Getting smart with aid

Climate change threatens the most vulnerable
Climate change threatens the most vulnerable

Today’s post is from Jon Lomøy, Director of the OECD Development Co-operation Directorate (DCD-DAC). It is also being published by Development Progress.

It’s fashionable these days to talk down official development assistance – ‘aid’, for want of a better word. Certainly, there’s little doubt that its relative importance has dwindled as more developing countries gather the economic momentum they need to finance their own progress and as aid becomes just one of many sources of finance for development.

All of this is welcome and helps us imagine a day when aid is just a distant memory. But that day is not today. Aid still matters, as even a quick glance at the websites of DAC members’ development agencies shows. Here we can see countless examples of how donor countries work with developing countries to get ahead of the curve in meeting social and other objectives.

So, aid still has a role to play, but that role is changing and sometimes at such a pace that it can be hard to keep up. That’s why I want to set down, first, some of the characteristics of the changing world in which aid now operates and, second, how aid can best meet the needs of developing countries in this ever-changing landscape.

The world in which aid operates has shifted profoundly. Take poverty. The poorest people once lived in ‘poor’ countries but, as Andy Sumner has shown, today around three-quarters of them now live in middle-income countries. On one level, this shift simply reflects what some have called a statistical ‘artefact’ – the poor didn’t move countries, but their countries moved classifications from low to middle income.

On another level, however, it underlines how the fight against poverty is evolving. As Owen Barder has argued, ‘The figures suggest that the biggest causes of poverty are not lack of development in the country as a whole, but political, economic and social marginalisation of particular groups in countries that are otherwise doing quite well.’

At the very least, this shift underlines the reality that developing countries are increasingly diverse, spanning a spectrum from middle-income emerging economies like China to low-income fragile states like South Sudan. Their needs vary greatly, as does their capacity to drive – and fund – their own progress. To be effective, aid must respond to this diversity.

A second key change is the increasing importance of non-aid financing, such as foreign investment and tax revenues, for developing countries, as well as development co-operation provided by countries beyond the DAC. At the OECD, we calculate that aid provided by the ‘traditional’ DAC donor countries now accounts for just one-quarter of total financing for development (official development assistance as captured in DAC statistics divided by total developing countries’ resource receipts, 2012 data).

Aid must also respond to the changing international development agenda. While the final shape of the post-2015 development goals has yet to emerge, they seem likely to include at least two priorities. First, building on the MDGs, world leaders will probably commit to the eradication of absolute poverty over a relatively short timeframe. Second, we’re likely to see a gradual merging of the development and sustainability agendas. This makes sense: it’s already clear that climate change threatens the hard-won progress made by many developing countries in recent years while undermining the foundations of future growth in both developing and developed countries – carbon emissions know no borders.

So, how should aid respond? In many areas, it already is. In recent years, for example, a growing slice of the aid pie has been spent on climate change mitigation. And the pie needs to get bigger: by 2020, an estimated $100 billion a year will be needed from public and private sources to tackle climate change. In other areas, however, aid is dragging its feet, with some countries getting far less than their fair share: using a recently developed analytical tool, the OECD calculates that 8 countries – from Madagascar to Togo – are ‘under-aided’.

All of this only emphasises the challenges that aid must address. If it’s to succeed, it must become ‘smart’ – increasingly targeted towards the poorest countries and those that face the greatest difficulties in raising alternative finance for development. It must also become increasingly strategic in creating effective development partnerships and in mobilising non-aid sources of financing for development. These ideas might sound abstract, but they have real-world applications. A few examples:

Untie aid to improve transparency: ‘tied’ aid obliges developing countries to use goods or suppliers based in donor countries. Untying aid creates greater transparency to build more effective partnerships, and cuts the cost of goods and services by at least 15%.

More value for money with predictable aid: uncertainties about future resources complicate countries’ decision-making and can stand in their way when it comes to the strategic planning of their own development priorities. More predictable aid allows countries to better implement their own development plans and reduces the deadweight loss associated with aid volatility, which has been estimated to amount to 15%-20% of the total value of aid.

Use aid to mobilise domestic funding: in Colombia, a $15,000 investment in capacity building for tax administrators was followed by a 76% increase in tax revenues – a rate of return of about $170 for every dollar spent.

