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We need an empowering narrative

23 June 2017
by Guest author

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

When the subprime crisis started, most economists, and the policymakers they advised, thought it would only affect people who had bought homes they couldn’t afford. They didn’t expect that national problem to trigger a cascade of events that almost caused the collapse of the world financial system. Nor did they foresee how the financial crisis would lead to the Great Recession. Global interconnectedness and the complexity it brings were not really understood, nor were the contagion mechanisms that they can trigger and that would impact other regions of the world.

Today, we’re trying to understand how the Great Recession and the other important trends that it aggravated such as growing income and wealth inequality,  gave birth to the backlash against globalisation, and to the political crisis we are confronting in many countries, with divided societies and a lack of common purpose. At the OECD, we set up our New Approaches to Economic Challenges (NAEC) initiative to examine these failures and establish the basis of a better way of analysing economic challenges and producing policy advice based on that analysis.

The slogan of this year’s OECD Forum was “You talk, we’ll listen”, and that is what NAEC has been doing. Over the past few years, we’ve asked a wide range of people what was wrong with the way we were doing things. And they haven’t been shy about telling us!

At the Forum, we presented the views of a sample of around 20 world experts across a variety of fields – financiers managing billions of dollars, Nobel prize-winning economists, political scientists, social scientists… compiling the ideas they have shared all through the NAEC initiative.

As you’d expect from such a strong-minded group, they don’t always agree with us or each other, and we do not claim to buy all that they say. More importantly, to avoid the “herd thinking” prevailing before the crisis, and that prevented a better understanding of the imbalances that were accumulating to a tipping point, it is important to listen to those that think differently from us, and to remain open to criticism and honest exchanges.

But a number of common views do emerge from reading the draft report. Growing integration and connectedness is helping to improve living standards across the globe, but the traditional models we use to study today’s economy make too many assumptions that are at odds with the facts. The very name of these models, general equilibrium, shows that they assume that the economy is basically in balance until an outside shock upsets it. They assume that you can understand the economy by studying a representative agent whose expectations and decisions are rational.

This view is essentially linear, and the policy advice it generates is tailored to a linear system where an action produces a fairly predictable reaction. It looks at aggregate outcomes and at average results. It concentrates on flows and does not consider stocks. Real life is not like that.

Economic models that rely only on inputs such as GDP, income per capita, trade flows, resource allocation, productivity, representative agents, and so on can tell a part of the story, but they fail to capture the distributional consequences of the policies we make, and do not address the  fact that the growth process has only benefited a few. They do not capture natural depletion, or incorporate environmental damage as liabilities. On the contrary, they assume that, by growing the pie, inequality of income and opportunities will diminish (the trickle-down effect), or that you can always clean after you grow. So we need a full re-vamp of our analytical frameworks and the assumptions that we make, to better capture the reality. At the OECD we have done so by proving that income inequality harms growth.

To start with, we need different more granular information, data and analysis, and definitely, better metrics. We have to be able to check how policies will impact different income groups, communities, regions and firms. We need to get away from growth first and distribute later, or clean later. The unintended consequences of policies should be considered beforehand, and so should equity.

Traditional models do not integrate important dimensions such as justice, trust or social cohesion that are not easily measurable. In fact these models are based on an ideology or narrative that claims that people are rational, take the best decisions according to the information they have to maximize utility, and that the accumulation of rational decisions will deliver the best outcome.

Real people are not like that. Their lives are shaped by their hopes, aspirations, history, culture, tradition, family, friends, language, identity, the media, community and other influences. As these other elements are not the core of macroeconomic models, they are neglected, and the social and human sciences (psychology, history, sociology…) that can explain these variables have been put aside in the modelling work to develop economic policy options.  As the economic profession became highly quantitative, the non-measurable features of the economy were just ignored, such as people’s fears, expectations or sense of unfairness.

The world we live in is a system of systems, physical or not, that is complex. That means you have to take a systemic approach that can deal with tipping points, phase changes, emergent properties, and – very important for us – the fact that shocks do not come from outside. The system itself produces the shocks that destabilise it.

We need a new approach to economics that isn’t just about quantitative economics. An approach that integrates behavioural economics and complex systems theory, as well as economic history.

We also need a new narrative to integrate all these different, often conflicting influences. So what might such a new narrative look like? The report concludes that it should be based on the best facts and science available, and contain four stories: a new story of growth; a new story of inclusion; a new social contract; a new idealism.

