Sustainable buildings: Does the OECD practice what it preaches?

This is what it won’t look like by the end of the year

Today we’re publishing the last in a series of three articles by Liisa-Maija Harju, Environmental Coordinator in the OECD Operations Service on the OECD’s environmental performance.

Did you know that the Eiffel Tour is going green? The planned €25 million investments will improve the landmark’s energy performance by 30%. The Eiffel Tour will start to generate its own electricity and hot water by the end of 2013. Solar panels and small, vertical wind and hydraulically-powered turbines will be installed 57 metres above the ground. Ninety-five per cent of the new lighting will be of LED-type that has a longer lifespan and consumes less energy than conventional eco light-bulbs.

Small, individual investments like this are needed because the building sector contributes up to 30% to annual global greenhouse gas (GHG) emissions and consumes up to 40% of all world energy, according to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). Not to mention that the big clock is ticking: the World Meteorological Organization announced that the amount of GHGs in the atmosphere reached a new record high in 2011.

Fortunately the building sector offers the largest potential for climate change mitigation at low-cost in all world regions, and sustainable building practices are becoming popular. In these types of buildings natural resources like energy and water are used efficiently; emissions, pollution and waste production is minimized; and occupants’ health and employees’ productivity are improved.

To tackle the climate challenge, private sector investments in buildings, transport and energy infrastructure will need to be shifted toward low-carbon options. Choices made today about the types and location of critical infrastructure will lock-in costly future emissions and the vulnerability of our economies to a changing climate. The OECD has developed a Green Investment Policy Framework which identifies how governments can improve the conditions to shift and scale-up private investment towards greener infrastructure.

The International Energy Agency’s Sustainable Buildings Centre (IEA-SBC) agrees, and recommends a holistic approach for lowering buildings’ energy consumption. Aiming for net-zero energy consumption, improving the energy efficiency of existing buildings, applying for building energy labels or certificates, as well as improving energy performance of building components and systems are some of the most cost-efficient ways to save energy in buildings. Appliances and equipment used within buildings should also be selected according to these guidelines. The Eiffel Tour is definitely on the right track!

But building occupants’ consumption habits can also have a significant impact. The results of an OECD survey on “Greening Household Behaviour” show that government policies and mixes of instruments can encourage the best changes towards occupants’ sustainable consumption habits. Regulations can incentivise building owners and services providers to offer an infrastructure and services that support positive behavioural changes. The presence and quality of collection services for recyclables, for example, is found to increase recycling participation and intensity. Providing the right economic incentive has also proved to be useful: price-based incentives encourage energy and water savings.

We at the OECD’s Operations Service have listened to these recommendations. One of the main goals we have set for ourselves within the Organisation’s internal greening strategy is to obtain the French High Environmental Quality (La Haute Qualité Environnementale® Exploitation, HQE®E)- environmental certification for the five major buildings in which we operate in France.

Our buildings have indeed a significant impact on total GHG emissions of OECD operations: in 2011 the overall GHG emissions of our operations were 8,535 tCO2e, an 8% decrease from 2010. Due to the nature of our work, travel on missions is the main contributor to this GHG footprint (64%), followed by buildings (20%) and commuting (16%).

The HQE® is the most frequently applied building certification scheme in France. It is a voluntary approach aiming to limit the short and long-term environmental impact of a building’s operation and maintenance, while guaranteeing healthy and comfortable living and working conditions for the occupants. The certificate’s 14 indicators are used to measure and manage buildings’ quality in four areas: construction, management, comfort, and as well as health. In addition to energy and emissions the indicators are used to measure topics like green procurement and waste management.

We are approaching our HQE®E-certification goal: two of the five buildings are now HQE®E – certified, and we are working towards certifying the OECD Conference Centre and Château de la Muette as well as one more building in which our employees work. These successes were made possible thanks to the support of the Secretary-General of the OECD, the know-how of all operations service teams involved, and the engagement of our employees.

While our strategy has so far proven to be successful, it should be remembered that HQE®E and other buildings’ environmental certificates available on the market only encourage the buildings’ owners and service providers to improve buildings’ environmental quality and performance. The certificates do not yet allow for the measurement of resilience. How do buildings react to impacts or risks, such as extreme weather events, caused by the environment?

