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Answering the Queen’s question: New approaches to economic challenges

12 October 2015
by Guest author

NAEC main messagesLord Robert Skidelsky, Emeritus Professor of Political Economy, University of Warwick, based on remarks made at the launch of the OECD Initiative on New Approaches to Economic Challenges (NAEC) on September 18th

“Why did no one see it coming?” asked Queen Elizabeth II of Great Britain, shortly after the world economy collapsed in 2008. In addressing the question to a group of economists, the Queen was spot on. As OECD Chief of Staff Gabriela Ramos said, “The crisis struck at the core of tightly held economic ideas, modules and policy”. I would go further. Crisis struck because of tightly held economic ideas, models and policies. The policy models used pre-2008 were wrong or seriously flawed; this contributed to the collapse, chiefly by omission. The OECD’s New Approaches to Economic Challenges (NAEC) report recognises this, arguing that the challenge is for economists to develop a better sense of how economies work; and for economic policy to develop policies which reflect this understanding.

To put the matter concretely, we have to determine under what combination of policies and institutions the macro economy will exhibit good performance, defined as cyclical stability, high employment, decent growth rates, stable prices, and human and planetary well-being. I would like to discuss questions which have occurred to me since 2008 along with some observations from the latest NAEC report, which gives much food for thought..

First, money and banking. Monetary policy is not mentioned by NAEC. Orthodox macro policy before the slump consisted of “one target, one instrument”. The target was the inflation rate; the instrument was interest rates. This was clearly inadequate. But we haven’t yet sorted out what should be the proper aims of monetary policy, what is properly monetary and what is properly fiscal, what is macro and what is micro. For example, bank regulation is micro, but it increasingly counts as part of macro policy. Perhaps we should call macro any micro event or institution which has macro effects.

The NAEC report calls for “Better integration of financial sector”. What does this mean? Does it mean “better able to serve the needs of the real economy”? If so, what reforms are needed? I’m disappointed that NAEC didn’t challenge the orthodox view that financial innovation is good. What it does is to make the economy more financial – that is, enable more and more people to earn their living making money out of money. We have to ask further questions on money, starting with whether the central bank can control the credit system to avoid boom and bust. And if not, what is the alternative? What has been the impact of quantitative easing (QE)? The Eurozone is gaily embarking on a massive monetary expansion, when most of the evidence suggests very limited effect for reasons Keynes would readily have recognised.

There is a cluster of issues around fiscal policy. The NAEC report talks of “promoting fiscal soundness and fostering the counter-cyclicality of macroeconomic policies”. What is meant by “fiscal soundness”? Does it mean balancing the budget? What is meant by balancing the budget? Which budget? All governments are embarked on deficit reduction. We are rarely told which deficit they are planning to reduce. Are there safe upper limits to public deficits and debts? What are the best ways of financing public borrowing -bonds, QE, Treasury bills-and under what circumstances?

Can the public accounts be differently presented to bring out the capital/current account distinction? Should governments have off-budget accounts, for instance a National Investment Bank?

Forecasts of inflation, output gaps, multipliers have been fairly consistently wrong ever since the crisis struck. The whole question of forecasting needs a serious look. Forecasts are highly model dependent. If the model is wrong the forecast will be wrong – or wronger than normal.

Jobs. What is Europe’s natural rate of unemployment? How is it estimated? If, as in Europe today we have zero inflation and unemployment at 10%, is this Europe’s natural rate? Or has the term lost any useful meaning?

Where are the jobs in the future to come from? The NAEC report doesn’t mention the impact of automation on jobs. It talks about need to enhance human skills and capital, which is simply conventional wisdom. Are humans destined to “race with machines” or “race against machines” to quote the question raised by Brynjolffson and McAfee.

Economic growth. NAEC wants both “economic growth and well-being” and “economic growth and environmental sustainability”, in other words all the good things in life simultaneously. And so say all of us. But we can’t have them. Continuation of the kind of growth we have had in the past will certainly be inimical to the well-being of humans, and of course of the planet. Growthmanship, and its associated consumerist culture, needs to be challenged much more vigorously.

Distribution and inequality. NAEC writes of “Increasing evidence that large income inequality undermines growth and well-being, by reducing investment in skills by low-income households”. It says that taxation systems need to be reformed to ensure they are “progressive enough”. But what is progressive enough? And what changes in politics will be needed to bring about more progressivity to offset the rise in inequality? Where is the political support to come from?

The woeful state of economics. NAEC says disappointingly little about this. It says economics should draw insight from sociology, psychology, geography, and history. I completely agree, except that philosophy is omitted and history put last. A reading of Aristotle would be a sound corrective to all those who place their faith in financial innovation and consumerism. A knowledge of history would correct the bias of economics to a priori theorising beautifully expressed by the 19th century French economist Jean-Baptiste Say: “What useful purpose can be served by the study of absurd opinions and doctrines that have long ago been exploded, and deserved to be? It is mere useless pedantry to attempt to revive them. The most perfect a science becomes the shorter becomes it history…” We are still waiting for the perfection which will abolish the need for history.

Useful links

The webcast of the NAEC launch is available here

How much is enough? Money and the good life Edward Skidelsky and Robert Skidelsky

Keynes: The return of the master Robert Skidelsky

The OECD Initiative on New Approaches to Economic Challenges (NAEC)

New Approaches to Economic Challenges from the OECD

12 October 2015
by Guest author

NAEC main messagesMathilde Mesnard, Coordinator of the OECD Initiative on New Approaches to Economic Challenges (NAEC)

New economic and policy thinking is required today more than ever. On September 18th, the OECD Secretary-General launched a discussion on the New Approaches to Economic Challenges (NAEC) Synthesis report with OECD Chief Economist Catherine Mann, Lord Robert Skidelsky and Jean Pisani-Ferry. The launch event was in the best tradition of NAEC seminars with hard questions being asked about the report and the OECD’s policy approaches.

