At the end of the first millennium, the only city that came close to reaching one million inhabitants was Baghdad—an incredible feat considering the total world population was estimated to be about 230 million. Fast-forward one thousand years to 1950. With the world population at 2.5 billion, the planet witnessed the rise of its first megacities—urban conglomerations of more than ten million inhabitants. The first of these colossi were Tokyo and the New York/Newark urban region. Today, there are 29 megacities, the majority in the developing world. By 2030, this number is expected to rise to 41. But, urbanisation isn’t just producing megacities. More than 50% of the world’s population now lives in cities of all sizes, with the figure projected to reach 85% by 2100. Within 150 years, the urban population will have increased from less than 1 billion in 1950 to 9 billion by 2100.
Ready or not
Few cities are well-equipped to handle the tens of millions of inhabitants of today’s largest urban centres. As urban populations rise, physical and administrative infrastructures struggle to keep up. Cities expand, swallowing up once-distinct neighbours, often leaving a hodgepodge of local administrations with varying degrees of cooperation and sometimes diverse political priorities. Coping alone, as a kind of minimal solution, isn’t an adequate response for reasons we will see below. Steps need to be taken to ensure that our cities are liveable, sustainable and inclusive going forward. For this, an adequate roadmap must exist along with the political and economic means to implement it.
A New Urban Agenda
What would such a roadmap resemble? The Habitat III Conference, presently underway in Quito, Ecuador, under the auspices of the United Nations, has an answer. It’s called the New Urban Agenda, a document that sets global standards of achievement in sustainable urban development for the next 20 years. As many urban populations continue to grow at a breathtaking rate, the next years are going to be critical in achieving Sustainable Development Goal 11–making cities inclusive, safe, resilient and sustainable. The OECD co-chaired the policy group devoted to producing the National Urban Policies document, one of the key building blocks of the New Urban Agenda.
How cities see themselves vs. how they really are
Urban areas are socio-economic and environmental entities that go beyond historically defined administrative borders. In spite of this, often, administrative boundaries between municipalities are based on centuries-old borders that do not correspond to contemporary patters of human settlement and economic activity. In the images of Paris and Rome below (high-density areas are red), population densities and administrative borders seem mis-matched. The OECD, in collaboration with the EU, has developed a harmonised definition of urban areas as functional economic units or Functional Urban Areas (FUAs), consisting of densely populated municipalities (urban cores) as well as any adjacent municipalities with high degrees of economic integration with urban cores, measured by travel-to-work flows. This helps to better understand the dynamics of the urban area and provides urban data at the right spatial scale for monitoring performance and providing comparable data between cities around the world.
Metropolitan areas are a boon for wages and per capita GDP
Throughout the OECD, productivity and wages increase with city size. Human capital levels in a city are a strong determinant of its productivity and cities attract and retain more educated workers. Productivity is also higher because firms in urban areas tend to be more specialised and innovative, and the high number of firms allow better matches between employers and employees. OECD estimates suggest that productivity increases by 2-5% for a doubling of population size. This implies that, on average, productivity increases by more than 20% when comparing urban agglomerations of 50,000 inhabitants within a metropolitan area such as Paris. Given high productivity levels and their sheer size, large cities have been making sizeable contributions to national growth, reaching a maximum of above 70% in certain countries. Related to productivity, higher household incomes, as seen in the graph below, represent an important agglomeration benefit.
But cities are often inequality machines
Agglomeration benefits include higher wages, more jobs, public transportation, amenities and markets. But the downside to agglomerations includes elevated housing prices, congestion, pollution, crime and inequality. For many, these negative effects constitute the inescapable reality of urban life. Using the Gini coefficient that measures inequality on a scale of zero to one, 63% of the cities examined had higher levels of inequality than the national average. And inequality is growing. One measure of inequality is spatial segregation, the degree to which rich and poor concentrate separately in metropolitan areas. In many cities, spatial segregation is on the rise. Growth in spatial segregation can indicate poverty traps including diminished access to health and educational services and entrenched differences in well-being.