Useful links

 OECD at the UN Climate Change Conference in Doha (COP 18)

OECD Environment Working Paper: Testing the effect of default on the thermostat setting of OECD

French HQE Association

What the BRICS need: Education, employment, equality, and soft infrastructure

Click to go to the Summit website
Click to go to the Summit website

To mark today’s opening of the Fifth BRICS Summit in Durban, South Africa, the Insights blog, in collaboration with Sustainable Governance Indicators (SGI) News, is publishing an interview with Helmut Reisen, former Head of Research at OECD Development Centre and author of Economic Policy and Social Affairs in the BRICS, just published by SGI and the Bertelsmann Foundation.

SGI News: Dr. Reisen, this week South Africa will host this year’s summit of the emerging BRICS economies – Brazil, Russia, India, China and South Africa. Is the nation of the Cape of Good Hope still a model for sustainable development?

Helmut Reisen: South Africa certainly has a number of positive characteristics. It has been a parliamentary democracy since the ANC came into power, and it has a well-developed government administration at the highest level. When you look at social issues, however, especially in the areas of health, education, social inclusion and the labour market, significant weak points are visible, as it is reflected in the BRICS study of the Sustainable Governance Indicators of the Bertelsmann Stiftung.

SN: What do you mean by weak points?

HR: Pandemic prevention is deficient, as is the general access to health institutions. This is also due to a lack of social inclusion. There are still very strong racial divisions, which are broken at best by a black elite. Within the black population there is profound inequality, and social integration remains also difficult. South Africa has the highest level of social inequality worldwide – not just within the BRICS nations. In this respect, one can understand how social conflict arises; in the mines, for example. That is also due to a very high unemployment rate, and youth unemployment rate, which can in turn be traced back to insufficient education reforms.

SN: Where are South Africa‘s biggest problems in relation to education?

HR: Primary and secondary education in South Africa is not especially good. And tertiary education has little regard to demand, especially in respect of engineering and other scientific degrees that are important for sustainable development. This leads to a so-called “skills mismatch”, because what is offered by the education system is not what is demanded by an emerging nation exhibiting sustainable growth. On the other hand, for example, there are relatively good educational opportunities in the finance industry. Universities in South Africa are not bad. But there is a structural defect, and access to universities is far from equal. This inequality is present not only in the tertiary sector, but also at the levels below that.

SN: What needs to happen in terms of policy?

HR: What’s required is an improvement in the quality of public schools, which are attended by the underprivileged segments of the population. There is also a lack of vocational training, which is something that distinguishes Germany, for example. In the secondary and tertiary sectors, there is a need for more attention to be paid to ensuring that the capabilities that are taught are those that are also important for the private sector.

SN: How does South Africa compare to other emerging nations with respect to education policy?

HR: In this respect, South Africa has been left behind. And that’s the case even though at 20 percent, expenditure on education makes up the largest component of the South African budget. In comparison to Brazil, Russia, India and China, South Africa exhibits the worst performance in education and employment policy.

SN: How do the BRICS nations generally stack up in your examination of their economic and social policy?

HR: The BRICS nations perform worse in the long-term indicators – that is, the social indicators – than in the short-term indicators such as fiscal space and macroeconomic solidity. In that respect, if sustainability is under threat in the BRICS nations, it is under pressure in the social sector. It is not threatened on the economic side to the same extent as in Europe for instance. To some extent, however, the social deficits can be traced back to the growth process itself.

SN: How is that?

HR: Emerging countries are generally large countries, and exhibit a dual structure. That means that on the one hand they have a rural, or informal urban, sector with very low productivity, and on the other hand a formal urban sector with high productivity. The growth and development process is characterised by a necessary transfer of resources such as labour and capital from these unproductive sectors to the productive sectors. This process leads to a temporary – and by temporary I don’t mean short-term, but rather for a number of years or decades – to greater social inequality. This inequality occurs between the rural and urban sectors, and also within the urban sector. These are relatively unavoidable processes which are very strong and which can at best be cushioned by good policy.

SN: Which country has managed that?

HR: Brazil, for example. There, under the administration of Lula and before that Cardoso, you could see a pronounced and strong-willed program targeted at fighting poverty and hunger. Brazil is alone among the BRICS nations in managing to stem the tendency towards growing inequality, especially through the transfer of money to the poorest population groups.

SN: In the SGI BRICS study, Brazil is also at the top of the BRICS nations when it comes to social policy.

HR: Right, followed by China. Then Russia. In that field, the real problem children are India and South Africa.

SN: And how do things look in terms of economic policy?