OECD Chief of Staff and G20 Sherpa Gabriela Ramos put several questions to the panellists about the current state of economic policy and the progress made since the economic crisis. We very much welcomed the perspectives of all the speakers. Jean Pisani-Ferry talked about the difficulties of incorporating risk into policy-making. He also suggested that policymakers base what they do on particular theories shorn of nuances and assumptions which are accepted by the research community. This often means that policy is based on over-simplification.

Catherine Mann questioned how far the agenda on complexity could be taken forward at the OECD. To help answer this, a NAEC workshop is being held at the OECD on Complexity of the Economy: Research and Policy Implications on 26-27 October. It will explore complexity research in finance, sustainability and macroeconomics as well as complex systems methods and data analysis.

We were encouraged by Lord Robert Skidelsky’s remark that the latest NAEC report gives much food for thought. We also welcome his positive remarks on our inequality work and attempts to inform our policy advice by looking to insights from other disciplines, in particular history. Indeed we have made a special effort to learn lessons from the OECD’s own history to inform NAEC. Lord Skidelsky observed several omissions in the NAEC report. Yet the NAEC Synthesis report was a continuation of two reports submitted to the Ministerial Conference Meeting in 2014 – the first Synthesis and NAEC: The Financial Stream.

Skidelsky mentions that NAEC does not examine monetary policy. This issue was addressed at length in the 2014 Synthesis. The report argued that monetary policy contributed to excessive policy accommodation in the lead-up to the crisis. It called for further investigation into the effects of unconventional monetary policy noting that while successful, the long–run effects as well as the short-term effects of an eventual tapering of these measures needed to be closely monitored. A major lesson of the crisis is that both fiscal and monetary policies alone are not sufficient instruments, even more so when interest rates are close to the zero lower bound.

He stated that NAEC did not challenge the wisdom of financial innovation. Yet numerous OECD Secretariat papers in the NAEC process identified poor micro-prudential regulation, excessive leverage and too-big-to-fail business models as prime reasons for the financial crisis. The crisis emphasised the limits to regulatory capacities in the financial sector, and how fragmented regulatory frameworks generated information and implementation gaps. We have questioned not only the merits of financial deregulation but also financial innovation arguing that the rents were extracted to a very large extent for the financial sector itself.

More recently with NAEC work on finance and inclusive growth, we have argued that if the financial sector grows too large, it can undermine growth and increase inequality. We have pointed to the need to ensure that the financial sector contributes to strong and equitable growth by avoiding credit overexpansion and by improving the structure of finance. Yet the launch event clearly indicated that the financial crisis exposed weak understanding of the inner workings of banks and financial institutions in the OECD. Analysis of financial markets and capital flows could also be strengthened.

Skidelsky asks another fundamental question, where are the jobs in the future going to come from? Dirk Pilat, Deputy Director of the OECD Science, Technology and Innovation Directorate responded during the debate that this issue is very much an issue on the table at the OECD, and at the heart of current discussions on productivity and inclusive growth. In fact a Labour Ministerial Meeting will take place early next year on this very subject. New production technologies and automation have always been disruptive with new jobs being created while others are lost all the time. The question remains if there is something new in terms of the amount of disruption caused by the next production revolution.

All speakers debated the merits and demerits of siloed approaches to research and policy-making. Gillian Tett from the Financial Times will address the OECD community in a NAEC seminar on October 12th outlining her new book The Silo Effect. Tett examines how silos can prevent us from seeing risks because we are so consumed with our own area of expertise that we are unaware of information from allied silos and thus fail to see the big picture. She also outlines how the effect of silos could be mitigated by keeping boundaries of teams fluid, rethinking how incentives can stifle collaboration beyond a team, and ensuring the broadest information flows. NAEC can help counter the Silo Effect – we should strive to create more joint teams; promote and support horizontal projects and further cross-committee discussion among the various OECD Committees.

The discussion of the report underlined the importance of creating a space for debate and fresh-thinking at the OECD on the fundamental issues facing economists and policy-makers. It also spurred continued efforts in searching for for new approaches to economic challenges.

Useful links


How Tajik weddings helped me understand Wall Street

8 October 2015
by Guest author

Silo EffectGillian TettFinancial Times US Managing Editor and 2014 British Press Awards Columnist of the Year

The Silo Effect first sprung to life during the Great Financial Crisis of 2008. But it is not a book about finance. Far from it. Instead, it asks a basic question: Why do humans working in modern institutions collectively act in ways that sometimes seem stupid? Why do normally clever people fail to see risks and opportunities that are subsequently blindingly obvious? Why, as Daniel Kahneman, the psychologist, put it, are we sometimes so “blind to our own blindness”?

It was a question I often asked myself in 2007 and 2008. Back then, I was working as a journalist in London, running the markets team of the Financial Times. When the financial crisis erupted, we threw ourselves into trying to understand why the disaster had come about. There were lots of potential reasons. Before 2008 bankers had taken some crazy risks with mortgages and other financial assets, creating a gigantic bubble. Regulators had failed to spot the dangers, because they misunderstood how the modern financial system worked. Central bankers and other policymakers had given the wrong economic incentives to financiers. Consumers had been dangerously complacent, running up huge credit card debts and mortgage loans without asking whether they could be repaid. Ratings agencies misread risks. And so on.