Use aid to mobilise additional resources: guarantees for development have been attracting attention among both the development community and the private sector as an effective tool to leverage private finance for development. According to a survey recently conducted by the OECD, guarantees issued by development finance institutions, both multilateral and bilateral, mobilised $15.3 billion from the private sector for investments in developing countries.

A last point: ‘smart’ should also mean taking our knowledge of what works in aid and putting it to good use. But, as a recent OECD paper pointed out, only 0.07% of aid allocated to fragile states is currently being used to bolster tax revenues in developing countries. Smart move? I’m afraid not.

Useful links

The Social Market Economy in a Globalised World

Ludwig Erhard
Ludwig Erhard, one of the founders of the social market economy

Today’s post is from OECD Deputy Secretary-General Yves Leterme, based on a speech he gave on 17 February to the 5. Frankfurter Ludwig-Erhard-Dialog at Frankfurt’s Goethe University

The Social Market Economy is often contrasted with the Anglo-Saxon capitalist model. While the term “social market economy” (soziale Marktwirtschaft) in its original sense is used primarily in Germany and Austria, across Europe, we find a range of different approaches to social and health policy – with vastly different implications for public expenditures, for social security contributions and tax rates, as well as for the role and responsibilities of the public sector, the private sector, and the individual.

What these models have in common is a basic vision of what is needed for social cohesion. All of them seek to provide comprehensive coverage to the entire population against a standard set of risks, which include unemployment, poverty, sickness and disability as well as old age; in addition, there are benefits in cash and in kind for families to ensure that having children does not result in economic insecurity. And in a wider sense, this ambition also includes equality in access to good quality education. Another goal, even though not explicit, is to keep income inequality at low levels; most European countries use their tax and benefit systems as well as publicly-provided services to this end.

One of the main criticisms of the European social model is that it is expensive and constitutes a drag on economic growth.

European countries lead the league of public social spending. France tops the list with about 33% of GDP going to publicly provided social protection, while in Australia, Switzerland and the United States public social expenditures account for about 20% of GDP, and in Canada 18%. All of these countries have large shares of private social spending, in particular  for pensions and health care.

Private provision of social protection, however, does not necessarily mean that the cost is reduced. European countries and the United States have similar levels of social spending once you factor in two things: first, many European countries tax social benefits which means that the state claws back some of the expenditures – this takes you to net public spending; and second, the United States and several other countries give tax incentives to employers and individuals to promote private provision of social protection, in particular for health care and pensions.

As private social spending is so much larger in the United States compared with other countries, its inclusion moves the United States from 23rd in the ranking of the gross public social spending effort to 2nd place after France when comparing net total social spending across countries. However, the implications for which groups of people are is covered to what degree by social protection can be very different.

Population structure is a key driver. Countries with a young population are much less likely to have higher social-spending-to-GDP ratios than countries with older populations, but have a greater share of education spending. The proportion of elderly in the population is around 15% across the OECD and on average they “receive” 40% of all public spending on education and social policy. In countries where only one in ten persons or less is over 65, only a quarter of social spending goes to the elderly. In Japan and Italy where 1 in 5 citizens is senior,  about 60% of all public social and education spending goes to the elderly. Population ageing will thus be a key driver of future increases in social spending. OECD projections suggest that public spending on health and long-term care services might almost double from 7% in 2009 to 13% in 2050 on average across the OECD.

OECD Pensions at a Glance and OECD Pensions Outlook show that in many countries pension reforms have improved the financial sustainability of pensions systems. The crisis has triggered faster reforms and more rapid phase-ins of already decided changes, for example in Greece, Spain and Italy. The pace and content of reforms has varied across countries but a common aim has been to promote longer working lives. While Germany was among the first to go beyond the age of 65 years, many countries have followed and now you could say that “67 is the new 65”. Often, pension promises for future retirees were lowered and more and more countries are introducing automatic links of key pension parameters to future increases in life expectancy. Some countries are also promoting private retirement savings.

Benefit systems for the working-age population have been particularly tested by the Great Recession. As unemployment benefit entitlements run out after certain periods and long-term unemployment has increased in many European countries, more pressure is now on last-resort social assistance systems. It is important to keep these schemes intact and also continue to help people on those benefits get back into the labour market.

Policy measures to boost job creation need to be cost-effective and focus on the most vulnerable groups. Labour market programmes can make a difference, and more investment in training would make the re-employment of jobseekers easier. As the OECD showed in the “Adult Skills Survey” – the “PISA for adults”- skills are very unequally distributed and this is a major source of entrenched inequality.

