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The Economy of Influence: Integrity for Inclusive Growth

9 December 2016
by Guest author

Rolf Alter, Director of the OECD Public Governance and Territorial Development Directorate @raltergov. Today is UN Anti-Corruption Day

Integrity can significantly boost inclusive growth and sustainable development, by assuring fair and efficient resource allocation, stimulating competition and investment, and fostering innovation. Curbing bribery of public officials and promoting responsible business conduct is important to create a level playing field for companies and to create equitable market conditions and an investment climate that provides fertile ground for business development, competition and innovation. For the public interest to prevail in policy making, accountability and integrity in revenue collection, public finance management and service delivery are crucial and encourage equality and prosperity of societies.

International Anti-corruption Day provides an occasion to zoom in on one factor within this debate that remains particularly unexplored: corruption and the capture of public policies by special interest groups. There is increasing evidence that voters feel disillusioned about political integrity and the intertwinement of elite networks across sectors in society. Indeed, less visible but equally or more harmful than corruption scandals is the influence of narrow interests on public decision making for their own profit. Lobbyists walk a thin line between sharing information, agenda setting and undue influence. Special interest groups inform, influence and sometimes tweak laws, policies and regulations through formal advisory boards and informal networks. Rules for the financing of political parties and electoral campaigns can be stretched and bent, which contributes to the erosion of the already alarming low trust levels in government and public institutions. Similarly, leaks on offshore tax evasion or former public officials taking up lucrative posts and board memberships in banks and multinationals have dented the reputation of elected politicians, established firms and respected countries.

The public sentiment runs deep. Over half of the citizens in developed countries distrust their government and a yawning trust gap is emerging between the elite and mass populations. Among the key factors cited by citizens to explain the prevailing distrust are “wrong incentives driving policies” and “corruption/fraud”. While levels of trust in government are low, trust in political parties is even lower. In addition, over half of the global population share the belief that their country’s government is either largely or entirely run by a few big entities acting in their own best interests.

Undue influence of narrow interest dogs public investments and infrastructure, public procurement, governance of state-owned enterprises and even trade policy. Economic growth is at stake and the toll on society is already significant. The close ties between the government, financial regulators and the financial sector, exemplified by “job carrousels”, have been widely linked to the 2008 financial and economic crisis. Moreover, ill-inspired filibustering unnecessarily delays policy reforms on tax, trade or market liberalisation. Biased policy decisions may greatly affect trade restrictions that modify the outlook of an entire sector or industry, and can hinder the diffusion of new technologies or the chances of new industry players. Corruption also leads directly to the misallocation of resources in government spending. Crossing the line towards favouritism and bribery in public procurement creates unequal access to information and government contracts, which distorts competition and market access.

Building on two decades of OECD experience in these risk areas, the new Recommendation on Public Integrity is particularly timely, as it presents a holistic approach to boost integrity in government and in society. The Recommendation promotes a risk-based approach with emphasis in promoting a cultural change. So what does this mean in practice?

It means creating a public integrity system that is built on 3 pillars. The first pillar is the system: creating a coherent and interconnected set of integrity policies and anti-corruption tools that are coordinated and avoid overlaps and gaps. Second, this integrity system needs to rely on effective accountability, building on risk based controls and real responsibility for integrity violations. This also implies transparency, open government, as was highlighted during the OECD Global Forum on Public Governance, and active participation by civil society in the public decision-making process. The third pillar of an integrity system provides for cultivating a culture of integrity. Here we refer to the recruitment, training and promotion of values of the individuals in an organisation. The intention is to appeal to the intrinsic motivation of individuals. One way of doing this is through awareness raising and educational campaigns aimed at changing values.

The 2017 OECD Global Anti-Corruption & Integrity Forum, to be held on 30 -31 March will debate and shape strategies to shield policy making from undue influence and corruption and help secure sustainable inclusive growth. It is a truly global multi-stakeholder event, involving the public and private sectors, civil society, and academia. Sectoral case studies and good practice examples from countries worldwide will further enrich the debates. The Forum will provide a platform to present new evidence and insights, to advance policies and programmes, and to strengthen commitments and partnerships for integrity-based politics and decision making.