HR: China is ahead of the pack in this regard. China is a successful developing country. It always had governments that involved themselves in development strategies. The experiences in China show that in certain settings the state can intervene with strength and be successful – for example, through financial instruments, subsidies and its industrial policy. China is easily the best-governed country within BRICS – despite a high level of state control, and despite a relatively restrictive policy in respect of direct investment. Brazil and India are next in line for economic policy in the SGI study. Russia is well behind here.

SN: Why?

HR: It’s predominately because Russia has failed to build a coherent development strategy. Everything happens on a discretionary and short-term basis. Russia mainly survives on resource rents and hasn’t proven capable of diversifying the economy.

SN: What are the biggest political challenges facing all the BRICS nations at the moment?

HR: The differences within the BRICS countries are significant, but there are at least three challenges which they all share. All of the countries are large and have a dual structure. That means that the fiscal equalisation between the central government and the regional authorities is very important. And this has not, to date, been addressed in an optimal manner in the BRICS nations. It must be conducted so that the regional authorities are delegated tasks that are sensibly funded by means of fiscal transfer. Otherwise, the regional authorities will fail to perform their task, or will attempt to fund it in another way. This encourages corruption.

SN: And secondly?

HR: The BRICS nations must pay more attention to the skills mismatch in the labour market, to ensure that the education sector doesn’t ignore modern industries. That is indispensable for strengthening industrial competitiveness which allows countries access to higher value-added segments in the modern global production networks. The third aspect is industrial innovation policy. This depends on diversification. It requires a new form of infrastructure in addition to the so-called “hard infrastructure” in the fields of energy and transport. This is “soft infrastructure”: Respect of property rights, individual freedoms, and democracy, to name just a few. These factors are similarly decisive with regards to the sustainable development of the BRICS countries.

Interview by Rosa Gosch. Translated from German by Rogan O’Shannessy.

Useful links

OECD work on South Africa

Education Quality and Labour Market Outcomes in South Africa OECD Economics Department Working Paper

Helmut Reisen debates the role of the BRICS with Bertelsmann Foundation’s Justine Doody

SGI Network

Helmut Reisen’s Shifting Wealth blog

Breathless in China

Click to see the report
Click to see the report

What do you look for in a holiday destination – sunshine and sand, fine food, ancient treasures? If none of these send you scuttling off to Tripadvisor, then how about this: fresh air. That’s what one Chinese province is promising in adverts running on national TV: “Take a deep breath, you’re in Fujian.”

The campaign seems to be working: So far this year, the coastal province has seen a 38% rise in visitors, according to NPR’s Rob Schmitz. “The air is so fresh here!” one tourist told him. “Whenever I go to work in Beijing, I have to wear a mask or else I’ll start coughing uncontrollably. It’s just been terrible lately.”

Indeed. Even by Beijing’s standards, air pollution this past winter has been awful, with the city repeatedly blanketed in throat-choking fog. On one weekend in January, the level of airborne fine particles classed as PM2.5, which are especially harmful to health, briefly rose to almost 40 times above the acceptable limits set by the World Health Organisation (WHO). Beijing is not alone: Less than 1% of China’s 500 biggest cities meet WHO air-quality guidelines, according to the Asian Development Bank, and seven of them rank among the world’s ten most polluted cities. According to the in the world from urban air pollution.

None of this is particularly new – China’s problem with pollution has been apparent for years, but the depth of the murk that descended this past winter does seem to have sparked a real bout of soul-searching. China’s media, for example, has been reporting the problem with unusual frankness –“Beijing’s 225 shades of grey,” says a headline in the China Daily, over a set of photos of the smoggy capital. The leadership, too, has responded, promising increased air monitoring and extra efforts.

The air problems in China’s urban areas bring together two major challenges facing the country, both of which get special attention in the OECD’s latest Economic Survey of China, released ahead of the annual China Development Forum in Beijing at the weekend.

The first is the challenge of making China’s rapidly growing cities more liveable. At one level, this means ensuring that citizens have access to breathable air, rapid transport and so on. But there are other, less visible, issues. Setting environmental problems aside for a moment, one of the most pressing concerns the status of internal migrants, who account for around 70% of the growth of China’s cities over the past few decades. Faced with an ageing population and stagnating workforce, China needs that movement to continue but, if that’s to happen, its cities will need to set out a proper welcome mat for migrants. As we’ve noted before, the hukou registration system means people leaving their home area can lose access to services like health and education. That’s bad not just for migrants but also their children. Many of them – perhaps 36 million – get left behind, and are raised by grandparents; those who do move with their parents to the cities – an estimated 23 million – don’t always have access to great education. Chinese cities and provinces have pursued piecemeal reform of the hukou system, but there are growing calls – including from the OECD – for cities to grant residential permits to migrants; recent reports suggest substantial reform may not be far off.