Even in a globalised world, this underlying philosophy of European welfare policies is unlikely to change. I believe that governments will continue to pursue the objectives of comprehensive coverage with a high degree of public sector involvement, be it as direct provider or as regulator and supervisor of private provision.

What if social market economy and, more precisely, welfare policies were not only a model for Europe, but also a precondition for a sustainable growth in developing countries and emerging economies?  Social policies are too often seen as either no fit or even as a threat for the growth of emerging economies, but a better welfare model in emerging economies would help in many ways:

  • In a global market for talents, it could help individuals to develop their skills so that they are well-equipped for a constantly evolving labour market, and can claim for better wages.
  • It could also drastically account for a more homogeneous tax system, providing a comprehensive pension scheme and allowing for more private consumption.
  • An efficient social system could also improve citizen’s trust in their institutions and governing bodies.

I am confident that the European social model will continue to adapt to a changing global context. This will require structural reforms which will inevitably have winners and losers and therefore be politically challenging at times. This, however, should be no reason for delaying action. We know that there will be no economic paradise on social ruins, but we also know that there will be no social paradise on economic ruins.

Useful links

OECD Social Expenditure database

OECD Income Distribution database

OECD Society at Glance


Rules of the road

taxis take to the streets
Taxis take to the streets

Visitors to Paris may have noticed that it can be hard to find a taxi. Lately, there have been days when it was impossible. The explanation? A strike.

Before you roll your eyes, it’s worth taking a moment to hear what’s riling the taxi-drivers. Yes, in many ways this feels like the sort of dispute we’re used to around here – shouting, blocked streets, frustrated travellers. But it also reflects issues that are playing out in many other parts of the world and that can be summed up in a word: regulation.

The roots of the dispute date back to 2009, when France licensed a new sort of taxi, a “passenger vehicle with chauffeur,” or VTC. These VTCs operate under rules similar to those covering “mini-cabs” in the United Kingdom: You can call one to pick you up at home, but – unlike a regular taxi – you can’t hail one in the street.

Even though VTCs are not full competitors, the taxi drivers don’t like them. They point to the fact that taxi drivers have to pass a test; VTC drivers don’t. But a bigger gripe is money. VTC drivers pay €120 for a licence. By contrast, a taxi licence is free – in theory. In practice, it’s anything but. In Paris, the price currently seems to about €240,000 (around $320,000). The reason it’s so high is that, as Le Parisien (in French) explains, only a very limited number of taxi licences are issued. If you want to secure a free licence you may have to wait 17 years. So, instead, would-be drivers buy licences from drivers who are retiring.

Still, despite their resentment, it’s possible that the taxi drivers might have learned to live with the VTCs – after all, old-style taxis in London seem to do fine despite being vastly outnumbered by mini-cabs. However, the emergence of new technologies has probably put paid to that hope. Using an app on your smartphone, you can order a VTC, provide your location and pay the fee with just a few swipes on your screen. That’s increasingly blurring the distinction between regular taxis and VTCs, and seems to have been the final straw for the taxi drivers. Hence the strike, and an announcement by the government last week that it would work to draft “new rules for balanced competition”.

That could prove challenging. The taxi drivers are angry: “Today, we are facing direct competition from VTCs that work virtually without regulation,” Karim Lalouani, a member of a taxi union, told RFI. “We are not fighting on equal terms.” But for their part, the VTC operators say they’re filling a gap. Certainly, by international standards France is short of taxis. The national total of 55,000 taxis and 12,400 VTCs is below the combined total of 72,000 for London alone. “People in France are fed up with monopolies,” Pierre-Dimitri Gore-Coty of US-based Uber, which operates VTC services in France, told The Economist. “The French now realise that in real life more competition brings innovation and improves the level of service.”

But even when new regulations appear, technology could make them outdated very quickly. After turning VTCs into quasi-taxis, app technologies are now turning anyone with a car, clean licence and a smartphone into a potential taxi driver, according to Stephen Shankland.

If it’s any comfort to the French regulators, they’re not the only ones facing challenges. In the United states, says The New York Times, “regulators, courts and city halls are struggling to define Uber. Is it a taxi company or a technology platform?” And it’s not just taxis. Services like Airbnb and FlipKey now mean that anyone with keys to an apartment can become a hotelier. Some cities aren’t happy. New York has subpoenaed Airbnb. By contrast, Amsterdam, has changed the rules to make Airbnb-style rentals easier.

