Policy Coherence from New Data, New Research, New Mindsets

NAECCatherine L. Mann, OECD Chief Economist and Head of the Economics Department

Recent global economic performance – characterized by sluggish growth, widening inequality, environmental precariousness, and market volatility – is a sobering reminder of the myriad challenges facing policymakers. How can understanding and quantifying the interrelationships between and among policies help design policy packages to improve performance?

New analysis at the OECD, undertaken with new data, new methods, and new mindsets reveals the importance of policy coherence. The essence of policy coherence is to ask, How well do policies – directed toward demand management, structure of markets, environmental sustainability, and frontier innovation – work together to enhance the overall wellbeing of the citizens of a country and even broader through spillovers to the world? To what extent could a piece-meal approach, rather than an integrated policy assessment, lead us astray?

The mindset of policy coherence seems obvious. But it is in the nature of governments, academia, think tanks, and international organisations to analyse economic policies in silos – e.g. labour, environment, competition, finance, fiscal – because that simplifies the analysis and contains the domain for policy bargaining. The OECD is not immune to the silo tendency. However, the New Approaches to Economic Challenges (NAEC) ushered in a systematic mindset to see economic problems through a new lens to recognise that coherence in research across the silos is required to produce the evidence that yields “better policies for better lives”.

Productivity research is one example of how new data and mindsets promote policy coherence. The traditional approach to policy making (and its research underpinnings) focused on policies to grow the pie (via productivity-enhancing policies such as R&D spending) in isolation from policies to redistribute the pie (via taxes and transfers or through skills development). This is partly because the research datasets to investigate these topics were distinctly separate, as were the interests of the researchers. But also, policy analysis was separated because the policymakers that would implement the policies had separate mandates. In any case, detailed data on firms and workers were not available, which implied that policy design was founded on the relationships between average firms, average workers, and average economies, and average outcomes.

The NAEC approach to policy research on productivity evaluates policies for growing the pie and for its distribution at the same time. The research shows that it is the same type of policies (such as ease of business entry and exit, flexibility of labour markets, robustness of financial firms) that negatively affect productivity growth, negatively affect the matching of skills to firms, with attendant negative consequences for income distribution and is growth. This work reveals negative feedback loops that were not observed before, opening up new recommendations for policy packages. We are able to make this link now between productivity growth and income distribution because our datasets are granular enough and can be matched across objectives, the interests of the researchers came into alignment, and the importance of policy coherence is better appreciated by policymakers too.

Whereas the same type of policies affect productivity growth and income distribution, each country has its own unique combination of those policies, and therefore its own specific set of challenges. A key understanding under NAEC is to promote policy coherence across structural policies as well as demand management policies. The first generation of analysis of structural policies tended to address the implications for GDP growth of flexibility-enhancing labour market policies in isolation from policies to promote product market competition, and with little reference to overall demand conditions and demand management policies such as fiscal spending or monetary expansion. And, potential structural flaws in financial markets were not considered.

This piece-meal approach to policy assessment can lead to misunderstandings of how policies might impact economic performance. For example, increased flexibility in labour markets alongside product markets that lack competition or in which there is slack demand push the brunt of adjustment onto individuals, raising inequality. On the other hand, robust competition among firms but with rigid labour markets starves competitive firms of resources to grow, hampering productivity. Or, a third example, banking systems that evergreen loans (renew them continuously) to poorly performing firms dampens overall productivity growth and traps labour, thus raising inequality. A new mindset appreciates the complexity of the interactions between policies. Integrated policy assessments that take into account the unique characteristics of each country help quantify how policy reforms might work together to raise productivity growth and improve income distribution. This integrated policy assessment helps policymakers tailor their approach to improve economic performance and respond to shocks.

We have the tools to quantify structural policies and their impact on firms and individuals in a coherent way, including during business cycle upturns and downturns. We have an understanding of how best to deploy different types of fiscal instruments to achieve inclusive growth. Is our understanding of policy coherence complete? No, not in two key dimensions: macroeconomic spillovers and micro-behaviour and attitude toward change.

On understanding and quantifying spillovers, we still lack the trade and financial linkages and the empirical apparatus to fully understand and quantify how spillovers from one country to another may impinge on achieving policy objectives of greater productivity along with inclusive and sustainable growth. But, these data and tools are available and the OECD is in the process of incorporating these into our integrated policy assessment for economies.

On understanding micro-behaviour and attitude toward change, much more needs to be done, and this is essential for understanding the political economy of reform. The key challenge is that enhanced productivity growth comes only with firm and worker reallocation, but fear of this dynamic can constrain policymakers’ actions. A dynamic environment can strip economic rents from sheltered firms and exposes workers and households to job change and income volatility. As the pace of technological change increases, the imperative for a dynamic economy also increases. If people are not empowered to adjust, the backlash is reflected in policy stasis instead of reform, and worse outcomes, rather than better.

