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Making Trade and Investment Work for People

9 February 2016
by Guest author

NAECKen Ash, Director of the OECD Trade and Agriculture Directorate

Both the UN Sustainable Development Goals (SDGs) and the OECD New Approaches to Economic Challenges (NAEC) explicitly recognize that trade and investment are not goals in themselves, but are a means to an end. That desired end is stronger and more inclusive growth, better jobs for more people, and improved societal well-being. Trade and investment policies cannot deliver these outcomes alone, but they can contribute as part of a wider package of comprehensive structural policy reforms, designed in light of the specific situation in countries at various stages of development.

Global value chains (GVCs) account for an increasing share of world income, reflecting the high degree of economic interdependence among nations today. All countries have increased incomes associated with GVCs, in particular major emerging economies, but these benefits do not accrue automatically. The fragmentation of production across borders highlights the importance not just of open, predictable and transparent trade and investment policies, but also of effective complementary policies that enable less developed countries (LDCs) and small and medium enterprises (SMEs), in particular, to participate in and to benefit from GVCs. In brief, making trade and investment work for people requires a coherent and well integrated public policy agenda.

GVCs magnify the costs of protection. As goods, services, capital, data and people cross borders multiple times, the cumulative effect of a number of individually small costs imposes a significant burden on traders and on investors. These costs can result from explicit restrictions, such as tariffs, from inefficient or unnecessary border procedures, and from constraints on the flow of capital. Where foreign investment is a driver of export capacity, the cumulative effect may even discourage firms from investing, or maintaining investment, in the country. As a result, production facilities, technologies and knowhow, and jobs might move elsewhere.

In a world dominated by GVCs, there is a tendency for more, and more demanding, regulatory standards, driven by the imperative to ensure reliability, quality, and safety. The right to regulate and to protect consumers is not in question, but regulations should be science-based, proportionate and non-discriminatory. Any unnecessary costs imposed by excessive regulatory burden falls most heavily on SMEs and firms in LDCs, where the capacity to adapt is often limited. In too many cases, this can preclude effective participation in GVCs.

There would be no GVCs without well-functioning transport, logistics, finance, communications, and other business services to move goods and coordinate production along the value chain. Today, services represent over 60% of GDP in G20 economies, including 30% of the total value added in manufacturing goods. The supply of these services is often provided through investment, yet services markets remain relatively restricted in many countries, imposing high costs on domestic as well as foreign firms, limiting productivity growth, and constraining participation in GVCs unnecessarily.

GVCs also strengthen the case for unilateral policy reform. Domestic firms benefit from the expanded export opportunities that are often the aim of trade negotiations, but they also benefit from access to world class imports of intermediate goods and services. Opening your own markets, in particular for intermediate inputs, can benefit your own firms and workers. But the gains are even greater when more countries participate and markets for goods, services, capital, technology, data, ideas, and people are opened on a multilateral basis.

GVCs make evident the necessity of more coherent rules for trade and investment; this twin engine of development can only reach its full potential if other policy areas are also better aligned and in coordination with those on trade and investment. These areas include macroeconomic, innovation, skills, social and labour market policies among others. The nature of the enabling environment and complementary policies to accompany trade and investment opening depends on country specificities; while there is no ‘one size fits all’ policy recipe, there are a number of common ingredients.

Trade and investment opening are necessary but insufficient conditions for stimulating much needed and more inclusive growth, development and jobs. Accompanying policies that promote responsible business conduct and enable the needed public and private investments, in particular in people, in innovation, and in strategic physical infrastructure, help ensure not just that growth is realized, but that the benefits are shared widely.

Useful links

OECD work on trade

OECD work on investment

 

 

Let’s Get Realistic About a Multilateral Investment Agreement

8 February 2016
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Any chance they’ll all agree?

Shaun Donnelly, retired U.S. diplomat and trade negotiator, now Vice President for Investment Policy at the US Council for International Business (USCIB).  He is a regular participant in the Business and Industry Advisory Committee to the OECD (BIAC) and  OECD Investment work.

I found some very interesting questions and even a few answers in the recent “OECD Insights” blog post on international investment agreements by Professor Jan Wouters from the University of Leuven.  But it seems to me that Professor Wouters’ prescriptions may fit better in a university classroom or a theoretical computer model than in real world of government-to-government diplomatic investment negotiations or in a corporate headquarters making real-world cross-border investment decisions.  As a former U.S. Government trade and investment negotiator and now in the private sector advising/assisting member companies of the U.S. Council for International Business (USCIB), as well as an active participant over the past three years in the investment policy work the OECD and its Business and Industry Advisory Committee (BIAC), I’d like to offer an alternative perspective on some of the international investment issues the professor addresses.

I’m tempted to challenge several of the assumptions that seem to underlie Dr. Wouters’ analysis and prescriptions.  His assertion that multilateralism is an inherently superior venue for all investment issues seems a little naïve to me as a practitioner.  Everyone accepts the theoretical point that in a textbook or the laboratory, multilateral can be the optimal approach – one set of comprehensive, high-standard rules applying to all countries and, by extension, to all investors – a WTO for investment if you will.

The reality is that diplomatic negotiations, investment projects, and job creation take place in the real world, driven by real people representing concrete, real-world interests.  In that real world, governments have a wide range of views on what should or shouldn’t be in an investment agreement. How strong are the protections accorded to investors? Does the agreement include (as U.S. government investment agreements typically do) market opening or “pre-establishment” provisions? Do investors have access to a credible, neutral arbitration process to resolve disputes with host governments?  These are key issues for any government or investor.

Unfortunately, not all players in the investment policy world would share all my views, or those of Dr. Wouters.  Governments vary widely on their policy and political approaches to international investment and, more specifically, to international investment agreements.  Many have views generally in line with those of the U.S. government, sharing a commitment to high-standard international investment agreements.  But some other governments only seem willing to accept much lower standards of investment protection; still other governments are hostile to any international investment agreements.

Some OECD veterans like me recall that some 20 years ago, the then-25 OECD members made a serious attempt to negotiate a Multilateral Agreement on Investment or “MAI.”  Unfortunately, after some early promise, the negotiations broke down over some of the key pillar issues I noted above.  Neither the OECD nor any of its member governments have attempted to revive the search for the elusive multilateral investment agreement framework.  Most OECD member nations seem, explicitly or implicitly, to have accepted the reality that, while multilateralism may be the optimal path, in the investment policy area, it is not, at least for now, a practical way forward.