The state can help empower the shift. An empowering state is one that focuses on strategic investments to allow people, firms and regions to fulfil their potential. That means putting people at the centre of our policy efforts, and broadening the objectives of policies to include not only material well-being but many other options that are important such as health, quality jobs, a sense of belonging, social cohesion, and environmental outcomes.

At the OECD we have made progress with NAEC and with the Inclusive Growth Initiative, inviting policy makers and stakeholders to consider different alternatives to the traditional framing of economic issues. We conclude that by being inclusive, economies can be more productive, and that fostering productivity growth in an inclusive manner makes growth sustainable.  We call this the “nexus” or the need to foster “inclusive productivity”. We are making the call to turn this analysis into action, but this will require a re-engineering of the institutional settings in OECD economies, getting rid of silos and having a holistic approach for the well-being of people, that is multidimensional.

The lively and informative debate with the public at the OECD Forum suggests to me that the draft report touched on a number of subjects people care deeply about. But it is still a draft and we need to continue the conversation, so please send your comments, criticisms and suggestions to us at [email protected], and we’ll keep you informed on how the discussion progresses over the coming months.

Useful links

 

 

 

 

 

 

 

 

 

Rain or shine, Asia needs a better umbrella of social protection

19 June 2017
by Guest author

Alastair Wood and Willem Adema, OECD Directorate for Employment, Labour and Social Affairs

An Indonesian proverb says that a firm tree does not fear the storm. After the Asian Financial Crisis of 1997/98, Asian economies recovered with strong economic growth (on average 4.2% annually), which over the past decade has contributed to a decline in “absolute poverty” – here defined as those with incomes of less than USD 2 per day. The share of people living in poverty fell from over half to a third of Asia’s population, with large reductions especially in Viet Nam, China and Indonesia. Greater prosperity has also contributed to lower fertility rates and higher life expectancy. Now the challenge is to create good jobs for Asia’s increasingly educated workforce and prepare for population ageing, which will drive social spending upwards.

With increasing prosperity, the leeway for greater public social expenditure (defined broadly as support for households in difficult circumstances which adversely affect their welfare) is growing, but at 7% of GDP it remains low compared with the OECD average of 21% of GDP (our first chart). Indeed, in many Asian countries, including India and Indonesia, public social spending is often as low as 2 or 3% of GDP .

Our report on A Decade of Social Protection Development in Selected Asian Countries indicates that one of the reasons for such low social spending is related to the large number of informal workers. Indeed, the problem isn’t so much the lack of jobs (Cambodia and Nepal, for instance, have over 80% employment rates) but rather the lack of good quality jobs–meaning the quality of the working environment, earnings quality and job security,  as set out under the OECD Job Quality Framework.

Informal workers in Asia frequently work long hours for little pay, with little to no job security and without social protection coverage. These workers do not make contributions to social insurance schemes–for healthcare and pensions for example–and therefore they cannot claim health insurance benefits when they fall ill or draw a pension when they grow old. As the bulk of public social spending goes to pension and health benefits tied to formal employment, current government efforts are more likely to benefit better-off households rather than poor ones. Governments have sometimes put in place last-resort benefits but spending on such social assistance benefits (support in cash or in-kind which is targeted at low-income households) is limited as benefits are small and they are not given to everyone. Public spending on labour market programmes is even lower, and only a limited number of poor workers have access to employment guarantee schemes.

Extending social protection is clearly needed not only to further reduce poverty, but also to provide for the population’s increasing medical and financial needs. Crucially, population ageing in Asia is expected to progress at a fast pace: by 2030 there will be fewer than 7 people of working age (15-65) per senior citizen (65+), compared to more than 10 today. So what are countries doing to prepare for this challenge?

Richer Asian countries such as Japan, Korea and Singapore have long since put in place mandatory pension systems to which workers contribute during their working life. In recent years, China has arguably been particularly successful in increasing pension coverage. In addition to its pension provisions for civil servants, China’s basic urban worker pension system covered almost 9 out of 10 workers in 2015, while the basic national resident pension system (which includes the rural pensions scheme) covered 500 million people, or about 75% of the target population (see report by Queisser et al, 2016). Various measures were also used to encourage pension saving, such as subsidising contributions or making pension payments to the elderly parents of those workers who started to contribute to rural pension schemes.