The second great challenge is, of course, the environment. Smog-filled cities are just one face of the country’s environmental degradation, which also encompasses desertification, flooding, soil contamination and water pollution. China has made some progress in tackling these: For example, sulphur dioxide emissions have declined somewhat, although the country remains the world’s biggest emitter, and there has been a slight improvement in water quality – Shanghai’s floating pigs notwithstanding.

Nevertheless, grave problems remain and, as the OECD report notes, a wider range of weapons needs to be used to tackle them, including market-driven pricing of fuels like natural gas and coal and greater use of pollution taxes and levies. The potential impact of China on the global environmental is so great that, unless the country rises to the challenge, it won’t just be the citizens of its own cities who are gasping for air.

Useful links

OECD work on China

网站 (中文) (The OECD’s Chinese-language site)

China Development Forum

World Water Day: Big problems but there are solutions

Click to find out more about International year of Water Cooperation
Click to find out more about International year of Water Cooperation

This week, around 30,000 children under the age of five will die from water-related diseases, one every 20 seconds. In fact unsafe water now kills more people than all forms of violence, including war, with diarrheal diseases claiming 1.8 million victims a year and causing more deaths in children under 15 than the combined impact of HIV/AIDS, malaria, and tuberculosis. Uleftae Mundeo from Manzo in Ethiopia told NGO WaterAid what that means. “Children often die here from the water. Often all of the money we earn from farming is spent on medicine.”

Uleftae uses a local pond, but often collecting water means walking a dozen or more kilometres a day carrying a heavy load, leading to chronic back pain and sometimes spinal deformities. China’s Global Times interviewed 12 year-old Mi Guie who spent her weekends helping her parents fetch water after a drought hit Yunnan Province in 2009-10. They walked for hours getting to and from the nearest river, climbing a 600 metre high cliff on the way there and back, for a few litres of muddy water each time.

In areas where supply is worst, women and girls (always them) get up in the middle of the night and queue for hours for their turn then a couple of hours more as water trickles into buckets. In urban areas, the problems are different but no less serious. Infrastructure hasn’t expanded as much as population, leaving millions of citizens with no access to piped water and modern sanitation, or forced to live near open sewers carrying household and industrial waste. One of these sewers caught fire in a shantytown in Nairobi in September 2011 after petrol spilled into it, burning to death over 100 people.

Fortunately for us, stories like these don’t take place in OECD countries, but the number of water-related disasters has increased worldwide over the last three decades, particularly floods, droughts and storms, with almost 40% in OECD countries, 30% in the BRIICS and 30% elsewhere. Only about 5% of the victims were in OECD countries, although OECD countries suffered almost two-thirds of the economic losses.

Floods accounted for well over 40% of the disasters over 1980-2009, storms nearly 45% and droughts 15%. The number of victims ranges between about 100 million and 200 million per year with peaks of 300 million or more. Almost two-thirds of the victims are due to floods, with droughts and other temperature extremes accounting for 25% and storms the remaining 10%.

Economic losses were $50-100 billion a year between 1980 and 2009, although that jumped to $220 billion following Hurricane Katrina in the US in 2005. Storms account for half of all losses, floods one third and droughts almost 15%.

With so many different factors influencing and being influenced by each other, it’s hard to define an overarching framework to think about water-related issues. Even the basic geographical categories I used above aren’t that useful in many cases. Within a single “OECD country” like France, the main concern can vary from place to place – pesticides and fertilizers polluting rivers, financing the replacement of ageing infrastructure, limiting the impact of drought on economic activity…

However, “water security” provides a useful lens through which to examine the issues, as we celebrate World Water Day, especially as this year, World Water Day is part of the UN’s International Year of Water Cooperation. Water security is emerging as one the major global challenges of the 21st century. World water use is projected to be 55% higher in 2050 than it was in 2000, and the OECD Environmental Outlook says that by mid-century, nearly half the world population will live in river basins under severe water stress. That means an additional 1 billion people compared with today. These figures are only talking about the quantity of water available. Degradation of water quality adds to the uncertainty about future water availability.