The lesson I personally draw is clear, and it’s quite different from the approach advocated by Dr. Wouters.  Those Governments around the world that think foreign direct investment is a positive force for economic growth, are trying to make practical progress, not simply engage in endless and frustrating political debates.  They want to negotiate investment agreements that can attract real investment and, thereby, create real economic growth and jobs.  While some of them may see intellectual debates about a theoretical multilateral investment regime at some point in the future as an interesting exercise, their priority is on finding ways to grow their economies today and tomorrow.

So my questions to Dr. Wouters and other advocates of a focus on multilateralism in international investment regimes would include:

  • What kind of investment regime do you really envision?  How strong an agreement would it be?  Would it include the sorts of high-standard protections for investors currently found in recent investment agreements of OECD member countries?
  • What causes you to think there is realistic chance for success in a multilateral investment negotiation?  “Multilateral” now requires nearly 200 sovereign nations reaching a consensus.  Countries ranging from Cuba and Argentina to Japan and Canada; from India and China to the U.S. and the EU; from Russia and Venezuela to Saudi Arabia and Singapore would have to be major players in any multilateral investment effort. What sort of consensus could emerge from that wide-ranging group?
  • When the then 25 “like-minded” OECD member nations couldn’t negotiate an MAI, what causes you to think 200 diverse and widely diverging nations could come together now to negotiate a multilateral investment agreement or framework?

I’d love to be proven wrong, by Dr. Wouters or anyone else, if they can show me a credible path to that elusive high-standard multilateral agreement.  But until someone can show me how to get that done, I believe strongly the better path in the real world is to keep doing what individual governments and groups of countries have been doing for some time, to find willing partners and negotiate strong bilateral or regional investment agreements that work in the real world.  Here in the U.S., we in the business community are excited about the possibility of two “mega-regional” agreements, the recently-concluded Transpacific Partnership (TPP) and the on-going Transatlantic Trade and Investment Partnership (TTIP) as vehicles to update and strengthen investment protections with key partners.

When it comes to investment protection/promotion agreements, let’s focus all of our efforts on paths that we know can work – negotiating high-standard investment agreements.  If/when someone can find that elusive path to a high-standard multilateral agreement, great! I’ll be at the front of the line applauding. But until that path really emerges, let’s stay focused on what works – the bilateral and regional path that has proven it can deliver real results, real investment, growth, and jobs and leave the multilateral investment framework to the theoreticians.

The OECD, specifically its Investment Committee, has long been a place for serious investment policy research, analysis and debate. I’ve been privileged recently to participate in some of those sessions as a business stakeholder as a BIAC representative. I encourage OECD to continue, indeed redouble, that policy work. There are important and challenging issues to address. We in the international business community, along with other stakeholders, can add much to that OECD work.   I simply urge that the OECD investment work focus on concrete investment “deliverables” which can be implemented, rather than idealistic pursuits of some theoretical multilateral panacea.

Useful links

OECD Conference on investment treaties: The quest for balance between investor protection and governments’ right to regulate OECD, Paris, 14 March, 2016. This second OECD Investment Treaty conference will explore: How governments are balancing investor protection and the right to regulate; the search for improved balance through new institutions or improved rules for dispute settlement including the new Investment Court System developed by the European Union; a case study on addressing the balance through substantive law in particular through approaches to the fair and equitable treatment (FET) provision; and how the OECD, working with other international organisations, can support constructive improvement of governments’ investment treaty policies in this regard.

BIAC’s strategic recommendations on investment

Reconciling Regionalism and Multilateralism in a Post-Bali World, OECD Global Forum on TradeParis, 11 February 2014, Rapporteur’s report

 

Where do OECD countries stand in the “war against cancer”?

4 February 2016
by Guest author

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Gaétan Lafortune, Senior Economist and Principal Administrator, OECD Health Division

In his State of the Union address in 1971, President Richard Nixon declared a “war on cancer”. World Cancer Day provides a timely opportunity to reflect on how much progress has been achieved over the past 45 years in the United States and other OECD countries in winning this war.

The good news is that after a poor initial start in the 1970s and 1980s, the mortality rates from cancer (age-standardised to remove the effect of population ageing) have come down in most OECD countries since the mid-1990s, thanks to a reduction in important risk factors such as smoking and improvements in survival related to earlier diagnoses and better treatments. But still, all countries could do better in their fight against cancer to reduce the number of new cases through public health and prevention efforts, and by detecting cancer earlier and treating it adequately.

Large reduction in cancer mortality rates on average across OECD countries since early 1990s

 

fig 1

Source: OECD Health Statistics 2015, http://dx.doi.org/10.1787/health-data-en (extracted from WHO).

There were nearly 5.8 million new cancer cases in OECD countries in 2012 (up from 4.6 million a decade earlier) and 2.6 million deaths (up from 2.3 million a decade earlier), according to GLOBOCAN. Cancer incidence is higher in men than in women in all OECD countries, with average age-standardised incidence rates of 310 and 242 per 100,000, respectively.

Data recently reported in Health at a Glance 2015 show that cancer accounted for 25% of all deaths in 2013, up from 15% in 1960, mainly because there has been a much sharper reduction in deaths from cardiovascular diseases over the past 50 years. In several OECD countries, mortality rates from cancer among men are at least two times greater than among women, because of greater prevalence of risk factors (e.g., smoking and harmful alcohol consumption) and later detection.

Cancer Mortality, 2013 (or latest year)

fig 2

Source: OECD Health Statistics 2015, http://dx.doi.org/10.1787/health-data-en (extracted from WHO).

Information on data for Israel: http://oe.cd/israel-disclaimer

Lung cancer continues to be by far the main cause of cancer mortality among men, accounting for 26% of all male cancer-related deaths on average in OECD countries in 2013, but it is also the main cause of cancer mortality among women, accounting for 17% of all deaths. Breast cancer is the second most common cause of cancer mortality among women in OECD countries (15% on average).

Main causes of cancer deaths among men and women in OECD countries, 2013

fig 3

Source: OECD Health Statistics 2015, http://dx.doi.org/10.1787/health-data-en (extracted from WHO).                

The cost of cancer goes far beyond health care

Beyond the costs in terms of human lives, the economic costs of cancer are also considerable. Cancer consumes around 5% of all health care costs, and growth in spending on cancer is outstripping growth in total health expenditure. But the cost of cancer is not only borne by health systems. There are also opportunity costs related to the loss of productivity and working days.