Managing urbanisation requires successful cooperation across all levels of government to design, implement, monitor and evaluate policies for sustainable urbanisation. No city can go it alone. National Urban Policies, as defined by the NUP policy group at Habitat III, must strengthen alignment of national and local policies affecting urban development. But, even at intercity or regional levels of cooperation we can see tangible benefits when local governments can pull back and look at the big picture, as in the cases of regional governance of public transportation and metropolitan governance of urbanisation. It suggests that cities that can get out ahead of the problem through cooperation have a decent chance of making urbanisation compatible with sustainability.
Marten van den Berg, Director-General for Foreign Economic Relations, Ministry of Foreign Affairs, The Netherlands
Today’s economy is unquestionably global. National markets for goods and services have become increasingly integrated. This process of globalisation has taken place over the past centuries. But during the period of 1987-2000 we saw a big leap in globalisation. And we saw a rapid development of Global Value Chains (GVC’s). Many countries have benefitted enormously from this process of globalisation. Not only high income countries, but also hundreds of millions of people in low and middle income countries have been taken out of poverty because of international trade and investment.
International trade and investment generate employment and income. But they are also a channel for knowledge transfer, technology flows and for specialisation according to comparative advantage. Through trade, firms get better access to cheaper and better quality inputs. And cheap imports raise consumer welfare. Openness matters for growth. This is why so many trade agreements have been negotiated between so many countries. Or why now 154 countries are a member of the WTO.
There is substantial evidence that trade agreements have a significant effect on trade and investment relations and therefore on jobs and productivity growth. However we should acknowledge that there are also income and distributional effects. Some sectors will experience significant expansions, other sectors will contract. Productive firms gain from international trade, others will lose. At the same time some workers will see a rise in their wages, others will see their wages stabilise or decrease. The famous “elephant graph” illustrates where there are losers (low-middle income group in US/Europe/Japan) and where we see winners (middle income class in China and India).
The shift in relative importance of different sectors as a consequence of international trade and investment generates labour and capital displacement. This will lead to adjustment costs for those that need to change employment. These adjustment costs have raised questions about the benefits of international trade and investment. But there are also concerns about fairness (unfair competition) and about the relation between international trade and investment regimes and labour and environment standards. And concerns that international regimes limit room for manoeuvre at a national level.
In 2007 the process of rapid globalisation came to an end. Growth in global trade today is less than half the growth during the two decades prior to the global financial crisis. This slowdown is largely the result of the decline in investment, the rebalancing of China and the shortening of the GVCs. But stalled liberalisation in trade and the increase of protectionism are also holding back international trade and investment.
Together with the decline in global trade, we see more and more people standing up against international trade and investment agreements. For example, neither candidate in the US presidential race supports a free trade agenda. In Europe there is a lot of resistance against TTIP. Also among economists we see a more intensive debate about the winners and losers of international trade and investment.
The lack of progress in trade liberalisation and the opposition to international trade and investment agreements is understandable, but still bad news. We should not forget that international trade and investment are important sources for productivity growth. In fact, it is one of the few proven sources of productivity growth in a world that is characterised by low productivity growth. And reducing trade costs in low and middle income countries where the poor live increases the competitiveness of the goods and services traded by poor people in the lower income groups. And in an increasingly digitalised world even start-ups and tiny companies can operate on a global scale (mini-multinationals), making open trade essential for SMEs. But the debate about those agreements is good news. In the past we probably were too much focused on the macro benefits of free trade and investment and did not sufficiently address the concerns among society of international trade and investment. Concerns about unfair elements of the international trade and investment system, about the negative effects of international trade on labor and environment standards, and about the adjustment costs of international trade and investment.
These concerns are genuine. How should we respond? Refusal to acknowledge these concerns undermines international trade and investment relations. So we have to rebalance our trade and investment policies. We have to shift from trying to organise a free trade regime to an architecture of a responsible trade and investment regime. We need to make the international trade and investment system fair and sustainable and inclusive. First we have to address the complexity issue of the system and include new economic and social developments. Secondly we need public discussion and consultation about those international trade and investment agreements. And finally, but perhaps most important, we need effective national policies to adequately complement international trade and investment policies.