So, what to make of this particular regulatory debate? Are existing service providers, like hoteliers and taxi drivers, being forced to play on an uneven playing field? Or are they a vested interest defending market rules that don’t serve consumer needs? Or are consumers facing increasing risks from “rogue” operators?

While pondering these questions, you might like to take a broader look at how OECD countries – including France – stand on a wide range of regulatory issues that affect competitiveness in our economies. This new data tool (below) has just been released alongside the latest edition of Going for Growth, the ongoing OECD project that examines the impact of structural policies, including regulation, on growth. The tool compares regulation and competition rules between countries across a wide range of markets, including telecoms, power and legal and other professional services. Ideal for passing the time while you’re waiting for that taxi.

Useful links

Going for Growth

OECD Indicators of Product Market Regulation

Beyond the first mile: where your Internet comes from

Submarine plough used to lay cables
Submarine plough used to lay cables

Today’s post is written by Rudolf Van der Berg of the OECD’s Science, Technology and Industry Directorate

In 2012 the only submarine fibre optic cable that then connected Benin with global telecommunication networks and the Internet was cut for two weeks. International payments were not possible and the equivalent of 150,000 weekly salaries were not available in a country of 10 million people. The influence was particularly severe because most servers are located outside the country due to a lack of data centres and local-hosting facilities. Though similar cable cuts happen on average twice a week, their effects are generally less. This is due to the fact that most countries are connected to multiple submarine fibre-cables, connect overland to neighbouring countries, and have domestic data centres.

In OECD countries, networks look like a mesh with multiple paths that can act as each other’s backup. In developing countries, however, communication networks often resemble rivers, with small branches of regional networks delivering their traffic to a central national backbone that ends at one submarine fibre, making cable cuts a greater risk to the functioning of the economy.

A new OECD report – International cables, gateways, backhaul and IXPs – investigates developments in these networks and other essential components that are beyond a consumer’s “first mile” connection. Such networks are known as backhaul, backbone, regional, middle mile, core, trunk, or international networks. The report finds that there is still considerable investment in backbone and submarine fibre networks being made. The Baltic Sea submarine project between Finland and Germany, for example, aims to increase the operational reliability of networks in Finland, where currently traffic is routed via Sweden. In New Zealand, on the other hand, similar market initiatives to develop an alternative to the Southern Cross system, its only link to California and Australia, have not yet found the much greater commercial support that would be required.

Today, the decision to invest in a new cable can be due to a number of factors. It may, for example, be due to the need for shorter routes for high frequency trading. Here the few milliseconds gained in transmitting orders can result in a significant difference in the amounts of money earned (and in fact fibre-optic cables are too slow, so microwave networks are deployed between some stock exchanges). Nonetheless, all regions have to some extent benefited serendipitously from the initial over-investment in (inter-) regional networks between large cities during the dotcom bubble. Despite bankruptcies of the initial investors, the fibre is still present and has been bought and swapped, by telecommunication companies, cloud networks, Internet content providers and others. For example, Facebook and Google have both invested in submarine fibre projects and bought regional rings. By way of contrast, in other areas such as in many rural regions there is insufficient competition. Here, governments sometimes choose to regulate these monopolies to allow for competitive access.

Not all interventions in OECD countries, however, may be interpreted as stimulating the rollout of backhaul networks. In the United Kingdom, some believe the application of a “fibre tax” has a restrictive effect on deployment of backhaul networks. This property tax charges long distance network operators via a depreciating scale, based on the number of lit fibres (cables in use) that they have and on the length of those fibres, creating a competitive advantage for incumbents. It also requires operators to use more expensive equipment to employ multiple colours on a single fibre pair, instead of lighting unlit fibres.

It is not enough that countries are well connected through networks. The presence of data centres or other local facilities that can host Internet exchange points (IXPs) and servers is also essential. This allows local traffic to stay local. A new indicator of the number of websites under a country code top level domain name, a ccTLD such as .fr for France, hosted in the country, developed based on data provided by Pingdom, gives some insight into the functioning of the country’s hosting market. Just six OECD countries host more than half of their ccTLD domains outside that country, with Greece being the only country where two countries (Germany and the United States) host more of its ccTLD domains.