In forthcoming work, the OECD will argue that when you talk about security, you’re implicitly or explicitly talking about risk, so a risk approach may be the best way to tackle water security. Water security would be defined as maintaining an acceptable level of risks in terms of water shortage or excess, pollution, and freshwater system resilience for society and the environment, today and in the future. The main thrust of a risk approach to water security would be to secure benefits for society and the environment in a way that maximises expected social welfare.

Issues ranging from infrastructure financing to climate change influence water resources, as well as economic activities have to be considered. Some of these activities are obvious, while others may come as a surprise, energy for example. Thermoelectric power generation accounted for 39% of all freshwater withdrawals in the US in 2000, roughly equivalent to water withdrawals for irrigated agriculture. You may also be surprised to learn how much water goes into making the products you use every day, over 15,000 litres for a kilo of beef for instance, or 1500 litres for a litre of apple juice. (You can calculate your own “water footprint” here)

From a risk perspective, water governance poses three main challenges: know the risk by obtaining the information needed to make effective and informed decisions; cap the risk by setting and enforcing acceptable limits on use and standards for water quality and flood protection; and managing the risk through policies and regulations that allow equitable and efficient allocation of water resources, equitable and efficient land-use planning for flood prevention, and implementing the polluter-pays-principle.

From a water cooperation perspective, that means for example ending the institutional fragmentation and promoting a multi-level approach so that all the different needs, options, and consequences can be looked at as a whole.

The problems are undeniable, but there is room for optimism. Next week sees the first meeting of the OECD Water Governance Initiative that argues that “Managed correctly, there is sufficient water on Earth for the world’s population”.  I’ll drink to that.

Useful links

The Water Challenge: OECD’s Response

Water Chapter of the OECD Environmental Outlook to 2050: The Consequences of Inaction

Water Governance in OECD Countries: A Multi-level Approach

OECD expert meeting on water economics and financing


Cyprus: Further Compressing the Coiled Spring

Bank runs are nothing new, but they're not a thing of the past either
Bank runs are nothing new, but they’re not a thing of the past either

Today’s post is from Adrian Blundell-Wignall, Special Advisor to the OECD Secretary General on Financial Markets. The view expressed here is his own and does not necessarily reflect that of any OECD government.

The Cyprus crisis is the result of policy mistakes and a failure of collective responsibility, as well as an illustration of what bad policy can do and could do if it’s not corrected. It’s now too late to take the easier steps that could have avoided the problems we’re facing today, but there are alternatives to the myopic, badly conceived plan proposed by the Troika (the committee led by the European Commission with the European Central Bank and the International Monetary Fund that negotiates loans to the states worst affected by the sovereign debt crisis).

While all deposits are supposed to be guaranteed to €100,000, those with above that amount were to be taxed 9.9%, and those with less 6.75%; enough to raise about €7bn, to make up the €17bn estimated to be needed to rescue Cyprus’ banks (since  a limit of €10bn for Troika bailout loans was imposed). The deposit plan was (naturally) rejected by Cyprus’ parliament.

The “above-€100,000” depositors are in the main Russian depositors; the bulwark of Cyprus’ role as an offshore centre.

Large withdrawals of electronic funds have been suspended. Electronic transfer of funds from Cyprus has been stopped. Banks are closed, now until next week.

Bank collapses would result in some €68bn deposit insurance liabilities to be paid (at least 1/3 outside the euro area), an amount much larger than Cyprus’s GDP (just under €18bn) —an unthinkable option.

While reports suggested there was a Troika threat to cut off ECB liquidity support (hence collapsing the banks), this was not made by the ECB, which has responsibility for such decisions and continues to support the banks for now.

A key policy mistake in Cyprus was that action was not taken sooner. Hybrid and unsecured bonds should be the first in line (after equity) in burden-sharing during bank failure resolution. Bondholders were involved in burden-sharing in other European countries and implicit bank debt guarantees declined. This caused the amount of outstanding unsecured bonds of Cypriot banks to fall noticeably during 2012 (there is now only €1.2bn of junior bond holders left!) but the Troika failed to take action to deal with the banks. Consequently, the bulk of liabilities now consists of deposits. Early action would have reduced the cost.

