Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct (@nieuwenkamp_csr)
The recent migrant crisis paired with shocking exposes of labour issues in global supply chains has heightened public attention to modern slavery, forced labour and human trafficking. Children working in cobalt mines for the Apple and Samsung supply chains, Syrian refugees working under terrible circumstances for garment supply chains in Turkey, Rohingya refuges working as slaves in the Thai fishing industry and North African migrants working in agriculture in Italy and Spain.
The International Labour Organization estimates that 21 million people are victims of forced labour, of which 44% are migrants. In total, forced labor generates an estimated $150 billion in illegal profits every year. A recent ETI survey found 71% of companies suspect the presence of modern slavery in their supply chains.
In response, a number of binding regulations regarding modern slavery in supply chains have been introduced. On an international level, the ILO has adopted the Forced Labor Protocol that requires States to take measures regarding forced labor. Domestically, the California Transparency in Supply Chains Act of 2010 is intended to ensure consumers are provided with information about the efforts to prevent and eradicate human trafficking and slavery from their supply chains. President Obama also launched a far reaching executive order to avoid human trafficking in federal contracts and passed a law allowing for stronger enforcement of the Tariff Act of 1930, which aims to block the import of products to the US produced using child labour.
Currently two lawsuits related to slave labour in supply chains of Thai shrimp are pending against well-known multinationals in US federal courts. Likewise earlier this year the US Supreme Court declined to hear an appeal for the dismissal of a lawsuit alleging that three large multinational enterprises aided and abetted child slave labor on cocoa plantations in Africa.
The recent UK Modern Slavery Act applies to all companies that do any part of their business in the UK if they have annual gross worldwide revenues of £36 million or more each year. These companies have to publish an annual slavery and human trafficking statement. The OECD Guidelines for Multinational Enterprises are referenced in the statutory guidance of the Act, noting that “whilst not specifically focused on modern slavery, they provide principles and standards for responsible business conduct in areas such as employment and industrial relations and human rights which may help organisations when seeking to respond to or prevent modern slavery.’’
The OECD Guidelines are recommendations to companies backed by 46 adhering governments and recommend that companies carry out supply chain due diligence to identify, prevent, mitigate and account for all adverse impacts that they cover, including child labour and forced labour. The OECD has developed more detailed guidance on how these expectations can be responded to in specific sectors. The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, the global standard on mineral supply chain responsibility, provides a 5 step framework for due diligence to manage risks in the minerals supply chain including forced and child labour in the context of artisanal mining. The FAO and OECD recently jointly developed a Due Diligence Guidance for Responsible Agricultural Supply Chains which also provides due diligence recommendations to manage risks related to forced labour and child labour in high risk agriculture sectors including palm oil and cocoa. Such approaches could be applied in the Thai shrimping industry as well. The OECD is also developing a Due Diligence Guidance on Responsible Garment and Footwear Supply Chains, which provides specific recommendations for addressing risks of forced and child labor. This Guidance will be launched later this year and will be relevant to migrant workers in textiles factories and cotton fields.
Although the OECD Guidelines are a non-binding mechanism they are accompanied by a unique grievance mechanism, the National Contact Points (NCPs). NCPs in the 46 countries that adhere to the Guidelines facilitate dialogue and mediation with companies who allegedly do not observe their recommendations. Several issues regarding forced or child labor in supply chains have been brought to the NCP mechanism and some have resulted in successful outcomes.
For example, in 2011 complaints were submitted to the NCP mechanism regarding sourcing of cotton from Uzbekistan cultivated using child labour. NCP mediation led to several agreements with companies involved in sourcing the products as well as heightened industry attention to this issue. In a follow up to the NCP processes several years later the European Center for Constitutional and Human Rights (ECCHR) concluded that the submission of the cases had encouraged traders to take steps to pressure the Uzbek government to end forced labour, although company commitment and media attention around the issue diminished over time. Nevertheless the report also noted that the NCP cases triggered investment banks to monitor forced labour issues in Uzbekistan in the context of their investments.
Other NCP cases, while not resulting in agreements between the parties have led to statements determining that certain companies were not observing the recommendations of the OECD Guidelines in the context of forced labour impacts, resulting in reputational harm to those enterprises (e.g. see DEVCOT) . Currently the Swiss National Contact Point is overseeing mediation between the Building and Wood Worker’s International (WWI) and FIFA regarding forced labor issues in Qatar. The results will have important implications for global sporting events and for managing risks of forced labour in large scale infrastructure projects.