In the poorer countries not many workers have had a chance to save for retirement and contributory pension systems still do not cover many workers. To fill the gap some Asian countries, such as Bangladesh, India, Nepal and Thailand, have established pension schemes targeted at low-income households, which are often the main or only system of income provision in retirement. However, coverage of such schemes is variable and the payment rates are generally low.

Increasing access to social protection is an imperative for achieving more inclusive and cohesive societies in Asia. The challenge facing many economies with a large rural sector or a large urban informal sector is overcoming administrative bottlenecks limiting coverage extension of social protection, not least because of the very limited capacity to register participants in insurance schemes and/or collect contributions from employers and employees. One approach worth considering is India’s effort of equipping all its citizens with a digital identity. This initiative, known as “Aadhaar”, is not compulsory yet, but covers about 4 out of 5 Indian citizens and addresses a range of activities from financial services, such as daily bank transfers to making benefit payments. This includes, for example, making payments to low-income households that are eligible for the “cooking gas subsidy” and “social assistance pensions”.

New technologies can represent a great opportunity for governments in Asia to leapfrog standard registration methods, track social protection eligibility, and help extend coverage to all those who need social protection most.

References and further reading

OECD (2017), A Decade of Social Protection Development in Selected Asian Countries, OECD Publishing, Paris,  http://dx.doi.org/10.1787/9789264272262-en.

OECD (2016), The OECD Job Quality Framework,

http://www.oecd.org/employment/job-quality.htm .

Queisser, M.  A Reilly and Y. Hu (2016), “China’s pension system and reform: an OECD perspective”, Economic and Political Studies, 4:4, pp. 345-67.

Statistical Insights: What role for supply-use tables?

5 June 2017
by Guest author

By the OECD Statistics Directorate

Supply-use tables provide the key accounting mechanism to ensure coherence between the various sources of data and approaches countries use to estimate GDP–expenditure, output and income. They also have the potential to inform a wide range of policy areas.

What are supply-use tables? Supply-use tables (SUTs) provide a detailed overview of transactions in goods and services by industries and consumers.

In the first chart, the supply table shows the total values of what industries produce and what is imported. It also shows estimates of industries’ distribution margins, taxes paid and subsidies received, which together explain the difference between basic or “factory gate” prices and the actual prices paid by purchasers.

1.

The use table divides product values into intermediate consumption, which is the value of products being used for further processing by industries, and final consumption of finished products by households and government. It also shows other components of final demand, such as investment and exports. For each industry, the use table also shows the value added by productive activities, that is to say, the difference between final output and intermediate consumption, including compensation of employees and operating surplus or mixed income.

Why are supply-use tables useful?

Traditionally, the main use of SUTs has been to improve GDP estimates by balancing records of the supply of goods and services with those of the demand for them, thus capitalising on and confronting disparate sources of data–business surveys, household surveys, labour force surveys, administrative tax records, imputations, and so on. But their potential goes well beyond this, as SUTs provide a bird’s-eye view of the structure of the economy–who makes what, how and for whom.

In recent years, SUTs have become the key accounting tool used to generate national input-output tables, and have become essential to the construction of datasets such as those used for Trade in Value Added (TiVA) estimates and related applications, such as CO2 footprints and jobs embodied in trade. And their potential goes beyond even these high-profile applications. SUTs can, for example, help simulate and estimate the economic impact of potential price shocks, or develop productivity estimates taking account of labour, capital and intermediate inputs. Moreover, they provide the basis for simple descriptive statistics that are not typically available or collected.

Supermarkets and mark-ups

One interesting new application is to compare distribution costs and mark-ups between countries. These vary with differences in countries’ policies in the areas of competition and deregulation; the prevalence of discount stores, specialised retailers, and e-commerce; transportation infrastructure; and the cost of petrol. There may also be differences in the shares of purchases made directly from producers or local units.

The chart below compares distribution margins in France and the UK with those in Germany–where discount stores, such as Aldi and Lidl, account for over a third of the market. It shows that distribution margins for fish in France were 64% of the total price in 2013, over 40 percentage points higher than in Germany, which may reflect higher margins on fresh as opposed to frozen fish. Margins on agricultural products in the United Kingdom were somewhat lower than in Germany but higher in all other categories shown below, except pharmaceuticals. In fact, margins in Germany are significantly lower across a range of products.

2.

Increasing e-commerce transactions can be expected to reduce margins. However, while complete data on e-commerce remain a work in progress, where anecdotal data are available, they do not appear to explain the significant cross-country differences in margins.