Research examining the behaviour of individuals is starting to give insights on which policies can best help them navigate change, but more needs to be done. Faster and more efficient resource reallocation helps economies to recover more quickly from adverse shocks, contributing thereby to reduced inequality, enhanced productivity growth, and higher living standards.

Useful links

OECD Economics Department

New Approaches to Economic Challenges (NAEC) Seminar Series January-February 2016

7th NAEC Group Meeting, 12 January 2016, “New Year, New Challenges, New Approaches”. Remarks by Angel Gurria, OECD Secretary General

NAEC Seminar: Fostering New Approaches to Sustainable Development, 13 January 2016  [Watch the webcast]

Capability and well-being: social protection through the lens of Buen Vivir (Living Well) in Latin America

BLI InitiativeEmmanuel Asomba, a consultant working on poverty reduction, human development and systematic reviews of development polices and programmes.

Well-being economics can provide a conceptual foundation for freedom of choice and quality of life to revamp such neo-classical yardsticks as utility, income and commodities. For governments in Latin-America, effective measures and mechanisms require an integration of a life-satisfaction concept to understand the well-being of citizens. In many aspects of life, a person’s perception of well-being is subjective, thereby broadening the differences across socio-economic and demographic groups.

Poverty reduction should be, for the most part, a process of change whereby people of various communities are able to operate freely in their wider societies. Hence poverty reduction strategies should focus on the concept of human development. For this to happen there has to be a radical shift allowing institutions to improve the political, socio-cultural, economic, and protective capabilities of the poor (Sepulveda and Nyst; JICA; Norton et al). The existing disadvantageous conditions of the poor necessitate the establishment of common properties to be used as a challenge to the vicious progression of poverty. These properties must be present in the performance, and evident in the results of, development policy (see, for example, OECD, or Deolalikar et al.)

Even though low growth has been projected for most Latin-American countries, for policy-makers, a basis for sustainable development is to blend standard frameworks, enhancing equity and efficiency, to support income redistribution and streamline investments in social protection schemes. However, to move forward with these transformational changes, and highlight the debate on the harmonisation of the capability approach, policies and institutions have to be thorough at each level of empowerment to ensure that the social status of the marginalised is truly enriched. Within this context, as suggested by some evidence, (International Poverty Centre; Philip and Rayhan), a reasonable component of policy-making is to better reflect on the factors and social influences that can fulfill basic human needs, thus improving the economic welfare of vulnerable groups.

To combat limitations on systems of implementation, evaluations of poverty reduction programmes have to identify plausible underlying variations, i.e., what are the correlations in the behaviours that people adopt in the attempt to develop their well-being over the long-term (according to the individual’s definition of well-being). The past few years have allowed development practitioners to come up with a variety of supply-side interventions to tackle poverty reduction. However, some persistent gaps highlight the need for improved understanding of individual notions in subjective well-being. An example of this is the nature of the direct connections framing the distribution of government cash transfers within households. To move the debate forward and respond adequately to changes in behaviour of programme beneficiaries, there is a need to capture the series of outcomes whereby poverty and vulnerability manifest themselves. The goal is to form points of entry for poverty reduction, expanding the scope of assessment on such values as substantive freedoms, self-respect, and the ability to live to old age.

For Mercado and Leiton-Quiroga, development should go outside of old-fashioned research questions and take into account the fact that poverty is a dynamic phenomenon. In the long run, poverty reduction initiatives have to address the structural environments (attention to people rather than economies) that can either encourage or hinder the poor from acquiring capability and assets. Therefore, whether in terms of protection of rights, or the integration of community livelihood programs, public policy and institutions should move beyond income-focused universals and instead frame national development objectives to evolve around local context-specific values. The idea is to consider how individual notions of well-being come into play and to use this information to overhaul power dynamics and target social risk so as to sustain indicators of good living (work satisfaction, greater longevity, lower rates of infant mortality, or mitigation of the impacts of natural disasters).

The philosophical concept of “Buen Vivir” (transformative and human-centered goals) has helped to widen social justice and well-being in Bolivia, Ecuador, and Costa Rica in the creation of a fiscal space to serve a transformative social protection framework. By targeting poor communities and various indigenous groups, based on the satisfaction of human needs and sustainable production, this paradigm juxtaposes meaningful livelihoods and human potentialities, and sees communities as active contributors to core life values.

In Costa Rica over the past fifteen years, the housing subsidy scheme known as Bono de Vivienda (Family Housing Voucher) has managed to balance fiscal discipline and effectiveness of expenditure, refining perceptions of well-being (access to adequate housing and the institutionalisation of consciousness of choice for poor families), supported by robust social marketing campaigns. A significant piece of this puzzle is the centralisation of housing policy which has enabled greater reforms in housing financing. It has capped credit portfolios, consolidated small-scale finance, and removed distortions like fixed rates. The government emphasis on building new homes has reduced the housing deficit so that from 1995 to 2009, 14% of households were able to have access to decent housing. The impact of this subsidy program, especially for families with a monthly income of less than US$217.20 indicates that between 2001-2005, 41.5% of Costa-Rican households were able to access privately produced housing, generating, strong community mobilisation on housing and neighbourhood development.