Companies themselves have been proactive in addressing these issues. For example Nestlé, despite currently being subject to a lawsuit related to slave labour in its supply chain, participated in and released a report developed with the non-profit organization Verité which identified labour abuses in its supply chain with regard to Thai-sourced seafood. Within the report the company outlined plans to tackle the problem, and notes that other companies that do business in this sector likely face the same risks.
Several MNEs also participate in the Shrimp Sustainable Supply Chain Task Force set up in 2014 by retailers such as Costco. This brings together manufacturers, retailers, governments and CSOs to conduct independent audits on Asian fishing vessels to ensure seafood supply chains are free from illegal and forced labour. The first round of audits is expected to be complete by July 2016.
In February this year, H&M asked all of its suppliers to sign an agreement prohibiting the use of cotton from Turkmenistan and Syria, on pain of termination in order to avoid sourcing of cotton from ISIS controlled territories, produced through forced labour. H&M also terminated a sourcing relationship with a Turkish supplier after discovering a Syrian migrant child working in its factory, responding to documented abuses against Syrian refugees in the Turkish textile industry.
Labour issues in global supply chains present a serious and pressing problem, therefore it is encouraging to see they are being taken seriously. In addition to regulatory approaches non-binding mechanisms such as the OECD Guidelines, accompanied by the NCP system, and industry initiatives have resulted in important progress and provide alternative models for managing forced labour risks throughout global supply chains. While litigating these issues can be a forceful tactic in bringing companies to account, non-judicial grievance mechanisms can provide a more affordable and more accessible platform for tackling forced labour issues.
In the context of modern slavery, all stakeholders must step up their efforts. Governments should promote due diligence in global supply chains among their companies as outlined in the OECD Guidelines and its related industry-specific instruments. Civil society can continue to be instrumental in reporting upon and exposing these issues and furthermore should rely on the NCP platform for reaching resolutions on supply chain issues with MNEs. Finally, as the current migrant crisis will last many years, companies should conduct heightened due diligence to ensure that they are not linked to forced labour throughout their supply chains, particularly in contexts with large migrant populations.
Monika Queisser, Willem Adema and Chris Clarke, OECD Directorate for Employment, Labour and Social Affairs. This article is also being published by the EUROPP blog at the London School of Economics.
Prince William did it, Justin Timberlake did it, and so did David Cameron and Mark Zuckerberg. All four took paternity leave to spend time with babies George, Charlotte, Silas, Florence and Max. These trailblazers are great role models in combining family and work – at least when a new baby arrives – but men around the world are still too slow in following their example. And this despite the fact that more than half of OECD countries grant fathers paid paternity leave when a child is born; and paid parental leave, i.e. a longer period of job-protected leave open to both parents, is also available in more and more countries.
Parental leave for fathers typically lasts between two and three months and comes in different forms. Most common are “daddy quotas”, or specific portions of paid leave reserved for the father only. Some countries offer “bonus periods”, meaning that a couple may qualify for extra weeks of paid leave if the father uses up a certain period of a sharable leave. Other countries simply provide both parents with their own individual entitlement with no sharable period at all. So, in theory, more dads could be at home taking care of their kids and making it easier for both the mothers and themselves to live up to the expectations of babies and bosses.
The reality, however, looks very different. Fathers usually take a few days off right after the birth of a baby, but only the most committed and bravest use their right to longer parental leave. In many countries, fathers account for less than 20 per cent of those taking paid parental leave. Scandinavian and Portuguese men are more progressive: their share among paid parental leave users goes up to 40 per cent or more. Fathers in Australia, the Czech Republic and Poland, by contrast, shun parental leave; only about one in fifty paid leave takers is male. The most generous leave entitlements exist in Japan and Korea: a full year of paid leave is reserved just for the father – but very few men take advantage of it.
Figure 1: Fathers’ leave entitlements
Why are we seeing so little movement in breaking up traditional gender roles? We are told that Generations X,Y and Z are looking for better balance of work and family life. So why are young fathers not even taking the days to which they are legally entitled?
