OECD shows how to fight inequality and boost growth at the same time
Join the dots and get a fright
If your sovereign debt was soaring and you were locked into a costly war, what would you do if, for various reasons, default and surrender had to be excluded from the policy package? Raise taxes and cut public services? But imagine there are practically no public services anyway and you’ve got as much as you can expect from taxes. Well, you could invent a temporary tax to be applied until things get better.
That’s what British prime minister William Pitt did in 1798 when he announced certain “duties on income” to be gathered starting in 1799 to finance the war against Napoleon, inspired perhaps by the eisphora, a temporary tax on capital to finance wars used by Athens and other Greek cities from around 430 BCE on.
Income tax, as it came to be known, was abolished briefly during a lull in the fighting, and again following Napoleon’s final defeat at Waterloo, when Parliament decided that all documents connected with it should be collected, cut into pieces and pulped, although duplicates had already been sent to the King’s Remembrancer. (By the way, I got these details from what must be one of the most unlikely celebration sites on the web: Her Majesty’s Revenue & Customs Bicentenary of Income Tax page.)
The tax was soon back, joining the excise duties and other taxes that still form the basis of government income. What should this money be used for? The day to day running of the country obviously, but new OECD research as part of the Going for Growth programme argues that “countries should fight rising inequality with policies that simultaneously curb the income gap between rich and poor while boosting economic growth.”
The World Economic Forum is worried about inequality too. Its annual survey of global risks warns about economic imbalances and social inequality, with respondents afraid that “further economic shocks and social upheaval could roll back the progress globalization has brought”.
The OECD policy mix focuses on tax, labour markets and education. The reduction or elimination of “welfare for the well-off” – tax breaks that primarily benefit the rich would create space for growth-friendly reductions in taxes for all taxpayers.
Reducing the gap in employment protection between temporary workers and those on permanent contracts would reduce the average 25% wage differential between these two types of employees while boosting employment and growth. Provision of more affordable child care would similarly improve labour force participation rates and incomes for women.
Improving educational outcomes, particularly for immigrants and socio-economically disadvantaged populations, would have long-term impacts on their employment opportunities, incomes and inequality.
The OECD report also points out that some reforms imply tradeoffs, for instance shifting taxes from labour to consumption might improve incentives to work, save and invest, but would raise inequality.
Useful links
Going for Growth will be released in March. In the meantime, you can download these:
Under shock: How to spread macroeconomic risks more fairly
Reducing income inequality while boosting economic growth
Less income inequality and more growth – Are they compatible?
The government inspectors
You'll pay sooner or later
Around a third of global assets are held offshore beyond the reach of effective taxation according to the Tax Justice Network. The TJN also estimates that private individuals hide $11.5 trillion in tax havens, depriving the rest of us of $250 billion a year in tax revenues.
You could do a lot with an extra quarter of a trillion a year – finance the UN’s Millennium Development goals or transform the world’s energy system to combat climate change for instance. But in the meantime, the response to the crisis and sovereign debt is increased taxes and reduced public services.
So how can we get the tax cheats to pay up? In Buenos Aires this week, tax commissioners from 45 countries plus representatives of big business and other organisations met to discuss “compliance” at the OECD Forum on Tax Administration. The Forum, created in 2002, brings together the people responsible for taxes at national level to “identify, discuss and influence relevant global trends and develop new ideas to enhance tax administration around the world”.
What have they done so far? Data from 20 countries that publish such information show that an extra $14 billion in taxes has been collected in the past two years. It’s a good start, but obviously a lot more has to be done. They’re dealing with highly mobile money that can be switched from place to place as havens become less safe and at the same time, tax administrations themselves are facing the same resource constraints as other parts of government, constraints the people they’re targeting don’t have to worry about.
The solution according to the FTA is to “work smarter” to optimise international cooperation, administration, compliance, legislation and service delivery. For an outsider like me, one of the most intriguing aspects of this is to be found in a list of publications with titles like “Guidance on Test Procedures for Tax Audit Assurance” and “Tax Reference Model – Application Software Solutions to Support Revenue Administration”. I discovered that the FTA is studying the use of social media by tax authorities.
In the US for example, the IRS has launched IRS2Go, a mobile app that lets users track the status of a refund, subscribe to e-mail updates, follow them on Twitter, and click to call a help line. Apart from providing services to the individual taxpayer, social media could also become important in another main aspect of FTA work – publicizing successes in getting tax avoiders to pay up or tax havens to close down so that those who once felt safe hiding their money feel more and more exposed to public scrutiny and public anger.
And imagine the kudos of having the tax inspector as your friend on Facebook.
Useful links
OECD Centre for Tax Policy and Administration
Tweeting on your taxes The OECD Observer looks at the social media aspect
The year from AAA to ZZZ: It’s the Insights quiz!