 

Where to find the data

OECD SUT data are available by industry and product on OECD.Stat under National Accounts statistics. The tables provide information by industry (at the 2 digit ISIC Rev 4 level: 89 industries) with corresponding breakdowns by products (using internationally agreed product breakdowns). They are available at the total economy level at both purchasers’ and basic prices, with separate tables breaking down the differences into trade and transport margins, and taxes and subsidies on products. Data are available for 37 countries in 2017, with more being added.

Further reading

The OECD Statistics Directorate is leading international efforts to develop extended supply-use tables that break down traditional groupings of industries in SUTs by a number of criteria, including trading status, firm size and ownership. These provide an essential tool to improve TiVA estimates and provide new insights on global value chains (GVCs), such as upstream integration of small and medium enterprises (SMEs) in GVCs, and on the trade-investment nexus.

For further information, see www.oecd.org/std/its/enterprises-in-global-value-chains.htm

Click for more Statistical Insights

Public procurement is making the world a better place—one order at a time

2 June 2017
by Guest author

Bill Below, OECD Public Governance Directorate

The greatest concentration of potentially world-changing spending power does not lie in the hands of the global super-rich. It lies rather in the hands of public procurement staff working in national, regional and local governments around the world. In the OECD alone, the aggregate value of what they buy, from the lowly paperclip to public hospital locksmith services, from launch services for interplanetary probes to the interplanetary probes themselves, is estimated to be €5.8 trillion per year. That’s a lot of stuff. Indeed, the public purchase of goods and services is worth 14% of GDP in the EU and 12% of GDP in the OECD. Spending power like this has the potential to elevate public procurement, still considered by some to be a simple clerical function, into a powerful force for change.

Of course, the first job of public procurement is to provide governments and state-owned enterprises with the goods, services and works needed to meet citizens’ needs. And this still has to be accomplished while ensuring the best value for money (the famous MEAT – Most Economically Advantageous Tender). But, with such huge amounts of purchase power in play, public procurers have an opportunity—some would say an obligation—to accomplish secondary policy goals. It adds a new dimension, as well as new complexity and responsibilities, to the remit of public procurement professionals.

This presents something of a conundrum. Despite huge aggregate public procurement budgets, times are tough. Throughout the OECD, the public sector continues to downsize. Programme budgets are being cut, and public services are forced to do more with less. Asking procurement budgets to multitask can help advance important policy goals without additional allocation. But, to be successful, procurement staff will need new training and skills, something not all governments are prepared to provide.

But many governments are succeeding in using the procurement function to achieve these secondary policy goals—called strategic public procurement, or SPP.  These objectives might include promoting sustainable green growth, the development of small and medium-size enterprises, the promotion of innovation, standards for responsible business conduct or broader industrial policy objectives. Today, all OECD countries have implemented strategic procurement programmes supporting one or more of the above goals.

Take the example of innovation. Typically, innovation is a supply function originating with the private sector. One of the traditional policy tools to enhance innovation consists of providing subsidies for R&D efforts in private enterprises. But, public procurement can be used to shape markets by stimulating demand. In essence, governments can ask bidders to come up with new, innovative solutions to service delivery challenges while ensuring the diffusion of the new technology or service. In a sense, procurement staff and suppliers put their heads together to imagine new things. It’s not without risk. Think of the initial rollout of healthcare insurance exchanges in the US. But there are lots of successes, too, many documented in Public Procurement for Innovation, Good Practices and Strategies (OECD, 2017). Evidence suggests that strategic procurement of innovation is in fact more effective than simple R&D subsidies in promoting innovation, with a combination of the two being ideal.

There are caveats, however. In exchange for taking on some of the risks of R&D, participating suppliers will require a minimum of visibility and market size. When markets are too fragmented and assurances too uncertain, suppliers will back away. At the same time, procurement specialists can lack the skills to identify unmet needs and strike the right balance between the primary procurement goal and secondary policy goals. The public sector also tends to be risk averse, a desired quality when it comes to the handling of public money, but it can also be an innovation killer. The public sector needs to find ways to encourage informed risk-taking behaviour.

But the biggest risk may be that, at a time when public money is short, governments will fail to provide public procurement teams with the skills they need not just to deliver value for money but to deliver on green growth, innovation, support for SMEs and more—goals that aren’t so secondary after all.

