Households and firms do not operate in a vacuum. Everyone has to play within a structure of rules, conventions, and their enforcement. Often these rules are not written down when they form part of the encompassing culture. Structural reforms adapt the ruleset to align it in a rational process with progress towards social goals. In most examples the progress is economic, but one can also target increased social welfare through education, rights, and obligations. This wide range of goals necessitates a variety of measures in means and ends. As a consequence, structural reforms need to be evaluated in their surrounding context and their merit depends on the analyst.
Common structural reforms
Most structural form aim to promote economic growth. At best, by higher efficiency and with increased economic welfare in mind. The usual way is allowing the market system to operate with reduced impediments, as to allocate resources where they have the highest valued impact. Where extractive institutions lay way, deregulation and a reduction in the state apparatus can enhance market functioning. In other cases, the assignment and better enforcement of property rights with increased state capacity can build a higher functioning civil society.
The inherent complexity of economic structure shapes the form of structural reforms and their success. However, many structural reforms share some common elements.
The triad of structural reforms
To help achieve the stated goals, structural reforms depend on macroeconomic stability. Without the ability to plan and act on a longer time horizon, short term requirements dominate any ability for long term reform.
The second step is to identify and ameliorate specific market failures. These can be a (natural) monopoly (or monopsony) or distortions leading to market power. Adding to the complexity, entrenched interests have to be overcome or worked with. For that, the state in question needs sufficient public support.
The third leg addresses this requirement through social and sectorial policies. Because the old system served a purpose, this purpose has to be still fulfilled another way.
For example, in parts of West Africa, share croppers paid the bigger share of their crops to their landlord. In fact, they paid above the rational market rate. But in return, they not only received the land usage rights, but also insurance in case of failing harvests. Any land reform seeking to provide a more equal land distribution would have to provide the insurance as well. However, insurance has a natural return to scale in that environment, which works against the stated goal of equality. A social reform that would give the farmers a land independent income —allow their women to work for a market income— could fulfill that insurance function and help with increased equality. Now the culture for some valid and historical reasons has a prejudice and the story goes on…
Conclusion
Structural reforms are hard work that require sufficient political capital and buy in from the population. The in-depth understanding needed and the longer time horizons for their pay-off however limit their effectiveness in societies without a strong civil culture. Autocrats do not have the incentives or time for reform.
The benefits of reform however are substantial. They can be even bigger than the value gained from integration into the global economy. Especially effective can be investment into human capital and build up of state capacity to lay the foundation for a strong civil society (which then can help with the next reform).
Further Readings
Structural Reforms, Growth and Inequality: an Overview of Theory, Measurement and Evidence
The macroeconomic effects of structural reforms: An empirical and model-based approach