Financial considerations are powerful factors in making leave decisions. Women still make about 15 per cent less than men, on average in OECD countries. So economically speaking it often simply makes more sense for fathers to continue working, especially if parental leave is paid at much lower rates than previous earnings or not paid at all. The period around childbirth is often a time of considerable stress on household budgets. Many families may feel that they cannot make that sacrifice. Arguably, neither Prince William nor Mark Zuckerberg had to lose sleep over making serious dents in family income when deciding to spend their time cuddling and changing diapers for a while.
Figure 2: Gender wage gap
Not surprisingly, research suggests that fathers’ use of parental leave is highest when leave is not just paid but well paid – perhaps around half or more of previous earnings. The father quotas in Iceland and Sweden are relatively well paid at over 60 per cent of last earnings. Similarly, a 2007 policy reform in Germany introduced well-paid bonus months for partners; as a result the share of children whose father took leave increased by over 50 per cent in Germany between 2008 and 2013, reaching 32 per cent.
But gender norms and cultural traditions still present serious obstacles to fathers taking leave. A 2013 survey by the Korean trade unions asked Korean fathers why they decided not to take leave; it showed that more than half were worried about the negative prejudices that they would be exposed to. In France, where men account for only 4 per cent of parents claiming parental leave benefits, 46 per cent of the fathers who did not take their full leave entitlement said that they were simply “not interested”. And in all but 6 OECD countries, at least 50 per cent of people surveyed by the International Social Survey Programme believe that paid leave should be taken ‘entirely’ or ‘mostly’ by the mother; and in the Czech Republic, the Slovak Republic and Turkey a whopping 80 per cent of respondents agreed with this statement.
Finally, employers’ opinions and the environment in the company obviously play a crucial role. Some employers may regard a father taking long leave as not being committed to his job, leading fathers contemplating a longer break to fear for their career and promotion prospects. In Japan and Korea, fathers taking paid parental leave are concerned this would have negative effects on their career and their relationship with colleagues. Such workplace attitudes may be less pronounced in many other OECD countries, but even in Sweden, working in a small workplace or in one with a long-hours culture can keep fathers from using parental leave.
Public policy can provide the best conditions to enable fathers to spend more time with their children. But change needs to come both from employers and fathers themselves if we want to succeed in a better sharing of paid and unpaid work between men and women. This is not only about promoting gender equality at work and at home; it is also about improving the quality of life – for men, women and children.
Heather Allen, independent consultant on sustainable transport, climate change and gender
March 8th – International Women’s Day – gives us a good reason to reflect on progress on the variety of women’s issues that are hindering equality. Being safe and secure is a basic human value, yet personal security is still a major issue everywhere. In a woman’s world there are also more subtle links between personal security, public space and transport that I have been looking into more closely having just finished a review of published literature on this subject, to be published soon on the website of the FIA Foundation.
Many studies show that all over the world women use all forms of public transport (formal and informal, including minibus services, shared taxis etc) more than men and, more importantly, they usually rely on it more than men as they have fewer or no other mobility choices. Yet they are also more worried about using it, as their personal security is frequently compromised, and it appears that this may be getting worse rather than better.
Incidents often take place in public places, especially as women travel to and from places of education or to and from work. It comes as no surprise that it especially seems to occur on public transport, and not only in the developing world. To avoid this, women tend to use strategies that mean either they decide not to travel or they seriously change their travel habits. This impacts their access to opportunities, and ultimately their quality of life.
Harassment is a complex subject, and not made any easier by the subjective nature of how individuals interpret what might be considered harassment. In some cultures this is directed by social norms whilst in others it may be religious, faith or even income-based. We are not just talking about violence here, but rather behaviours that are unwanted, uninvited or that cause fear. Fear of it happening is as bad as what actually happens and it affects different women in different ways, making it difficult to apply scientific theory to understand why and how this happens. Collecting data on this is also made more difficult as the information can be spread across a number of security agencies, so much of the information can be considered anecdotal, unless it is obviously of a criminal nature.
Harassment would seem to be on the increase despite the high estimated level of non-reporting of incidents that were found internationally. In New York it is estimated that 96 per cent of sexual harassment and 86 per cent of sexual assault on the subway goes unreported; in Baku, Azerbaijan, none of the 162 out of 200 women who reported having been sexually harassed on the metro reported it to the appropriate authority. In Egypt, only 2.4 per cent of the 83 per cent of Egyptian women and 7.5 per cent of the 98 per cent of foreign women living or travelling in Egypt who had experienced sexual harassment in a public place reported it.