In a population-based cost analysis in the Lancet, the economic burden of cancer across the European Union was estimated at €126 billion in 2009. Health care costs accounted for €51 billion, equivalent to €102 per citizen. Productivity losses because of early death cost €43 billion and lost working days €9 billion. Informal care costs – the cost of work and leisure time carers forgo to provide unpaid care for relatives or friends with cancer – amounted to €23 billion. Lung cancer had the highest economic cost of €18.8 billion.

Much more can be done to improve cancer care, but at what cost?

OECD research indicates that countries can do more to reduce the social and economic costs of cancer, and save lives. Survival after diagnosis of various types of cancer, such as breast cancer, cervical cancer and colorectal cancer, have generally increased over the past decade, thanks to earlier diagnosis and better treatments.

fig 4

Further progress is possible. It has been estimated that about one-third of cases could be cured if they are detected on time and adequately treated. Systematic screening of at-risk populations should be implemented where it is proven to reduce mortality, where cost-effectiveness is acceptable, where high quality is assured and the public is educated about the benefits and potential harms of screening.

Making cancer care rapidly accessible and of high quality, continuously improving services with strong governance such as a national cancer control plan, and monitoring and benchmarking performance through better data are also important in improving patients’ outcomes.

But the progress in cancer survival has come with a cost. New types of surgery, radiation therapy and chemotherapy (including the introduction of new high-cost drugs which in some cases prolong the lives of patients by only a few weeks) have contributed to increased survival, but at increasing cost. And it is likely that these costs will continue to grow, with population ageing and improved sensitivity of diagnostic tools leading to the detection of more cases. This will all add up to higher costs.

An important challenge in cancer care that many OECD countries have already started to face is balancing what may be doable given the growing range of possible treatment options and what may be sensible to pay for publicly. Economists can provide some guidance in making difficult decisions about resource allocation through cost-effectiveness analysis. But at the end of the day, it will require hard policy decisions to manage these fiscal challenges responsibly and sensitively.

Useful links

OECD Health Statistics 2015 The OECD Health Database offers the most comprehensive source of comparable statistics on health and health systems across OECD countries. It is an essential tool to carry out comparative analyses and draw lessons from international comparisons of diverse health systems.

 

Learning from Firms in East Asian Production Networks

2 February 2016

production networks previewGaneshan Wignaraja, Advisor, Economic Research and Regional Cooperation Department, Asian Development Bank

Slowing growth in the Peoples Republic of China (PRC) – the world’s second largest economy – is grabbing the headlines with some suggesting a third wave of the 2008 global financial crisis. While this topic deserves attention because of its global economic implications, there is insufficient analysis of firms in global production networks (GPNs), which were at the forefront of the economic transformation in PRC and the rest of East Asia, and lessons for latecomers to GPNs.

GPNs entail a type of sophisticated industrial organization which is different from a textbook idea of a single large vertically integrated factory situated in a country. It involves the location of different production stages (e.g. design, assembly and marketing) across different countries, linked by a complex web of trade in intermediate inputs and final goods. For example, the Toyota Prius – a hybrid electric mid-size hatchback car – for the US market was designed in Japan and is presently assembled there. But some parts and components for the Prius are made in Thailand, other ASEAN economies, and the PRC.

The extent of East Asia’s participation in GPNs is significantly greater than elsewhere and has spurred the region’s global rise to the coveted “Factory Asia” league with rapid growth and rising per capita incomes over several decades. East Asia’s share of world production networks exports rose from 38% to 48% between 2001-2004 and 2009-2013. The PRC is the leading player within East Asia with its share rising from 13% to 25%. Korea’s share rose from 4% to 5% and the share of the 10 ASEAN economies remained at about 9%. Japan’s share fell from 11% to 8% but this figure seems understated as Japanese firms are present in GPNs in other East Asian economies. The 2009-2013 figure for East Asia compares with 28% for the European Union, 7% for the US, 6% for Latin America, less than 1% for India and less than 1% for Africa.

GPNs in East Asia originated in the 1980s in the clothing and electronics industries and have since penetrated many industries including consumer goods, food processing, automotives, aircraft, and machinery. The role of services in GPNs in East Asia is increasingly important but has been underestimated due to serious data problems.

The role of firms in GPNs in East Asia is a new frontier in economics. While there are insightful case studies of the organizational aspects of individual firms in GPNs in East Asia, little research attempts to generalize the findings of case studies to multiple firms though econometric analysis. The recent availability of microdata from enterprise surveys has enabled identification of the benefits of joining GPNs in East Asia and the characteristics of firms in GPNs.

Evidence from Malaysia and Thailand suggests that joining GPNs brings tangible benefits such as raised profits and value added at firm-level. Furthermore, these benefits arise when firms actively invest in building technological capabilities focusing on assimilating and using imported technologies rather than formal Research and Development (R&D) by specialized engineers. Strikingly, firms in the PRC generally have higher levels of technological capabilities than those in ASEAN economies, which partly explains the PRC’s impressive record in GPNs. The gap in technological capabilities between PRC and ASEAN firms is associated with higher levels of foreign ownership, skills, managers’ education and capital.

It is observed that more developed East Asian economies like Japan and Korea have a deep base of industrial suppliers to large firms in GPNs including small and medium enterprises (SMEs). SMEs account for most of the jobs in ASEAN economies but have a limited presence as suppliers in GPNs. Evidence from Malaysia suggests that even among SMEs, larger SMEs benefit from economies of scale and set lower prices than smaller SMEs when joining GPNs. However, size is not the whole story. Licensing foreign technology, building technological capabilities and actively using preferences in free trade agreements (FTAs) also facilitates SMEs joining GPNs. Access to credit from commercial banks is another crucial factor for SMEs to participate in GPNs as indicated by the PRC and ASEAN economies. Financial access for SMEs in these East Asian economies is in turn influenced by managerial experience, availability of collateral and financial audits.

GPNs in East Asia are interwoven with forces associated increasing globalization and regionalization. They are underpinned by strategies of multinational firms, technological advances (e.g., information, communications, and transport technologies), improvements in logistics and trade facilitation, and tumbling barriers to trade and investment. At the national-level, outward-oriented market-friendly strategies supported the participation of East Asian firms in GPNs. While there are subtle differences in the strategies pursued, East Asian economies commonly emphasized attracting export-oriented foreign direct investment (FDI) into export processing zones (EPZs); investing in ports, roads from EPZ to ports and airports; streamlining business regulations; notable spending on education and training; and developing banking systems.