But as I dug into the story of the Great Financial Crisis as a journalist (and later wrote a book about it, Fool’s Gold) I became convinced that there was another reason for the disaster: the modern financial system was surprisingly fragmented, in terms of how people organized themselves, interacted with each other, and imagined the world. In theory, pundits often like to say that globalization and the Internet are creating a seamless, interlinked world, where markets, economies, and people are connected more closely than ever before. In some senses, integration is under way. But as I dug into the 2008 crisis I also saw a world where different teams of financial traders at the big banks did not know what each other was doing, even inside the same (supposedly integrated) institution. I heard how government officials were hamstrung by the fact that the big regulatory agencies and central banks were crazily fragmented, not just in terms of their bureaucratic structures, but also their worldview. Politicians were no better. Nor were the credit rating agencies, or parts of the media. Indeed, almost everywhere I looked in the financial crisis it seemed that tunnel vision and tribalism had contributed to the disaster. People were trapped inside their little specialist departments, social groups, teams, or pockets of knowledge. Or, it might be said, inside their silos.

That was striking. But as the 2008 crisis slowly ebbed from view, I realized that this silo effect—as I came to call it—was not just a problem at banks. On the contrary, it crops up in almost every corner of modern life. In 2010 I moved from London to New York, to run the American operations of the Financial Times, and when I looked at the corporate and government world from that perch, I saw a fragmented pattern there too. The silo syndrome cropped up at gigantic companies such as BP, Microsoft, and (later on) at General Motors. It plagued the White House and Washington agencies, not to mention large multilateral groups such as the World Bank and International Monetary Fund – and, I daresay, the Organisation for Economic Cooperation and Development too.

Large universities were often beset with tribalism. So were many media groups. The paradox of the modern age, I realized, is that we live in a world that is closely integrated in some ways; but fragmented in others. Shocks are increasingly contagious. But we continue to behave and think in tiny silos.

So this book sets out to answer two questions: Why do silos arise? And is there anything we can do to master our silos, before these silos master us? I tackle this partly from the perspective of someone who has spent two decades working as a financial journalist, observing global business, economics, and politics. That career has trained me to use stories to illustrate my ideas. So in this book you will hear eight different tales about the silo effect, ranging from Michael Bloomberg’s City Hall in New York to the Bank of England in London, Cleveland Clinic hospital in Ohio, UBS bank in Switzerland, Facebook in California, Sony in Tokyo, BlueMountain hedge fund in New York, and the Chicago police. Some of these narratives illustrate how foolishly people can behave when they are mastered by silos. Others, however, show how institutions and individuals can master their silos. Some of these are stories of failure. But there are also tales of success.

But there is a second strand to this book. Before I became a journalist (in 1993), I did a PhD in the field of cultural anthropology, or the study of human culture, at Cambridge University. As part of this academic work, I conducted fieldwork, first in Tibet, and then down on the southern rim of the former Soviet Union, in Soviet Tajikistan, where I partly lived between 1989 and 1991 in a small village. My research was focused on marriage practices, which I studied as a tool to understand how the Tajik had retained their Islamic identity in a (supposedly atheist) communist state.

When I first became a financial journalist, I was often wary about revealing my peculiar past. The type of academic qualifications that usually command respect on Wall Street, or the City of London, are MBAs or advanced degrees in economics, finance, astrophysics, or another quantitative science. Knowing about the wedding customs of the Tajiks does not seem an obvious training to write about the global economy or banking system. But if there is one thing that the Great Financial Crisis showed it is that finance and economics are not just about numbers. Culture matters too. The way that people organize institutions, define social networks, and classify the world has a crucial impact on how the government, business, and economy function (or sometimes do not function, as in 2008). Studying these cultural aspects is thus important. And this is where anthropology can help. What anthropologists have to say is not just relevant for far-flung non-Western cultures, but can shed light on Western cultures. The methods I used to analyze Tajik weddings, in other words, can be helpful in making sense of Wall Street bankers or government bureaucrats. The lens of anthropology is also useful if you want to make sense of silos. After all, silos are cultural phenomena, which arise out of the systems we use to classify and organize the world. Telling stories about the silo effect as an anthropologist- cum-journalist can thus shed light on the problem. These tales may even offer some answers about how to deal with silos, not just for bankers, but government bureaucrats, business leaders, politicians, philanthropists, academics, journalists – and perhaps OECD officials too. Or that, at least, is my hope.

Useful links

Gillian Tett will be visiting the OECD on October 12 as part of the New Approaches to Economic Challenges seminar series

Say goodbye to the 9-to-5

7 October 2015
by Brian Keeley
There are few traditional offices left in the wild

There are few traditional offices jobs left in the wild

In the United States it’s called “the 9-to-5”; in France it’s métro, boulot, dodo –“subway, work, sleep”; in Japan it’s personified as the “salaryman” and his female equivalent, the “office lady”. Whatever it’s called, the traditional job seems to be something we all identify with.

So it was a surprising to read earlier this year that most jobs are anything but permanent, routine and predictable. According to the International Labour Organisation (ILO), only around one in four workers worldwide have what most of us think of as a traditional job – stable and full-time with predictable earnings and working for a single employer. The rest? They’re all “employed on temporary or short-term contracts, working informally often without any contract, are self-employed or are in unpaid family jobs,” as The Guardian reported.

To be sure, there are major variations. For example, even though there are signs of a slight shift towards higher rates of formal employment, very few people in poor and developing countries have formal jobs. In Sub-Saharan Africa and Southeast Asia, fewer than one in five workers are working 9-to-5, says the ILO.

By contrast, traditional jobs are much more widespread in the wealthy OECD countries. But that, too, is showing signs of change. While part-time and temporary work and self-employment still only accounts for about one in three jobs in OECD countries, it makes up a much bigger share of new jobs. Between 1990 and the crisis, around half of all new employment in OECD countries involved these sorts of jobs.