There is little documented evidence that women have either reduced their mobility horizons or changed their travel patterns entirely because of concerns over personal security. But we do know that all forms of harassment affect women deeply and reduce their confidence, and that they implement strategies to reduce the risk of this, which ultimately impacts their ability to move freely in public places. If this is directly associated with their transport options, it is also likely to affect their decisions to take up educational opportunities, join the labour market and influences the kinds of jobs they pursue.
In addition, if women pass on a negative value judgement to their children, those boys and girls will grow up thinking that public transport is unsafe. It is likely that this will become “a belief” as they grow into adulthood and as soon as they can, they will prefer to buy or share a car, motorbike or scooter – creating a vicious downward spiral of increased congestion even if every vehicle is cleaner than today!
So where does that lead us? Certainly farther away from where we want to be in terms of equal opportunities and sustainable development. Excluding women from being active in the labour market, for any reason should be considered to be out of order in today’s world. The McKinsey Global Institute estimates that if women in every country were to play an identical role to men in markets, as much as $28 trillion would be added to the global economy by 2025. If this exclusion or reduced opportunity is due to transport inequalities, we can do something about it, but only if we shift it to being a development rather than a security issue.
Both aspects are interdependent – the more active women are in the labour market the more they are able to demand safe and secure transport, while the less empowered they are the more socially exclusive transport becomes. Putting them in separate carriages may be a temporary solution, but it also underpins the concept that women should be kept apart and not be given equal rights.
By addressing both ends of this equation we can create a win, win, win situation – addressing equity, economic empowerment and improving quality of life. But we need to make sure that people do not think that harassment is unavoidable or acceptable, or that they will not be caught. Let’s start today in respect of women everywhere!
This article is based on work supported by the FIA Foundation. I would like to express my thanks to the FIA Foundation for its foresight and vision in supporting this research. The full report and executive summary can be downloaded here.
You are invited to attend a free FIA Foundation webinar on March 21st 14 -17h GMT. Details are available from Caroline Flynn ([email protected]).
At the upcoming International Transport Forum’s 2016 Annual Summit, 18-20 May 2016, Leipzig, Germany, there will be a debate on “Women in Transport: Mind the (gender) gap”.
Aida Caldera Sanchez and Giuseppe Nicoletti, OECD Economics Department
Countries are subject to economic shocks originating from long-term trends such as demography and short-term events such as financial crises, but healthy economies should be resilient to both. It is important to understand the factors that shape a country’s economic resilience, defined broadly as a country ability to contain long and short-term vulnerabilities as well as its capacity to resist and recover quickly when shocks occur. Ideally, whatever the shock, policies should be such that they help the economy remain close to its welfare potential in a sustainable way, notably in terms of jobs, incomes and quality of life.
Sources of short-term vulnerabilities include financial crises, sovereign debt crises, commodity price fluctuations or volatility. Longer term issues include ageing, declining dynamism, rising inequalities and environmental degradation. Resilience to short-term shocks also has implications for long-term sustainability because large shocks can lead to significant upheaval (as witnessed by the recent financial crisis), increasing risk and uncertainty for households, investors and governments and have negative effects on the potential for increasing welfare that cannot be easily reversed.
Countries can strengthen the resilience of their economies to shocks through better detection and analysis of structural trends, for instance with an increased focus on long-term scenarios, as well as a better monitoring of macroeconomic and financial vulnerabilities; and by strengthening policy settings to address long-term challenges and mitigate the vulnerabilities that can lead to costly shocks, as well as strengthening policy settings that can help to mitigate the shock impact and speed the recovery.
The OECD identifies five types of short-term vulnerabilities that are most often linked to severe financial crises, deep downturns in economic activity or both:
- Financial sector imbalances, e.g. excessive leverage, maturity and currency mismatches, high interconnectedness of banks and their common exposures.
- Non-financial sector imbalances, such as imbalances in the balance sheets of households and non-financial corporations.
- Asset market imbalances, most notably equity and real estate busts.
- Public sector imbalances, in particular doubts about the sustainability of public finances that can lead to high risk premiums on government debt.