Complexity and new issues
Through GVC’s markets and companies, including SMEs, are connected in many ways. Today our international markets are highly complex. It is almost impossible to regulate this complex system in a sustainable and fair way through a spaghetti bowl of regional and bilateral trade and investment agreements. We have to return to a more global architecture of the international trade and investment regime. We need a revival of the multilateral system. Therefore it is good news that we have seen small successes in the WTO negotiations in Bali and Nairobi. But a new success in Buenos Aires is also crucial. Not only on the Doha Development Agenda issues, but also on other issues relevant to international trade and investment. For example digital trade. But also on investment we have to focus more on a global architecture. The outcome of the G20 under Chinese presidency in concluding non-binding principles for investment was a very important step. We should continue on this path and international organisations like the OECD and UNCTAD can and should play a major role in this process. The issue of sustainability should be an integral part of this agenda. Therefore it is good news that among the non-binding principles for investment responsible business conduct is one of them. The OECD guidelines for Multinational Companies are of key importance here.
Get stakeholders involved
Second, it is extremely important that relevant stakeholders are involved in the process of designing and implementing international trade and investment agreements. CETA is a very good step forwards in this respect. Canada and the European Union have committed themselves to a stakeholder consultation process: employers, unions, business organisations and environmental groups are getting a key role in the implementation of CETA. In the future public discussions and stakeholder involvement should be an integral part of our international trade and investment agenda. That’s the way to make trade and investment a “race to the top” in terms of standards.
Complementary national policies
Finally, national policies need to effectively complement international trade and investment policies. More (pro-)active labour market and social security policies are needed to minimise adjustment costs. We need targeted education and skill policies to help vulnerable groups to keep up with the fast changing demands of labour markets. We need stronger tax policies to address the issue of inequality, e.g. implementing the OECD guidance on tackling Base Erosion and Profit Shifting (BEPS). In lower income countries national policies are needed in order to address challenges like lack of infrastructure and education to ensure that lower trade barriers actually benefits the poor.
To conclude, we need to shift from a free trade regime to a sustainable and inclusive trade and investment regime. And we need national policies to make globalisation work for all. I look forward to discuss this in the meeting of the Global Strategy group at the OECD on 28-29 November. These changes are needed and the only way to restore public trust and to build public support for globalisation and for an international trade and investment regime. And we absolutely need this, because international trade and investment are crucial engines for productivity growth, for implementing the SDGs and to abolish poverty.
International trade: Free, fair and open? Patrick Love, OECD Insights
Andrew Wyckoff, Director, OECD Directorate for Science, Technology and Innovation
Since its creation in 1961, the OECD has influenced how governments approach science, technology and innovation, and how economics as a discipline tries to understand these phenomena. The OECD Working Party of National Experts on Science and Technology Indicators (NESTI) was created in 1962, and in 1963, Science, economic growth and government policy convinced governments that science policy should be linked to economic policy. In 1971 Science, growth and society anticipated (also called the “Brook Report” after the Chair, Harvey Brooks) many of today’s concerns by emphasising the need to involve citizens in assessing the consequences of developing and using new technologies.
For many experts though, the major contribution was the concept of national innovation systems, presented in 1992 in a landmark publication, Technology and the Economy: The Key Relationships. The origins of the concept go back to the 1970s crisis, which had provoked an in-depth re-examination of previous economic thinking on how growth came about and why growth in productivity was slowing. A 1980 OECD report, Technical Change and Economic Policy, is now widely recognised as the first major policy document to challenge the macroeconomic interpretations of the 1970s crisis, and to emphasise the role of technological factors in finding solutions, arguing for instance that innovation can be more powerful than wage competitiveness in stimulating an economy.
Economists working at the OECD were pioneers of a new approach that saw innovation not as something linear but as an ecosystem involving interactions among existing knowledge, research, and invention; potential markets; and the production process. In national innovation strategies, one of the key issues is the interactions among the different actors: companies, public research institutions, intermediary organisations, and so on. And contrary to the dominant thinking in policy circles in the 1980s and early 1990s, the OECD also saw it as something that governments should play a central role in – hence the term national innovation strategy.