 

Further reading

OECD & Public Procurement

www.oecd.org/gov/public-procurement/

Public Procurement for Innovation: Good Practices and Strategies

www.oecd.org/gov/public-procurement-for-innovation-9789264265820-en.htm

EU & OECD Conference on Strategic Public Procurement

bit.ly/p-procurement

OECD Directorate for Public Governance

www.oecd.org/gov/

 

 

 

 

 

For globalisation to work for all, you have to level the playing field first

30 May 2017
by Guest author

Adrian Blundell-Wignall, Special Advisor to the OECD Secretary-General on Financial and Enterprise Affairs, argues that key corporate and financial issues must be addressed if globalisation is to work better for all. These issues are examined in the new 2017 OECD Business and Finance Outlook.

Today the debate rages about whether the decline in living standards is due to the effects of globalisation or to poor domestic policies. Both have surely played a role. But the problems often associated with globalisation (inequality, the hollowing out of the middle class, employment of less-skilled workers in advanced countries, etc.) do not originate from “openness” as such. The problem is that not all countries are open to the same degree and the playing field in the cross-border activities of businesses is not level.

Since entering WTO in 2001, China has quickly become the largest exporting nation in the world, with 14% of merchandise exports and 18% of manufacturing. Hong Kong (China), Singapore and Korea together export as much as the United States or Germany. Companies may also set up production abroad, closer to foreign markets. China has increasingly joined this model too, and is now responsible for 11% of world merger and acquisition (M&A) outflows in 2016. In recent years it has been switching away from M&A in oil and gas much more towards high technology companies.

In parallel, the number of state-owned enterprises (SOEs) among the Fortune Global 500 companies grew from 9.8% in 2005 to 22.8% in 2014. Most are domiciled in Asia, and the largest among them are Chinese  banks. Distortions, resulting from subsidies and other advantages accorded to SOEs, often coming via cheaper finance from SOE banks, are important. But strong government ownership of shares in emerging economies is present across all industrial sectors. Emerging-market SOEs have greatly contributed to the  current excess capacity in key materials, energy and industrial sectors, contributing to a decline in the  average return on equity in many sectors and countries.

No matter where firms sit in the value chain, penetration of markets by emerging economies evokes responses from companies to move further up the value chain – forcing them to restructure and enhance  technology to remain competitive. If they don’t take advantage of global economies of scale, they will in any case find themselves facing strong competition from other successful firms, whether at home or abroad. The fastest productivity growth companies are also those that take advantage of foreign  sales—whether by exporting or by setting up subsidiaries that produce abroad to serve foreign markets.

There is nothing wrong with success in cross-border activities—provided of course that success is not based on unfair competition.

The leaps in productive potential can be enormous, but all of this requires investment, innovation and new technology. The company data shows that it makes no sense to try to separate these things out. The companies at the forefront of innovation and technology (as reflected in productivity growth) are often multinationals engaged in trade and foreign direct investment—they buy and sell business  segments, set up to produce abroad and the export from multiple global production bases.

The losers in this story—those workers affected by reduced hours, innovative work contracts and compressed wages—belong to companies that are scattered within their own industry. It is not that the  middle class as such is being hollowed out but that these ranks are swelled by those that work for less successful companies forced to restructure or exit.

Some large emerging economies have managed to pull millions of people out of poverty—and the long-term future of every country lies with continued success in this regard. Competition too is to be welcomed. Like any sporting match, let the best teams win. But also like any sporting match, the game needs to be played with the same rulebook. If the same rules do not apply to all, then fairness is put into question. If fairness is questioned, then sustainability of open trade and investment in the global economy is also put at risk.

Openness promotes opportunities for business. But the governance of trade, international investment and competition does not use a common rule book. Without this, the size and cost of the other policies needed to protect the losers will continue to be burdensome and possibly beyond reach.

This year’s OECD Business and Finance Outlook discusses many aspects of the lopsided nature of  the  world economy, among them: the growing role of state-owned enterprises (SOEs), uneven financial regulations, distorting capital account and exchange rate management, cross-border cartels that translate into benefits for companies and shareholders rather than into lower consumer prices, collusive behaviour  in investment bank underwriting practices, corner-cutting responsible business conduct, and the bribery  and corruption that distort international investment and misallocate resources.

We need improved rules of the game and enhanced international co-operation. OECD standards can play a leading role in shaping this conversation, and promoting a level playing field that ensures the benefits of globalisation are shared by all. This requires a commitment by economies participating in globalised markets to a common set of transparent principles that are consistent with mutually-beneficial competition, trade and international investment across a range of areas.