This was our most popular photo in 2011 and in 2010
We’re glad you read the Insights blog, but if you’re a true follower you learn it off by heart, so this is your chance to win a blogtastic prize in our 2011 annual quiz(1)
1st prize: A year’s supply of punctuation marks. Imagine how much more interesting your prose will be!!! Want to add a note of incredulity to your questions??? Or prepare your reader to die… laughing???!!!
2nd prize: Paid internship(2)
Here goes!!! Good… luck!!!
A is for A. Triple A is to debt what the triple Axel is to ice-skating. Who was worried about the euro area falling on it’s A (Add your own Anatomical Allegory) due to sovereign default?
A. China’s finance minister.
B. Former Lehman’s boss Richard S. Fuld.
C. The OECD’s Chief Economist.
D. European Central Bank President Mario Draghi.
B is for Bullets. Magic ones or silver ones, we’re obsessed by them at the OECD and are afraid people think they really exist. This can give a plaintively murderous tone to our teachings, for instance, when we say there’s no magic bullet to solve unemployment, it sounds like we wish governments would shoot the jobless. But we’re not the only ones in denial. Who else says there’s no magic (or silver) bullet?
A. The Lone Ranger
B. The Economist
C. The IMF
D. The National Rifle Association
C is for conflict. No conflict-affected fragile state has achieved any of the UN’s Millennium Development goals, nor is any of them likely to do so by the 2015 target date. What should their priorities be instead according to the g7+ group of developing countries and their partners?
A. Roadbuilding and telecommunications.
B. Trade and foreign investment.
C. Peacebuilding and statebuilding.
D. Fair elections and a free press.
D is for Diarrhoea. Outbreaks are usually due to various well-known causes, but certain practices can make the problem worse, including:
A. Skinning snakes.
B. Killing leopards
C. Riding elephants.
D. Photographing monkeys.
E is for Epistemology. Knowledge is power, as Francis Bacon never actually said, although Thomas Hobbes did. Whoever said it, becoming an epistemic influence is obviously a smart move, but who managed this recently?
A. The KGB.
B. The BBC.
C. The OECD.
D. Wikipedia.
F is for Forecasts. “With the underlying conditions sound, we believe that the recession in general business will be checked shortly and that improvement will set in during the spring.” This forecast in the Harvard Economic Society’s January 18 weekly letter was referring to:
A. The 1930s Depression.
B. The subprime crisis.
C. The 1997 Asian financial crisis
D. The end of the dot.com boom.
G is for Twenty. The OECD is closely involved in shaping the G20 agenda and in carrying out its work. One of our lesser-known proposals to tackle a global challenge (as we call problems) is AMIS, or to give it its full name:
A. Agreement on Multilateral Investment Statistics.
B. Agricultural Market Information System.
C. Analogue Mobile Information Sequencing.
D. Ammunition Mainly Including Silver.
H is for Happiness. Some people claim that childhood was the happiest time of their life, making you wonder what the rest of it was like if potty training and going to school was as good as it got. The happiest time is happier in some places than others though, and a report on 21 developed countries suggested that the most miserable kids are to be found in:
A. Japan.
B. France.
C. The UK.
D. The US.
I is for Investment. It’s also for indoors and inefficient. Indoor air pollution from inefficient biofuel-burning stoves will soon cause more premature deaths in developing countries than HIV/AIDS, tuberculosis or malaria. What percentage of global energy investments would eradicate the problem?
A. 9%
B. 1%
C. 3%
D. 13%
J is for Joybubbles. Joe Engressia, who later changed his name to Joybubbles for obvious reasons, was the world’s first:
A. Blind photographer.
B. Hacker.
C. Radar operator.
D. Professional baseball umpire.
K is for kissing. Most of us have tried it, and many people enjoy it, but according to one best-selling guide, unless it can’t be avoided, you should never kiss:
A. Your boss.
B. Your cat.
C. Your children.
D. Yourself.
L is for Luddites. The machine-wrecking Luddites were not the ignorant technophobes the name has come to be associated with, and they even aroused the sympathy of one the 19th century’s best-known authors. Who? (Bonus point for giving the name of the book)
A. Emile Zola.
B. Herman Melville.
C. Charlotte Brontë.
D. Charles Dickens.
M is for Melancholy. According to our data, one in five workers in OECD countries suffers from depression or another mental illness, possibly linked to work-related stress. According to an earlier study, which of these does not provoke melancholy?
A. Exercise.
B. Study.
C. Poverty.
D. Cabbage.
N is for Nobel. Did you know that Winston Churchill got the Nobel Prize for literature and that they gave the 2011 prize for medicine to a dead man? OK smartypants, what did economist Elinor Ostrom get it for?
A. Her work on resources management.
B. Her work on financial market volatility.
C. Her work on game theory.
D. Her work on asymmetric information.
O is for the OECD. Of course. We are famous for many things (aren’t we?) but some of our greatest contributions to human progress are unknown to the general public. Which of these do we set standards for?