An important implication of the PRC’s growth slowdown and rising wage costs is the increased opportunities to attract FDI and participate in GPNs especially in labor-intensive activities. East Asia’s rich GPN experience offers valuable lessons for industrial latecomers in the developing world. First, participating in GPNs offers a fast track means to achieve higher levels of economic development. Second, it is crucial to focus on the role of firms in GPNs, particularly the process of building technological capabilities and accessing finance. Third, continuity with deep policy reforms provides a supportive business environment for joining GPNs. Fourth, mainstreaming GPNs into policy dialogues with aid donors and multilateral development banks will help to generate development finance for policy reforms and infrastructure development.

Useful links

Donor Support for Connecting Firms in Asia to Value Chains, William Hynes and Frans Lammersen, OECD, in Ganeshan Wignaraja (Ed.), Production Networks and Enterprises in East Asia: Industry and Firm-level Analysis: Springer, 2016

OECD work on global value chains

Getting globalization right: the East Asian Tigers Dani Rodrik on the Insights blog

Structural Policies and Distributional Consequences

1 February 2016
by Guest author

NAECChristian Kastrop, Director of the Policy Studies Branch, Economics Department, OECD

In a majority of OECD countries, growth over the past three decades has been associated with growing disparities in household income. This suggests that some of the forces driving GDP have also fuelled inequalities. As a result, gains in household disposable incomes generally have not matched those in GDP per capita and the gap has been particularly large among poorer households and the lower-middle class. An important policy question is whether some of the policy changes driving GDP may in addition play a “hidden” role on inequality. New empirical evidence produced by the OECD on the effects of structural policies on households’ incomes across the distribution scale has identified potential policy tradeoffs and complementarities between efficiency and equity.

Labour market policy reforms

Labour market policy reforms are often designed to boost aggregate employment through behavioural effects such as labour supply incentives, and via this channel, GDP per capita. At the same time, these policies also affect income inequality through their impact on the earnings distribution. For some reforms, these two impacts on measures of inequality may be offsetting each other. For example, reducing unemployment benefits and lowering statutory minimum relative to median wages are associated with both higher wage dispersion and higher employment rates among low-skilled workers, which may result in a very small net change on inequality among the working-age population, while the impact on overall inequality is uncertain. For other reforms, however, wage and employment effects may reinforce each other, resulting in both stronger growth and less inequality. This could be the case of policy reforms aimed at easing the strictness of job protection on regular contracts as a way to tackle labour market duality, i.e. the existence of separate segments where comparable workers enjoy differential wage conditions and job protection in contrast to others.

Tax policy

Many tax policies raise well-known trade-offs with respect to growth and equity objectives. Economic theory and empirical evidence suggests that the tax structure influences macroeconomic efficiency. In particular, that direct taxes have relatively more distortionary effects by reducing incentives to work and invest. One of the highest ranked growth-friendly tax reforms, shifting the tax burden away from income taxes to consumption and property taxes, may in principle have adverse effects on inequality through various channels. For instance, reform-driven positive employment effects can be counterbalanced by increased income dispersion resulting from lower tax progressivity. Also, empirical evidence suggests that consumption taxes can be regressive, at least in the short run. There is ambiguity with respect to the distributional effects of property taxes. On the one hand, depending on how they are designed, recurrent taxes on immovable property can be regressive with respect to disposable incomes; on the other hand, inheritance and capital gains tax clearly reduce wealth inequality.

Product market regulation

Relaxing anti-competitive product market regulation can bring productivity and employment gains in the long run, therefore spurring economic growth. However, the impact on income inequality is uncertain and empirical evidence generally inconclusive. This is because employment gains may be at least partly offset by changes in the wage dispersion, as more intense product market competition tends to reduce the bargaining power of workers. Recent evidence has shown however that reducing barriers to competition is found to lift incomes of the lower-middle class by more than GDP per capita. Research also shows that linking well-tailored employment and product market reforms could bring additional gains on growth and equality.

Globalisation and technological progress

There is some consensus, in both developed and, to a lesser extent, developing countries, that globalisation is a growth-enhancing force. But there is no consensus, and mixed empirical evidence, about the distributional implications. Economic globalisation involves increased exposure to international trade and financial and capital movements, increased mobility of production factors (i.e. workers and capital) and increased fragmentation of the production process in Global Value Chains (GVC). The effects of globalisation on overall income inequality have mainly focused on the earnings dispersion channel as opposed to the employment channel. Available evidence would seem to suggest that globalisation-induced inequality effects are mainly driven by greater wage dispersion, in particular arising from changes in the skill and industry composition of labour demand.

Stronger export intensity based on sound and dynamic competitiveness is found to boost long-run GDP per capita and average household disposable income. Such effects hold across the distribution of household income, with stronger estimated gains for the poor – implying reduced inequality. Overall, these findings signal synergies across policy objectives, i.e. that reforms enhancing competitiveness aimed at encouraging exports among domestic firms could boost efficiency and equity.

Globalisation may also affect income distribution insofar as increased trade and international capital flows facilitate the diffusion of technology, increasing thereby wage dispersion via mechanisms such as skill-biased technological change. To the extent that skill-biased technological change shifts demand of labour towards higher skills and especially when this increase in demand is not matched by a sufficient increase in the supply of skilled workers, technical progress may increase wage inequality. The implications of this hypothesis for inequality have found empirical support for many OECD countries. Going further, recent evidence strongly suggests that skill-biased trade specialisation is associated with higher wage inequality, even accounting for technological change.

Technological progress, as measured by the share of investment in communication technology (ICT) in overall investment, is found to boost long-run GDP per capita and average household disposable incomes. Average household income gains hold across the distribution and as a result, there is no evidence of inequality effects.

Taken these findings into account, the OECD is following up designing general but also country-tailored policy frameworks which avoid and minimise trade-offs in the short and long run. This encompasses the right mix and sequence of employment and product market reforms, etc., together with science, innovation, education and redistribution systems with taxes and benefits in cash or kind.

Useful links

Economic Policy Reforms 2015: Going for Growth The OECD’s annual report highlighting developments in structural policies in OECD countries and the key emerging economies.

The productivity and equality nexus: is there a benefit in addressing them together?

29 January 2016
by Guest author

NAECGabriela Ramos, Special Counsellor to the OECD Secretary-General, Chief of Staff and G20 Sherpa

Productivity growth has slowed since the crisis and inequality has been getting worse. Could they be influencing each other?

The linkages between the productivity and inequality challenges are still to be fully explored. Each may have its own solution, but there is also good reason to think that there is a nexus between them. For instance, OECD evidence suggests that wage dispersion between firms, which reflects diverging rates of productivity growth, has contributed to rising inequality of incomes between workers. At the same time, the increased prevalence of knowledge-based capital and digitalisation may have unleashed winner-take-all dynamics in key network markets, which in turn may have led, in some instances, to an increase in rent-seeking behaviour.