- External sector imbalances, such as persisting current account deficits.
Monitoring these country-specific vulnerabilities can be useful in warning of severe recessions and crises and should be an essential part of a country strategy to strengthen resilience. To assist countries, the OECD systematically reports vulnerability indicators in both the Economic Outlook and country Economic Surveys. Vulnerability indicators should be and are complemented with other monitoring tools and in-depth assessments that provide a holistic view of country risks, as even countries without significant domestic or external imbalances can be affected by external shocks through spillovers and contagion via trade, financial and confidence channels.
From a longer-term perspective, the OECD has pointed at three major factors that could continue to generate difficult challenges for the global economy:
- A slowdown in global growth, mainly related to ageing and deceleration in emerging economies, but also due to uncertainties concerning the rate of innovation and skill development.
- A tendency for inequalities to continue to rise, partly due to the nature of technical progress that raises the demand for the highly-skilled.
- Rising economic damages from environmental degradation due among others to climate change.
To raise awareness about these long-term challenges, the OECD has developed long-term scenarios and has increasingly focused on forward-looking analysis in various areas, including productivity, income and wealth inequality and the environment, for example in The Future of Productivity and The Economic Consequences of Climate Change.
Policies should be geared towards mitigating the build-up of vulnerabilities and prepare the economy to deal with structural challenges, combining both structural and macroeconomic dimensions and including international coordination in some areas.
For instance, preventing or soothing the effects of financial crises requires macro-prudential regulation to limit banking sector instability and excessive pro-cyclicality; tax policies that avoid special treatment of housing or corporate debt, to help reduce the risk of asset price bubbles; and monetary and fiscal policies that mitigate the impact of shocks. Structural policies can facilitate worker mobility (e.g. active labour market policies and flexible housing markets) and the turnover of firms (e.g. lifting barriers to entry and competition) thereby improving resilience by accelerating the reallocation of resources across firms and sectors in response to shocks.
Similarly, addressing longer-term challenges requires structural policies – such as those affecting innovation, market experimentation, labour force participation and skill formation – that inject dynamism in markets and make the most of the knowledge economy to sustain both productivity and employment growth in the context of ageing. Policies should also target redistributive mechanisms and education systems to improve equality of opportunities and contain the tendency for inequality to rise. Finally, early action is needed via a policy mix of carbon pricing, reduction of fossil fuel subsidies and other targeted measures to avoid environmental damage that affects future growth potential and welfare.
More international co-operation will also be needed to support global supply chains and trade, to boost the provision of global public goods that are increasingly important – such as basic research, intellectual property rights legislation, competition policy and the climate – and to tax bases that are increasingly mobile across borders, thereby limiting tax avoidance. Cooperation in these areas will help address long-term challenges with positive repercussions on innovation, growth and welfare.
Identifying policy tools to enhance overall resilience is complicated by the existence of trade-offs among policy objectives and interactions in both macroeconomic and structural policy settings. In times of crisis, macroeconomic policies that aim at reducing the severity of the downturn and stimulate the recovery may have unintended consequences by increasing vulnerabilities down the road, for instance by increasing public debt ratios or building-up central banks’ balance sheets and generating ample liquidity. Structural policies aimed at sustaining dynamism and knowledge-based growth could at the same time tend to increase earning gaps and favour continued structural adjustment. The consequences for inequality and workers’ well-being will have to be addressed including via fiscal measures, which however will be increasingly constrained by the need to manage public debts.
Understanding and Managing the Unequal Consequences of Environment Pressures and Policies
Shardul Agrawala and Rob Dellink, OECD Environment Directorate
The consequences of degradation of environmental quality as well as the consequences of environmental policies are typically unevenly distributed. In general, poorer countries and lower income households are more severely affected by environmental degradation and at the same time have less capacity to adapt.
Outdoor air pollution kills more than 3.5 million people a year globally (WHO, 2012). Poor health caused by air pollution is especially problematic for children and the elderly in major emerging economies. Between 2005 and 2010, the number of premature deaths in China and India increased by 5 and 10 percent, respectively. Road transport is a significant source of air pollutant emissions, and rapid growth in traffic has outpaced the adoption of tighter regulations, leading to increased vulnerability of the urban population. The welfare costs of road transport alone are projected to amount to around USD 1.7 trillion in the OECD countries, USD 1.4 trillion in China and USD 0.5 trillion in India (OECD, 2014).