Name Hosted in Country Total Sites Sites in Country cctld
Korea 97% 1750 1693 .kr
Germany 92% 25469 23306 .de
Japan 91% 14188 12964 .jp
Czech Republic 90% 4736 4258 .cz
Hungary 84% 2619 2197 .hu
Israel 84% 1302 1088 .il
Estonia 83% 456 378 .ee
Netherlands 82% 7937 6532 .nl
Turkey 81% 2095 1693 .tr
Slovenia 78% 518 403 .si
United States 78% 2709 2100 .us
Denmark 76% 2735 2072 .dk
Finland 76% 1444 1098 .fi
France 74% 10820 8021 .fr
Iceland 72% 193 138 .is
Norway 72% 1930 1389 .no
OECD 72% 164740 118479
Poland 71% 14235 10176 .pl
Sweden 71% 3541 2522 .se
Italy 68% 8158 5513 .it
New Zealand 66% 1106 730 .nz
Australia 65% 7914 5140 .au
United Kingdom 64% 17532 11206 .uk
Switzerland 62% 2849 1755 .ch
Ireland 60% 1070 638 .ie
Slovakia 60% 1628 984 .sk
Chile 58% 1231 713 .cl
Portugal 54% 1347 729 .pt
Spain 50% 6129 3049 .es
Austria 49% 2614 1280 .at
Luxembourg 49% 174 85 .lu
Belgium 46% 2635 1213 .be
Canada 45% 4138 1873 .ca
Mexico 22% 3566 776 .mx
Greece 19% 3972 767 .gr

Econometric analysis of the extended global table, indicates that there is a strong positive correlation between the percentage of sites hosted in country and the reliability of a country’s energy network and ease of doing business in the country.

Local (blue) versus Foreign (Red) hosted content*

Foreign hosted content

Source: OECD, Pingdom, Alexa

The new OECD report also looks at the issue of local infrastructure development and costs. The lack of locally hosted content sites makes it difficult for local IXPs to continue to develop, because a market for Internet traffic exchange (peering and transit) is weak. However, in some cases it is local players that refuse to exchange traffic locally. By not peering or buying transit locally, established networks force other ISPs and content providers to buy transit from them to reach customers in that country. If networks refuse to buy transit locally from these networks, but buy it from another transit provider, the traffic will be routed via an international link out of the country, to be exchanged elsewhere with the network. Forcing networks to peer (exchange traffic without settlement) has in the past not proven to be a successful solution. In exceptional circumstances an alternative could be to force networks to buy transit locally.

Useful links

For more on Internet traffic exchange (peering and transit):

A 2014 report on “Connected television”, explains peering and transit decisions between first-mile networks and content providers.

A 2013 report on “Internet traffic exchange” explains peering and transit and shows that out of 144,000 agreements 99,5% are based on a handshake.

OECD digital economy papers

This map is included herein without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

FATCA, fat cats and tax

Click to download
Click to download

“It’s a wrong situation. It’s gettin’ so a businessman can’t expect no return from a fixed fight. Now if you can’t trust a fix, what can you trust? For a good return you gotta go bettin’ on chance, and then you’re back with anarchy. Right back inna jungle. On account of the breakdown of ethics.”

Johnny Caspar in the Coen brother’s Miller’s Crossing would have been pleased to hear that today the OECD is announcing a way to remedy the shocking lack of ethics in the increasingly globalised globe people do business on. Like Johnny, we’re concerned about the consequences when certain parties don’t play fair. Johnny’s way of levelling the playing field is to bury the scallywags underneath it, but this being the OECD, our proposal, developed with G20 countries at the G20’s request, concerns the international tax system and how to “inject greater trust and fairness”  into it.

It’s less exciting than machine guns and hit men, but the sums involved are literally millions of times bigger than the cash the Coens’ gangsters are fighting over. The Tax Justice Network claims that $21-32 trillion are stashed offshore – the equivalent of the combined GDP of the US and Japan. That only concerns tax havens. There are also a number of other means available for what is variously called tax evasion, tax avoidance or tax planning, depending on the degree of legality. Sometimes the neutral, non-judgemental term tax dodging is used, even by the OECD. Usually though, we use more technical terms like “base erosion and profit shifting” (BEPS) to describe the mechanisms firms exploit to avoid paying what most citizens would consider “fair” taxes. As we discussed in this article, BEPS schemes themselves can be extremely complicated, but the basic idea is simple: shift profits across borders to take advantage of tax rates that are lower than in the country where the profit is made.