OECD research has highlighted how the rise in inequality over the last three decades has slowed long-term growth through its negative impact on human capital accumulation by low income families.

Since the crisis, stalled business dynamics have seen resources, including workers, being trapped in firms where they are not using their full potential. In particular, individuals with fewer skills and poorer access to opportunities are often confined to precarious and low productivity jobs or – in many emerging countries – informal ones.

In the spirit of our integrated framework on inclusive growth and our New Approaches to Economic Challenges (NAEC) initiative, at the OECD we believe that our efforts to address productivity and inequality challenges could have a better chance of succeeding if we looked at the synergies and trade-offs emerging from policies to address them. This means designing policies for each of these two core issues bearing in mind how they might impact one another and avoiding the “silo” approach through more effective and comprehensive policy packages.

We must also learn from previous policies. Traditional measures to boost productivity in competition, labour market, or regulatory frameworks would allow for the reallocation of resources to more productive activities, or for increasing productivity in specific sectors. But this may have an adverse impact on inequalities of income and opportunities, as workers better equipped to cope with change are usually those with higher skill sets. For instance, in the past, the drive towards flexible labour markets has benefited many employers, and particularly the most productive firms that have gained from an improved allocation of labour resources. But increased flexibility has also brought a greater prevalence of non-standard work. Recent OECD work on job quality highlights how low skilled individuals can be trapped in precarious low wage jobs, and receive less training.

Our approach to designing policies to ensure that individuals, firms and regions that are left behind can fulfil their full potential and contribute to a more dynamic economy, draws on OECD work from diverse policy areas. It starts from the Inclusive Growth agenda, by focusing on well-being as an ultimate objective of policy. It builds on OECD productivity work via The Future of Productivity report and efforts Towards an OECD Productivity Network. It also synchronises with the Organisation’s efforts to measure productivity more accurately at a time when traditional measures are ill-adapted to account for the full effects of rapid technological change and innovation centred on knowledge based capital, the increasing prominence of the services sector, and productivity in the public sector.

The ultimate outcome is for governments to focus on the extensive range of win-win policies that can reduce inequalities while supporting productivity growth, thereby creating a virtuous cycle for inclusive and sustainable growth. This calls for distinct but complementary policy interventions at the individual, firm, regional and country levels. What this entails in practice will vary for each country depending on its circumstances. But broadly speaking, a number of policy areas are worth considering:

First, a new approach is needed to boost productivity at the individual level so that everyone has the opportunity to realise their full productive potential. Expanding the supply of skills in the population through more equal access to basic quality education is crucial, but not enough. With rapid technological change, skills need to keep up with the demands of the market to avoid the skills mismatches which have contributed to the productivity slowdown. A broad strategy is also needed to ensure a better functioning of the labour market, promote job quality, reduce informality, allow for the mobility of workers and inclusion of underrepresented groups such as women and youth, and promote better health outcomes for everyone.

Second, for people to realise their full productivity potential, businesses have to realise theirs. While heterogeneity among firms is normal, the widening dispersion in productivity levels and its implications for aggregate productivity and workers is a cause for concern. According to our productivity report, the early 2000s saw labour productivity at the global technological frontier increase at an average annual rate of 3.5% in the manufacturing sector, compared to just 0.5% for non-frontier firms. The gap was even more pronounced in the services sector. The larger the share of business that can thrive, the more productive and inclusive our economies will be. Achieving this requires a reassessment of competition, regulatory and financial policies to ensure a level playing field for new firms relative to incumbents. It also requires policies to facilitate the diffusion of frontier innovations from leading to lagging firms.

Third, policy prescriptions will be ineffective unless they take regional and local circumstances into account. Inequalities that play out in regions, like housing segregation by income or social background, poor public transport, and poor infrastructure, can lock individuals and firms in low-productivity traps. This means that some policies to promote both productivity and inclusiveness are best undertaken at the regional level.

Finally, adopting a more holistic approach to policy requires fundamental changes to public governance and institutional structure to strengthen the ability of national governments to design policy that promotes synergies and deals with trade-offs. In highly unequal societies, governments also need to address political economy issues including the capture of the regulatory and political processes by elites that benefit from the status quo, and policies that favour the incumbents.

None of this will be easy, but it is nevertheless essential. At the OECD we believe it is time to develop a better understanding of the dynamics between two of the key issues of our time – productivity and inequality – in order to build a more resilient, inclusive and sustainable future.

Useful links

OECD Inclusive Growth Initiative

OECD Centre for Equality and Opportunity

OECD Inequality webpage

OECD Future of Productivity

OECD Productivity Statistics

 

Bringing help and hope to war victims: When Shennong meets Avicenna in Iraqi Kurdistan

28 January 2016
by Guest author

lien amazonAnne-Lise Prigent, editor in charge of development publications at OECD Publishing.

Can a Chinese herbalist emperor ever meet a Persian thinker of the Islamic Golden age? Well, you’d be surprised… “If my strength is needed, then I must go forth.” “I hope I can be of aid.” These are the words of Shennong, the father of traditional Chinese medicine. It is also the calling of Shennong & Avicenne, a French medical NGO. Shennong & Avicenne combines traditional and modern medicine, Western and Eastern approaches. A scientist and a philosopher, Persian Avicenna was the father of modern medicine, the 11th century’s famous Muslim “prince of physicians”. More than a thousand years after his time, new warfare seems to be emerging – it is agile and powerful, mobile and violently radical. Shennong & Avicenne helps war victims in Iraqi Kurdistan.

The UNHCR estimates that there are 2.5 million refugees and internally displaced persons in Iraqi Kurdistan. Many of them are Yazidis and Christians who have lost everything fleeing Daesh; others are Muslim. Some were made prisoners by Daesh and managed to escape. Despite efforts by the Kurdish authorities and the international community to build camps to shelter them, the influx has been so massive and so sudden that 90% of the refugees are scattered around the territory, in isolated regions far from the help and services they need. They are living in waste dumps, empty buildings, improvised camps… where sanitary conditions are catastrophic.

Faced with this situation, Shennong & Avicenne felt they had to be next to the scattered populations who need their help. They raised funds to buy a truck in France to use as a mobile dispensary and a bus for women and children’s health care, thanks to the support of the French Ministry of Foreign Affairs and the Alliance des Femmes pour la Démocratie. Every day, Shennong and Avicenne visits more than 30 sites in the provinces of Erbil and Duhok and takes care of thousands of ailing victims.

