSBG. 11
Annex Table 1. Priority areas for structural reform for Strong, Sustainable, and Balanced Growth Argentina Spur investment and productivity growth. Improve private investment climate, remove regulatory barriers (such as import restrictions on essential inputs), and enhance competition. Alleviate tax burden on SMEs, especially reforming regressive taxes. Improve policy framework for infrastructure investment. Improve agricultural productivity and diversify exports. Implement further product market reforms to enhance the sector s competitiveness, improve regional infrastructure to support lagging regions, and diversify the product base through enhanced support to technology and innovation. Improve quality of public services. Improve quality of education and address low health insurance coverage in the poorest regions while ensuring the fiscal sustainability of the programs. Improve service delivery at subnational levels, including reviewing the tax sharing system. Brazil Expand and improve the quality of infrastructure. Increase infrastructure investment to address continuing deficiencies, supported by prudent fiscal management (including rationalization of the tax system), improved policy framework to foster private participation, and further development of long-term capital market. Improve quality of human capital. Expand crèche coverage to poor households, improve basic education by raising teacher quality, expand higher education with reforms to raise quality of public universities, and expand technical and vocational training through PRONATEC partnerships with the existing system (the S system) and states. Extend progress in social inclusion. Build on gains in reducing poverty and improving equity by continuing to strengthen programs for productive inclusion of the poor and the disadvantaged in the economy and assuring their sustainability. China Strengthen the foundations for a market-based economy. Redefine the role of government, restructure SOEs, and undertake further regulatory reforms to improve environment for private activity and boost competition in industry and finance. Deepen fiscal reforms. Strengthen revenue mobilization to meet rising demands, reallocate spending toward social and environmental objectives, and align revenue and expenditure assignments at different levels of government. Deepen reforms to lay a solid foundation for urbanization. Put in place a modern legal, institutional and governance framework to achieve a more efficient and equitable market-based allocation of land. Further labor market reforms, including reform of the hukou system. India Improve infrastructure and private investment climate. Implement regulatory and institutional reforms in the power sector, reform labor laws, and improve access to finance and land. Manage rural/urban dynamics. Combine policies to boost agricultural productivity with policies to reap benefits of agglomeration through urban development, including strengthening institutional and financial capacities of urban administrations, with particular attention to secondary cities. Promote inclusive human development. Improve access to education for underprivileged children and expand opportunities in higher education for all youth, with a focus on learning outcomes. Improve accountability in health service delivery, regulation of private providers, and coverage of health insurance among the disadvantaged. Indonesia Reallocate fuel subsidies to infrastructure projects (while compensating the poor), strengthen institutional framework for project preparation and implementation and PPPs, and enhance the capacity of the National Land Agency. Reduce poverty and vulnerability. Further strengthen programs to expand economic opportunities for the poor and safety nets to prevent vulnerable households from falling back into poverty, supported by improved targeting systems. Upgrade skills. Reform the skill development system, including expanding and improving tertiary education and vocational and technical training, and emphasizing quality at all levels. 12
Mexico Implement a thorough tax reform with a view to promoting efficiency, revenue collection, equity and ultimately growth. Move forward with energy sector reform that promotes expansion of energy production together with economic efficiency and environmental sustainability. Further investment climate reforms, including regulatory reform to promote competition (at national and subnational levels), administrative reform to cut red tape, and simplification of judicial processes for contract enforcement. Russian Federation Improve labor productivity. Address the rising share of less-formal employment and large productivity gaps by complementing labor market reforms with broader investment climate reforms (business regulation, access to finance) and following through on commitments relating to the WTO accession and envisioned OECD accession. Implement tax and expenditure reforms. Reform tax code and improve tax administration. Give priority to improving SME tax regime. Improve budget transparency and expenditure management. Reform inter-governmental fiscal relations. Reduce the state s footprint. Develop a detailed plan for privatization. Promote wider use of PPPs (building on the Pulkovo example). Saudi Arabia Implement labor market reforms, with a view especially to improve the employment of Saudi nationals and youth, including reform of the wage structure and strengthening of training and employment services. Implement education reforms, building on progress in improving access to education and emphasizing measures to raise quality, including through improvement of teacher skills and other aspects of the performance of educational institutions. Improve efficiency in energy consumption through price reform as well as non-price measures such as changes in building codes and appliance standards, improvement of public transport infrastructure, and development of solar energy and gas options. South Africa Enhance factor market competition. Strengthen competition policies to reduce concentration in industry and finance. Reduce labor market rigidities, including reform of the system of collective bargaining. Address infrastructure gaps. Improve the policy and regulatory framework for PPPs. Strengthen Eskom s financial and commercial performance, tap the potential for regional power, and improve service quality and O&M. Increase investment in water in a sustainable manner. Clarify cities mandates in urban infrastructure. Improve public service delivery. Increase emphasis on education quality (stronger school accountability coupled with enhanced autonomy, merit-based teacher rewards, better measurement and sharing of student and school performance). Carefully manage phased rollout of NHI, with a clear eye on fiscal and financial implications. Turkey Deepen reforms aimed at improving competitiveness and labor productivity, with a focus on improving business environment. Promote financial intermediation, including by enhancing enterprise governance; improve labor market flexibility and worker protection; and further reform the business regulatory framework. Pursue an inclusive strategy to develop human capital. Improve learning outcomes by raising teacher quality and strengthening systems for education financing and quality. Consolidate reforms to build an integrated social assistance system that protects the poor and helps activate in particular women and youth into employment. Further energy sector reform. Promote energy efficiency and renewable energy; implement energy pricing reform and in the medium term develop a mechanism for pricing GHG emissions; implement the new Electricity Market Law; and amend the Natural Gas Market Law, develop the natural gas market and restructure BOTAŞ. 13