Despite the role of international trade in smoothing the economic costs of environmental feedbacks across regions, OECD estimates suggest that climate change impacts will be substantially more severe in most countries in Africa and Asia than in most of Europe and America. Despite large regional differences, market consequences from climate change are projected to be negative in almost all regions, and the economic consequences of greenhouse gas emissions are unavoidable and enduring for a century or more. Changes in crop yields and in labour productivity are projected to affect the economy most strongly, each amounting to several percent of GDP loss in the most vulnerable regions. Moreover, there are significant non-market impacts as well as risks of crossing essential tipping points and moving towards a climate system with the potential for very severe impacts on regional economies over the longer term.
In OECD countries the sectoral shifts in employment, resulting from global climate mitigation policies, are substantially larger than the effect on overall employment. Moreover as skill requirements differ across sectors, skills mismatches could appear thereby significantly increasing the transition costs associated with these policies, and increasing inequality between skilled and unskilled workers.
Mitigation and adaptation policies can reduce the negative impacts of climate change globally, yet the costs of these policies will not be borne by all sectors and regions proportionally to their expected benefits, that is they are unequally distributed. These differential impacts pose key political economy challenges to policy reform.
Distributional aspects are often used as an argument against implementing or reforming environmental policies. A key economic question then becomes whether policy reforms can be designed in such a way that they are not regressive. For instance, OECD work finds large differences in regressiveness of different energy taxes between energy carriers and between regions in 21 OECD countries.
The case of Indonesia is particularly illustrative: the country is facing severe environmental challenges, not least from climate change and air pollution, and until very recently had significant subsidies for fossil fuel consumption. As part of the NAEC initiative, an innovative analytical framework was developed to simultaneously assess the macroeconomic, environmental and distributional consequences of energy subsidy reforms in Indonesia. The study found that if Indonesia were to remove its fossil fuel and electricity consumption subsidies, it could record real GDP gains of around half a percent in 2020, while also substantially reducing a range of energy-related emissions. The simulations showed that replacing the fuel subsidies with cash transfers, and to a lesser extent food subsidies, can make reform more attractive for poorer households and reduce poverty. Food subsidies tend to create other inefficiencies, however. Mechanisms that compensate households via payments proportional to labour income were, on the contrary, found to be more beneficial to middle and higher income households and increase poverty. This is because households with informal labour earnings, which are not eligible for these payments, are more represented among the poor.
Indonesia has reformed its subsidies to fossil fuel consumption providing real world evidence of what policy reform can achieve. The conclusion from OECD work – confirmed in practice by the way Indonesia went about its reforms – is that the design of any redistribution scheme will be crucial in determining the overall distributional performance of the reform. Well-designed policies with adequate accompanying measures can ensure a triple win on economic efficiency, environmental effectiveness and reduced inequality. The right policy mix is very sensitive to local circumstances, but the OECD’s analysis confirms that inequality concerns do not have to hamper environmental policy.
Both environmental pressures and environmental policies clearly affect different countries and different groups within them unequally. These differences are essential to take into account in the design of more targeted and more equitable policies, but in order to do so measurement and quantification of these differential effects is an important first step. The tools and frameworks developed in this area particularly as part of the NAEC exercise are an important methodological contribution in this regard.
Christian Kastrop, Director of the Policy Studies Branch, Economics Department, OECD
In a majority of OECD countries, growth over the past three decades has been associated with growing disparities in household income. This suggests that some of the forces driving GDP have also fuelled inequalities. As a result, gains in household disposable incomes generally have not matched those in GDP per capita and the gap has been particularly large among poorer households and the lower-middle class. An important policy question is whether some of the policy changes driving GDP may in addition play a “hidden” role on inequality. New empirical evidence produced by the OECD on the effects of structural policies on households’ incomes across the distribution scale has identified potential policy trade-offs and complementarities between efficiency and equity.
