It wasn’t long after the financial crisis struck before people began talking about the road to recovery. Many years on, it turns out that there is no such road. Instead, there are roads – several of them – all leading OECD countries back, some more quickly than others, to modest growth.
Among the major OECD economies, the fastest recovery seems to be happening in the United States, according to the latest edition of the OECD Economic Outlook, released today. Revived confidence and repairs to the financial system are driving growth, and the number of people out of work is falling. By the end of next year, the OECD projects, the U.S. will economy will be growing year-on-year by 3.4%.
Taking a rather slower road to recovery is the Euro area, which is projected to see growth of just 1.8% by the end of 2014. That might not seem like much, but it’s an improvement on estimates for growth in the current quarter, which hover around zero. Europe continues to be weighed down by financial concerns and, of course, unemployment, which is still rising.
Here, the contrast with the performance of the U.S. is striking: The Outlook estimates unemployment in this current quarter stands at around 7.5% in the U.S. and 12% in the Euro zone. By the fourth quarter of next year, it projects that the figure for the U.S. will have fallen to 6.7%, while in Europe it will have risen to 12.3%.
Joblessness is less of a concern in Japan – where it’s currently estimated to stand at around 4.2% – but even that low level looks set to improve over the next 18 months as the government enacts substantial economic reform. The Outlook describes this policy shift as “welcome”, but it warns that the task of boosting sustainable growth, beating deflation and tackling the public debt will require a “delicate balancing act”.
Japan isn’t the only OECD country that will have to do some careful manoeuvring. It’s just one of a number of OECD governments that have used very low interest rates and other, more unconventional, measures to stimulate their economies. On the one hand, continuing with those measures indefinitely risks creating bubbles; on the other, ending them suddenly could provide an unwanted economic shock. Again, some delicate footwork will be required.
Nevertheless, and despite several other caveats, this edition of the Outlook offers a modestly upbeat outlook on the global economy, with growth seen as firming both in OECD and other major economies. As OECD Chief Economist Pier Carlo Padoan says in this video, “we remain convinced that there’s light at the end of this tunnel”.
The OECD Forum starting today will bring together around 2000 people in over 20 sessions, but the main question will be how to make sure the economy is a firm foundation on which to build our societies’ goals.
As OECD data on rising inequality show, the benefits of growth do not automatically trickle down to generate more equal societies. The most immediate challenge is to ensure that growth benefits everyone – women, men, children, the elderly – providing not just income, but access to the goods and services such as housing, health care or education vital to personal well-being and development.
That means we need to adopt a new, inclusive approach that looks at the social as well as the economic aspects of growth. “Inclusive growth” is already happening at the level of national economies, with countries linked together by global value chains (GVCs). And not just in the OECD area. One of the most striking features of the 21st century economy is how the economic centre of gravity is shifting towards Asia, and surprisingly for many, Africa, home to six of the world’s ten fastest growing economies in Africa.
These trends make old ideas of development partnerships obsolete. Large emerging economies now have their own international aid programmes. The private sector is funding major global health, education and other projects. Civil society is increasingly shaping policy and not just working in the field.
However, government policy has not always kept up with the deepening and widening of globalisation and the pace it’s happening at. For example, some multinationals may pay as little as 5% in corporate taxes in a given country when smaller businesses are paying up to 30%. But this is perfectly legal, and exploits the fact that tax systems are still essentially nation-based and were designed for the “old” economy.
Even so, public opinion and the media are outraged, especially given the efforts demanded of ordinary citizens to help cut budget deficits, and the suffering caused by austerity programmes in certain countries. There is a feeling that tax is not the only area where businesses are not acting ethically. Banks manipulating interest rates or food manufacturers deceiving consumers about the ingredients in their products destroy confidence and reinforce mistrust. Government responses to these issues are often perceived as too lenient, and encourage the feeling that there is one law for the rich and powerful, another for the rest.
Many are saying that the social contract – the agreement between citizens and their government, defining the rights and duties of each – is now broken. In the face of unprecedented unemployment levels, governments have cut expenditure. As a consequence, more and more people cannot afford health care, and many young people in particular are giving up trying to find jobs or investing in further education. This is a personal tragedy, and it also weakens social cohesion and the future prospects of the economy, given the growing need for workers with new skills.
