Policy Coherence from New Data, New Research, New Mindsets
Catherine 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.
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]
“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.
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).
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Question 1 of 10
This little guy was photographed at OECD headquarters in Paris in September. What was he up to?Correct
He was visiting the OECD’s beehives during an open day. About 90% of human nutrition depends on crops pollinated by bees, but bee populations are in decline. With two beehives at its Paris headquarters, the OECD is doing its bit to support the city’s bees.Incorrect
He was visiting the OECD’s beehives during an open day. About 90% of human nutrition depends on crops pollinated by bees, but bee populations are in decline. With two beehives at its Paris headquarters, the OECD is doing its bit to support the city’s bees.
Question 2 of 10
A survey showed that only about one in three people worldwide can answer a question like this: “Suppose you put money in the bank for two years and the bank agrees to add 15% per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years?” What’s the answer?
Question 3 of 10
When it comes to success in education, which piece of wise advice from your parents did the OECD’s PISA programme confirm this year (although not in exactly these words)?Correct
Students who use computers only moderately during school hours do better than those who use them frequently, according to research by the OECD’s Programme for International Student Assessment (PISA). Now don’t you wish you’d listened to your parents?Incorrect
Students who use computers only moderately during school hours do better than those who use them frequently, according to research by the OECD’s Programme for International Student Assessment (PISA). Now don’t you wish you’d listened to your parents?
Question 4 of 10
If preliminary findings from the OECD’s Compare Your Income survey are any guide, members of which income group are most likely to have an accurate sense of where they stand on the income scale?Correct
Based on first results from Compare Your Income, middle earners have the best sense of where they stand on the income scale. By contrast, high earners don’t appreciate how well they’re doing while low earners don’t appreciate how far behind they are.Incorrect
Based on first results from Compare Your Income, middle earners have the best sense of where they stand on the income scale. By contrast, high earners don’t appreciate how well they’re doing while low earners don’t appreciate how far behind they are.
Question 5 of 10
You’ll need some special insights to answer this question: In 2015, Angus Deaton won the Nobel for economics. What else do Prof. Deaton and fellow Nobel laureates Edmund Phelps, (the late) Elinor Ostrom and Mario Molina have in common?Correct
Question 6 of 10
May the force be with you – Star Wars is back! The seventh installment of the space epic is on screens everywhere, reminding us of the deep importance of space exploration and research to humanity’s future. About how many people worldwide work in the space economy?Correct
The space economy is something of a niche in the global economy, employing fewer than a million people worldwide, says the OECD’s Space Economy at a Glance. To put that in context, about 8 million people in the US alone went to see the widely reviled Stars Wars III: Revenge of the Sith on just its opening day back in 2005.Incorrect
The space economy is something of a niche in the global economy, employing fewer than a million people worldwide, says the OECD’s Space Economy at a Glance. To put that in context, about 8 million people in the US alone went to see the widely reviled Stars Wars III: Revenge of the Sith on just its opening day back in 2005.
Question 7 of 10
China announced the end of its one-child policy in 2015, opening the way for more Chinese families to dust off those hand-me-downs. In how many of the OECD’s 34 countries does the average woman have two or more children?Correct
The average woman has two or more children in just four of the OECD’s 34 member countries – Israel, New Zealand, Mexico and Turkey. Fertility rates have been declining in much of the world, particularly in wealthier countries. Excluding the impact of migration, a fertility rate of below 2.1 typically leads to a falling population.Incorrect
The average woman has two or more children in just four of the OECD’s 34 member countries – Israel, New Zealand, Mexico and Turkey. Fertility rates have been declining in much of the world, particularly in wealthier countries. Excluding the impact of migration, a fertility rate of below 2.1 typically leads to a falling population.
Question 8 of 10
The Bank of England estimates that around £1,000 (about $1,500) in cash – banknotes and coins – is in circulation for every man, woman and child in the United Kingdom. As electronic payments become more widespread, what’s happening to demand for cash?Correct
Demand for cash is rising, not just in the UK but also in Australia, Canada, the United States and in the euro area, says the Bank of England. It’s unclear why this is happening. Possible factors include hoarding, the use of cash in the shadow economy and the use of stable currencies – particularly the US dollar – as a “safe haven” in unstable economies.Incorrect
Demand for cash is rising, not just in the UK but also in Australia, Canada, the United States and in the euro area, says the Bank of England. It’s unclear why this is happening. Possible factors include hoarding, the use of cash in the shadow economy and the use of stable currencies – particularly the US dollar – as a “safe haven” in unstable economies.
Question 9 of 10
Migration – in all its forms – was one of the stories of the year, often for tragic reasons. In OECD countries, where does the largest single group of immigrants come from?Correct
About 2 in 5 migrants currently living in OECD countries come from other OECD countries, according to the 2015 OECD report Connecting with Emigrants.Incorrect
About 2 in 5 migrants currently living in OECD countries come from other OECD countries, according to the 2015 OECD report Connecting with Emigrants.
Question 10 of 10
A temperature rise of more than 2°C is predicted to have a catastrophic impact on our planet. Based on current trajectories, around how many more years of greenhouse-gas emissions would be enough to trigger a 2°C rise in temperatures.Correct
Without urgent action to reduce greenhouse-gas emissions, the carbon “budget” for a temperature rise of 2°C will be reached in around 2040, according to Climate Change Mitigation: Policies and Progress (OECD, 2015).Incorrect
Without urgent action to reduce greenhouse-gas emissions, the carbon “budget” for a temperature rise of 2°C will be reached in around 2040, according to Climate Change Mitigation: Policies and Progress (OECD, 2015).