References

OECD Business and Finance Outlook 2017 is available at: http://oe.cd/BusinessAndFinanceOutlook2017

OECD Business and Finance Scoreboard 2017 is available at: www.oecd.org/daf/OECD-Business-and-Finance-Scoreboard.htm

Climate: Towards a just transition, with no stranded workers and no stranded communities

23 May 2017
by Guest author

By Sharan Burrow, General Secretary, International Trade Union Confederation (ITUC)

Ambitious action on climate is an imperative. The G20 leaders have a chance to reinforce the Paris Climate Agreement and raise ambition with concrete measures to ensure significant progress towards net zero economies and reap the benefits of investment now in jobs and economic growth.

There can be no doubt that a zero-carbon world is possible, but critical choices need to be made about how we manage the transition. The trade unions fought for the demand of a just transition with the result that the Paris Agreement included the requirement that national responses ensure just transition measures.

The OECD report Investing in Climate, Investing in Growth adds to the volume of evidence that there is economic advantage, there are jobs and we can secure the future for humanity.

However, the sectoral and economic transformation we face is on a scale and within a time frame faster than any in our history. And increasingly companies and investors are acting to avoid risk and build the foundations for a zero-carbon world.

Notwithstanding, stranded workers and stranded communities will result if inclusive planning which includes just transition measures does not feature in national development plans along with industry and investment strategies. We can work to prevent fear, opposition even inter-community and generational conflict if unions and community are consulted and sustainable jobs and decent work result.

People need to see a future that allows them to understand that, despite the threats, there is both security and opportunity.

The shift is on in energy. Renewable energy employed 8.1 million people around the world in 2015. And investment trends in this sector are beginning to outstrip that in fossil fuels.

But we cannot accept that workers and communities dependent on fossil fuels will be abandoned as investment shifts. These workers and their communities brought us the prosperity of today. This is why industrial transformation should generate both new sources of energy with new companies and transparent plans for existing companies to transition to renewable energy, energy storage, and energy efficiency, with the guarantee of decent work. To see new energy jobs paid a fraction of traditional energy jobs is not acceptable, and breaking down labour rights and standards is not the answer.

Beyond those vulnerable groups it is also about new industrial processes, new skills for new jobs, new investment and the opportunity to create a more equal economy that helps to reduce emissions, improves resilience and ensures the solidarity of compensation for loss and damage for those on the front lines of extreme weather events, water shortages or changing seasons.

Facilitating the social dialogue that allows government, business, trade unions and civil society groups to collaborate in national, industry and community planning for transition and decent work is the key. Clean technologies, energy efficiency, retrofitting, infrastructure built to green standards, investment, information technology and digital distributional systems, and demand management of all sectors inclusive of upstream and downstream supply chains: this is the imperative. It must be a just transition that leaves no one behind.

For coal and other fossil fuel companies in communities dependent on coal fired power stations, corporate transition with investment in new energy, new infrastructure, new industries and new jobs are vital. And some responsibility for community renewal needs to be enshrined whether directly or by exit funding arrangements.

For cities, the job opportunities are significant in green construction and retrofitting, electric mass transit and related services. It requires long-term investment, but creates jobs and drives growth.

For industry, renewable energy must be supplemented with cleaner industrial processes.

For workers, collective bargaining will ensure workers the essential support when there will be a need for redeployment, re-skilling and redeployment. Pensions for older workers must be secured. Sharing prosperity based on resource productivity must become a new tool for ensuring just wages and decent work within planetary boundaries.

For parents everywhere, a just transition can ensure strong communities and quality jobs for their sons and daughters.

There are good examples of progress emerging. And there are models for investment vehicles to secure progress but while businesses, unions and communities are acting, there are many gaps. The absence of appropriate government policies, funds and structures for a just transition makes it hard for workers, employers and communities to move forward on their own. In particular the need for targeted investment in infrastructure, regional redevelopment and social protection requires the broader scope and mandate that governments bring. Without more assertive action from governments, we risk seeing many more examples of unjust transition, with stranded workers and communities.

For governments to fulfil the Paris Climate Agreement, governments should ensure that job-related aspects of climate policies are part of their decarbonisation pathways. They should establish plans and strategies for a just transition.