Part-time and temporary work doesn’t always have a very good reputation – often for good reasons – but it undoubtedly meets the needs of some workers. Women, who still bear the brunt of household chores and parenting duties, are much more likely to work part-time than men. Among women who work, about 40% are part-timers against 28% for working men. Young people, too, are a big presence in non-traditional jobs. Among temporary workers, close to half are aged under 30. Some may be tempted by the gig economy; others are probably finding it impossible to break into the permanent workforce.

The growth of non-traditional jobs is affecting not just workers and their families. Its impact can also be seen in society and the economy, and not least in income inequality. The main reason for this is that part-time and temporary jobs are helping to drive a trend towards job “polarisation” or a hollowing-out of the workforce. In other words, old-style jobs are vanishing in the solid middle of the workforce – middle incomes, mid-level skills – while non-traditional jobs are increasingly prevalent among both low and high-skill workers. So, goodbye full-time accountants, hello part-time cleaners and freelance designers.

This squeeze on the middle would tend to widen the income gap in any case. But its impact is exacerbated by the fact that, for low-paid workers, non-traditional jobs tend to pay less – hour for hour – than traditional jobs. Indeed, about 60% of so-called “working poor” households rely mainly on income from non-standard workers.

And lower pay isn’t the only problem facing low-skill temps and part-timers. As the OECD’s recent report on inequality, In It Together, notes, non-traditional workers “tend to receive less training and, in addition, those on temporary contracts have more job strain and have less job security than workers in standard jobs.” Non-traditional work is also rather less of a “stepping stone” to a traditional job than many people think, especially for part-timers and the self-employed.

And there’s a cost for businesses, too, from the decline of traditional jobs: As the OECD’s Stefano Scarpetta told the FT recently, the rise of temping “is not even good for the firms themselves nor for the economy, because this reduces the build-up of human capital on the job.”

Still, despite the drawbacks, it seems clear that growing numbers of people are going to be temping, working part-time or self-employed in the future. In response, countries will need to find ways of better supporting such workers to ensure they don’t slip beneath the poverty line. That may mean changes to taxes and benefits and more support in areas like training and job search to ensure that non-traditional workers can maximise their earnings and job prospects.

Useful links

OECD Policy Brief: Adapting to the changing face of work

OECD work on employment and income inequality

In It Together: Why Less Inequality Benefits All (OECD, 2015)

OECD Employment Outlook 2015

How good is your job? Measuring and assessing job quality” – OECD Employment Outlook 2014

Where do you stand on the income scale? Find out with the OECD’s Compare Your Income web tool.

Global Capital Stock 2005-2014: A Natural Benchmark for Multi-Asset Portfolios

6 October 2015
by Guest author

global capital stocksAndrea Vacchino and Markus Schuller, Panthera Solutions

How can you know whether a multi-asset portfolio is well managed? Many institutions have policy indices built according to the investment management’s preferences and expectations on risks and returns associated to each asset class. Other institutional investors run peer group comparison between multi-asset managers or measure their portfolio against total return indices. But these are workarounds only. Surprisingly, there is no policy portfolio benchmark investors can use at the very beginning of multi-asset investment against which to measure later decisions.

Even seven years after the Great Recession, the world is still suffering significant data gaps in its understanding of the Global Capital Stock, so we decided to build an objective, multi-asset, market-weighted policy portfolio index, based on the measures of the global capital stock.

Initially, we focused on measuring the current stock of different assets worldwide, a big challenge since only limited primary or secondary research is available. We looked especially at illiquid global stock components such as real estate, land and private equity, thanks to the contribution of several international institutions such as the OECD, BIS, Global Data Gaps Initiative, SME Europe, the European Commission and (hedge) fund managers like Strategos Capital Mgmt. Due to their support, we gained access to data or won insights on data interpretation and manipulation. At this point we would like to sincerely thank all the institutions and fund managers who supported our project.

This was the most comprehensive research conducted in the field so far, but was only the beginning of an ongoing optimization process. We concentrated on the Global Capital Stock of 11 assets and their major changes since 2005 because pre-2005, the tradeoff with regards to the quality and availability of data would have been too unfavorable. It’s only in recent years that academia has benefitted from the increasing reach and quality of databases like OECD Stats. We want to highlight research on specific asset classes in certain geographies such as New Estimate of Value of Land of United States (Larson, 2015). We used this kind of work not just for retrieving data but also to interpolate applicable findings to other uncovered areas.

The two figures below visualize our findings when measuring the Global Financial Stock per asset class, firstly expressed as percentage and then in Trillions of USD (click to see full size).

Asset allocation

Asset allocation

Outstanding trillion USD

Trillion USD

The graph below plots the evolution of nonsecuritized loans in terms of geographic exposure. We would like to highlight the growing weight of China and the relative decline of Japan as a result of the rebalance in the global economies.

Nonsecuritized loan composition


Lastly we tested the performance of the Policy Portfolio against a global 60-40 portfolio and the gestaltu portfolio, which represents an alternative liquid market portfolio.

By comprehensively measuring the Global Capital Stock and its two byproducts, the Policy Portfolio and the investable policy portfolio, we understand our research as a first step towards reliably defining a natural benchmark for multi-asset portfolios. When comparing a multi-asset portfolio with the policy portfolio, one can derive preliminary conclusions on asset managers’ active decisions in terms of their strategic asset allocation configuration.

The limitations of our research revolve around the margin of error in measuring the Global Capital Stock. However we feel strongly optimistic about future development about data gap initiatives which will further reduce the margin of error.

We will continue our efforts on searching for better measures of the Global Capital Stock, for finding better indices to covering the Global Capital Stock for the Policy Portfolio, and for converting the Policy Portfolio into an Investable Policy Portfolio. The results of our ongoing optimization process will be accessible through the quarterly publication of the PS Policy Portfolio Index.