Today, services are becoming the focus of innovation, with some companies even blurring the distinction between the value-added of products and services, smartphones being a good example. This is a logical outcome of the increasing digitalisation of the economy. Digital technologies are now so ubiquitous that it is easy to forget how recent they are. The World Wide Web we know today for example was created in the 1990s, and Microsoft thought it was possible to launch a rival to Internet (called MSN) as late as 1995. Google was only founded in 1998 and it would be 6 years before it went public.
With the digital economy and society coming so far in such a short time, it is hard to predict what they will look like in the future. We can however identify some of the drivers of change. Big Data will be among the most important. In The phenomenon of data-driven innovation, the OECD quotes figures suggesting that more than 2.5 exabytes (EB, a billion gigabytes) of data are generated every single day, the equivalent of 167 000 times the information contained in all the books in the US Library of Congress. The world’s largest retail company, Walmart, already handles more than 1 million customer transactions every hour. Because so many new data are available, it will be possible to develop new models exploiting the power of a complexity approach to improve understanding in the social sciences, including economics. Also, the policy making process may benefit from new ways of collecting data on policies themselves and vastly improving our evaluation capabilities.
The analysis of data (often in real time), increasingly from smart devices embedded in the Internet of Things opens new opportunities for value creation through optimisation of production processes and the creation of new services. This “industrial Internet” is creating its own complex systems, empowering autonomous machines and networks that can learn and make decisions independently of human involvement. This can generate new products and markets, but it can also create chaos in existing markets, as various financial flash crashes have shown.
Two sets of challenges, or tensions, need to be addressed by policy makers to maximise the benefits of digitally-driven innovation, and mitigate the associated economic and societal risks. The first is to promote “openness” in the global data ecosystem and thus the free flow of data across nations, sectors, and organisations while at the same time addressing individuals’ and organisations’ opposing interests (in particular protecting their privacy and their intellectual property). The second set of tensions requires finding policies to activate the enablers of digital-driven innovation, and at the same time addressing the effects of the “creative destruction” induced by this innovation. Moreover, there is a question concerning the efficacy of national policies as digital-driven innovation is global by definition. As a policy maker you can promote something in your country, but the spillovers in terms of employment or markets can be somewhere else.
With so many new technologies being introduced, more firms and countries being integrated into global value chains, and workers becoming more highly educated everywhere, you would expect productivity growth to be surging. In fact it is slowing. But that average trend hides the true picture according to an OECD study on The Future of Productivity . Labour productivity in the globally most productive firms (“global frontier” firms) grew at an average annual rate of 3.5 per cent in the manufacturing sector over the 2000s, compared to 0.5% for non-frontier firms.
Diffusion of the know-how from the pioneering frontier firms to the bulk of the economy hasn’t occurred – either because channels are blocked or because we are in a transformative period and the expertise for how best to exploit the technologies is still in the heads of a few. Most likely, it is a combination of the two. We therefore have to help the global frontier firms to continue innovating and facilitate the diffusion of new technologies and innovations from the global frontier firms to firms at the national frontier. We can try to create a market environment where the most productive firms are allowed to thrive, thereby facilitating the more widespread penetration of available technologies and innovations. And we have to improve the matching of skills to jobs to better use the pool of available talent in the economy, and allow skilled people to change jobs, spreading the know-how as they move.
In a complex system, you can’t forecast outcomes with any great degree of certainty, but many of the unintended outcomes of interactions in the innovation system are beneficial. The policies mentioned above would each be useful in themselves and would hopefully reinforce each other beneficially.
The Innovation Policy Platform (IPP), developed by the Organisation for Economic Co-operation and Development (OECD) and the World Bank is a web-based interactive space that provides easy access to knowledge, learning resources, indicators and communities of practice on the design, implementation, and evaluation of innovation policies.