Useful links

Registration for the 2017 Global Anti-Corruption & Integrity Forum is now open.

Click here to register.

Read and answer the call for papers

 

Lessons for France from PISA 2015

6 December 2016
tags: ,
by Guest author

pisa-2015Gabriela Ramos, OECD Chief of Staff and G20 Sherpa. A French version is available here

Fifteen years ago, the OECD started evaluating education systems worldwide by testing the knowledge and competences of 15 year-old students through the Programme for International Student Assessment (PISA). Right from very first PISA exercise in 2000, we noted that the although the results for France were around the OECD average, they revealed a system where children’s socio-economic status had a disproportionate influence on their school grades, and where children from disadvantaged backgrounds did not receive enough support.

The OECD PISA 2015 results are now in. Even if France’s performance hasn’t deteriorated since the last series in 2012, it has not improved much compared to previous rounds either. France’s results for science and mathematics are around the OECD average, while reading comprehension is slightly above average.

Nonetheless, the French system is still markedly two-tier. The number of high-achieving students is stable and higher than the OECD average, but lower levels are not improving, with a proportion of 15 year-olds in difficulty in science higher than the OECD average.

According to PISA 2015, students from the most disadvantaged backgrounds have four times less chance of succeeding than the others. This is not only a human tragedy. It is also a brake on economic development, which can only be solid and sustainable when it is inclusive.

Reconciling educational excellence and success for all is not just the best way to tackle social inequalities at the root, but also to obtain good results.

Results from around the globe illustrate various best practices applied to improve the equity and performance of the education system. Portugal’s TEIP programme for example (Priority Intervention Education Territories) targets investment in geographical regions where the population is socially disadvantaged and where school drop-out rates are higher than the national average. Singapore, first in the PISA science rankings, has a comprehensive teacher evaluation system that includes in particular the contribution to students’ personal and academic development, as well as the quality of parent-teacher relations.

In short, the capacity of a system to help students in difficulty and those from disadvantaged backgrounds to improve raises the general quality of the system and thus its overall performance.

In France however, investments in education do not always reach these groups. I had some personal experience of this malfunctioning when I arrived in France and asked people to recommend primary schools for my own children. The answer was: “Don’t pick a school, pick a neighbourhood”.

How can we ensure that success at school isn’t the result of a postcode lottery? France has already implemented reforms going in the right direction.

As recommended by the OECD, more resources, teachers, scholarships and support have been made available for disadvantaged students. The July 2003 Education Act (Loi d’orientation et de programmation pour la refondation de l’école de la République du 8 juillet 2013) designed to tackle school drop-out and failure from the earliest age marks an important step. The recent implementation of numerous reforms inspired by the Act at primary and junior high levels, could, depending on their practical application, respond to certain ongoing challenges and help to improve students’ learning and outcomes.

Of course it is too early to see any impact of these reforms on PISA 2015 scores. However, they were necessary and should be strengthened and evaluated regularly.

In France, as elsewhere in the past, teachers will play a key role in the reforms and will have to take ownership of the main objectives. Reform of teacher training should therefore be continued and made a priority.

It is important to stress that contrary to a commonly-held belief in France, the PISA 2015 results do not show that reforms designed to reduce social and educational inequalities result in a lowering of the overall level. On the contrary. In countries that carried out such reforms, the number of students failing dropped in the following decade, while the good students got even better. OECD countries that have managed to achieve high performance in science along with equity in terms of educational outcomes include Canada, Denmark, Estonia, Finland, Japan, Korea, Norway, and the UK according to PISA 2015.

We chose science as the focus of PISA 2015 because a good understanding of science and the technologies derived from it is indispensable, especially in our age of digital revolution. This is not only a necessity for those whose career depends directly on science, but for every citizen who wants to take an enlightened position on any number of questions facing society today, from health to sustainable development or climate change. Today, everyone should be able to “think like a scientist”.

More generally, education is fundamental in these troubled times, when populism is on the rise, when France has been shaken by several terrorist attacks, and social inequalities in the world have left by the wayside a number of citizens who no longer have any trust in institutions.

More than ever, we have to invest in our children’s science education, to respond to the “post-fact” era with an open and informed dialogue. More than ever, we have to strengthen our education systems to face up to the challenges that threaten increasingly to divide us.