Useful links

For fuller details of the methodology and findings, see the report this article is based on here or click on the cover page above.

Capital stock data at the OECD – status and outlook Paul Schreyer et al, OECD (2011, Word document)

OECD work on financial statistics

OECD work on productivity statistics


Plans to tackle tax avoidance announced

5 October 2015
by admin

Follow the BEPS Project on Twitter

The OECD presented today the final package of measures for a comprehensive, coherent and co-ordinated reform of the international tax rules to be discussed by G20 Finance Ministers at their meeting on 8 October, in Lima, Peru.  The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low/no tax environments, where little or no economic activity takes place. The BEPS measures were agreed after a transparent and intensive two-year consultation process between OECD, G20 and developing countries and stakeholders from business, labour, academia and civil society organisations.

Revenue losses from BEPS are conservatively estimated at $100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant.

Undertaken at the request of the G20 Leaders, the work to address BEPS is based on the 2013 G20/OECD BEPS Action Plan, which identified 15 actions to put an end to international tax avoidance. The plan was structured around three fundamental pillars: introducing coherence in the domestic rules that affect cross-border activities; reinforcing substance requirements in the existing international standards, to ensure alignment of taxation with the location of economic activity and value creation; and improving transparency, as well as certainty for businesses and governments.

The final package of BEPS measures includes new minimum standards on: country-by-country reporting, which for the first time will give tax administrations a global picture of the operations of multinational enterprises; treaty shopping, to put an end to the use of conduit companies to channel investments; curbing harmful tax practices, in particular in the area of intellectual property and through automatic exchange of tax rulings; and effective mutual agreement procedures, to ensure that the fight against double non-taxation does not result in double taxation.

The BEPS package also revises the guidance on the application of transfer pricing rules to prevent taxpayers from using so-called “cash box” entities to shelter profits in low or no-tax jurisdictions, and redefines the key concept of Permanent Establishment, to curb arrangements which avoid the creation of a taxable presence in a country by reliance on an outdated definition.

The BEPS package offers governments a series of new measures to be implemented through domestic law changes, including strengthened rules on Controlled Foreign Corporations, a common approach to limiting base erosion through interest deductibility and new rules to prevent hybrid mismatch arrangements from making profits disappear for tax purposes through the use of complex financial instruments.

Nearly 90 countries are working together on the development of a multilateral instrument capable of incorporating the tax treaty-related BEPS measures into the existing network of bilateral treaties. The instrument will be open for signature by all interested countries in 2016.

Examples of BEPS schemes to be eliminated

Useful links

The final outcomes of the BEPS Project are being presented on Monday 5 October 2015 at 2 p.m. (CET) – more details of webcast streaming here.

Final reports on the 15 action areas of the OECD/G20 BEPS Project

OECD Policy Brief – Taxing Multinational Enterprises

BEPS – Frequently Asked Questions

It’s a gig, but is it a job?

5 October 2015
by Brian Keeley

Whistle while you work…

Time was when the only people who had gigs were long-haired types who stayed in bed till noon and played in bars till dawn. These days, it seems, everyone’s hopping from one gig to another – drivers, software designers, cleaners. Bye-bye full-time work, hello freedom and flexibility.

Well, maybe …

The “gig economy” has emerged as potentially one of the major shifts in what the Financial Times calls “the new world of work(paywall). It’s certainly one of the most eye-catching. Unlike other trends in this brave new world, the gig economy seems to represent a significant shift in what it means to be a worker. Depending on where you stand, it will either liberate millions of people to become mini-entrepreneurs free from the 9-to-5 grind or imprison them in a world of low-wage self-servitude and insecurity.

If you’re confused by what defines the gig economy, you’re not alone. The term is used to refer to everything from old-style temping to the sharing economy – think amateur-hotelier sites like Airbnb or car-rental sites like RelayRides. But it seems mostly to describe various forms of self-employment and independent contracting facilitated by online platforms like TaskRabbit and Uber. Indeed, in France, uberisation has become shorthand for the gig economy.

This ambiguity is not a trivial matter. Uncertainties over the gig economy, and what it means to be a gig worker, have sparked reviews and court cases in a number of countries. In the United States, for example, a judge in California recently gave the green light to a group of Uber drivers to sue to establish their legal status. The drivers contend they are effectively employees of Uber, and so entitled to be reimbursed for expenses, including the cost of buying petrol and maintaining their cars. Uber argues that they are independent contractors, which means it is not required to cover payroll taxes, health insurance and the cost of maintaining cars. As The New York Times pointed out, the outcome of the case “could strike at the heart of the ride-hailing company’s business model.”

That’s not the only uncertainty hanging over the gig economy. As the Wall Street Journal (paywall) reported last month, despite all the hype there doesn’t currently seem to be a lot of evidence in US jobs data of a big upsurge in self-employment. The same is true, too, of the United Kingdom, according to Ian Brinkley of The Work Foundation. But, as he also points, the emergence of the gig economy may still be “too recent a development to show up in the aggregate figures”.

Indeed, given the rapid growth of services like Uber so far, it’s hard not to feel that we are witnessing genuine shift in the economy. That may well continue, if for no other reason than demographics. By many accounts, the so-called Millennial generation – the oldest of whom are now approaching their mid-30s – are particularly keen on gig working. According to research in the US, almost half of millennials “will choose workplace flexibility over pay”. Of course, a few years down the road, when they’re trying to feed children and pay school fees, Millennials’ taste for job security may well increase.

Indeed, for individual workers, that tension between the freedom of freelancing and the security of the 9-to-5 may become a core issue. “There’s certainly something empowering about being your own boss,” Arun Sundararajan of the NYU Stern School of Business wrote in The Guardian. “[…] But there’s also something empowering about a steady pay cheque, fixed work hours and company-provided benefits.”