As we’ve discussed before, the core of the problem is that taxes are a national affair while finance is international. The OECD has been helping governments cooperate on tax collection for decades, and the Model Tax Convention serves as the basis for the negotiation, application, and interpretation of over 3000 bilateral tax treaties in force around the world. The Convention was updated in 2012 to allow tax authorities to ask for information on a group of taxpayers without having to name them individually.

These are so-called targeted requests, but automatic exchange of information is the systematic and periodic transmission of “bulk” taxpayer information collected by the source country to the country of residence concerning income from dividends, interest, royalties, salaries, pensions, and so on. Automatic exchange seems to work both to detect tax evasion and as a deterrent. Clinical trials suggest it also cures memory loss. Denmark helped 440 of its absent-minded citizens to remember foreign income after the tax administration sent them a letter announcing that it received automatic information from abroad.

More than 40 countries have committed to early adoption of the Standard for Automatic Exchange of Financial Account Information published today, committing tax jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions annually. The Standard sets out what information has to be exchanged, the financial institutions that need to file reports, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions (verifying the address of account holders for instance).

According to today’s presentation, the “advantage of standardisation is process simplification, higher effectiveness and lower costs for all stakeholders concerned” (except presumably for tax dodging stakeholders).

The Standard consists of the two parts: the Common Reporting and Due Diligence Standard (CRS) describing the reporting and due diligence rules to be imposed on financial institutions; while the detailed rules on the exchange of information are in the Model Competent Authority Agreement (CAA). The CRS draws heavily on a model developed by the United States, France, Germany, Italy, Spain and the United Kingdom to implement the US’s Foreign Account Tax Compliance Act (FATCA) through automatic exchange between governments.

Of course companies and individuals who spend a fortune on experts to help them dodge taxes will try to get round the CRS. To avoid this, the financial information to be reported includes all types of investment income, account balances and revenue from selling financial assets. A wide range of financial institutions apart from banks have to report too, including brokers, certain insurance companies, and certain so-called collective investment vehicles – funds that pool money from a number of accounts. The Standard also requires those signing it to look beyond “passive entities” to report on the individuals that ultimately control the money from behind the screen of entities set up to hide where the money is actually going.

What’s the alternative to imposing a global standard? “A proliferation of different and inconsistent models would potentially impose significant costs on both government and business to collect the necessary information and operate the different models. It could lead to a fragmentation of standards, which may introduce conflicting requirements, further increasing the costs of compliance and reducing effectiveness.”

Or as Johnny Caspar pointed out, “… ethics is important. It’s the grease that makes us get along, what separates us from the animals, beasts a burden, beasts a prey”. I hope youse all agree.

Useful links

OECD work on exchange of information for tax purposes

OECD Centre for Tax Policy and Administration

OECD work on BEPS

OECD work on transfer pricing

OECD work on aggressive tax planning

How accurate are OECD forecasts?

Click to download the presentation
Click to download the presentation

If you’re a regular visitor to the blog, you’ll know we often report on the latest OECD economic forecasts. After reading these, you may have found yourself asking this question: Is this really what’s going to happen? You’re not alone. The OECD’s economists, too, have been asking themselves the same question, and today they offered some answers.

In a “post-mortem” project, the OECD examined the accuracy of the economic forecasts it issued between 2007 and 2012, a period of seemingly endless economic turbulence. The study reports that, in general, the OECD tended to be too optimistic – it didn’t predict the scale of the collapse in economic activity between 2008-09 and then overestimated the speed of the subsequent recovery.

The errors were particularly notable for certain countries. When it came to the vulnerable Eurozone economies, for instance, the OECD was too hopeful of a quick resolution to the euro crisis. Equally, when it came to small, open economies, the OECD didn’t grasp just how connected these had become to the global economy, making them highly vulnerable to developments beyond their borders.

This review may seem a bit like navel-gazing, but there is a point to it. “We have learned a lot from the crisis,” OECD Chief Economist Pier Carlo Padoan said today in London, where he presented findings from the OECD review. He added that the experience gained over the past few years was helping to change how the organisation works and thinks – a process reflected in the OECD’s ongoing New Approaches to Economic Challenges project.

So what has the OECD learned (pdf)? One quite striking lesson is that the organisation’s economists are better at predicting upturns than downturns (so much for “the gloomy profession”). Between 2007 and 2012, they predicted 91% of accelerations in OECD countries over the following 12 months, but only 46% of decelerations.