 

PowerPoint Presentation to accompany this article (in French)

Useful links

Social wealth funds: a key ingredient of a new pro-equality economic model

6 December 2016
by Guest author

sharing-economyStewart Lansley, visiting fellow at Bristol  and City Universities. He is the author of  A Sharing Economy: How Social Wealth Funds Can Reduce Inequality and Help Balance the Books, Policy Press, 2016; the co-author (with Joanna Mack) of Breadline Britain, Oneworld, 2015, and the author of the Cost of Inequality, Gibson Square, 2011. 

Since 2008, the dominant model of capitalism – with its emphasis on markets, weak regulation and the concentration of private capital – has been fast losing friends.  It has fuelled rises in inequality, and far from delivering stable, long term growth, has brought growing economic turbulence. Even former cheerleaders, including the IMF, are questioning its sustainability.

Yet despite the growing scepticism, the model of corporate capitalism remains intact, while proposals for change mostly involve tinkering with the existing pro-inequality model. A serious attempt at reform needs to build an alternative “sharing political economy”, one that disperses capital ownership, power and wealth, and ensures that the fruits of growth are more equally distributed. As the former lead economist at the World Bank, Branco Milanovic has argued, one of the principal drivers of inequality is the heavily private concentration of the ownership of capital. Central to a new, pro-equality economic model must be the de-concentration of such ownership.

To help achieve de-concentration, the French economist, Thomas Piketty, favours a global tax on wealth, while accepting it is a somewhat utopian idea. Encouraging the spread of alternative business models – from co-operatives to partnerships – that allow the greater sharing of economic gain – would also help disperse ownership.

As argued in a new book, The Sharing Economy, an especially powerful weapon for building more inclusive economies would be the creation of commonly-owned social wealth funds. These are publicly owned funds, created from the pooling of existing resources and used for the wider social benefit of society.  By helping to secure a more even economic balance between public and private ownership and ensuring that economic returns are more evenly shared, social wealth funds are a direct way of tackling inequality.

More than 60 countries have already introduced state-owned sovereign wealth funds, mostly resourced from oil revenues. While most of these are run in a non-transparent way as little more than the investment arm of the state, sometimes without obvious public benefit, several examples offer a blueprint for a model social fund. Since the early 1980s, Alaska has operated a highly popular fund which pays an annual dividend to all citizens. Perhaps the most successful and transparent of these funds is the $700 bn Norwegian Fund. Overseen by an independent ethics committee, it holds one per cent of global equities.

Many nations, including the UK, have been moving in the opposite direction, entrenching the private ownership of capital through the selling off of state owned enterprises and land.  An alternative strategy would have been to pool existing public assets (land, property and public companies)  into a ring-fenced fund to form a significant pool of commonly held wealth. Imagine the shape of the British economy today if, instead of rolling privatisation,  such a fund had been established in the mid-1980s.  It would have preserved the family silver, and by boosting the value of public assets in an era of growing liabilities, greatly strengthened the public finances. With part of the returns reinvested and part used to boost social spending, the fund would have grown to represent a very sizeable chunk of the economy. At least part of the returns could have been used to boost spending on vital infrastructure, thus strengthening the productive base of the economy.

Fifteen nations – in Europe, Asia and the Middle East – have already created “public ownership funds” which manage all state-owned commercial assets. Many of these – such as the Temasek fund in Singapore – have achieved impressive rates of return.

There are other ways one or more social wealth funds could be established.  Take the UK. Although it has already spent most of its oil revenue, such a fund could still be established using other sources of income including the dividends from other natural resources (that should be commonly shared) such as minerals, urban land and the electromagnetic spectrum. The occasional one-off taxes on windfall profits, such as those levied in the past on banks, energy companies and oil producers, could also be paid into such a dedicated fund, possibly in the form of shares.  Other options might include a direct charge on those financial and commercial transactions – such as merger and acquisition activity – which contain a high element of rentier activity.

In the 1960s, the British Nobel Laureate, James Meade, advocated just such a fund to help promote a ‘property owning democracy` in which all citizens have access to assets. He argued that such a fund should be financed by the dilution of existing capital ownership, through, for example, an additional, modest annual levy on share ownership.