There is a collective responsibility here. Starting from the failure to act early, one can add more to the list: the losses of Cyprus’ banks derived mainly from holdings of Greek government bonds, which successive European politicians promised would never be allowed to default; the one size fits all monetary policy; the failure to implement and monitor the Maastricht fiscal pact; and the permission given to enter the euro in the first place.

The Troika’s plan amounts to a confiscation of deposits. The most recent example of this kind of policy was Zimbabwe in 2008—confiscating foreign currency bank accounts (puzzlingly the IMF was critical of this then). And there have been examples in extreme crisis situations in Europe and Latin America before that, which also made things worse and left a deep distrust of banking for generations.

The plan has surprised even the worst critics of the euro project.Not contributing to bank runs is the single most important lesson of hundreds of years of financial policy making in crises, lessons that appear to have been lost on the Troika.

The full implication of this latest policy announcement from Europe is hard to assess. But policy makers need to rethink this policy quickly.

The risk of runs on Cyprus bank deposits is now high, as soon as the banks re-open, in the absence of capital controls and limits on cash withdrawals. Governments went through a lot of trouble to establish new deposit insurance ceilings in Europe. The new harmonised EU (and EFTA)-wide deposit insurance ceilings have to be seen against the background of re-instilling depositor confidence, while also trying to limit moral hazard risks. Major efforts have been undertaken by deposit insurers to raise awareness of these new ceilings. Any policy measure that undermines the credibility of this ceiling runs the risk of triggering a depositor runs in other countries that have banking sectors under stress and weak sovereigns.

The Basel process is trying to discourage reliance on short-term wholesale funding while favouring retail deposits, with a view to improving the outlook for financial stability. Deposits are currently very much sought after.  For example, the relative stability of the Italian banking sector in part reflects the ability of Italian banks to increase their domestic retail deposit base. Haircutting small depositors will undermine these efforts.

Restrictions on capital flows, should they prove necessary, perpetuate external imbalances, undermine trust, and may prompt and encourage similar measures by other countries.

There are serious problems on bank balance sheets in certain larger EU economies, which may in the end require bank resolutions. It is only natural that the Cyprus approach be taken as a pointer for what could be done elsewhere (confiscation of deposits). This is very important, because one of the stumbling blocks for the European Banking Union project is the very nature of deposit insurance and who will pay for it. The precedent being set here will make it more difficult to finalise the banking union project.

Trust in the financial system is built around the most basic ideas of caveat emptor for sophisticated participants and protections for unsophisticated investors.  European politicians have strongly supported the OECD push for better financial literacy and consumer protection—yet the Cyprus plan says that Europe is prepared to hurt the small unsophisticated depositor in banks that they believed were safe.

Global systemically important banks have not been restructured to separate material derivatives and securities businesses, where caveat emptor should apply, from traditional businesses of deposit taking and lending where protections are important. More volatility can put big banks under pressure via margin and collateral calls, contaminating traditional banking, if the crisis were to escalate from here.

What could be done?

There were so many choices that could have avoided the problems. A list of alternatives from the easiest to the hardest includes:

  • Earlier action in the first place—alas now not available.
  • Given no meaningful action was taken, ‘tax’ uninsured deposits for all depositors above €100,000 to the amount required. Promises are not broken, and many unsophisticated depositors had more than one bank account to avoid the risk of loss. This ‘big deposits approach’ would undermine Cyprus’ status as an offshore financial centre—but that may not be such a bad thing for the future.
  • Capital injections into banks from the European Stability Mechanism (ESM) to the amounts required, TARP-style, in exchange for warrants.
  • Fully nationalise the banks, keep them running, and wipe out all equity and bond holders. Restructure the banks, and then sell them back to the private sector—a time honoured and profitable approach, used in Scandanavia, in the US S&L crisis and even on a piecemeal basis in this crisis.

Sticking with the Cyprus plan amounts to telling European depositors and that their money is not safe in any country where banks have problems (bond holders know this already). The ‘coiled spring’ has just been compressed further. For now the private sector believes in ECB magic. This is perhaps the most strongly held market view. But when the strongest-held views are contradicted—even by the slightest hint of a problem elsewhere in the future—the coiled spring could uncoil explosively in a collective unwinding of all those beliefs. This would create new problems and would certainly further delay Europe’s recovery.

Change course now! And, in doing so, clarify Europe’s view on deposit insurance and resolution in the Banking Union plan as soon as possible, making it clear that confiscation of insured deposits will never happen anywhere.