We asked Elise Boghossian, the organisation’s founder and president, to tell us about Shennong & Avicenne and the work they are doing in Iraqi Kurdistan. Below, she talks about the philosophy behind their approach; the people they treat; the situation on the ground; and what we can do to help.

S&A video

From Paris to Viet Nam through China, Elise Boghossian has become an expert “war” acupuncturist. Her recently-published book (Au royaume de l’espoir, il n’y a pas d’hiver : Soigner en zone de guerre) recounts her journey and calling. In Armenia, Jordan and Iraqi Kurdistan, Boghossian demonstrates that acupuncture is an efficient and cost-effective way of relieving pain and healing patients. Acupuncture, she argues, can become part of health care services in conflict-affected zones, where medical products are often missing or fake.

In her book, Boghossian discusses the pitfalls of aid – and how to avoid them: “I think there are two main pitfalls in aid. First, our presence can lead to dependency and create additional needs. We must accept the limits of our action, and let those we’ve come to help be autonomous, free, and most importantly, we must ensure they keep their dignity. We should support them in this. Putting things right when they’ve gone wrong is essential. The other pitfall is the inverse relationship between our need for recognition, (…) and the risk of not respecting the Other, his difference, his culture, his living conditions.”

Boghossian’s infinite respect can be sensed throughout the book. One thinks of Levinas. The Other’s face is exposed, vulnerable. It makes one demand more of oneself. “The face opens the primordial discourse whose first word is obligation.” (Levinas, Totality and Infinity) Face to face with Daesh’s victims, Boghossian heals them and sometimes even seems to breathe new life into victims who have lost everything. Boghossian’s Armenian roots have not been forgotten and she will not let the history of genocide repeat itself without standing by today’s victims. As stated by Levinas, the face is what forbids us to kill. Yet, some of the scenes described in the book are horrific. “Wait” some of the refugees said to Boghossian, “you have not seen anything yet, this is only the beginning.” This was back in January 2015.

“They [Daesh] hate difference, whether it is Muslims who think differently, Yazidis or Christians (…)” (The Archbishop of Canterbury). Shennong & Avicenne takes care of victims, whatever their religion – Christian, Yazidi, Muslim. The organisation’s medical staff (doctors, paediatricians, nurses, gynaecologists etc.) are refugees themselves and they are employed irrespective of their race, ethnic origin or beliefs.

Boghossian won’t let herself be intimidated or silenced. One closes her book in awe. This woman has the determination and stamina of a Florence Nightingale. Both women have grit, “good” grit as Howard Gardner defines it – perseverance and the accumulation of valued traits, a “can-do” attitude, a positive, constructive mindset that benefits others – and brings deep meaning to their lives. Nightingale famously nursed wounded soldiers in the hellish world of Crimean warfare and revolutionised nursing practices in Britain. She was remembered as the lady with the lamp:

Lo! in that house of misery
A lady with a lamp I see
Pass through the glimmering gloom
Longfellow (1857)

What is less well known is that Florence Nightingale saved so many lives also because of the data she gathered and her expert use of statistics. She was passionate about data. Boghossian is not the lady with the lamp, but she has needles and data too. Data about the impact of acupuncture on the health of patients is now available (and its effect on the brain can be demonstrated). The book begs a question: why is acupuncture not more commonly used in conflict-torn areas, in conjunction with other medical practices (as is done by Shennong & Avicenne)? As Levinas pointed out, “the very relationship with the other is the relationship with the future.”

On their modest scale, Shennong & Avicenne bring a scarce commodity to those who have lost everything: a glimmer of hope. In 2015, Shennong & Avicenne was in touch with 50,000 war victims and 30,000 procedures were carried out. Grit will make a difference – it always has and always will.

Useful links

Entretien avec Elise Boghossian pour OECD Insights Anne-Lise Prigent

Making Integration Work: Refugees and others in need of protection

Immigrant Students at School: Easing the Journey towards Integration

Securing Livelihoods for All

States of Fragility 2015: Meeting Post-2015 Ambitions

Development Co-operation Report 2015: Making Partnerships Effective Coalitions for Action

Gender and Statebuilding in Fragile and Conflict-affected States

Statistical Insights: Government assets matter too, not just debt

28 January 2016
by Guest author

OECD Statistics Directorate

In analysing the sustainability of government finances, the focus tends to be on gross government debt as a percentage of GDP. However, as gross debt does not take into account the asset side of government balance sheets, this measure only tells part of the story. Assets may generate income or be sold in order to redeem part of gross debt, and are therefore very relevant in assessing the financial health of government as well. A government with a high level of liabilities but also with significant amounts of assets on its balance sheet may be better off than a government with a lower level of liabilities and hardly any assets. Therefore, net government debt, which incorporates information on assets, constitutes a useful additional measure to gross government debt. It provides insight into the capabilities of governments to service debt in the longer run and thus presents a more comprehensive and nuanced picture of government financial health.

How do OECD countries compare in terms of gross and net government debt?

Figure1-Gross-and-net-government-debt.fw

Figure 1 shows gross and net financial debt as a percentage of GDP in 2013 for selected OECD countries

The impact of the inclusion of financial assets in the debt measure differs considerably across countries. The impact is particularly large for Norway, Japan (which may be partly due to the fact  that debt data are not consolidated across different government units, i.e. gross debt figures include liabilities between these units which cancel out in net debt data), Finland, Luxembourg, Sweden, Slovenia and Greece. These countries have a relatively large amount of financial assets on their balance sheets, and so they rank lower on the basis of net government debt than on the basis of gross debt. For some of them, the debt measure even changes sign, implying that the amount of financial assets is higher than that of financial liabilities. On the other hand, the difference is relatively modest for the United States, Hungary, Italy, Poland, Belgium and the Slovak Republic. These countries only have a small amount of financial assets on their balance sheets and their net and gross debt ratios are therefore similar.

What happened during the crisis?

During the recent financial crisis most countries experienced an increase in their debt levels. This was a direct consequence of the economic downturn, which resulted in lower tax revenues and increasing expenditures. Furthermore, some governments increased their spending to actively support the economy and acquired assets in financial institutions to prevent a collapse of the financial sector. As these policies affected liabilities and assets in different ways, the impact on gross and net government debt levels also differed among countries. And of course, changes in GDP levels also affected debt ratios in different ways.