A. Tax treaties.
B. Cucumbers.
C. Nuclear safety.
D. Testing cosmetics.
P is for Protection. Alexander Graham Bell’s telephone wasn’t protected by a Swedish patent, so Ericsson reverse engineered it and started the phone business we know today. Philips did something similar with the incandescent light bulb in the Netherlands before going on to invent and invest in cassette tapes and CDs. Examples like this fuel the debate about much intellectual property protection there should be, but quality is just as important as quantity when it comes to patents. Over the past 20 years, patent quality has:
A. Declined by 20%.
B. Increased by 20%.
C. Remained stable.
D. Stopped being measured.
Q is for Quality. The OECD has developed a Better Life Index to allow citizens to create their own definition of quality of life. It combines a number of different topics, but does not include:
A. Safety.
B. Mobility.
C. Health.
D Housing.
R is for Ricardo. The 19th century economist David Ricardo was responsible for developing the theory of comparative advantage. This has been described as a concept that is:
A. Calculable and counterintuitive.
B. True and non-trivial.
C. False but practical.
D. Objective though indefinable.
S is for Sex. We share our 50th anniversary with Lady Chatterley’s Lover. The jury in the court case for obscenity against the book decided that it was, all things considered:
A. A fair representation of social relations at the time of writing.
B. A useful if unorthodox introduction to gardening.
C. Suitable reading for your wife and servants.
D. Written by a man with a soul so black he would obscure even the darkness of hell.
T is for Titles. Thanks to sophisticated spying software we got cheap when the News of the World closed, we can track how you actually use this site and adjust content to meet your (pleasingly low) expectations. That’s why we’re thinking of just writing titles next year. Do you know which of these ones we didn’t use in 2011?
A. Rats rejoice as India goes mad.
B. More power to your grannies.
C. Dracula, Prince of shopping.
D. Bugs, drugs and death.
U is for Unfair. The drive for alternative energies is accelerating, but not everybody is pleased. A prominent economist publicised the case of one group complaining about unfair competition from solar energy. Which group?
A. Candlemakers.
B. Shale gas operators.
C. Windfarmers.
D. Biofuel crop growers.
V is for Violence. Over 100 million people died in wars during the 20th century. In the 21st century, even more could be killed by something else according to the WHO. What is it?
A. Famine.
B. Road traffic.
C. HIV/AIDS.
D. Antibiotic resistance.
W is for the Weekend. According to scientists (as they say in the papers) analysis of 500 million tweets shows that people are happier at the weekend. The study also claims that people:
A. Tend to get up later at the weekend.
B. Often stay out late on Friday night.
C. Go shopping more at the weekend.
D. Wish the weekend was longer.
X is for the Higgs boson field, better known by its nickname, h(x). Makes a change from the xylophone, doesn’t it? But that’s not the question. The question is: the photo of a simulated Higgs event that illustrates the article about the Higgs boson has a caption quoting James Joyce’s Finnegans Wake because:
A. Joyce invented the word “quark”.
B. The Finnegan-Joyce manifold describes the topology of the Higgs boson.
C. We didn’t know it was Joyce and just liked the sound of it.
D. Joyce’s literary executor worked at the OECD.
Y is for Youth. Globally, things are getting better for children across a whole range of indicators according to Unicef but once they get a bit older, the benefits may be wiped out. In Brazil for instance, various programmes saved the lives of 26,000 babies aged 1 year or less. Over the same period, 81,000 15-19 year-olds:
A. Died of drug overdoses.
B. Were murdered.
C. Were kidnapped.
D. Suffered fatal injuries at work.
Z is for ZZZ. We’re trying to avoid zebras as well as xylophones, so this one’s about sleep. Or sleep-deprivation to be more exact. Who complains about this, as well as being “isolated” and “troubled”?
A. European central bankers.
B. Chinese exchange students.
C. African peacekeepers.
D. American truckers.
Tiebreaker In case more than one person enters the competition we may need a tiebreaker, so here it is: Which of the above questions does not refer to a post published in 2011?
A. A
B. B
C. C.
D. D
E. Etc
Click here to see the answers and to calculate your score
(1) You love phone contracts, don’t you?
(2) You pay.
Listening, learning … and getting creative
The Second OECD youth video competition has just been launched, with education and skills as the theme. We asked the six youth co-organisers of the 2012 edition for their thoughts on the importance of education, why they think young people should speak up, and how they got involved in this competition.
Little did we know that when we were creating three minute videos for the OECD’s first global youth video competition early in 2011 that a few months later we would actually be co-organising the next competition! In May 2011, we were invited to Paris as winners of that first competition and our worlds suddenly became a whole lot bigger. For three exciting days at the OECD Forum we had a unique opportunity to observe and even participate in a global convergence of innovative ideas and forward-looking approaches to addressing the major social and economic challenges of our time, including climate change, poverty, gender inequality, underdevelopment, financial instability and unemployment.