The organisations says it also needs to take better account of the impact of the financial system on economies. That’s one reason why it tended to underestimate the impact of weak banking systems on economies. “The repeated deepening of the euro area sovereign debt crisis took us by surprise,” according to Pier Carlo Padoan, “because of the stronger-than-expected feedback between banking and sovereign weaknesses …”.

Of course, this isn’t the first time the crisis has illustrated what many see as a gap in how economists see the world. “There’s a lot of stuff that isn’t there – financial institutions, feedback effects,” William White, Chairman of the OECD’s Economic Development and Review Committee, remarked four years ago in OECD Insights: From Crisis to Recovery. “All of this stuff is very, very hard. I don’t want to disparage current modelling, but the fact of the matter is it’s all very hard. But I do think progress is being made – something has started.”

The review also reflects another oft-repeated theme from the crisis – namely, the tendency towards “groupthink,” or a herd mentality, in economic and financial analysis. As we reported here on the blog some time ago, an IMF self-evaluation in 2011 attributed some of its failures in the run-up to the crisis to “a high degree of groupthink” and “an institutional culture that discourages contrarian views”. Indeed, it’s notable the extent to which OECD forecasts between 2007 and 2012 matched those of other leading international agencies like the IMF, World Bank and European Commission. A lesson for the OECD, perhaps, is that it needs to encourage its people to “think out of the box” (apologies for the jargon).

But perhaps the most important lesson to come out of the crisis is that governments, economists, international organisations need to come to terms with the reality that they know less than they think they do. That might sound like a platitude, but it has important implications for economic forecasting, some of which are already evident in OECD work. Most notably, the OECD is now placing more emphasis on the health warnings surrounding its projections; in other words, it’s saying “here’s what we think will happen, but here’s why it might not”. Worth bearing in mind next time you read a forecast on the blog.

Useful links

OECD Forecasts During and After the Financial Crisis: A Post Mortem (pdf) (An OECD Economics Department Policy Note)

OECD Economic outlook, analysis and forecasts

New Approaches to Economic Challenges at the OECD

Conflict management is at a low point

Click to see the Index
Click to see the Index

In today’s post, Rosa Gosch interviews the team responsible for the latest edition of the Bertelsmann Stiftung Transformation Index (BTI), launched in cooperation with Deutsche Welle, Germany’s international broadcaster

What exactly is the Bertelsmann Stiftung’s Transformation Index, the BTI?

Hauke Hartmann (Senior Project Manager at BTI): The BTI team is interested in observing transformation processes from authoritarian systems to democracies based on rule of law and socially just market economies—and learning from what we see at the global level. To achieve this, the BTI analyzes and assesses the progress being made by 129 developing and transition countries with respect to political and economic transformation and governance quality.

Sabine Donner (Senior Project Manager at BTI): Our Status Index looks at these countries’ current state of development in terms of democracy and the market economy. We believe that we need to examine both the political and the economic transformation to get a complete picture of societal change. Since quality of democracy is more than free and fair elections, our indicators also examine the extent to which citizens can participate politically and freely express their opinions. They also investigate the extent to which an independent justice system provides equality before the law and how parties, interest groups and NGOs act as liaisons between policymakers and society. Of course, a sustainable market economy needs more than growth and fiscal stability; creating and maintaining social balance is essential. So we look into the quality of a country’s social safety nets, its investment in education and the environment, and whether there is a framework that enables economic participation for all people. Our Management Index examines how successful governments are shaping the change towards a democracy based on the rule of law and a socially just market economy. Key aspects of this are whether political players are able to set strategic priorities and implement their policies, whether they are successfully fighting corruption, and whether they are managing to create consensus between all parts of society about the path of transformation.

What are the findings of the newly published BTI 2014?

Robert Schwarz (Project Manager at BTI): We are seeing an increase in protests around the world. These protest movements are by no means limited to underdeveloped and hopelessly mismanaged dictatorships—Chile is a case in point. In many places, a well-connected, self-confident civil society is putting up more resistance against growing social inequality, bad governance, despotism and corruption. Governments need strategies for how to enter into constructive dialogue with protesters and how to moderate their interests without hurting the national transformation process, as appears to be happening in some countries right now.

Is developing such strategies one of the goals of the BTI?