The ability of advocacy groups like unions to protect core rights and promote social change is in question, especially if they neglect newer forms of informing, mobilising and campaigning around issues such as social media. At the same time, there are doubts as to whether “social media based” movements are anything more than a passive expression of opinion, and whether protest groups that reject the usual structures of leadership and policymaking can stay together long enough to bring about lasting change in the face of opponents organised in a more traditional way.
There is consensus though that access to information and the ability to exploit it will play an increasing role in the economy and society in the future, with both benefits and dangers. Business models and personal behaviour and attitudes are already changing. But once again, policy is not evolving as quickly as the trends and technologies it is supposed to respond to, or even guide. Massive amounts of personal data are being collected, often with little or no consultation or consent, or debate as to who has the right to know what.
The fact that so many of the phenomena being discussed are immaterial (data, intellectual property, the financial system) can blind us to the fact that we still depend on physical, material, resources to live full lives. Beyond the immediate and pressing concerns linked to the situation today, we have to look to the future. Growth will come to a halt if it destroys the very natural bases on which it ultimately depends. And growth as such will not solve our problems if it is not sustainable as well as equitable and inclusive.
The links below are grouped around the main themes of the Forum. Click to read an article presenting the topic itself, and giving access to dozens of articles providing background data, analysis and opinion.
Africa has made tremendous progress over the last 13 years, going from “hopeless” to “aspiring”, in the words of The Economist. Certainly, Africa’s pace of growth has been impressive, averaging 5.1% of GDP per year – much faster than most OECD countries. Some have dismissed this simply as reflecting only the recent boom in natural resource prices. They point to the fact that prices of most commodities – agricultural, mineral and energy – doubled or even tripled over the same period, and warn that Africa’s growth will come to an end once resource prices taper off, as it is happening now.
This viewpoint misses the real story on two counts. First, natural resources and their improved terms of trade contributed only a third of Africa’s growth. That’s quite a lot, but not enough to make Africa’s growth exclusively a resources story. Instead, much of Africa’s success is actually a productivity story. Applying new methods of measurement, the African Economic Outlook 2013 finds that Africa’s labour productivity increased by close to 3% during the 2000s, with almost half this attributable to workers moving to new activities with higher productivity. By contrast, Latin America’s productivity growth was less than 1%.
Second, rather than being the exclusive drivers of growth, Africa’s natural resources are contributing less than they could do. Agricultural commodities are a striking example: 24% of the world’s agricultural land is in Africa, but only 9% of agricultural production. With regards to mining, spending on exploration in Africa has remained below $5 per square kilometre; in Canada, Australia and Latin America the average is $65 per square kilometre.
So the story of Africa’s growth and natural resources is a mixed bag: On the upside, Africa’s growth rests on a much more diversified base than is often assumed. On the downside, Africa failed to make the most of its natural resource wealth during the recent boom. Had it done better, overall growth and the type of structural transformation that can provide more and better jobs would have been higher.
“Hang on,” you might say now. “Isn’t it conventional wisdom that for development to take off a country must leave commodities behind and focus on building factories? Shouldn’t it then be a good thing to leave most resources in the ground?” Not quite. If managed well, natural resources can play a crucial role in transforming economies. This can happen through three channels: diversification, capabilities and revenues.
Diversification, which essentially means the range and variety of products a country exports, is an important driver of growth in developing countries. Given the right conditions, natural resources can be an important source of diversification. Chile, for example, used proceeds from copper to invest in new agricultural commodities, such as salmon, that it previously did not export. Malaysia invested its oil revenues in forestry and palm oil, building very successful industries. Indonesia used oil revenues to supply fertilizer to farmers and develop new crops, building the basis for the country’s green revolution.
Capabilities are the cornerstone of structural transformation. In simple terms, these represent the things a country “can do” – its technological know-how and skills, for example, or the quality of its public services in areas like infrastructure, education and health, and much, much more. Countries with strong and diversified natural resource production have more opportunities to develop their capabilities. Take South Africa, which went from supplying simple tools to its miners to become an internationally competitive supplier to the world’s mining industry. Chile successfully developed local know-how on adapting mining technology to local conditions, while Nigeria has started to build up a supplier industry for its resource sectors.