Figure2-change-in-government-debt.fw

Figure 2 presents the changes in gross and net debt ratios between 2007 and 2013 for selected OECD countries

Most countries experienced increases in both gross and net debt ratios during the crisis, but the extent of such increases differs substantially between countries. Ireland reported the largest increase in gross debt ratio, from 26.9% in 2007 to 125.4% in 2013. This increase was the result of a sharp rise in liabilities combined with a decrease in GDP. As assets only increased to a small degree, the net debt ratio showed a sharp increase as well (from -1.4% to 72.8%).

Greece, Portugal, and Spain also registered large increases in their gross debt ratios in the period 2007 to 2013. As was the case with Ireland, this was due to a combination of increased liabilities and a decrease in GDP levels. In that respect, it can be noted that the United States reported a larger relative increase in liabilities than Portugal and Greece (86.0% versus 77.5% and 28.5%), but due to an increase in its GDP level over the same time period, the gross debt ratio increased to a lesser extent (by 46.4 percentage-point versus 64.4 percentage point and 75.1 percentage point in Portugal and Greece, respectively). It is interesting to note that while Spain recorded a lower increase in its gross debt ratio than Portugal and Greece, in terms of net debt ratios, the increase was higher in Spain. And the increase in the net debt ratio in the United States was almost as high as in these three countries, although the increase in the US gross debt ratio was much lower. Both effects are due to the fact that Spain and the United States experienced smaller increases in the value of their assets than Portugal and Greece. Therefore, the change in the net debt ratio for the former countries is relatively close to the change in their gross debt ratio, contrary to the latter countries.

The Czech Republic and Poland are the only two countries in which the net debt ratio increased more than the gross debt ratio. Both countries recorded increases in liabilities of more than 80%, whereas the value of assets only increased by 0.8% for the Czech Republic and by 8.7% for Poland. Combined with increases in their GDP levels of respectively 1.0% and 5.7% per year, this led to increases in their net debt ratios that exceeded those in their gross debt ratios.

The measure explained

In this Statistical Insight, we compare gross debt to net financial debt, calculated as gross debt minus the value of all financial assets. Whereas in gross debt only liabilities defined as debt instruments are taken into account, i.e. liabilities that constitute a financial claim on the debtor and that involve payments of interest and/or principal (therefore excluding liabilities in the form of shares, equity, financial derivatives and monetary gold), all financial assets, including e.g. equity, are taken into account in calculating net debt. The rationale is that all financial assets are deemed to be available for debt redemption. In some cases, non-financial assets are taken into account in calculating net debt, but as some of these assets may be highly illiquid (like land or infrastructure) and relevant data are only available for a few countries, they are not included here. With regard to valuation, the nominal value is used for liabilities, as that is the amount that the government owes the creditors, and market value is used for assets, as that best reflects the amount that can be obtained to service the debt.

Where to find the underlying data

The underlying data are published in the OECD data warehouse: OECD.Stat.

Further reading

Contacts

For further information please contact the OECD Statistics Directorate at [email protected]

 

From Analysis to Action – Multidimensional Country Reviews

27 January 2016
by Guest author

NAECMario Pezzini, Director of the OECD Development Centre and Director ad interim of the OECD Development Co-operation Directorate, and Jan Rieländer, Head of Multidimensional Country Reviews at the OECD Development Centre

Multidimensional Country Reviews (MDCRs) support developing countries in designing development strategies that aim for high impact. These strategies address the binding constraints to development, defined as sustainable and equitable growth and well-being. A growing number of developing countries worldwide are implementing MDCRs. Many see the MDCR as a tool to implement the Sustainable Development Goals.

The OECD’s 2012 Strategy on Development put forward the MDCR as a response to a twofold challenge. First, all countries face challenges that are specific to their individual circumstances and their level of social, institutional, and economic development. Only mutual learning and the adaptation of expertise and policy advice to the inner workings and outer circumstances of a country can achieve better policies for better lives. Second, policy makers, especially from developing countries, shared feedback that while the OECD’s sector-specific policy expertise was excellent, little is offered to inform a comprehensive strategy and manage the trade-offs. Yet, key policymakers, especially at the centre of government, were seeking precisely this overarching analysis and where to prioritise efforts and in what sequence.

Shortly before the 2012 Strategy on Development, the Arab Spring shook up a number of beliefs about development. Take Tunisia for example. It had very high marks on all indicators according to the Millennium Development Goals and standard macroeconomic guidance: 3% fiscal deficit, 5% average growth since 1990, 100% primary enrolment rate since 2008, 80% healthcare coverage for its population, and a good reformer in doing business. Although of little surprise in hindsight, the uprisings revealed the need for a broader understanding of what progress means for a country. Observers had completely overlooked the importance of social cohesion, the highly unequal regional distribution of opportunities, and the inability of the institutional and productive systems to adapt to changing circumstances.

MDCRs take the essential broader view. They understand development as strengthening a society’s capabilities to consistently translate monetary, human and natural resources into well-being outcomes. The definition of well-being is inspired by the OECD’s How’s Life? framework with its 11 dimensions and concepts of quality of life and material well-being. These include income and jobs as well as subjective well-being measures of social connections, civic engagement, environmental conditions, health and education, among others. To consistently create such well-being requires a large range of capabilities in the realms of innovation, production, governance, finance and social protection, to name a few.

Countries must transition to higher levels of functioning as internal and external circumstances change if they are to successfully pursue broad-based development. A stumbling block to further development occurs whenever a given combination of capabilities, resources, and the external environment impedes a country from optimising opportunities and addressing its most imminent social and economic challenges. In this context, traditional analysis has often concentrated on investment or productivity constraints. This correctly describes a need in most cases. However, social, environmental and governance challenges are equally important and often underlie the productivity trends. High inequality, for example, translates into highly unequal school systems that weaken human capital, which implies reduced economic capabilities and lower productivity. A high concentration of economic power reduces opportunities for new activities to surface and drive change by challenging less efficient incumbents. A misuse of natural resources may be a bottleneck to further development. Low levels of trust combined with non-transparent judicial and executive government systems often lead to a social contract of the smallest common denominator that cannot underpin a transition to new engines of progress.

MDCRs have been created as a continuously evolving tool to help countries identify the core constraints among their capabilities. The MDCR then provides national policymakers and their partners with the inputs needed for a country-owned and implemented development strategy.