There will be dilemmas, too, for government policy, both in terms of wider regulation of the gig economy and unleashing what some argue is its potential to create jobs. According to consultants McKinsey, it could contribute $2.7 trillion, or 2%, to the global economy over the next 20 years and add the equivalent of 72 million full-time equivalent jobs.

But will they be good jobs? That question is relevant not just to the gig economy but to other trends in the world of work, such as temporary and short-term employment, both of which are on the rise. As we’ll discuss in the next post, some fear that the benefits of these shifts may be outweighed by the loss to workers of both income and job security.

Useful links

OECD work on employment

Where do you stand on the income scale? Find out with the OECD’s Compare Your Income web tool.


We need global policy coherence in trade and investment to boost growth

3 October 2015

Investment Forum

Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20 @gabramosp

Mounting fears of another slowdown in the global economy call for bolder policy responses. Trade and investment are a case in point.

The latest WTO forecasts suggest 2015 will be the fourth year running that global trade volumes grow less than 3%, barely at—or below—the rate of GDP growth. Before the crisis, trade was growing faster than GDP. In addition, global flows of foreign direct investment (FDI) remain 40% below pre-crisis levels. If we are to achieve the ambitious Sustainable Development Goals agreed in New York in late-September, and underpin broad-based improvements in living standards, we need to reignite these twin engines of growth and we need to do it for the ultimate goal of improving people’s prospects and wellbeing.

Trade and investment have always been intertwined in business, but they have never quite come together in policymaking. In a world of Global Value Chains (GVCs), characterised by the fragmentation of production processes across countries, the interdependencies between trade and FDI are sharper. Technological improvements, reductions in transport and communications costs, and regulatory developments allow firms to combine multiple channels–- imports, FDI, movement of business personnel, licenses — to optimize their international business strategies. Businesses do not think in terms of trade or investment, but in terms of maximizing expected profitability. On the contrary, policymakers have long addressed trade and investment on separate tracks. In the face of new economic realities, policymakers need to up their game.

The symbiosis between trade and investment is more complex than ever before. Multinational enterprises (MNEs) play a key role in this relationship, with their activities driving a large share of world trade. The decision of a firm to invest in a foreign country is influenced by the ease with which it can sell its products, but also by how easy it is to source inputs from its affiliates (intra-firm trade) or independent suppliers (extra-firm trade) abroad. Hence, trade barriers become indirect barriers to investment. In addition, “world factories” make emerging trade patterns more complex, as not only goods and services cross borders, but capital, people, technology, and data do too. Without a transparent framework, it is also difficult to upgrade and upscale responsible business conduct.

Services are an increasingly critical node in the relationship between trade and investment. The WTO’s General Agreement on Trade in Services (GATS) explicitly recognizes this by defining FDI in services as one of the four ways in which services can be traded (mode 3, or ‘commercial presence’). This reflects how trade and investment interact with one another. Clearly, services will be central in any further efforts to liberalize investment and to improve the business environment. The OECD FDI Regulatory Restrictiveness Index shows that investment barriers are overwhelmingly in the services economy. Reforms in backbone services, notably digital services, transport, and logistics are key to unclogging GVCs. Domestic reforms to allow for more competition in the service sectors is also a source of growth and equality. Moreover, there is untapped potential in services value chains that could be realized if services markets were opened further. The OECD Services Trade Restrictiveness Index (STRI) provides a tool for identifying these barriers and measuring their costs, in order to prioritize and sequence reforms.

There is still no global set of rules governing investment and trade, however. Apart from GATS, two other WTO agreements—TRIMS and SCM–cover aspects of FDI, but they are not comprehensive. The OECD Codes are also a reference on capital flows, but does not address the link with the trade dynamics. The void has been filled with a complex network of nearly 3,000 bilateral investment treaties (BITs) of different quality and with different coverage.. Investors and States need certainty. A uniform regime would help, providing a consistent interpretation of the rules that apply to investment flows, taking into account the interest of all stakeholders. We urgently need a clear, coherent and coordinated approach at multilateral level. Multiplying the number of BITs further muddies the water and moves us further away from the multilateral ideal. A better way forward may be to start consolidating and replacing BITs on the road to a comprehensive multilateral framework. We also need to take a hard look at investment dispute settlement mechanisms, transparently addressing stakeholders’ legitimate concerns.

Replace BITs with what? Regional Trade Agreements (RTAs) are already providing some closer policy linkages. Over 330 RTAs contain comprehensive investment chapters, reflecting more advanced thinking of how trade and FDI interact in the real economy. These agreements also cover ‘deep integration’ disciplines that are essential to investments, such as movement of capital, business persons, intellectual property rights, competition, state-owned enterprises, and anti-corruption. New generation RTAs are not perfect, but they are taking us several steps forward in addressing the services-trade-investment-technology nexus. Being regional, however, they are not applied uniformly at a global level, and create their own overlaps and incoherence. It would therefore be useful to create clearer rules for co-existence among RTAs and mega-regional blocs. Above all, it is important to foster information-sharing on emerging practices from these negotiations, so that good practices can be diffused more widely and uniformly, and provide a pathway for multilateral convergence. In this way, RTAs and mega-regionals can become the building blocks of an integrated and truly multilateral trade and investment regime.