Capabilities make the link between the production of basic commodities and diversification at large. On average, the more unprocessed commodities a country exports competitively, the more manufactured products it exports competitively. For example, South Africa exported 46 raw commodities competitively in 2005 and 197 manufactured final products in 2010. Angola only exported one commodity (oil) competitively in 2005 and 24 manufactured final products in 2010.
Finally, the third channel – revenues – offers arguably the greatest benefit from extractive industries in the short to medium term. Invested wisely, the proceeds from mining and petroleum production can be used to fund many of the crucial inputs for structural transformation such as education and health, as well as infrastructure and strong public services.
So, instead of putting natural resources aside, African countries should look to them for their strengths and the opportunities they offer to create a diversified economy.
It’s probably safe to say that, in absolute terms, more children are now in school than at any other time in human history. Not just that, it’s also likely that a greater proportion of children – both boys and girls – are in school than ever before.
In Sub-Saharan Africa, for example, just under three in five children of primary school age attended class at the turn of the century; today, that figure is above three in four, according to Unesco. Similarly, back in 1999 in the world’s developing countries, there were around ten boys in school for every nine girls; today, the ratio is close to parity. All this represents good progress for the Millennium Development Goals on education.
But here’s a question: What are all those children actually learning in school? Regrettably, in many developing countries the answer looks to be not much or, at least, not enough. It’s become increasingly clear that the progress developing countries are making in improving the quantity of education is not being matched by a rise in quality. The problem was described in stark terms last year by the Africa Progress Panel, which stated that many children in African schools “are receiving an education of such abysmal quality that they are learning very little. Far from accumulating ‘21st century skills’, millions of Africa’s children are emerging from primary school lacking basic literacy and numeracy.”
The problem is not confined to Africa. Despite a big rise in enrolments and numerous government initiatives, India, too, has many failing schools, as writer Rakesh Mani found when he arrived to teach at a school in Mumbai: “Only a handful of my third-grade students could read first-grade books, and almost all struggled with elementary arithmetic,” he wrote recently. “Despite this being an English-language school, few teachers – and fewer students – could speak the language at all. Indeed, most of my students were unable to recognize basic alphabets or perform simple addition.” The quality deficit in Indian education was also highlighted in an OECD report a couple of years ago, which noted that “barely over one-half of fifth-grade [rural] students demonstrated a sound ability to read a second-grade text”.
The reasons for all this are no mystery. In many developing countries, teachers are in short supply, while those who are available have often received little training and may rely on outdated techniques like rote learning. Teacher absenteeism can also be an issue. On the student side, malnourishment and sickness can hold back children’s learning – it’s hard to study when your stomach is growling. Families may also struggle to pay school fees and may take children – especially girls – out of school before they finish their education or for parts of the year.
So, if we’re to measure progress on education, it’s clearly not enough to look just at enrolment rates. We need also to examine quality in education – an idea that’s emerging strongly in the Post-2015 process of creating a new round of global development goals.
Of course, a number of models for assessing how well students are doing in school already exist, including the OECD’s PISA programme, which examines the performance of 15-year-old students in over 70 countries every three years. While most of the focus has been on the performance of developed countries in PISA, a growing number of developing countries have also been taking part in recent rounds of the three-yearly assessment as well as in follow-up rounds.
PISA’s role in development could be extended still further: “With increased numbers of developing countries participating in the PISA 2015 cycle this could potentially serve as a baseline for measuring progress by developing countries, including some of the least developed, towards a post-2015 education goal,” a recent paper from the OECD notes. Indeed, work has already begun at the OECD to make PISA more relevant to developing countries, with the aim – as a recent blog post noted – of ensuring the programme offers “developing countries more tailored and relevant policy analysis and insights”.
In 1845, Belgian farmers discovered, too late, that a load of seed potatoes they had bought from America was contaminated with Phytophthora infestans, a Mexican fungus that had recently spread northwards. The blight caused by P. infestans rapidly spread from Belgium all over the continent, triggering the European potato famine. In Ireland, 1 million people out of a population of 8 million died of starvation and its side-effects, and another million emigrated. Social, economic and political reasons help explain why the country was so badly affected, but the main cause was that a third of the population was entirely dependent on the potato for food.