Social wealth funds have the potential to become a new and powerful economic and social instrument that could play a key role in the search for ‘inclusive economies`. They would provide a powerful balance to private capital while the returns could be used to help build the productive and social base of economies.

Useful links

Inequality, the crash and the crisis Three articles by Stewart Lansley on OECD Insights

OECD work on inequality

 

Ants, algorithms and complexity without management

5 December 2016
by Guest author

NAECDeborah M. Gordon, Department of Biology, Stanford University

Systems without central control are ubiquitous in nature. The activities of brains, such as thinking, remembering and speaking, are the outcome of countless electrical interactions among cells. Nothing in the brain tells the rest of it to think or remember. I study ants because I am interested in how collective outcomes arise from interactions among individuals, and how collective behaviour is tuned to changing environments.

There are more than 14,000 species of ants, which all live in colonies consisting of one or more reproductive females, and many sterile workers, which are the ants that you see walking around. Although the reproductive females are called “queens”, they have no power or political authority. One ant never directs the behaviour of another or tells it what to do. Ant colonies manage to collect food, build and maintain nests, rear the young, and deal with neighbouring colonies – all without a plan.

The collective behaviour of colonies is produced by a dynamical network of simple interactions among ants.  In most ant species, the ants can barely see. They operate mostly by smell. As an ant moves around it briefly contacts other ants with its antennae, or it may contact a short-lived patch of a volatile chemical recently left behind by another ant. Ants smell with their antennae, and when one ant touches another with its antennae, it assesses whether the other ant is a nestmate, and sometimes what task the other ant has been performing. The ant uses its recent experience of chemical interactions to decide what to do next. In the aggregate, these simple interactions create a constantly shifting network that regulates the behaviour of the colony.

The process that generates simple interactions from colony behavior is what computer scientists call a distributed algorithm. No single unit, such as an ant or a router in a data network, knows what all the others are doing and tells them what to do. Instead, interactions between each unit and its local connections add up to the desired outcome.

The distributed processes that regulate the collective behaviour of ants are tuned to environmental conditions. For example, harvester ants in the desert face high operating costs, and their behaviour is regulated by feedback that limits activity unless it is necessary. A colony must spend water to get water. The ants get water by metabolizing the fats in the seeds they eat. A forager out in the desert sun loses water while out searching for food. Colonies manage this tradeoff by a simple form of feedback. An outgoing forager does not leave the nest until it meets enough returning foragers with seeds. This makes sense because each forager searches until it finds food. Thus the more food is available, the more quickly they find it and return to the nest, stimulating more foragers to go out to search. When food is not available, foraging activity decreases. A long-term study of a population of colonies shows that the colonies that conserve water in dry conditions by staying inside are more successful in producing offspring colonies.

By contrast, another species called “turtle ants”, living in the trees of a tropical forest in Mexico, regulate their behaviour very differently. The turtle ants create a highway system of trails that links different nests and food sources. Operating costs are low because it is humid in the tropical forest, but competition from other species is high. These ants interact using trail pheromones, laying down a chemical trail everywhere they go. An ant tends to follow another and this simple interaction keeps the stream of ants going, except when it is deterred by encounters with other species. In conditions of low operating costs, interactions create feedback that makes ongoing activity the default state, and uses negative feedback to inhibit activity. Thus this is the opposite of the system for desert ants that require positive feedback to initiate activity.

What can we learn from ants about human society? Ants have been used throughout history as examples of obedience and industry. In Greek mythology, Zeus changes the ants of Thessaly into men, creating an army of soldiers, who would become famous as the Myrmidons ready to die for Achilles (from  myrmex – μύρμηξ – ant). In the Bible (Proverbs 4:4), we are told to “Look to the ant” who harvests grain in the summer to save for the winter. But ants are not acting out of obedience, and they are not especially industrious; in fact, many ants just hang around in the nest doing nothing.

Ants and humans are very different. Power and identity are crucial to human social behaviour, and absent in ants. Ants do not have relations with other ants as individuals. As an ant assesses its recent interactions with others, it does not matter whether it met ant number 522 or ant number 677.  Even more fundamental, an ant does not act in response to any assessment of what needs to be done.