Aided by the toolkits of strategic foresight and governmental learning, a multidisciplinary team works together across OECD directorates to identify a country’s most important shortcomings in terms of well-being outcomes and the capabilities to produce them. Some of the capabilities that have been identified as holding back development in the MDCRs currently underway in Cote d’Ivoire, Kazakhstan, Myanmar, Philippines, Peru, and Uruguay include:

  • The capability to sustain inclusive economic growth by continuously diversifying the economy to meet the changing demands of the global marketplace (this shows up in various forms at most levels of development).
  • The capability to channel sufficient financial resources to where they can be used most productively.
  • The capability to turn the country’s human resources into human capital by equipping citizens with the skills necessary to further develop the economic, social and institutional potential of the country, given the most likely set of opportunities.
  • The capability to adapt the institutional environment to the higher level of functioning required to transition, including more reliable judicial systems, less corruption, and stronger incentives for performance in the civil service.
  • The capability to manage environmental resources to maximise natural capital while at the same time providing incentives for increased productivity.
  • The capability to sustain a social contract that overcomes the divisions between the formal and informal economies and delivers well-being and revenue by including as many citizens as possible.

In a follow-on, OECD expertise is applied by the partner country to address these shortcomings and create a more sustainable system for delivering growth and well-being. In Cote d’Ivoire, sector experts from across the OECD worked together with a strong local team in the Prime Minister’s office to design a full government action plan which addresses the needs for economic modernisation, infrastructure, a more efficient and equitable tax system, developing skills that can sustain production transformation, and a financial sector that can deliver resources to where they can be most productive.

Analysis is only the very first step. Progress requires action. With this in mind, the OECD team works closely with a core group of national policymakers and analysts throughout the MDCR. This ensures that the recommendations are well adapted to a country’s circumstances and priorities and that the policymakers are in a position to make full use of the MDCR output. The preparation of the MDCR involves a spectrum of policymakers and researchers as well as public, private, and NGO actors. They reach beyond capital cities to encompass expertise across a country. Once the analysis and recommendations are done, MDCRs go beyond just delivering a report to engaging in a true dialogue around the recommendations that build on shared prioritisation. The result is a programme that, when implemented well and in supportive circumstances, can rapidly and positively transform national welfare.

Useful links

OECD work on development

 

Are you in the 1%?

25 January 2016
by Guest author
It's good news: I'm in the 1%!

It’s good news: I’m in the 1%!

Oliver Denk, OECD Economics Department

The 1% are back in the news following last week’s Oxfam report claiming that the world’s 62 richest billionaires own as much wealth as the poorest 3.6 billion people on the planet combined. But what about labour income rather than wealth: Who are the 1% when earnings are counted, and not shares, property, and so on? We have a good idea of how much they earn thanks to the administrative records studied by researchers like Thomas Piketty. But these studies don’t actually tell us much about the personal characteristics of the top earners, such as their education, occupation, or the industry they work in.

That’s where my new research comes in, which for the first time puts hard numbers on who the top earners are across 18 European countries. The data source I use is the Eurostat Structure of Earnings Survey for 2010. It is the largest harmonised dataset on employees’ earnings across Europe, with a total of 10 million observations.

Thanks to these vast data, I was able to compare the top 1% earners with the bottom 99%, focusing on the employee’s age, gender, and highest attained level of education, in addition to the number of years the employee has been with the firm, industry, and occupation. You can find the details of the sample, analysis and results in OECD Economics Department Working Paper N°1274.

So, what do the data show? I’m sure you’ll be as unsurprised as me to learn that, whatever the country, if you’re a middle-aged man working as a financier, doctor, or engineer you’ve a better chance than most of being among the top 1% of earners. The typical person in the top 1% is male, in his 40s or 50s, has a tertiary education degree, works in finance or manufacturing, and is a chief executive, manager or professional.

Digging deeper shows that the top 1% have an average age of 47, hence are five years older than the average worker in the bottom 99%. Around 80-85% in the top 1% are men versus 50-55% in the bottom 99%, and the share of men among the top 1% is actually above 90% in Germany and Luxembourg. Likewise, 80-85% among the top 1% completed tertiary education, compared with 30-35% among the bottom 99%.

There are however important differences between countries and regions. And these appear to be connected to political and economic institutions. Thus, some of the policies your governments are choosing may matter for whether you are in the 1%. I’ll highlight a few of these differences.

Top earners are disproportionately younger, often in their 30s, in Eastern Europe (the Czech Republic, Estonia, Hungary, Poland and the Slovak Republic). At first glance, you might think this is because the workforce is younger in these countries than elsewhere, but the analysis doesn’t support this explanation. The much younger age of top earners in Eastern Europe is probably related to the economic transformation of these countries after the fall of the Iron Curtain. Workers already in the labour market during the 1980s, the last years of communism in Eastern Europe, have less chance than in Western Europe of having moved up to the top 25 years later.

In countries where overall female employment is higher, more of the top 1% are women. The paper does not attempt to establish that it is higher female employment, rather than a related factor, that “causes” more women to be at the top. Nevertheless, one way to interpret this finding is that public policies to broaden female participation in the labour market might also have the benefit of facilitating high-paying careers for women.

Length of career with a particular employer shows contrasting results. One in five top 1% earners has worked for the same employer for more than 20 years. On the other hand, almost one-third of the 1% are new recruits. This pattern is quite different though in Southern Europe (Greece, Italy, Portugal and Spain) where top earners tend to have stayed much longer with their current firm than other workers. The difference could be a sign of stronger family ties or lower labour market flexibility at the top in these economies.

Health professionals are a large group of top earners in several countries, and how much they are paid appears to be linked with life expectancy for the population as a whole. The data suggest: wealthy doctors=healthy people, or that life expectancy is higher the larger the share of the top 1% who are health professionals. Spain and Italy, for example, have both the best-paid doctors, relative to other occupations, and the highest life expectancy, though the analysis does not preclude that better weather, nutrition or other factors might be at work.

Finally, industry structure can affect how concentrated labour income is. Comparing countries with one another shows that the more of the 1% who work in finance, the higher is the share in total earnings that goes to the top 1%, and the smaller is the share that goes to the bottom 99%. That’s one indication that more finance may increase inequality. In earlier work with Boris Cournède and Peter Hoeller, I showed that financial expansion more generally, of bank credit or stock markets, is connected with a widening of the income distribution. Now we’ve come full circle, as the Oxfam report actually draws on our results.

What next? The analysis suggests several questions to be explored in future work, for example trying to establish causality for some of the correlations. This kind of data could also serve as the basis of a study of what’s known as the “rent extraction view”, according to which sectors that are more strongly regulated relative to other sectors and other countries attract more top 1% incomes. And of course it would be interesting to extend the geographical scope if suitable data became available for other countries.

Useful links

Income Inequality: The Gap between Rich and Poor, Brian Keeley, OECD Insights, 2015

OECD Economics Department

OECD work on inequality

OECD data on income inequality

OECD Economics Department Working Papers

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