The Irish famine is a stark lesson in what happens when monoculture goes wrong, and why the resilience biodiversity brings is important to agriculture. But as we celebrate International Biodiversity Day, the outlook is not very encouraging. Around 12% of birds, 25% of mammals, and at least 32% of amphibians are threatened with extinction over the next century. Humans may have increased the rate of global extinctions by up to 1000 times the “natural” rate typical of Earth’s long-term history.
Plants used for food have been hard hit. Although humans ate around 10,000 plant species in the past, today’s diet is based on just over 100 plant species, a dozen of which represent 80% of human consumption, and four of which (rice, wheat, maize and potatoes) provide more than half of our energy requirements.
China has lost 90% of the wheat varieties it had 60 years ago. The US has lost over 90% of the fruit tree and vegetable varieties it had at the start of the 20th century. Mexico has lost 80% of its corn varieties, India 90% of its rice varieties. In Spain, the number of melon varieties has gone down from nearly 400 in the early 1970s to a dozen.
Biodiversity in itself is not the key to the production, recycling and other services ecosystems provide. What matters is the abundance of the species that are critical in maintaining habitat stability and providing those services. At a local scale, the loss of a species may have an adverse impact on ecosystem services, even if that species is not threatened globally.
In OECD countries agricultural land is a major primary habitat for certain populations of wild species, particularly certain species of birds and insects, in particular butterflies. For nearly all OECD countries, agricultural land area has decreased since the 1990s. Farmland has been converted to use for forestry and urban development, with much smaller areas converted to wetlands and other land uses. While little quantitative information about the biodiversity implications of converting farmland to forestry is available, the high rates of clearance of native vegetation for agricultural use in some countries are damaging biodiversity.
Biodiversity loss can have significant economic costs, but often they are indirect and longer term, while the benefits of the action that causes the loss are more immediate and measurable. For example, clearing mangroves to make room for shrimp farms raises incomes, but mangroves are important natural coastal defences, and the new farms, and the land behind them, are then exposed to destructive flooding that climate change could make even worse.
Most ecosystem services are externalities, meaning their benefits are not bought and sold commercially. This makes it hard to use market mechanisms to protect biodiversity, and governments have to take the lead. Most OECD countries and many others have implemented conservation programmes designed to protect and enhance the populations of endangered livestock breeds, and the number of breeds included under these programmes is increasing. Greater efforts are underway to conserve plant genetic resources useful for crop improvement.
There are also some multilateral initiatives to address biodiversity issues, including the International Treaty on Plant Genetic Resources for Food and Agriculture, also known as the International Seed Treaty. This is a comprehensive international agreement in harmony with Convention on Biological Diversity, designed to guarantee food security through the conservation, exchange and sustainable use of the world’s plant genetic resources for food and agriculture, as well as the fair and equitable benefit sharing arising from its use.
Could a tragedy similar to the Irish famine happen again? Traditional threats to crop production are either acute and of relatively short duration, such as extreme weather events. Chronic threats such as desertification or urban sprawl develop slowly. Strategies for dealing with these exist or are being developed. However, a new disease affecting a major food crop (such as rice), that appeared suddenly, spread easily and resisted known treatments could pose a serious threat if it persisted over a few growing seasons. New viruses and other pathogens appear all the time spontaneously. The vast majority of them die out immediately. Occasionally though, a strain that may have been around for centuries mutates and takes advantage of present day conditions. This is probably what HIV did, and as we discussed last week, recent years have seen the sudden emergence of potentially catastrophic viruses.
Lack of alternatives to infected species and the high mobility of people and goods enabled the 19th century potato blight to spread, and both of these factors are much stronger today.
Biodiversity Chapter of the OECD Environmental Outlook to 2050: The Consequences of Inaction “Globally, terrestrial biodiversity(measured as mean species abundance – or MSA – an indicator of the intactness of a natural ecosystem) is projected to decrease a further 10% by 2050.”