Labour market policy reforms
Labour market policy reforms are often designed to boost aggregate employment through behavioural effects such as labour supply incentives, and via this channel, GDP per capita. At the same time, these policies also affect income inequality through their impact on the earnings distribution. For some reforms, these two impacts on measures of inequality may be offsetting each other. For example, reducing unemployment benefits and lowering the statutory minimum wage relative to median wages are associated with both higher wage dispersion and higher employment rates among low-skilled workers. This may result in a very small net change in inequality among the working-age population, while the impact on overall inequality is uncertain. For other reforms, however, wage and employment effects may reinforce each other, resulting in both stronger growth and less inequality. This could be the case of policy reforms aimed at easing the strictness of job protection on regular contracts as a way to tackle labour market duality, i.e. the existence of separate segments where comparable workers enjoy different wage conditions and job protection.
Many tax policies raise well-known trade-offs with respect to growth and equity objectives. Economic theory and empirical evidence suggest that the tax structure influences macroeconomic efficiency. In particular, that direct taxes have relatively more distortionary effects by reducing incentives to work and invest. One of the highest ranked growth-friendly tax reforms, shifting the tax burden away from income taxes to consumption and property taxes, may in principle have adverse effects on inequality through various channels. For instance, reform-driven positive employment effects can be counterbalanced by increased income dispersion resulting from lower tax progressivity. Also, empirical evidence suggests that consumption taxes can be regressive, at least in the short run. There is ambiguity with respect to the distributional effects of property taxes. On the one hand, depending on how they are designed, recurrent taxes on immovable property can be regressive with respect to disposable incomes; on the other hand, inheritance and capital gains tax clearly reduce wealth inequality.
Product market regulation
Relaxing anti-competitive product market regulation can bring productivity and employment gains in the long run, therefore spurring economic growth. However, the impact on income inequality is uncertain and empirical evidence generally inconclusive. This is because employment gains may be at least partly offset by changes in the wage dispersion, as more intense product market competition tends to reduce the bargaining power of workers. Recent evidence has shown however that reducing barriers to competition is found to lift incomes of the lower-middle class by more than GDP per capita. Research also shows that linking well-tailored employment and product market reforms could bring additional gains on growth and equality.
Globalisation and technological progress
There is some consensus, in both developed and, to a lesser extent, developing countries, that globalisation is a growth-enhancing force. But there is no consensus, and mixed empirical evidence, about the distributional implications. Economic globalisation involves increased exposure to international trade and financial and capital movements, increased mobility of production factors (workers and capital) and increased fragmentation of the production process in Global Value Chains (GVC). The effects of globalisation on overall income inequality have mainly focused on the earnings dispersion channel as opposed to the employment channel. Available evidence would seem to suggest that globalisation-induced inequality effects are mainly driven by greater wage dispersion, in particular arising from changes in the skill and industry composition of labour demand.
Stronger export intensity based on sound and dynamic competitiveness is found to boost long-run GDP per capita and average household disposable income. Such effects hold across the distribution of household income, with stronger estimated gains for the poor – implying reduced inequality. Overall, these findings signal synergies across policy objectives, i.e. that reforms enhancing competitiveness aimed at encouraging exports among domestic firms could boost efficiency and equity.
Globalisation may also affect income distribution insofar as increased trade and international capital flows facilitate the diffusion of technology, increasing thereby wage dispersion via mechanisms such as skill-biased technological change. To the extent that skill-biased technological change shifts demand of labour towards higher skills and especially when this increase in demand is not matched by a sufficient increase in the supply of skilled workers, technical progress may increase wage inequality. The implications of this hypothesis for inequality have found empirical support for many OECD countries. Going further, recent evidence strongly suggests that skill-biased trade specialisation is associated with higher wage inequality, even accounting for technological change.
Technological progress, as measured by the share of investment in communication technology (ICT) in overall investment, is found to boost long-run GDP per capita and average household disposable incomes. Average household income gains hold across the distribution and as a result, there is no evidence of inequality effects.
Taking these findings into account, the OECD is following up designing general but also country tailored policy frameworks which avoid and minimise trade-offs in the short and long run. This encompasses the right mix and sequence of employment and product market reforms, together with science, innovation, education and redistribution systems with taxes and benefits in cash or kind.