What particularly struck us was the conviction of so many people at the OECD when they spoke about the importance of listening to young people and what we have to say about important issues. Their view is that it is not only valuable, but essential, for the next generation to get involved today in finding solutions to major global challenges. So when the OECD asked us to team-up with them to launch a second global youth video competition, we jumped at the chance.
As a group of young people, some of whom have recently completed third level education, we believe that many of the problems facing the world today are born of ignorance, intolerance and lack of education. We know that issues cannot be solved by taking a “band-aid approach”, but that solutions should always address the root cause of any problem. For us, there is no better long-term solution to a problem than education.
Education is a powerful economic indicator in any country: social progress and economic development are closely linked to academic ability and competitive skills among the labour force. Equally, a comprehensive and well-rounded education creates smart, compassionate and open-minded individuals – and consequently societies that are much better equipped to tackle environmental, social and financial issues, not only locally, but globally.
Young people have an important role to play: we must continue to remind decision-makers and political leaders that the problems they are facing today are the same problems we will have to tackle tomorrow – unless we work together to achieve equitable and sustainable solutions, not just for today’s generation but for future generations.
We are delighted that, after a public vote, education has been chosen as the theme of the 2012 youth video competition and we are very excited about seeing creative and innovative ideas from other young people around the world that will hopefully challenge our current ways of thinking about this topic. We also look forward to meeting the competition winners in Paris next May, so we can share with each other the incredible journey we have embarked on since stepping forward to express our ideas to the world.
Yours,
Alina, Desiree, Hew, Javier, Stephanie and Vidhya
Work life imbalance
Sigh Ho, Sigh Ho, it's off to work we go...
If you’re fretting, chafing, sighing, grieving, complaining, finding faults, repining, grudging, weeping, vexing, disquieted in mind, with restless, unquiet thoughts, then you’ve probably been eating cabbage, which as you should know by now, sends black vapours up into the brain, provoking melancholy. It’s not the only cause, of course, and you should also avoid sorrow, fear, shame, disgrace and any other emotion as well as too much exercise, too much study, poverty, scoffs, pleasures immoderate and werewolves.
You’ll find all this and more in the hundreds of pages of Robert Burton’s 1621 masterpiece Anatomy of Melancholy, where he describes the causes and symptoms of psychiatric disorders and discusses possible cures, ranging from herbal teas to drilling holes in the head. What he doesn’t mention is work, except to say that hardworking servants have no time for such ladylike maladies.
That’s where the OECD steps in. Sick on the Job? Myths and Realities about Mental Health at Work says that on average, one in five workers in OECD countries suffers from a mental illness, such as depression or anxiety. From a third to a half of all new disability benefit claims are for mental health reasons, and that figure rises to 70% for young adults. The report highlights the “considerable lack of awareness, non-disclosure and under-treatment among adolescents and young adults, with the gap before the first treatment of a mental illness on average being about 12 years”.
As a result, many young people struggle to get through school, and once they leave they are unfit for work and go straight onto disability benefit. The human cost is appalling, and the economic cost is considerable too – around 3% to 4% of the EU’s GDP according to the International Labour Organisation.
As the subtitle implies, Sick on the Job tackles some of the myths about mental ill-health, and notably the idea that prevalence is increasing. It’s not, but there is much more public awareness of mental disorders, less stigma, and better assessment tools. Unfortunately, at the same time, that’s also meant that more people suffering from mental disorders have been excluded from work, perhaps because many jobs now require social skills or cognitive competencies that workers with mental health problems don’t have.
The problem could get worse though, as working conditions grow harsher and job insecurity grows. The share of workers exposed to work-related stress, or job strain, has increased in the past decade all across the OECD. And in the current economic climate, more and more people are worried about their job security (a rising fear among the employed according to this poll).
What can be done to improve the well-being of people suffering from mental disorders? The OECD report argues for a “three-fold policy shift will be required thereby giving more attention to common mental disorders and also sub-threshold conditions; disorders concerning the employed as well as the unemployed; and preventing instead of reacting to problems””
How about Burton? Apart from cutting down on the cabbage, what did he have to propose? In OECD jargon, we’d say a holistic approach to increasing overall well-being accompanied by timely, targeted interventions aimed at the most vulnerable.
But let’s hear him argue for a welfare state, pensions, social security and justice in his own, magnificent, words: “If they be impotent, lame, blind, and single, they shall be sufficiently maintained in several hospitals, built for that purpose; if married and infirm, past work, or by inevitable loss, or some such like misfortune cast behind, by distribution of corn, house-rent free, annual pensions or money, they shall be relieved, and highly rewarded for their good service they have formerly done; if able, they shall be enforced to work. For I see no reason why an epicure or idle drone, a rich glutton, a usurer… should live at ease, and do nothing, when a poor labourer… that hath spent his time in continual labour…, and without whom we cannot live, shall be left in his old age to beg or starve, and lead a miserable life worse than a jument.”