Ousman Tall, Sahel and West Africa Club (SWAC) Secretariat
There are growing concerns about the world feeding itself in 2050 and beyond, and many consider that Africa has the potential to positively impact this enormous, though not insurmountable, challenge. Is this wishful thinking or reality based on the success stories of agricultural production and productivity on the African continent? Or, is it based on Africa’s untapped potential and its readiness to ensure that everything is put in place to make this dream a reality?
According to Akinwumi Adesina, President of the African Development Bank, “Africa may have the potential in agriculture, but you cannot eat potential”. Discussing Africa’s potential requires an understanding of the challenges impeding agricultural growth and development on the continent. Based on my experience and understanding of agricultural development trends in Africa, the continent is far from feeding itself in 2050, due to a combination of several factors, which are equally reinforcing and which affect all sectors of the agricultural economy. Take for example, the food crops sub-sector in Africa.
Yields in Africa for a majority of food crops are below the world average and substantial progress can be made. However, boosting yields requires more and better research to generate new and appropriate technologies as well as increased funding for the dissemination and adoption of these technologies to ensure that essential farming inputs are available and affordable. Agricultural research institutes in Africa lack the funding to carry out the research required to address yield deficits. Similarly, farmers cannot afford the high cost of inputs and most countries are not in the position to provide subsidies.
Rice paddy yields by continent (2007-14)
Source: FAOSTAT-Agriculture (database), Food and Agriculture Organization, Rome
Furthermore, if the plan to increase yields in Africa were to be based on the context of the Asian Green Revolution, the costs for Africa could outweigh the benefits. The Green Revolution was based on the massive introduction of improved varieties, agro-chemicals and investment in infrastructure. Africa simply cannot introduce the use of agro-chemicals on a colossal scale to increase yields. Sub-Saharan Africa accounts for less than 2 percent of the total fertilizer used in the world, not as a matter of choice, but partly due to its high cost or to a lack of understanding of its usage. Moreover, the misapplication of agrochemicals is detrimental to the environment and human health. Rather, the development of appropriate varietal technologies to increase yields, amidst a decline in the agricultural labour force, should focus on improvements in labour-saving technologies and farmer field schools.
The rate of urban growth in Africa is one of the highest in the world. In West Africa alone, the urban population will reach 500 million in 2050. Increased urbanisation translates into a substantial decline in agricultural workers, who are predominantly rural dwellers. In fact, the ratio of the non-agricultural to the agricultural population in West Africa is expected to increase by 250 percent in 2050. Urbanisation is moving in the same direction for the rest of sub-Saharan Africa and keeping up the pace of food production on the continent will require massive transformation in the agricultural production system.
Africa is already feeling the effects of climate change. The continent is experiencing recurrent droughts and floods for which tolerant and resistant crop varieties need to be developed. Using different climate models, the World Bank predicts that many parts of sub-Saharan Africa will become hotter and drier and that the extent of drylands might increase up to 20% by 2030. Land for crop production in some African countries, especially those in the tropical rainforest zones, will become scarce as a result of the global pressure to spare the forest and preserve the environment. Further warming of the earth will increase land unsuitable for farming and at the same time affect crop yields. In a World Bank report on extreme climate and its impacts, a warming of 1.5°C would reduce sorghum yields alone by 10%.
Notwithstanding these challenges, the continent offers numerous opportunities for agricultural growth and development. There is a huge market potential, supported by an increasing demand in food staples as a result of increased population growth and per capita consumption. The level of regional integration and co-operation taking place within the Regional Economic Communities will stimulate agricultural production and market linkages. Whereas agricultural land in other parts of the world is becoming scarce, Africa is home to 60% of the world’s uncultivated arable land. The continent is presently home to 19 percent of the world’s youth population, which is expected to double by 2030. This young, and largely unemployed and unskilled population could become the engine of agricultural growth.
