'Pace of reform' crucial to growth, Lou tells meeting

Finance Minister Lou Jiwei speaks about structural reform on Friday in Shanghai. [Photo/Agencies]

Structural reform is the recipe for mending faltering global growth and receding productivity gain, officials at a G20 meeting said on Friday. But the sequencing of reform measures also matters to prevent unintended negative effects, they said.

"Whether the world can deliver strong, inclusive and sustainable growth really depends on the pace of structural reform," Finance Minister Lou Jiwei said. "The overall reform of the G20 has lagged behind expectations in recent years, so it is critical to strengthen the G20 reform agenda."

Lou's remarks are seen as a nuanced criticism that seven years after the global financial crisis, governments around the world still have been relying mainly on monetary easing to stimulate the economy at the expense of structural reform.

A report released by the Organization for Economic Cooperation and Development on Friday sounded an alarm by revealing that productivity gain has decelerated in advanced economies since 2000, and since recently in emerging economies. It warned that the pace of reform has steadily declined since 2011 and '12.

"At a time that called for accelerated reform, leadership and political guts, the reform actually slowed. It is deeply disturbing," said Angel Gurria, OECD secretary-general.

Christine Lagarde, International Monetary Fund chief, said in the "fragile environment", countries urgently need to take action not only to boost economic potential, but also to boost confidence about the recovery and near-term growth.

However, Lou warned that while structural reform is needed and can boost long-term growth potential, some reform would take time to see benefits and could have a deflationary effect in the short-term. So it is important, especially in times of slower economic growth, to "get the sequencing right" and implement reforms with faster visible effects and those that can boost aggregate demand.

Lou cited the example of cutting red tape, tax cuts that encouraged innovation, and greater internal migration - they are structural reform policies that in effect bolster demand.

Commenting on the fiscal deficit this year, Lou said the country's deficit ratio is set to rise, without giving details. Most economists expected China's ratio of fiscal deficit as a percentage of GDP to rise to above 3 percent from last year's 2.3 percent.

"Unlike other economies, China has room to expand the deficit," Lou said. But he warned against complacency, stressing that the room is not "infinite".

"You don't want to be pushed to the edge of a cliff and then start reform," he said.

Lagarde also noted the supply-side reform could risk tightening demand, which is why she called for "a mix of mutually reinforcing demand and supply policies".