Economic Policy Reforms: Going for Growth
Connecting the dots on income inequality: what do official sources suggest when adjusted for top incomes? Nicolas Ruiz, on OECD Economics Department, on OECD Ecoscope blog
Johannes Jütting, Manager of The Partnership in Statistics for Development in the 21st Century (PARIS21), and Christopher Garroway, Economic Affairs Officer at the United Nations Conference on Trade and Development (UNCTAD)
In January, the World Economic Forum meeting in Davos, Switzerland saw members of the global elite extolling the virtues of the so-called “4th industrial revolution”. The catch-all term, also known as “Industry 4.0,” ties together a wide range of cutting-edge digital technologies – such as 3-D printing, machine intelligence, the internet of things, cloud computing, and big data – into a vision of a future world of work. In this brave new world, smart factories will operate by automation with machines exchanging data seamlessly. The consequences for the work force in both developing and developed countries will be huge.
To start with, the hoped-for productivity gains from the 4th industrial revolution will have a global impact on the amount, type and quality of jobs available and on worker competitiveness. Most of the worries expressed so far about the rise of the robots have focused on job losses in developed economies. But there will be consequences, too, for those developing countries that depend for their competitive advantage on low-cost, low-skilled labour. For example, we could see the re-localisation of low-skill jobs (and even many medium-skill jobs) back to developed countries that possess robots. That could turn global value chains on their head, potentially spelling their demise as a development strategy, as mentioned in some of the targets and commitments of the new United Nations 2030 Agenda for Sustainable Development and in the Addis Ababa Action Agenda.
So how can developing countries confront this possible widening of the digital divide, and its potential threat to their development strategies? One thing they need to do is turn the possibly liberating power of open data and big data to their own advantage. If data are the lifeblood of the robot revolution, then they must also be used to defend and compensate those who might lose out from these disruptive technologies.
Open data and big data can be important tools for helping entrepreneurs in developing countries maintain a stake in global value chains. Take the example of business-2-business web marketplaces like China’s Alibaba, which connects small- and medium-sized businesses to global markets. The more these businesses in developing countries can get online and engage in e-commerce, the greater chance they will have of following the changing patterns of global value chains. Another promising example is the US data-driven trade-analysis solutions company, Panjiva, which uses machine learning and data visualization tools to mine publicly available customs data. This allows entrepreneurs to identify and source new suppliers and new importers. While today a European importer might be using such tools to find a supplier in Asia, as the 4th industrial revolution kicks in, these tools may soon be connecting entrepreneurs from the developing world to robot factories in Germany, for example. But for this to work in everyone’s interest, open data standards and big data analysis skills need to be more widely embraced and prioritized in developing countries. This also means putting in place the right institutions that can allow their use to spread – and empower – citizens.
Outside factories and boardrooms, the technologies of the 4th industrial revolution can be used to enable a wide range of new services to help guarantee and protect citizen rights. The impact of these technologies is also already being felt through the expansion of public “smart” services: Smart cards and RFID technology, for example, are being used to create unique identification numbers for citizens in many developing countries, not only to improve civil registration, but also to enable financial inclusion and payment of government benefits as countries expand social protection. Agricultural productivity can also be improved: In East Africa, for example, cell-phone services are offering real-time price data to farmers.
One of the biggest challenges to embracing these new technologies in developing countries may be that the relevant policies and legal frameworks are in their infancy or non-existent, as UNCTAD’s Global Cyberlaw Tracker reveals. Data literacy, official statistical capacity and investment in 4th industrial revolution technologies are particularly low in these countries. Legal standards and frameworks are outdated or non-existent, and individual rights with respect to data collection and privacy almost unheard of.
To realize a “digital dividend” from Industry 4.0, the World Bank’s recent 2016 World Development Report says countries need to put in place “analogue components”. This means providing a level playing field for healthy competition between tech companies; raising the tech skills of all workers; and holding brick-and-mortar government accountable to citizen’s online rights. These “analogue components” are at play in the ongoing dispute in India over Facebook’s Free Basics service, which rolls out limited online services on mobile phones to underserved markets. Some see it as a promising idea for expanding the digital citizenry, helping improve poor people’s skills and use of new technology. However the telecoms regulator in India has just come out against the service because it provides free access only to some websites, rather than to the internet as a whole.
By its very nature, technology can be both liberating and disruptive. Attempting to resist it can also be futile or counterproductive. But the promise of the 4th industrial revolution suggests that disruptiveness does not have to mean divisiveness. Open data, big data and smart services, working hand in hand with the right policies, can go a long way to counterbalancing the disruption caused by robots, machine intelligence and the internet of things.
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