The theme of this year’s World Food Day is “Climate is changing. Food and Agriculture Must too”. If Africa is to be an example for the rest of the world in how to sustainably increase food production to feed a growing population, then the policy trajectory of the food and agricultural economy must be rethought in order to appropriately factor in not only climate change, which is vital, but all of the issues mentioned above. African researchers and technicians can play a crucial role in addressing these issues by actively and emphatically guiding their policy makers. Unless we do so, per capita food production will diminish and African agriculture’s opportunity to show the world how to feed itself by 2050 will remain an illusion.
Alastair Wood and Stéphane Carcillo, OECD Employment, Labour and Social Affairs Directorate
In the 1955 film Rebel without a cause, Jim Stark (played by James Dean) is an alienated and unhappy young man in mid-1950s America. He and his friends form a trio that evokes youthful pain, torment and bewilderment. The film’s focus is on teenage rebellion and parental neglect, and it conveys an important message about listening to the needs and desires of our youth population. Today’s youth (aged between 15-29) have been hit particularly hard by the financial crisis and Great Recession; they have been struggling to make a successful start to their working lives in very difficult times. At its peak, youth unemployment reached an average of 17% in OECD countries (far higher than the rest of society) and hit an astonishing 60% in Greece. OECD’s Society at a Glance 2016 puts young people under the spotlight, looks at how they are holding up in society and shows which of their needs are not being met.
But it is not just about unemployment. Many young people are not at school and are not even looking for a job. Taking the unemployed and the inactive together shows that in 2015, about 40 million young people, a total of 15% of all OECD youth, were not in employment, education or training (the so-called NEETs). Beyond the moral dilemma, the opportunity cost of having such a large number of young people being isolated from society is estimated to have been between 360-605 billion US dollars in 2014 alone (0.9-1.5% of OECD-wide GDP, depending on the wage level used to impute income – minimum wage or median wage) – this is the income that could have been generated had they been better integrated into society.
Low-skilled youth are particularly at risk of long-term isolation and disengagement from society. Those who have not finished high-school are 3 times more likely to be unemployed or “inactive” while only one quarter of NEETs have higher education qualifications. People with low-skilled parents or unemployed parents are also more likely to be NEET, suggesting an intergenerational transmission of disadvantage. Lower educated parents may not be able to encourage higher education as much, they may not be able to help as much with homework, and they often lack social networks to help their children get their first work experience. For similar reasons, and due to language difficulties and possibly also discrimination, youth born outside their country of residence are 1.5 times more likely to be NEET than native youth. Being female adds to the NEET risk. Young women are one and a half times more likely than men to be unemployed or “inactive”, often because they are caring for children and other family members, especially in Mexico and Turkey.
Fortunately, for many young people, inactivity and unemployment is only temporary. But for a significant fraction, it is a lasting curse. About half of all NEETs experience such isolation for more than a year. The low educated account for 17% of the youth population, but represent 30% of those who spend more than 12 months as a NEET; young people with health problems are also over-represented. Taking a short time out of work to care for children or to travel can be great and have no negative effects, but longer periods risk harming future employment opportunities and earnings.
Better policies are needed to foster self-sufficiency among young people and bring back their trust in society and politics: the report shows that we need to continue fighting early school leaving; it also documents how apprenticeships are a valuable alternative to academic schooling and can help bring more young people smoothly into the labour market. Intensive second chance programmes targeted at high-school dropouts motivated to catch up on their skills are also needed. For women, ensuring access to high quality childcare helps them re-join the labour market (France, Denmark and Sweden are good examples), and improving uptake by fathers in parental leave can also help young women’s careers. Efforts are also being made at the international level. Policy makers from the G20 economies collectively committed to reduce the share of young people most at risk of being left permanently behind in the labour market by 15% by 2025. At the EU level, the Youth Guarantee is also a good opportunity to reduce the number of youth who fall through the cracks and make them an employment or training offer.
Not surprisingly, NEETs are less satisfied with their lives compared with their peers – 22% reporting low levels of life satisfaction compared to 14% overall. Feeling isolated and disconnected means that they often have no interest in society and only 18% report that they trust others compared to 29% of youth overall. Sixty years after Nicholas Ray’s film, they can probably understand Jim when he says “Boy, if, if I had one day when…I felt that I belonged someplace, you know?”