Cheers you up, doesn’t it?
Useful links
The OECD “Mental Health and Work Project”
Greening the global energy system
Today’s post is from Dana Krechowicz, Research Associate at Sustainable Prosperity, Ottawa, Canada
Energy is the foundation of our modern lives, providing us with mobility, comfort and convenience, and powering the economy. Although the carbon-intensity of energy production varies from country to country, the current energy system is a significant contributor to CO2 emissions (accounting for 84% of global global greenhouse gas [GHG] emissions). It’s clear that a fundamental transformation is required in the way we produce, deliver and consume energy to reduce its carbon-intensity. But given the energy sector’s size, complexity, path dependency and reliance on long-lived assets, how do we get there? This question is at the heart of the climate change dilemma.
Following the release of the 2011 World Energy Outlook, the IEA and OECD have released a joint report Green Growth Studies: Energy . This study draws on the IEA’s work on global energy trends and predictions to outline the necessary policy interventions to redirect the global energy system onto a greener path.
A comprehensive green growth strategy for the energy sector will take into account the inter-relationships between economic sectors, transport systems, land-use patterns, social welfare and environmental integrity. A range of mutually reinforcing policies is required, which address market failures and barriers, and create the enabling policy framework for large-scale private sector investment.
Governments play an important role in fostering innovation and supporting the scaling up of deployment of existing and emerging technologies in the energy sector, since many low-carbon technologies currently are more costly than fossil fuels, although their costs are declining. In fact, to achieve a 50% reduction in CO2 emissions, government funding for research and development in low-carbon technology needs to be two to five times higher than current levels.
Government support for specific technologies needs to be tailored according to the stage of technology development, which can be categorized as promising, technically proven, close to competitive and competitive. On one end of the scale, for emerging technologies, governments can provide financial support for research and large-scale demonstration; at the other end, more mature and competitive technologies need governments to help tackle market, informational and other barriers to large-scale deployment.
Broadly, the key policies that are required to set the framework for the transformation of the energy sector include:
- Set enabling conditions to make markets work.
- Eliminate fossil fuel subsidies.
- Provide price signals for environmental externalities (e.g. carbon).
- Radically improve energy efficiency.
- Foster innovation and green technology policy.
The energy revolution that is needed can be characterized by improved energy efficiency, widespread introduction of carbon capture and storage, increased deployment of renewable energy, continued fuel switching, and support for new and enabling technologies.
A large-scale transformation of the global energy sector is possible, though it will require significant investment. Global emissions could be halved by 2050, using existing and emerging technologies, with additional new investment of $46 trillion. It is vital for governments to create the enabling policy framework to catalyze private sector investment in the transition to a low-carbon energy sector. It is cheaper in the long-run to act now, as every dollar of energy sector investment not spent before 2020 will require an additional $4.3 to be spent after 2020 to compensate for increased GHG emissions by building zero-carbon plants and infrastructure by 2035.
Without decisive action, existing and emerging low-carbon technologies won’t be deployed on the scale necessary to make large reductions in GHG emissions, due to the entrenchment of fossil fuels.
Investments in a new energy strategy would however pay dividends in areas other than cliumate too. The report finds that the transition to a low-carbon energy system is likely to have a positive impact on employment in the energy sector because renewables tend to be more labour-intensive that fossil fuel-based energy. Increased deployment of solar phtovoltaics would yield the largest number of jobs, with strong growth also expected in the energy efficiency, geothermal and solar thermal sectors.
Useful links
Busan: Yes we could
We’ll start with a close-up of a woman on her knees. She seems to be scrubbing some tiles. We track back and see that in fact she’s scrubbing the tyre tracks off a forecourt. Back a bit more and we see that she and her colleagues are in front of a huge conference centre. It’s covered with banners in Korean and English announcing the Fourth High-Level Forum on Aid Effectiveness, HLF4. There’s a metaphor there somewhere, and it’s called Busan, the host city and the world’s fifth largest port.
Busan is like a life-sized lesson for participants in this conference. As the Korean president Lee Myung-bak reminded delegates in his speech to the conference, when he was a child, this was one of the poorest countries in the world, and Busan was used to import food to stop people starving after the civil war. In From Poverty to Power, Oxfam’s Duncan Green makes this point too, recalling that 50 years ago Korea’s main export was wigs made from human hair.
Aid played a part in this, and it’s worth looking at why Korea succeed in moving from being a recipient to a member of the OECD Development Assistance Committee, the donor group that oversees Official Development Assistance (ODA).
The first lesson is that ODA has to be stable and reflect a long-term commitment. Korea could count on the US and Japan, and knew from one year to the next what funding to expect. Volatility makes programme management harder, or even impossible. I’ve heard stories from the field of health, education, and other projects that were started, were going well and then had to be stopped because promised funding suddenly dried up. The OECD says that the value of aid is reduced by 15% to 20% when it is unpredictable and volatile.