Useful links

OECD work on sovereign debt and financial stability

OECD work on public debt management

You and me and eudaimonia

Click to download the report
Click to download the report

Be honest, if you had to pick one of Snow White’s Dwarfs to run your country, would Happy be your first choice? I mean, what’s so great about happiness that it gets enshrined in constitutions and even gets its own International Day today (even if it does have to share with Alien Abduction Day according to OECD sources)? When your economy is going to hell in a hand basket, Doc and the technocrats are called in.  And it’s Grumpy and the rest of the dissatisfied who stimulate progress. As Shimon Peres said during his visit here last week, the reason Israelis are so innovative is that they’re always complaining.

But even the glum old OECD is trying to cheer you up, or at least find out if you’re miserable. The title alone of our latest report, OECD Guidelines on Measuring Subjective Well-being, will probably bring a smile to your face, but just wait till you see what’s in it. You may think that subjective well-being is easier to recognise than to define, but that’s because you’re not a statistician.  The OECD definition “encompasses three elements: life evaluation (a reflective assessment on a person’s life or some specific aspect of it); affect (a person’s feelings or emotional states, typically measured with reference to a particular point in time); and eudaimonia (a sense of meaning and purpose in life, or good psychological functioning).

We’ll come back to eudaimonia below, but you may be wondering how you can actually measure these things. Since the report consists of guidelines, its main purpose is to help to design surveys – sample size, target population, survey frequency, that kind of thing. But it does provide examples of measures. My favourite is the Andrews and Withey scale that asks how you feel about your life as a whole and you have seven possible options ranging from (no, not “Sleepy” to “Dopey”) “Delighted” to “Terrible”.

Back to Eudaimonia. It’s defined here as “meaningfulness” or “purpose” to life, but Eudaimonia is often translated from the ancient Greek as “happiness”, our subject today. However, for philosophers from Socrates on who used the term, the meaning wasn’t really that implied by the OECD guidelines (if only they’d known!). It referred less to a pleasant feeling than to how you lived your life and whether your actions were moral – well-living and well-doing and not just well-being if you like. Less to do with how you feel than how you act.

So what’s that got to do with an organisation like the OECD? Everything, if you take our slogan “Better policies for better lives” seriously.

Eudaimonia meant taking the morally appropriate course of action in a given situation. A typical example would be how to react to fear, as discussed by Aristotle in his Nicomachean Ethics.  Too much fear can lead to cowardice and inaction. Too little fear may mean doing something stupid through over-confidence. Courage is the virtuous reaction in this case. Substitute “crisis” for “fear” and you’re not far from the kinds of choices a government has to make and the kind of advice the OECD gives.

Maybe you think that’s according too much credit to the continuing relevance to modern governance of ancient ideas of virtue. After all, these ideas refer to individual conduct rather than what a government (or company) is judged on – its actions, and whether they increase overall well-being and conform to certain standards.

At the same time, one of the main themes of this year’s OECD Forum is rebuilding trust. The latest Edelman Trust Barometer shows that the public puts a high price on individual ethics. Fewer than one in five respondents believes a business or governmental leader will actually tell the truth when confronted with a difficult issue, while unethical behaviour is one of the main reasons that banks and financial services remain the least trusted sectors .

Surveys like the Barometer also underline the fact that the people who are most trusted are those the respondents feel are most like them. There is a general impression that what is important to political and business leaders isn’t what counts to most citizens. Measuring Subjective Well-being is part of a broader OECD project, the Better Life Initiative, which tries to change that, at least as regards governments. The Initiative includes Your Better Life Index, an interactive tool that allows you to compare well-being across countries, based on 11 topics covering material living conditions and quality of life, according to how important you think each topic is. Try it, you’ll make a lot of statisticians happy.

Useful links

Better Life Initiative: Measuring Well-Being and Progress


Will the bottom billion always be with us?

Click to go to the Forum website
Click to go to the Forum website

I know a photographer who worked in the Egyptian oases at the time when the people living there became poor. Their wealth and number of possessions didn’t change, but with the arrival of television and other modern media, they suddenly learned that they were living in a backward, disadvantaged area. Until then, they’d believed that they had everything you needed for a good life – food, water, animals, plants, friends, feuds… But they didn’t have fridges, schools, and most of the other goods and services to be found in the city. At the same period, people who lived in a metropolitan slum would not have considered themselves rich just because they had a TV, electricity and most of the other things the Bedouin lacked.