This requires the urgent establishment of formal social dialogue mechanisms so that just transition strategies can be democratically designed for all levels–community, region, company and sector, and country. The ITUC has established a Just Transition Centre to support this vital social dialogue.

Just transition plans should be based on the ILO’s just transition guidelines.

And governments should establish just transition funds in all countries and for vulnerable communities, regions and sectors. The funds will support the implementation of just transition plans.

Just transition funds should cover investment in education, reskilling and retraining; extended or expanded social protections for workers and their families; and grant, loan and seed capital programmes for diversifying community and regional economies.

The G20 Financial Stability Board’s Recommendations of the Task Force on Climate-Related Disclosures should be expanded to include disclosure of just transition plans for vulnerable workers and communities, consistent with disclosure of company plans for decarbonisation and management of climate risk.

The design of public and blended investment in low emissions infrastructure with the aim of creating decent, high value work throughout the value chain and with a focus on vulnerable communities and regions.

Investment in public transport, renewable energy and appropriate grid and storage infrastructure, zero emissions buildings, and infrastructure for electric vehicles should be prioritised.

When 64% of people in 15 of the G20 countries in the ITUC Global Poll 2017 want their governments to do more to promote a just transition to a zero-carbon economy, the mandate is there for governments to act.

The G20 group of countries can set the direction through both individual and collective action. This is a time for leadership, and where there are reluctant leaders other must simply set the pace.

 

References and further reading

The Just Transition Centre is at www.ituc-csi.org/just-transition-centre

The OECD report Investing in Climate, Investing in Growth, released on 23 May, provides an analysis of how low-emission and climate-resilient development can be achieved without compromising economic growth, competitiveness or well-being. Chapter 6 of the report provides a detailed discussion of just transition issues and how governments can manage them.To read the publication, synthesis report and related material visit:  www.oecd.org/environment/cc/g20-climate/

 

A dash of data: Spotlight on Irish households

18 May 2017
by Guest author

Esther Bolton, OECD Statistics Directorate

GDP growth always gets a lot of attention, but when it comes to determining how people are doing it’s interesting to look at other indicators that focus more on the actual material conditions of households. Let’s focus on a few alternative indicators to see how households in Ireland are doing.

GDP and household income

Real household disposable income per capita grew at the same pace as real GDP per capita in Q4 2016, both increasing 2.3% from the previous quarter. However, that does not mean that real GDP and real household income always grew in tandem as shown in chart 1. Real household income levels in Ireland only recently returned to their pre-crisis level (the index was 103.5 in Q4 2016 from a baseline value of 100 in Q1 2007 before the economic crisis), following more than 7 years below that level. On the other hand, real GDP per capita is up more than 27% since Q1 2007 (the index was 127.3 in Q4 2016) due to the remarkable growth rate seen in Ireland in Q1 2015.

What occurred in Ireland in 2015 reflects the growing importance of global value chains, combined with the increasing importance of “intangible assets” used in production, as multinational enterprises (MNEs), in particular, have sought to maximise profits and minimise costs, including through optimisation of their global tax burden, by (re)allocating some of their economic activities in different parts of the world. In 2015, MNEs relocated intangible assets to Ireland, where these assets are being used by Irish enterprises (including Irish affiliates of foreign MNEs) to generate value added.

This is an excellent example of why GDP should not be interpreted as an indicator of the purchasing power or the material well-being of a country. GDP is primarily a gross measure of economic activities on the economic territory of a country, and of the income generated through those activities. High levels of GDP thus do not necessarily mean high levels of income flowing to the residents nor does it mean that their growth rates will be similar(read this post for an explanation on Irish GDP large increase in 2015). A major reason is that some of the income generated by production may be repatriated to non-residents, for example in the case of income generated by affiliates of multinational enterprises.

The divergence between GDP and household disposable income can clearly be seen in Chart 1 with real GDP per capita growing sharply (by 21.3% in Q1 2015 from the previous quarter), while real household income increased by only 1.6%.

Chart 1

The presence of a significant number of foreign affiliates of MNEs (responsible for around half of Ireland’s business sector GDP, that is to say, excluding agriculture, most self-employment, the public sector and some financial services activity) is not the only reason why there can be a divergence between the growth of household income and GDP. Government interventions can also play a role.

As GDP was contracting throughout the quarters of 2008, household income was sustained by increased unemployment benefits and other social benefits received by households. As a result, between Q1 2008 and Q4 2008, the net cash transfers to households’ ratio showed a sharp increase; see Chart 2. Since Q4 2010 the ratio has trended down.