For the outsider, one of the more opaque terms of the “aid community’s” particularly opaque jargon is “ownership”. What it means is that countries receiving aid take charge of the process. Korea didn’t always agree with its partners, but the results show that it knew best what strategy corresponded to its needs and resources. It wanted non-military aid rather than the guns, tanks and planes it was being offered, and it insisted on focusing on large enterprises rather than the small and medium-sized businesses foreign development experts told it were the key to success. Samsung and Sons would no doubt have been a great little shop for the latest Japanese and American gadgets.
However, to “own” the development process a country needs to develop a whole range of skills and institutions. For instance, if it’s going to export, it needs lawyers who understand international trade rules and port managers who can get the goods onto the ships on time. This is what’s meant by “capacity building”. Countries can’t be expected to acquire all these capacities on their own, but they shouldn’t depend on outsiders either. While over 1500 foreign experts were sent to Korea between 1962 and 1971, over 5 times as many Koreans received training abroad.
Another thing about aid programmes is that the best ones become useless because they’re no longer needed. In the 1950s and 1960s, practically all of Korea’s foreign funding came from grants, but by the mid-70s, grants only represented 11% of funds, the rest being loans. The fact that Korea respected repayment conditions reassured private finance and encouraged foreign direct investment in the country.
Korea also proves that it’s possible to recover from even the most desperate situation. At the end of the 1950s this was a mainly agricultural country still suffering from a war that had killed or injured over 2.5 million civilians. If conference delegates want to see a success story, they just have to look around them. And if they want a reminder that the fruits of economic success aren’t always shared equally, they can look at those women scrubbing the ground they walk on.
Useful links
OECD Economic Outlook: Global economy weakening
In today’s post, OECD Chief Economist and Deputy Secretary-General Pier Carlo Padoan talks about the Economic Outlook, released today
In your baseline scenario, GDP growth across the OECD countries is projected to slow from 1.9% this year to 1.6% in 2012, before recovering to 2.3% in 2013. In some economies, especially the euro area, a mild recession is projected in the near term. Why are you so pessimistic?
The global economy has deteriorated significantly since our previous Economic Outlook. Advanced economies are slowing and the euro area appears to be in a mild recession. Concerns about sovereign debt sustainability in the European monetary union are becoming increasingly widespread. Recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption if not addressed. Unemployment remains very high in many OECD economies and, ominously, long-term unemployment is becoming increasingly common.
Emerging economies are still growing at a healthy pace, but their growth rates are also moderating. In these countries falls in commodity prices and slower global growth have started to mitigate inflationary pressures. More recently, international trade growth has weakened significantly. Contrary to what was expected earlier this year, the global economy is not out of the woods.
What factors underpin this assessment?
Deleveraging in the financial and government sectors remain with us. Likewise, imbalances within the euro area, which reflect deep-seated fiscal, financial and structural problems, have not been adequately resolved. Above all, confidence has dropped sharply as scepticism has grown that euro area policy makers can deal effectively with the key challenges they face. Serious downside risks remain in the euro area, linked to the possibility of a sovereign default and its cross-border effects on creditors, and loss of confidence in sovereign debt markets and the monetary union itself.
Another serious downside risk is that no action will be agreed upon to counter the pre-programmed fiscal tightening in the United States, which could tip the economy into a recession that monetary policy can do little to counter.
If this is the “baseline” scenario, are the others?
Alternative scenarios are possible, and may be even more likely than the baseline. A downside scenario would be characterised by materialisation of negative risks and the absence of adequate policy action to deal with them. An upside scenario could arise if policy action were successful in boosting confidence and no significant negative events occurred.
In the downside scenario, the implications of a major negative event in the euro area depend on the channels at work and their virulence. The results could range from relatively benign to highly devastating outcomes. A large negative event would, however, most likely send the OECD area as a whole into recession, with marked declines in activity in the United States and Japan, and prolong and deepen the recession in the euro area.
Unemployment would rise still further. The emerging market economies would not be immune, with global trade volumes falling strongly, and the value of their international asset holdings being hit by weaker financial asset prices.
What would be required for an upside scenario to materialise?
A credible commitment by euro area governments that contagion would be blocked, backed by clearly adequate resources. To eliminate contagion risks, banks will have to be well capitalised. Decisive policies and the appropriate institutional responses will have to be put in place to ensure smooth financing at reasonable interest rates for sovereigns. This calls for rapid, credible and substantial increases in the capacity of the European Financial Stability Facility together with, or including, greater use of the European Central Bank’s balance sheet. Such forceful policy action, complemented by appropriate governance reform to offset moral hazard, could result in a significant boost to growth in the euro area and the global economy.
An upside scenario also requires substantial and credible commitment at the country level, in both advanced and emerging market economies, to pursue a sustainable structural adjustment to raise long-term growth rates and promote global rebalancing. In Europe, such policies are also needed to make progress in resolving the underlying structural imbalances that lie at the heart of the euro area crisis.