We are at a critical juncture, both economically and politically. The global economy needs a helping hand for recovery from the global financial crisis and to give people the improvements they expect in their daily lives. At the same time, we have both an opportunity and obligation to upgrade the policy framework to meet the changing reality of how trade and investment are conducted across the world, to enhance policy coordination, and to ensure that both have a positive impact on people’s well-being. Mega-regional agreements like TTIP and TPP are on track to deliver new frameworks over the coming months. These can be stepping stones towards the future of global trade and investment rules. As these mega-regional deals approach the finish line, the 10th WTO Ministerial in Nairobi in December is an opportunity to break the current impasse in the Doha Round. Finally, all of this is taking place as we enter a new “Post-2015” era with the new SDGs, where trade and investment are expected to do more of the heavy-lifting in global development.

Against this backdrop, the G20-OECD Global Forum on International Investment (GFII), being held on 5 October 2015 in Istanbul, back-to-back with the meeting of G20 Trade Ministers, will bring together the trade and investment policy communities—along with the business community–to reflect on the main axes of a pragmatic strategy to enhance the international regime for investment, including through closer links with trade. The agenda cannot be delayed: trade and investment decisions must go hand-in-hand in policy, just as they do in global business.

Useful links

G20-OECD Global Forum on International Investment

OECD work on International Investment Law

OECD work on Regional Trade Agreements

OECD work on Global Value Chains

OECD work on Trade Facilitation


Women taking risks: closing the gender gap in entrepreneurship

29 September 2015
by Guest author

EAG 2015OECD Statistics Directorate

Women entrepreneurship is increasingly recognised as a key source of employment creation and innovation, and for addressing inequalities. McKinsey for example have just published a study estimating that “$12 trillion could be added to global GDP by 2025 by advancing women’s equality.” Women entrepreneurs could be a major part of this, but the latest figures presented in the OECD’s Entrepreneurship at a Glance 2015 show that in OECD countries there are two and a half times more men than women that are self-employed with paid employees. On average, 2.2% of all employed women are entrepreneurs who employ paid personnel, while the average for men is 5.6%. There are gender differences also when looking at the sectors of entrepreneurial activity, with a higher concentration of women in the services sector, particularly trade and hotels, while only few have businesses in manufacturing and construction. However, these patterns seem to be changing for young women entrepreneurs. Evidence points to considerable diversity in many OECD countries, including high shares of young women owning businesses in the construction sector, suggesting that stereotype barriers may be eroding.

Encouraging findings are also observed in terms of earnings from self-employment. Although a gender gap continues to exist in all countries, it has nevertheless decreased significantly in many. This is particularly true for Belgium, Finland, Iceland, Luxembourg, and the Netherlands where the gap has closed by more than 10% in recent years (see figures 1 and 2).

Figure 1. Gender gap in self-employment earnings

Click to see full size or on the link below for the original data

Figure 2. Changes in gender gap in self-employment earnings

Percentage points, 2010-11 average compared to 2006-07 average

Fig 2

Click to see full size or on the link below for the original data

This could be an important driver for inspiring entrepreneurial motivation among women. Indeed, the fear of low or erratic earnings is one of the main reasons why many people do not become entrepreneurs. While entrepreneurship is a pathway to wealth for highly successful individuals, many people that are self-employed struggle instead with relatively low incomes, a condition that results in lower opportunities to accumulate savings and a higher likelihood of falling into poverty if the business fails.

Inevitably, there are risks when choosing to set-up a new business. But some of these risks, like achieving a gratifying remuneration or attaining a satisfactory work-life balance are often more inhibiting for women than for men. In fact, independently of a country’s economic context and cultural attitude toward entrepreneurship, women always appear less prone to take the risk of creating their own business than men (see figure 3). The share of men who would rather take a risk and build their own business than work for someone else is larger in virtually all countries, from high income OECD countries to least developed low income economies. There are a few exceptions where woman are more willing to take the risk, including Mexico and South Africa.

Figure 3. Willingness to take the entrepreneurial risk

2013, Percentage

Fig 3

Click to see full size or on the link below for the original data

Why are women less willing to engage in entrepreneurship? Perhaps because the share of women declaring that they have access to money or training to start-up and grow a business is always inferior to the corresponding share of men. As expected, the average share of women having access to money or training is the highest in OECD countries and lowest in low income countries. However, the main fact remains that across all countries in the world there is an important gender gap in accessing funds and training which are key ingredients for becoming an entrepreneur.

Evaluating the policies that support women entrepreneurs is complicated by the difficulty of measuring gender differences in entrepreneurship. The evidence presented Entrepreneurship at a Glance 2015 clearly shows that policy initiatives are needed to improve access to finance and training for setting up a business. Such initiatives would have a beneficial impact on women’s willingness to become entrepreneurs.

Useful links

Entrepreneurship at a Glance 2015

Gender Data Portal

Corporate Accountability and the UN Sustainable Development Goals: How Responsible Business Conduct could and should play a decisive role

28 September 2015
by Guest author

SDGsProfessor Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct (@nieuwenkamp_csr)

The UN has now agreed to the Sustainable Development Goals, a set of 17 goals which will define the post-2015 development agenda. It is recognised that the private sector has an important role to play in economic and social development. Private sector growth can create income opportunities, contribute to human capital development and lead to technology transfers, among other positive economic and social effects. For example, in Bangladesh the apparel sector has been credited in lowering the official poverty rate from 70% to less than 40%. Today it employs tens of millions of workers globally, predominantly women, which has contributed to empowering women from poor communities.

However, as we have also witnessed in Bangladesh in the context of the apparel sector, in order to avoid other negative impacts, businesses must behave responsibly. Not just within their direct operations but throughout their supply chains and business relationships. This is particularly important in weak regulatory contexts. Given that a significant portion of global manufacturing takes place in such contexts, if multinationals would commit to promoting sustainability and responsible business conduct throughout their supply chains this would have a decisive impact on the success of the SDGs.

The OECD Guidelines for Multinational Enterprises on Responsible Business Conduct currently represent the most comprehensive set of government-backed recommendations on responsible business conduct. They are an important tool for promoting responsible business conduct globally, and therefore for supporting global development.