However, we may be able to learn from ants about the behaviour of very large dynamical networks by focussing on the pattern or structure of interactions rather than the content. While we care about what our emails say, the ants care only about how often they get them. It is clear that many human social processes operate without central control. For instance, we see all around us the effects of climate change driven by many different social processes that are based on the use of fossil fuel. No central authority decided to pump carbon into the atmosphere, but the CO2 levels are the result of human activity.  Another obvious example is the internet, a huge dynamical network of local interactions in the form of email messages and visits to websites. The role of social media in the recent US election reflects how the gap between different networks can produce completely disparate views of what is happening and why.

The most useful insights may come from considering how the dynamics of distributed algorithms evolve in relation to changing conditions. The correspondences between the regulation of collective behaviour and the changing conditions in which it operates might provide insight, and even inspire thinking about policy, in human social systems.  For ants or neurons, the network has no content. Studying natural systems can show us how the rhythm of local interactions creates patterns in the behaviour and development of large groups, and how such feedback evolves in response to a changing world.

Useful links

The OECD organised a Workshop on Complexity and Policy, 29-30 September, OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning29/09 afternoon30/09 morning

Ants at Work: How an Insect Society is Organized Deborah M. Gordon

Ant Encounters: Interaction Networks and Colony Behavior (Primers in Complex Systems) Deborah M. Gordon

A complex global financial system

2 December 2016
by Guest author

NAECAdrian Blundell-Wignal, Special Advisor to the OECD Secretary-General on Financial and Enterprise Affairs

Global finance is the perfect example of a complex system, consisting as it does of a highly interconnected system of sub-systems featuring tipping points, emergence, asymmetries, unintended consequences, a “parts-within-parts” structure (to quote Herbert Simon), and all the other defining characteristics of complexity. It is shaped by numerous internal and external trends and shocks that it also influences and generates in turn. And as the system (in most parts) also reacts to predictions about it, it can be called a “level two” chaotic system (as described, e.g. by Yuval Harari)

Numerous developments combined to contribute to the 2008 crisis and several of them led to structures and institutions that might pose problems again. Two important trends that would play a huge role in the crisis were the opening up of OECD economies to international trade and investment after 1945, and rapid advances in digital technology and networks. These trends brought a greater complexity of financial products and structures needed to navigate this new world, going well beyond the needs to meet the increased demand for cross-border banking to include new products that would facilitate hedging of exchange rate and credit default risks; financial engineering to match maturities required by savers and investors, and to take advantage of different tax and regulatory regimes; mergers and acquisitions not only of businesses, but of stock exchanges and related markets with global capabilities; and new platforms and technological developments to handle the trading of volatile new products.

The freeing up of financial markets followed the opening of goods markets, and in some respects was the necessary counterpart of it. However, the process went very far, and by the end of the 1990s policies encouraged the “financial supermarket” model, and by 2004 bank capital rules became materially more favourable to bank leverage as did rule changes for investment banks. The banking system became the epicentre of the global financial crisis, because of the under-pricing of risk, essentially due to poor micro-prudential regulation, excessive leverage, and too-big-to-fail business models. The rise of the institutional investor, the expansion of leverage and derivatives, the general deepening of financial markets and technological advances led to innovations not only in products but also in how securities are traded, for example high-frequency trading. The increasing separation of owners from the governance of companies also added a new layer of complexity compounding some of these issues (passive funds, ETFs, lending agents custody, re-hypothecation, advisors and consultants are all in the mix).

The trends towards openness in OECD economies were not mirrored in emerging market economies (EMEs) generally, and in Asia in particular. Capital controls remained strong in some EMEs despite a strengthening and better regulated domestic financial system. Furthermore, capital control measures have often supported a managed exchange rate regime in relation to the US dollar. When countries intervene to fix their currencies versus the dollar, they acquire US dollars and typically recycle these into holdings of US Treasuries, very liquid and low-risk securities . There are two important effects of the increasingly large size of “dollar bloc” EME’s: first, they compress Treasury yields as the stock of their holdings grows, second, their foreign exchange intervention means that the US economy faces a misalignment of its exchange rates vis-à-vis these trading partners.