Poverty then isn’t just a question of income. The newly-published 2013 UN Human Development Report looks at two measures: poverty defined in strictly monetary terms as living on less than $1.25 a day, and the Oxford Poverty and Human Development Initiative’s Multidimensional Poverty Index (MPI). The MPI has three dimensions and ten indicators, all equally weighted, which reflect some Millennium Development Goals and international standards of poverty. The three dimensions are health, education and living standards; while the indicators are nutrition, child mortality, years of schooling, school attendance, cooking fuel, sanitation, water, electricity, type of floor of the dwelling, and assets.

The data support the optimism of the UN report’s title “The Rise of the South: Human Progress in a Diverse World”. More than 40 countries in the developing world have done better than expected in human development terms in recent decades, with their progress accelerating markedly over the past ten years. Of 22 countries having data on MPI poverty over time, 18 reduced MPI significantly, and most of them reduced multidimensional poverty faster than income poverty.

On current trends, half the 22 countries would eradicate MPI within 20 years and 18 within 41 years, but it would take 95 years for all 22 to eradicate multidimensional poverty.

What about the “bottom billion”, the poorest of the poor? In this article in 2010, Brian Keeley discussed Andy Sumner’s argument that if we focus on the poorest countries, we’ll actually miss most of the world’s poor. The new figures suggest that where the bottom billion live depends on whether you look at national averages, the subnational  level or the intensity of poverty experienced by each poor person.

At national level, the bottom billion are concentrated in the 30 poorest countries. But the situation can vary significantly from one region to another within a given country. For instance in Tanzania, 32.4% of the people in the Kilimanjaro region were poor in 2010, but the figure rises to 87.4% in the Dodoma region just 250 miles (400 km) away. Looking at 265 subnational regions, the bottom billion are spread across 44 countries.

The bottom billion by individual poverty profiles more than doubles the number of countries to 100. This is calculated by starting with people who are deprived in all 10 indicators. This gives 17 million in all, with India and Ethiopia having 4 million each. You then add people who are deprived in 95% of the indicators and so on until you reach 1 billion.

Surprisingly, 9.5% of the bottom billion live in upper Middle Income Countries, and 41,000 of the poorest bottom billion live in five High Income Countries. Unsurprisingly, 51.6% reside in South Asia, 32.7% reside in Sub-Saharan Africa, and 12.3% reside in East Asia and Pacific. Nearly 40% of the bottom billion poor reside in India.

But to get back to the optimism. Bangladesh was the original international “basket case” (a term used by the Henry Kissinger-led State Department in 1971). The image persists, but in reality Bangladesh is one of the three top performers in reducing MPI, along with Nepal and Rwanda. The Economist argues that it got out of the basket thanks to four factors: it improved the status of women; the Green Revolution and remittances boosted incomes; the government maintained social spending; and non-government organisations managed to scale up their programmes to work nationwide.

You may have noticed that The Economist doesn’t cite economic growth. The Human Development Report says something similar: “Economic growth alone does not automatically translate into human development progress. Pro-poor policies and significant investments in people’s capabilities  – through a focus on education, nutrition and health, and employment skills – can expand access to decent work and provide for sustained progress. The 2013 Report identifies four specific focuses for sustaining development momentum: enhancing equity; enabling participation of citizens, including youth; confronting environmental pressures; and managing demographic change.

These themes will also be discussed at the OECD Global Forum on Development on 4-5 April. The Forum will be looking at how the global economic landscape has changed, and with it, the understanding of what development and poverty are all about. For example the session on the multidimensional nature of poverty will highlight the links between poverty reduction, natural resource management and growth as issues that are central to social protection and pro-poor growth.

Useful links

The OECD Global Forum would like to hear your opinions on the major themes.

Click here to discuss: Post 2015: Effective partnerships for development in a changing world

Click here to discuss: Beyond Poverty reduction: The challenge of social cohesion in developing countries

Click here to discuss: Measuring poverty, well-being and progress: Innovative approaches and their implications for statistical capacity development

Click here to discuss: The global-national nexus and country-level policy actions

The 2010 edition of the OECD Development Centre’s Perspectives on Global Development: Shifting Wealth pioneered the topic of shifting wealth and the impact of emerging economies on the development of Low Income Countries, taken up in this year’s Human Development Report. The 2012 edition of Perspectives looking at the impact of shifting wealth on social cohesion has an extensive analysis of poverty trends and measures.