Chart 2

 

 

Confidence, consumption and savings

Household disposable income is a meaningful way to assess material living standards, but to get a fuller picture of household material well-being one may also want to look at households’ consumption behaviour.

Consumer confidence (chart 3) trended upward, from a low seen in Q1 2009, until Q4 2015 when it reached its peak (104.7). Since then it has been declining to 103.0 in Q4 2016, yet still 10 points higher than Q1 2009.

Chart 3

Despite the recent downward trend in consumer confidence, the increase in household income helped boost real household consumption expenditure per capita (chart 4), which rose 0.5% in Q4 2016 from the previous quarter (from 95.7 in Q3 2016 to 96.2 in Q4 2016). Since Q1 2013 real household consumption expenditure per capita has increased in line with developments in real household income. However, Irish households are still buying less goods and services than before the crisis.

Chart 4

Because household income increased more than final consumption expenditure, the households’ savings rate (chart 5), which shows the proportion that households are saving out of current income, increased 1.2 percentage points to 13.5% in Q4 2016. The ratio has been trending up since Q1 2016, suggesting that households remain cautious about their future income.

Chart 5

 

Debt and net worth

The households’ indebtedness ratio, i.e. the total outstanding debt of households as a percentage of their disposable income, may reflect (changes in) financial vulnerabilities of the household sector and provides a useful yardstick to assess their debt sustainability.

The household indebtedness ratio dropped considerably since the crisis, by nearly 75 percentage points, from its highest point in Q4 2009 (230% of disposable income, compared with 155 % of disposable income in Q4 2016). This corresponds to the largest drop in the debt ratio seen amongst OECD countries. The decline was driven by a decrease in loans (primarily mortgages) and rising household income.

Chart 6

When assessing households’ economic vulnerabilities, one should also look at the availability of assets, preferably taking into account both financial assets (saving deposits, shares, etc.) and non-financial assets (for households, predominantly dwellings). Because information on households’ non-financial assets is generally not available, financial net worth (i.e. the excess of financial assets over liabilities) is used as an indicator of the financial vulnerability of households.

In Q4 2016, households’ financial net worth was stable at 214 % of disposable income (chart 7). Since Q1 2009, it has been trending up driven primarily by the reduction in household debt (as seen in chart 6) and increasing financial assets (mainly pension assets and currency and deposits). Between 2009 and 2016, household financial net worth increased by around 145 percentage points. However, some caution is needed interpreting this figure since financial net worth does not take into account housing assets which saw spectacular growth due to a bubble in house prices until it burst in 2007 followed by sharp declines afterwards.

Chart 7

 

Unemployment

The unemployment rate and the labour underutilisation rate (chart 8) also provide indications of potential vulnerabilities of the household sector. More generally, unemployment has a major impact on people’s well-being. The unemployment rate was 7.1% in Q4 2016, pursuing the downward trend observed since Q1 2012 when it reached a peak of 15.1%. The labour underutilisation rate takes into account the share of underemployed workers and discouraged job seekers. Since Q4 2015, this rate has been twice the size of the unemployment rate, compared with around one and half time pre-crisis, indicating higher slack in the labour market.

Chart 8

Overall, the last quarter of 2016 saw a continued increase in Irish households’ material wellbeing with income and consumption per capita continuing to expand, a further decline in debt, an increase in financial net worth (although total net worth still remains below its pre-crisis level ) and a fall in the unemployment rate. However, the savings rate increased in line with declining consumer confidence (although consumer confidence is now much higher than its pre-crisis level). And despite the continued fall in the unemployment rate, many workers would prefer to work more, as indicated by the remaining high level of the underemployment rate.

One should keep in mind that households’ income, consumption and savings may differ considerably across various groups of households; the same holds for households’ indebtedness and (financial) net worth. The OECD is working on these distributional aspects and preliminary results can be found here and here.

To fully grasp people’s overall well-being, one should go beyond material conditions, and also look at a range of other dimensions of what shapes people’s lives, as is done in the OECD Better Life Initiative.

 

Useful links

Are the Irish 26.3% better off?”, OECD Insights post, 5 October 2016

For many years, OECD has been focusing on people’s well-being and societal progress. To learn more on OECD’s work on measuring well-being, visit the Better Life Initiative.

Interested in how households are doing in other OECD countries? Visit our household’s economic well-being dashboard.