Deep structural reforms will be instrumental in strengthening the adjustment mechanisms in labour and product markets that, together with a robust repair of the financial system, are essential for the good functioning of the monetary union. By raising confidence, lowering uncertainty and removing impediments to economic activity, rapid implementation of such reforms could raise consumption, investment and employment.
If combined, stronger macroeconomic and structural policies might raise OECD output growth by as early as 2013. The largest benefits would be felt in the euro area, though these could take some time to emerge. Stronger activity and trade, and the consequent rise in asset values in the OECD economies, should boost activity in the emerging market economies as well.
What is your advice to policy makers?
In view of the great uncertainty policy makers now confront, they must be prepared to face the worst. The OECD Strategic Response identifies country-specific policy actions that need to be implemented if the downside scenario materialises. The financial sector must be stabilised and the social safety net protected; further monetary policy easing should be undertaken; and fiscal support should be provided where this is practical. At the same time, stronger fiscal frameworks should be adopted to reassure markets that the public finances can be brought under control.
The difference between the upside and the downside scenarios reflects the impact of credible, confidence building policy action. Such action, as we have seen, requires measures to be implemented at the euro area level as well as at the country level throughout the OECD, especially in the structural policy domain. In the case of a downside scenario, policy action would clearly be needed to avoid the worst outcomes. But then the question arises of why policy efforts are not taken to deliver the upside scenario even if the worst case does not materialise. Why, in other words, should we settle for less?
Useful links
Country summaries from the Economic Outlook
The Chief Economist’s presentation
Social cohesion: making it happen
Click to get the report from the OECD Online Bookshop
A famous Deng Xiaoping quote goes : “Let some people get rich first”. Yet, in Spring 2011, the Beijing city authorities banned all outdoor advertisement of luxury goods on the grounds that they might contribute to a “politically unhealthy environment”.
The trouble with growth is that inequalities tend to rise with it. Growth does not necessarily translate into better life satisfaction – far from it, as the experience of Thailand or Tunisia shows. What happens when the fruits of growth are not shared, when people feel that income inequalities are rising and food prices soaring? Well, that’s when the so-called “politically unhealthy environment” sets in.
Millions voiced their frustration during the Arab Spring. From Tahrir square to the streets of Tunis, a huge emerging middle class showed that it has a tremendous capacity to mobilize people. It demands governments that are open and transparent, as well as more and better services. How can governments answer these demands? How can they go about redistributing the fruits of growth?
A new policy agenda is needed: one that focuses not only on growth but also on openness, fairness and inclusion. Social cohesion needs to be at the centre of policy making. Failing this, we may (re)enter a vicious circle where inequalities create a sense of injustice, which in turn can lead to (mass) protest and sometimes violence. As a result, social peace and stability, as well as long-term growth, may be jeopardized.
How can governments foster social cohesion? Perspectives on Global Development: Social Cohesion in a Shifting World from the OECD Development Centre published today, answers this. With this latest report, the Development Centre again proves that it is engaged with the world we live in, whether discussing tax revenues or the merits of football as a factor of social cohesion: having a sense of community can make a difference. That, along with equality of opportunities is what social cohesion is all about.
The report first shows how the world has undergone a shift of historical significance over the past decade, with the centre of economic gravity moving towards the East and South. The figures speak for themselves: in 2000, OECD countries represented around 60% of global GDP but by 2010 this was down to 51%, and it will be only 43% by 2030. In fast-growing economies, per capita growth rate was more than double that of high-income OECD countries over the last decade.
It is precisely this shifting wealth that opens a window of opportunity for development and social cohesion. In fast-growing economies, fiscal revenues rose from 20% of GDP on average in 2000 to 27% in 2008. These countries now have the (fiscal) resources to finance social policies that can make the difference – or, can they?
This report argues that public policies can make a difference. OECD countries with initially high income inequalities manage to redistribute income through taxes and transfers. The challenge is to leave no one behind. A cohesive society reduces inequality between groups and ensures that all citizens – the poor, the middle-earners, and the rich – are socially included.
Over the last decade, hundreds of millions of people were lifted out of poverty. This report argues that the emerging middle class should not be ignored either. Today, nearly 1 billion out of the 2 billion people living on 10 to 100 dollars a day in the world – the global middle class – live in fast-growing countries. This number is projected to exceed 3 billion in 2030.
The emerging middle class is a critical economic and social actor because of its potential as an engine of growth, particularly in the largest developing countries such as China and India. Its contribution to social cohesion can be high, and its expectations are sharply rising. What is needed is a social contract between citizens and the state, which entails more and better services in exchange for paying taxes. This would foster a virtuous circle that boosts social cohesion as well as growth. Citizens are more willing to pay taxes in societies where they feel a sense of belonging. Fiscal policy is thus a good place to start.