The OECD Guidelines state as an overarching objective that enterprises should contribute to economic, environmental and social progress with a view to achieving sustainable development. Furthermore under the Guidelines enterprises are expected to avoid causing or contributing to adverse impacts (social, environmental, human rights, etc.), through their own activities, and address such impacts when they occur. Therefore the Guidelines promote a concept of responsible business conduct which includes both the idea that business should do no harm and that they can do well by doing good. This applies to an enterprise’s direct operations as well as products, operations and services throughout its supply chain.

Currently 46 countries adhere to the Guidelines, and therefore make a binding commitment to promote RBC amongst businesses operating in or from their territories. Adherent countries represent diverse geographies and include OECD member states as well as 12 non-OECD member countries (Argentina, Brazil, Colombia, Costa Rica, Egypt, Jordan, Latvia, Lithuania, Morocco, Peru, Romania and Tunisia). These 46 countries account for around four-fifths of outward FDI and two-thirds of inflows and are home to the majority of multinational enterprises. This means that the Guidelines are relevant even for non-adherent nations looking to attract investment or home to companies operating abroad.

Linkages amongst the OECD Guidelines and SDGs

Given the instrumental role that business has to play in sustainable development the OECD Guidelines directly support many of the aims of the SDGs. Some of the main complementarities amongst the OECD Guidelines are outlined in the table here: MNE Guidelines SDGs

Perhaps the most important feature of the Guidelines is the National Contact Point mechanism, the built in grievance mechanism of the Guidelines. Countries adhering to the Guidelines are obligated to establish NCPs which are tasked with promoting the Guidelines as well as providing a platform for mediation and conciliation of alleged non-observance by the Guidelines. Given the substantive overlap between the RBC recommendations of the OECD Guidelines and the SDG’s the NCP system can serve as an important tool in advancement of the objectives under the SDGs.

Although the NCP mechanism does not have legal authority and thus cannot impose sanctions nor mandate that parties participate in the process, it has nevertheless proven to be an effective tool in promoting sustainable development. Utilizing the NCP mechanism provides a venue for enterprises to discuss and explore issues regarding responsible business conduct in a low-cost, non-adversarial manner, which can avoid further escalation of disputes. The OECD NCP mechanism has a growing track record of agreements resulting through mediation. For example in 2014 the UK NCP resolved a complaint brought by the World Wildlife Fund based on the activities of Soco, an oil exploration company, in Virunga national park, a world heritage site in the Democratic Republic of the Congo (DRC). The mediation resulted in Soco agreeing to cease its operations, to never again jeopardise the value of another world heritage site and to conduct environmental impact assessments and human rights due diligence in line with international standards. Such a result directly supports the environmental agenda of the SDGs.

A complaint submitted by UNI Global Union and the International Transport Workers Federation against DHL also led to a useful agreement at the German NCP. The complainants and the company agreed to respect the rights of workers to establish and join trade unions in Turkey, India, Colombia, Indonesia and Vietnam. In another case concerning the Tazreen factory fire in Bangladesh, the complainant, Uwe Kekeritz, member of the German Bundestag, and Karl Rieker, a garment company, reached an agreement in which Karl Rieker committed to improve the fire and building safety standards in its supplier factories. Measures included reducing of the number of supplier factories, establishing long-term supplier relations, close supervision by local staff, and signing the Bangladesh Accord on Fire and Building Safety. The conclusion of these cases supports the SDG goal of protecting labour rights and promoting safe and secure working environments for all workers.

Many NCP cases tackle multiple issues and thus can contribute to several aspects of the SDGs. For example in a complaint by several NGOs against the Cameroon palm oil giant Socapalm and its owners (France’s Bolloré) the French NCP brokered an agreement in which Socapalm agreed to improve workers’ conditions in Socapalm and its suppliers, improve stakeholders engagement with local communities, and reduce environmental damage.

Although non-binding, this soft law mechanism can have hard consequences. If mediation in the context of an NCP procedure fails an NCP may issue a statement with recommendations, sometimes including a statement on whether a company did or not act in adherence with the recommendations of OECD Guidelines. While such determinations may cause significant reputational damage to a company they can also protect a company’s reputation in instances when conduct is found to be consistent with the recommendations of the OECD Guidelines. Furthermore in some contexts governments consider NCP statements with regard to economic decisions, e.g. in the context of public procurement decisions or in providing support to international operations. For example, export credit agencies of OECD member countries must take into account the final statements of NCPs when they make decisions on export credit guarantees. Additionally, some countries have taken NCP decisions and processes into account with regard to their commercial diplomacy.

Beyond government related commercial consequences, increasingly financial institutions are conducting human rights due diligence. This process is being conducted to avoid ethical and commercial risks associated with being linked to such operations. Likewise institutional investors have increasingly started to apply pressure in situations where human rights issues are identified and in some cases have been known to pull their investment where adverse impacts are not adequately addressed. For example in 2010, investors withdrew from mining company Vedanta following an upheld NCP complaint. All this can increase the cost of capital.

The private sector has an important role to play in realizing the SDGs and in this respect, the OECD Guidelines provide a strong existing framework for corporate accountability supporting the aims of the SDGs. Specifically, where the SDG address behaviour of enterprises the NCP mechanism of the Guidelines will continue to function as a strong tool for encouraging responsible behaviour. Governments should take a whole of government approach to this tool and strengthen the NCP system with the SDG’s in mind. For countries with an existing NCP this means strengthening the mechanism and providing it with adequate resources to fulfill its tasks. Finally, multinationals should play their role by behaving responsibly within their direct operations as well as throughout their supply chains.

Useful links

OECD and the Sustainable Development Goals

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