Robert Schwarz: One of the goals of the project is to identify successful strategies from the trove of data and analyses that we have collected on transformation management. And to stimulate a learning process for decision-makers in other countries.

Hauke Hartmann: If there’s anything we’ve learned from the work we’ve been doing during the ten years since the BTI began, it’s that we can only develop those kinds of strategies through dialogue. It only works when we meet with scholars and decision-makers in politics and society to discuss the BTI’s findings.

Sabine Donner: The basic premise of our work on the BTI is that transformation processes can only succeed if there are clear strategies for how to promote social change. And this strategic approach has to take into account that a very broad consensus needs to be reached regarding the direction in which the country is to develop.

What did each of you find to be the most remarkable finding in the BTI 2014?

Hauke Hartmann: I am impressed by how pervasive, intense and numerous the protests against despotism, mismanagement and corruption have been. It’s remarkable that so many people are going to the streets for very similar reasons and saying, “No way! We don’t want this kind of government! We don’t want this kind of system!”

Sabine Donner: We are observing that many governments around the world seem to be helpless, inadequately dealing with these protests. Everywhere, including in Western European democracies, people are obviously asking similar questions, like, “Is this system capable of finding solutions to the burning questions of our time?” In democracies and autocracies alike, no one seems to be able to answer this question with a clear “yes” right now.  I don’t exactly find that encouraging, but it does raise other questions, like, “Where can we find new ideas or even old ideas to help strengthen democracy and democratization?”

Does the BTI give answers to those questions?

Hauke Hartmann: The BTI offers suggestions on where one might look for answers. I’m thinking of countries like Benin, Uruguay and Taiwan, which according to our findings are doing a very good job at getting civil society involved in political decision-making processes. In Uruguay they discuss education and security questions in a group that includes decision-makers from civil society. Benin is a very ethnically diverse society but the government keeps the country together by fostering consensus. As a result, Benin has a very clear national identity, unlike many other countries in West Africa.

How are transition countries doing in the realm of conflict management in 2014?

Hauke Hartmann: They are still limited in terms of their ability to moderate and de-escalate. This has always made it more difficult for them to steer transformation processes. But the new BTI shows their conflict management abilities reaching a new low. No other management indicator in the BTI showed a sharper decline. And the countries that take a moderate, balanced approach to dealing with forces that polarize and create conflict are located in regions that are not particularly prone to conflict. In other words, the regions where good conflict management is missing—in the Sahel, North Africa and the Middle East—those are the regions that need it more than ever. That is alarming. Governments feel very helpless right now because there is such extreme mistrust within these societies and everyone is so dug in. The people have experienced too many human rights abuses and crimes to see things differently.

Robert Schwarz: And in those very same regions, which have inadequate conflict management to begin with, the influence of religious dogma on national legal systems and political institutions has increased. When the state is usurped by religious dogmas or fundamentalism, it is even more difficult to enter into dialogue with the opposition.

Hauke Hartmann: In most cases, especially in polarized societies, there are two opposing sides that have a pretty clear idea of what they can gain at the polls, on the streets, and through an escalation of violence. And they often back different positions depending on which side they are on. For example, Thailand’s current government knows very well that it will get all of the “red-shirt” votes from the rural areas and win the next election hands-down. Of course, the opposition in Bangkok won’t play along. On the other hand, the opposition has absolutely no mandate to demand the resignation of a democratically elected government. It’s counting on an escalation and the possibility of military intervention. Neither side has any interest in listening to the other side’s mediation strategy.

Who uses the BTI?

Sabine Donner: To start, other organizations use our data to compile their own indices. The World Bank’s Worldwide Governance Indicators and the Ibrahim Index of African Governance are two examples. Transparency International uses our data to fight corruption in its Corruption Perceptions Index (CPI), as does the Basel Anti-Money Laundering Index (AML). In addition, many foreign ministries and development ministries use our data and country reports as an additional source when they assess their partner countries. In particular, the BTI’s qualitative evaluations appear to be helping them by opening the door to political dialogue with governments in developing countries and transition economies. And those countries in turn can use the BTI as an additional, independent source to help them identify areas in which they are doing very well and areas in which they need to improve.  We are delighted to see that more and more civil society organizations in developing and transition countries are using the BTI as a way of holding a mirror up to their governments and demanding accountability for social change.

Translated from the German by Douglas Fox

Useful links

OECD work on peacebuilding, statebuilding and security