In the most basic sense, improvement in the quality of life of citizens rests on a mix of functions. The Buen Vivir approach is about the creation of tangible measures enabling individuals or communities to access opportunities to bring about valued outcomes. By disconnecting the causes of poverty from poor people, this paradigm addresses “effectiveness” through the implementation of a long-term theory of change. Such notions as beings and doings (“functionings”) denote people’s part as members of society, reinforcing empowerment through the expansion of their freedoms.

Useful links

Latin American Economic Outlook 2016

OECD Development Co-operation Report 2013: Ending Poverty

West Africa: Security crisis and food crisis

Laurent Bossard, Director of the Sahel and West Africa Club (SWAC) Secretariat. A shortened version of the article is available in French on Le Monde Afrique

“The outlook is good”, concluded food security experts who reviewed the food and nutrition situation in the Sahel and West Africa at the 31st annual meeting of the Food Crisis Prevention Network (RPCA), held from 14-15 December 2015 in Dakar. The region recorded a cereal crop production of 63.6 million tonnes, an increase of 5% over the previous season and 12% over the average of the last five campaigns. Tuber production is estimated at 158.6 million tonnes, up 8% and 18% compared to last season and to the five-year average respectively. Only Chad recorded a decline in its food production, with a decrease of 12%. Markets are generally well supplied, and the availability of food products is all the more satisfactory with new harvests arriving. In spite of the difficult and late start to the 2015-16 agro-sylvo-pastoral campaign, “the sky has shown mercy on the Sahel and West Africa”, a region where agriculture still largely depends on rainfall.

Despite this excellent agricultural performance, the Network notes – as it does every year – that malnutrition remains a major challenge for the region: between January and October 2015, almost a million children have been detected and treated for severe acute malnutrition. Whether harvests are good or bad, each year the region has to manage between 3 and 5 million people experiencing food insecurity. The region faces chronic food and nutrition insecurity. Rates of global acute malnutrition (GAM) in the Sahel have exceeded the 10% warning level at least since the beginning of this century. In many areas, they regularly exceed the emergency threshold of 15%.

According to the 2013 State of the World’s Children report, about 39% of children under five in the Sahel are stunted. “Whether the granaries are full or empty is of no interest to a 6-month-old baby,” recalls Noël Marie Zagre, regional adviser in nutrition for the UNICEF West and Central Africa Regional Office. He deplores the fact that the rate of exclusive breastfeeding remains low in the Sahel countries (around 40%) while stressing the importance of the first 1 000 days for the cognitive and physical development of infants. Nutrition does not depend solely on food security, but also on many other factors such as health, education, poverty that limits access to food, weak social protection systems, etc.

As we approach the next lean season in the Sahel, from June to August 2016, the situation is expected to become even more dire than usual, particularly in areas affected by insecurity. Indeed it is insecurity that this year could be the primary cause or decisive aggravating factor for acute malnutrition. Around 10.5 million people could face a food crisis, including 5.2 million in northern Nigeria. The entire perimeter of Lake Chad – vulnerable to attacks by Boko Haram – is at risk due to the high numbers of displaced persons and refugees, 1.7 million according to the United Nations High Commissioner for Refugees (UNHCR), including 1.4 in Nigeria alone. In the Diffa region in southeast Niger, border villages have been deserted and 150 schools closed. Grain prices have increased sharply due to transport difficulties and a very weak millet harvest around Lake Chad. The food and nutrition situation is also strained in northern Mali. The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) reported in early November that the prevalence of global acute malnutrition in the Timbuktu region has increased from 14.8% to 17% (the emergency threshold is 15%).

Response plans are under preparation, both by the countries concerned and at the international level. But will they help reach those who desperately need it? Will humanitarian workers be able to venture into north-eastern Nigeria, and more generally around Lake Chad? Will the restoration of state authority, as expected throughout the entire territory of northern Mali, be sufficient to allow for the delivery of emergency aid to the north? Another cause for concern: the collapse of international oil prices, which translates into drastically reduced budgetary resources in Nigeria and Chad. Allocations for social programmes benefiting the most vulnerable are likely to suffer, since at the same time, the fight against terrorism requires increasingly significant financial means.

Security crisis and food crisis work in tandem to undermine the resilience of millions of West Africans. They feed off each other. Yet the security responses and humanitarian responses are still designed and implemented separately.

Useful links

For more than 30 years, the Food Crisis Prevention Network (RPCA) has brought together all food and nutrition security stakeholders in the Sahel and West Africa. It relies on the political and technical leadership of ECOWAS, UEMOA and CILSS and benefits from the support of the Sahel and West Africa Club Secretariat (SWAC/OECD).

WARI magazine/TV5 Monde on the 31st RPCA annual meeting

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