Low interest rates, together with the more compressed yields on Treasury securities, have encouraged investors to search for higher-risk and higher-yield products. In “risk-on” periods this contributes to increased inflows into EME high-yield credit which, in turn, contributes to more foreign exchange intervention and increased capital control measures. The potential danger is that in “risk-offperiods, the attempt to sell these illiquid assets will result in huge pressures on EME funding and a great deal of volatility in financial markets.

The euro affects financial stability too, often in unexpected ways.. European countries trade not only with each other but with the rest of the world. However, the north of Europe is, through global value chains, more vertically integrated into strongly growing Asia due to the demands for high-quality technology, infrastructure, and other investment goods, while the south of Europe is competing with EMEs to a greater degree in lower-level manufacturing trade. Asymmetric real shocks to different euro area regions, such as divergent fiscal policy or changes in EME competitiveness, mean that a one-size-fits-all approach to monetary policy creates economic divergence. Resulting bad loans feed back into financial fragility issues, and interconnectedness adds to the complexity of the problem.

Population ageing adds to these concerns, notably due to the interactions among longer life spans, low yields on the government bonds that underpin pension funds, and lack of saving by the less wealthy who were hardest hit by the crisis and may also suffer from future changes in employment and career structures. To meet yield targets, institutions have taken on more risk in products that are often less transparent and where providers are trying to create “artificial liquidity” that does not exist in the underlying securities and assets.

However big and complex the financial system, though, it is not an end in itself. Its role should be to help fund the economic growth and jobs that will contribute to well-being. But despite all the interconnectedness, paradoxically, as the OECD Business and Finance Outlook 2016 argues, fragmentation is blocking business investment and productivity growth.

In financial markets, information technology and regulatory reforms have paved the way for fragmentation with respect to an increased number of stock trading venues and created so-called “dark trading” pools. Differences in regulatory requirements and disclosure among trading venues raise concerns about stock market transparency and equal treatment of investors. Also, corporations may be affected negatively if speed and complexity is rewarded over long-term investing.

Different legal regimes across countries and in the growing network of international investment treaties also fragment the business environment. National laws in different countries sanction foreign bribery with uneven and often insufficient severity, and many investment treaties have created rules that can fragment companies with respect to their investors and disrupt established rules on corporate governance and corporate finance.

Complexity is in the nature of the financial system, but if we want this system to play its role in funding inclusive, sustainable growth, we need to put these fragmented pieces back together in a more harmonious way.

Useful links

New Approaches to Economic Challenges (NAEC): The financial stream

OECD Business and Finance Outlook

The OECD organised a Workshop on Complexity and Policy, 29-30 September, OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning; 29/09 afternoon; 30/09 morning

Statistical Insights: Blowing bubbles? Developments in house prices

1 December 2016

OECD Statistics Directorate

Few economic indicators make the newspapers’ front pages. One that often does though is house prices. This is because, as witnessed during the financial crisis, movements in house prices can have a direct impact on households’ wealth and economic growth. At the same time, fluctuations in economic activity can also drive trends in house prices. House price indicators are therefore among the indicators that are closely monitored by policymakers.

However, despite their importance, until recently, largely reflecting a variety of conceptual and measurement differences across countries, no harmonised internationally comparable measure of house prices existed. In 2013, a new statistical handbook on house price indices was endorsed by several international organisations, and since then the OECD has been working with countries to develop a new internationally comparable database on house prices.

The new data confirm the positive association between house prices and economic activity but they also reveal significant differences in the strength of the link across countries, especially in the wake of the recent financial crisis.

There is a positive correlation between fluctuations in house prices and in economic activity…

As Figure 1 shows, fluctuations in real house prices (i.e. adjusted for general inflation) and economic activity in the OECD are positively related (with a correlation coefficient of around 0.6 over the period 1971 to 2015). This relationship reflects three drivers, that may differ in intensity and over time: a leading component, as the wealth effects from increases in real estate prices can boost final consumption of home owners, through re-mortgaging for example; a lagging component, as stronger economic growth may boost house prices; and a co-incident component as both house prices and economic activity may be explained by the same underlying factors, such as credit market conditions and population growth.

house-prices-figure1

Note: The real house price index for the OECD area is computed from real house price indices for the 35 OECD countries, weighted using their nominal GDP weights in PPP terms. This real house price index is sourced from the OECD Analytical house price indicators dataset and real GDP from the OECD Quarterly national accounts database.