As the report highlights, fiscal, social and employment policies should go hand in hand. With recent innovations in social protection, the poorest are covered by social assistance and the wealthy by either contribution-based or private alternatives. Yet, a considerable number of (informal) middle-class workers are stuck in the uncomfortable “missing middle” of coverage. More comprehensive social protection systems should protect all sections of the population.
Stronger labour market institutions are also needed. They should aim to create more “good” jobs and reduce the duality in labour markets – between standard and non-standard contracts or between formal and informal workers. This will be critical in reducing inequalities and fostering social cohesion.
A series of cross-cutting issues have to be addressed coherently as well, including education, gender equality, food policy, the integration of immigrants, and institutions.
As Albert Einstein once said, “Reality is merely an illusion, although a very persistent one”. Ignoring people’s desires and the reality in which they live is perilous. Technocratically good policies that do that just won’t work and giving space to dissenting voices is essential to the creation of a sustainable, socially cohesive society.
Social cohesion is a means for development as well as an end in itself. What if social cohesion were the 21st century’s holy grail? A holy grail that can only be attained with some long-term vision and commitment – and a smile. Failing that, there might be rough times ahead.
Useful links
Unsuitable for wives and servants?
Only one of us still goin' strong, Bobby Baby
Apart from the OECD and the Bobby Darin Dream Car, this year marks two other major anniversaries, both linked to books: the publication of the King James Bible in 1611 and DH Lawrence’s Lady Chatterley in 1961.
By the time you get to the end of this article, I hope to have thought of an OECD link for the KJB, but for the torrid tale of her ladyship and the hired help, there are a couple of possibilities, the first and most obvious being the Smoot-Hawley Tariff Act.
In 1930, this raised import duties on thousands of items coming into the US and is now widely condemned as having made the Great Depression worse, since America’s trading partners retaliated. President Hoover said that the Smoot-Hawley Act was “vicious, extortionate, and obnoxious”. Today of course, what you’d be more likely to get is something like: “While we share the concerns of Senators Smoot and Hawley, we feel more discussion is required on certain aspects of their proposed solution”.
That said, OECD Secretary-General Angel Gurría was less mealy-mouthed the other day at the OECD Global Forum on Trade when he talked about the “phantom of protectionism again showing its ugly face”. Smoot himself could actually be quite entertainingly odious. He opposed an amendment to his Act that would have stopped US customs from censoring “obscene” books using Lady Chatterley as an example, explaining that it had been written by a “man with a diseased mind and a soul so black that he would obscure even the darkness of hell”.
Lawrence’s book was published in 1928 in Italy, but the first unexpurgated version was not openly published in the UK until 1960, and in November it was prosecuted under the Obscene Publications Act (as it would be in similar trials in many other countries). The defence was based on the literary merits of the work, but the turning point for many people was when chief prosecutor Mervyn Griffith-Jones asked the jury if “they would let their wife or servants read” this kind of book. Apparently they would, and the book was published again without a problem early in 1961.
Griffith-Jones’ question was outrageous even by the standards of 50 years ago, so has much changed since? Attitudes to sex and sexism have certainly evolved, and women have improved their lives in some respects. According to the World Economic Forum’s Global Gender Gap Report 2010, the 134 countries covered, representing over 90% of the world’s population, have closed almost 96% of the gap regarding health between women and men and almost 93% of the gap regarding education. However, only 59% of the economic gap has been closed and the figure for political rights and representation is even worse, at only 18%. A report on the OECD Gender Initiative also talks about “persistent inequalities”.
How about your staff? For much of the 19th and part of the 20th century, domestic service was the main job in the urban areas of advanced economies. Manufacturing employment rose and fell, and now services are once again the main sector in OECD countries and elsewhere. The gap between masters and servants (or their modern equivalents) hasn’t closed much though, and in fact it’s been widening.
Movements like Occupy Wall Street in the US or the Indignados in Spain are one manifestation of the sentiment that even when there is progress, the rich get more than their fair share. To return to Gurría’s speech to the trade conference, he pointed out that thanks to NAFTA, his home country Mexico has annual exports “close to 300 billion dollars a year, becoming one of the top exporters in the world. But the benefits of NAFTA need to be better distributed.” According to this OECD report on the two decades before the crisis, “In a large majority of OECD countries, household incomes of the top 10% grew faster than those of the poorest 10%, leading to widening income inequality.”
So, it’s still dream cars for some and increasingly overcrowded buses for the rest.
How about that link between the King James Bible and the OECD I promised you? Well, the best I can do is that it the King James translation was actually done by a (seriously underfunded) committee and when we were preparing our booklet on the OECD 50th Anniversary, one of the invited contributions started: ”One of the most exciting things about the OECD is the impressive range of its committees”. I think some thrill-averse subeditor deleted that bit though, so if you can think of anything better, let us know.
Useful links
OECD work on income distribution and poverty