Environmental journalist Simran Sethi explains what she thinks we all can do to ensure the security and sovereignty of our seed and food:
Imagine this scene between doctor and patient. The doctor: “I’ve got good news and bad news”. “Gimme the good news, doc”. “I’ve found you a bed in a hospital”. “Great! What’s the bad news?” “It’s in the Hospital for Incurables”. They were up-front if not exactly upbeat about these things in the old days, but could incurable diseases come back? The question is asked every time a new virus like the latest strain of coronavirus appears.
The last time a coronavirus caused world-wide panic was ten years ago when SARS killed around 9000 people in 37 countries. That’s half the number of victims of the 2009 H1N1 outbreak. Around 18,000 victims is a lot, but it’s nothing compared to the previous appearance of H1N1 in 1918, when the virus infected half a billion people (a fifth of the world’s population) and killed 40 to 100 million of them. At that time there was no treatment, but today antibiotics can cure even something as terrifying as the plague.
There are worries though that the microbes are winning again. Microbes resistant to penicillin appeared within a few years of the drug’s introduction, and since then medical science has been fighting an increasingly serious battle against resistance to cheap and effective first-choice, or “first-line” drugs. Moreover, bacterial infections which contribute most to human disease are also the most resistant: diarrhoeal diseases, respiratory tract infections, meningitis, sexually transmitted infections, and hospital-acquired infections.
The human and other consequences are enormous. In South Asia, for example, one newborn baby dies every two minutes due to treatment failure caused by antibiotic resistance. About 3 million women are at risk of impaired fertility following failure in the treatment of gonorrhoea. Treating multidrug-resistant tuberculosis in South Africa costs around $4300, compared with $35 if first-line drugs are effective. It’s not just in developing countries either. In their gloriously entitled report Bad Bugs, No Drugs, the Infectious Diseases Society of America estimated that 70% of the 90,000 deaths from bacterial infections were attributable to antibiotic resistant strains, and that “for many patients, there are simply no drugs that work”.
Resistance is becoming more serious due to a number of social, economic and behavioural causes. Urbanisation facilitates the spread of typhoid, tuberculosis, respiratory infections, and pneumonia. Pollution, environmental degradation, and changing weather patterns affect incidence and distribution, especially of diseases spread by insects. A growing number of elderly people need hospital care and are at risk of exposure to highly resistant pathogens found in hospitals. AIDS has enlarged the population of patients at risk from many previously rare infections. Global mobility increases the speed and facility with which diseases and resistant micro-organisms can spread.
Irrational use of antibiotics is also promoting microbial resistance. This is due to their being prescribed when not needed or in self-medication, or because patients do not complete courses for financial or other reasons. Antibiotics use in agriculture is another factor. In North America and Europe, half of all antimicrobial production by weight is used in farm animals and poultry, notably as regular supplements for prophylaxis or growth promotion, exposing even healthy animals to frequently subtherapeutic concentrations of antimicrobials. This is accompanied by an increased resistance in bacteria (such as salmonella and campylobacter) that can spread from animals, often through food, to cause infections in humans.
But while new diseases such as the latest coronavirus are emerging and others appearing in new locations (dengue fever in Texas and West Nile encephalitis in New York) only two new classes of antibiotics have been brought to the market in the past 30 years. You may remember that the Human Genome Project was supposed to lead to radical innovation in health care, characterised by new, highly-effective, targeted treatments for a vast range of diseases. It hasn’t happened. Two-thirds of the new applications to the US Food and Drug Administration (FDA) are for modifications to existing drugs rather than new drugs.
There are fears that a pessimistic scenario could come about in which biotechnology never lives up to its promise, the flow of major new treatments dries up, and the profits of big pharmaceutical companies decline, creating a vicious circle where there is less money to invest in long-term R&D to find new products. The discovery deficit is then made worse by investor and government reluctance to continue funding basic research and long-term projects that do not produce payoffs.
As Harvey Rubin pointed out in his 2011 study of pandemics for the OECD Future Shocks project, antimicrobial agents make less money for drugs companies than other prescription drugs. A study of ten-day treatment costs of all new drugs approved by the FDA between January 1997 and July 2003 showed that new antimicrobial drugs cost $137 (all anti-microbial agents) or $85 if anti-HIV medications are excluded, compared with $848 for anti-cancer agents.