…but the relationship may have weakened over time…

Understanding the dynamic contribution these drivers make over time is clearly of interest, especially as they provide insights on the potential build-up of vulnerabilities stemming from strong household spending growth driven by rising leverage and inflated asset prices.

The latest edition of the OECD’s  Economic Outlook provides evidence of a post-crisis weakening of the relationship between house price growth and the propensity to consume, in part reflecting the changes in financial regulations and credit standards introduced after the crisis which have reduced the ability of households to use rising housing values as collateral for additional borrowing to fund current spending.

…and it differs across countries.

A number of factors influence house price movements, including real household incomes, real interest rates, mortgage market regulations and supervision, lending patterns (at fixed rate versus variable rates), tax relief on mortgage debt financing, and transaction costs such as stamp duty. Therefore, differences in institutional arrangements combined with differences in economic activity may explain heterogeneity in housing markets across countries.

The internationally comparable house price indices from the OECD database show that the relationship between house prices and economic activity is indeed stronger in some countries than others. For example, in countries like Finland, Ireland, Japan and the United Kingdom, fluctuations in house prices and economic activity are closely related, with a correlation coefficient of around 0.7 from 1971 to 2015, whereas it is much weaker in countries like France, Italy and Norway, with a correlation coefficient lower than 0.3 over the same period.

Similarly, while house prices dropped in many countries at the time of the crisis, factors that affect house price developments differ markedly across countries. Figure 2 shows how real house price developments have diverged significantly across countries since 2005. Notwithstanding some differences within each group, four broad groups of OECD countries can be distinguished:

  • An initial fall in real house prices followed by a subsequent rebound in New Zealand, the United Kingdom and the United States.
  • A continuous increase in real house prices pre and post crisis in Australia, Mexico and Sweden.
  • A severe and prolonged fall in house prices post the crisis with only recent signs of stabilisation in Greece and Spain.
  • Relatively stable house prices since 2005 in Belgium and Korea.

In respect of the above, it should also be noted that there may be significant differences across local housing markets within countries. Unfortunately internationally comparable data at sub-national level are typically not available.

house-prices-figure2

 

Note: House price indices for individual countries are sourced from the OECD RPPI – Headline indicators dataset and deflated by the Consumer Price Indices (CPIs) for all items. The real house price index for the OECD area is sourced from the OECD Analytical house price indicators dataset.

The measure explained

House price indices, also called Residential Property Prices Indices (RPPIs), are index numbers measuring the rate at which the prices of all residential properties (flats, detached houses, terraced houses, etc.) purchased by households are changing over time. Both new and existing dwellings are covered if available, independently of their final use and their previous owners. Only market prices are considered. They include the price of the land on which residential buildings are located.

Where to find the underlying data

The OECD database on house prices is available on OECD.STAT and includes the three following datasets:

  • Residential Property Price Indices – Headline Indicators: This dataset covers OECD members and some non-member countries. For each country, the RPPI that is available at the most aggregate level has been singled out in this dataset, but due to data availability, headline indicators are country specific. For example, the RPPI at the most aggregate level for the United States only covers single-family dwellings and not all types of dwellings as is the case for most other OECD countries.
  • Residential Property Price Indices – Complete database: This dataset contains nominal house price indices with various breakdowns for OECD members and some non-member countries. Headline indicators are a subset of this complete dataset.
  • Analytical house price indicators: This dataset contains, in addition to nominal RPPIs, information on real house prices, rental prices and the ratios of nominal prices to rents and to disposable household income per capita. It should be noted that for Brazil, Canada, China, Germany, the United States and the Euro area, the datasets “Analytical house price indicators” and “Residential Property Price Indices (RPPIs) – Headline Indicators” do not refer to the same nominal price indices. These differences are further documented in country-specific metadata that are attached to this dataset.

In the future, the OECD database on house prices will include other housing-related indicators in order to provide a more comprehensive picture of real-estate markets.