Health is one of the indicators in the OECD Better Life Index, that shows what matters to individuals (you can make and share your own index here). It would be interesting to see how the average of all the BLI indices compiled so far compares with what governments think is important, based on budget allocations. It would also be interesting to see within health if conditions that affect or could affect people most are the ones receiving the most funding.
‘There’s a lot of little kids going hungry round here,’ explained one friend, who works in a local community centre. Indeed, just the other day she had spoken to a family where the child had been chewing wallpaper at night. ‘He didn’t want to tell his mum because he knew she didn’t have the money for supper,’ she explained.”
That’s not from Dickens or George Orwell’s Down and Out in Paris or London, but from a recent column by Gillian Tett in the Financial Times. And she’s writing not about Lagos or Lahore, but Liverpool, a modern city in one of the world’s wealthiest countries.
Of course, the presence of poverty amid plenty – inequality – is not new. In reality, it’s hard to imagine any society functioning without some sort of wealth gap. But the past few decades have seen inequality rise in much of the world. That’s causing concern, and not just for reasons of social justice: A number of economists, most notably, perhaps, Joe Stiglitz, argue that excessive inequality undermines the foundations of growth by restricting the ability of poorer people to develop their human capital and by encouraging what economists call “rent seeking” – in essence, instead of creating a bigger economic pie, the well-off use their economic and political strength to take a bigger slice of the existing pie.
High levels of income inequality also seem to be linked to low levels of social mobility – in effect, it becomes more difficult for people to reach a position where they earn more than their parents did. Why? As Timothy Noah has memorably explained, “it’s harder to climb a ladder when the rungs are farther apart”. Alan Krueger, who chairs the panel of economists that advise President Obama, calls this phenomenon “The Great Gatsby Curve”. The fact that it’s getting attention at the highest levels of the U.S. government is indicative of growing concern over inequality.
Unfortunately, there’s no sign of it going away: New data from the OECD today show that the Great Recession has done nothing to narrow the gap between rich and poor – quite the opposite, in fact.
The numbers focus in part on what economists call “market income,” essentially the income households earn from work (as well as from investments), but excluding money they give to the state in tax and receive from it in the form of benefits. The data show that inequalities in market income in OECD countries rose by 1.4 percentage points between 2007 and 2010. That may not sound like much, but it’s equal to the increase seen in the previous 12 years.
Of course, for most families, market income is, at most, an abstract concept; what really matters for them is take-home income – in other words, the money they have after paying tax and receiving payments from the state. As taxes have tended to rise since the crisis struck, and as more people are now receiving payments like unemployment benefits, much of the increase in market income inequality has actually been cancelled out.
Does this mean it doesn’t matter? Not necessarily: Firstly, the data released today go up only to 2010. Since then, presumably, many long-term unemployed have seen a fall-off in their benefits, so reducing take-home income. As the OECD paper notes, “… these results only tell the beginning of the story”. Secondly, governments in many countries have moved to tighten spending in response to rising debt burdens. In her FT column, Gillian Tett touches directly on this point: “[T]ucked away behind (cheap) curtains on the estates, thousands of poor households are being quietly hammered by a myriad of subtle, hard-to-understand cuts.”
Her image of a hungry boy eating wallpaper also introduces another key aspect of the inequality story – namely, the impact on children and young people. As the OECD paper notes, poverty among children rose in 16 of the OECD’s 34 countries between 2007 and 2010 (although, it declined in the United Kingdom), while poverty among young people went up in 19. This links to a longer-term trend that has seen “youth and children replacing the elderly as the group at greater risk of income poverty across OECD countries,” as today’s paper notes.
Indeed, a recent Unicef report on child well-being showed that in eight OECD countries, more than 15% of children live in relative poverty. Some might argue that relative poverty shows only where someone stands in material terms in their own society, not an absolute sense of their ability to meet their needs. Nevertheless, as the Unicef authors note, the reality for children living in relative poverty is that they are “to some significant extent excluded from the advantages and opportunities which most children in that particular society would consider normal”.