Useful links

ILO, IMF, OECD, UNECE, Eurostat, World Bank (eds.), (2013), Handbook on Residential Property Price Indices, Eurostat, Luxembourg

OECD Economic Outlook, Volume 2016 Issue 2

Does homework work?

30 November 2016
by Guest author
The baby ate it

The baby ate it

Julia Stockdale-Otárola, OECD Public Affairs and Communications Directorate

In 1988, Iranian filmmaker Abbas Kiarostami took his camera into a primary school in Teheran and asked the kids a simple question: “Did you do your homework?” Of the many justifications for not doing it, the most reasonable was no doubt, “My baby sister keeps coming and biting my back”. Nobody claimed their parents stopped them from doing it though. Unlike Spain, where this month CEAPA, a confederation of 12 000 parents’ associations, called for a nationwide weekend homework strike.

Gracia Escalante, a mother of two and a social worker, explained some of the reasons behind the call: “My family will be on strike as a way of making more visible the view that the current system of homework in Spain is appallingly inefficient and socially divisive.”

Even some teachers support the strike. Alvaro Caso, who doesn’t assign any homework to his students, explains that he believes: “Children spend enough time at school and have enough work to do during the day. If a teacher is doing their job right, there is no need for any more – at least in primary education.”

Former acting Education Minister and now Government Spokesperson Iñigo Méndez de Vigo considers that the strike “is a bad idea“, although he added that this question “could be the subject of debate in the national education pact” that the government will “immediately set in motion in the Lower House of Parliament”. In the meantime, the regional governments of Madrid, the Canary Islands, and Murcia have approved recommendations to reduce homework time.

All sides in the debate quote data from the OECD PISA project that show that the Spanish 15-year olds spend more time on homework than most, at nearly 8 hours a week compared to an OECD average of nearly 6 (that’s less than half the time students in Shanghai spend).  Does it do any good? The PISA figures show that on average across OECD countries, for each hour per week students spend doing homework, they score 4.5 points higher in reading and mathematics and 4.3 points higher in science.

However, Spanish students are in the bottom half of PISA rankings, suggesting that spending more time doing homework doesn’t always translate into higher student achievement compared to other countries, although you could also argue that without homework the gap would be bigger. The discrepancy between efforts and results might be explained by what some argue to be the difference between homework versus “busywork”. That is to say that there is such a thing as good and bad quality homework and that there’s a point when children get to a point of oversaturation. Drawbacks of a heavy workload include boredom, burnout, increased stress, lack of sleep and less time for family and extracurricular activities.

Harris Cooper conducted a comprehensive analysis of the correlation between student achievement and homework. This study found a positive correlation, however it notes that this is much stronger at the high school level than in primary school.  Cooper suggests the 10-20 minute rule: every year no more than 10 minutes should be added to the time spent on homework. Following this approach, a child in the first grade would be assigned 10 minutes of homework, while a secondary student in year 9 would be assigned no more than 90 minutes of homework. The only problem with this approach is that not all children take the same amount of time on each assignment.

More generally, as you’d expect, the averages in all these studies hide a number of important differences, some of which are constant across countries and time. The conversations with Kiarostami gradually paint a fascinating picture not just of the pupils’ attitudes to education and child raising, but of family life and Iranian society at the time in general. It becomes clear that one of reasons for not doing homework was poverty – there was nowhere to study at home, or the parents were illiterate, so it was left to older brothers and sisters to give what help they could.

Today, poverty can still be a barrier to learning, whatever the country. An OECD study showed that this is the case even when all students, including the most disadvantaged, have easy access to the Internet. A digital divide, based on socio-economic status, still persists in how students use technology. Advantaged students are more likely than disadvantaged students to search for information or read news on line.

All things considered, it would seem that some homework is worthwhile, an “opportunity for learning” as PISA says, although it may also reinforce socio-economic disparities in student achievement. The OECD report gives some practical suggestions on how to help, such as providing a quiet place for disadvantaged students to complete their assignments if nowhere is available at home. If nothing else, that would maybe stop the baby biting her brother.

Useful links

More work? More play? What’s really best for high school students? Laura Capponi gives a student’s view on OECD Insights

Ten steps to equity in education