William Hynes, OECD New Approaches to Economic Challenges (NAEC) initiative
The OECD launched its “New Approaches to Economic Challenges” (NAEC) initiative in 2012 to reflect on the lessons for economic analysis and policymaking from the financial crisis and Great Recession. European Central Bank Governor Jean-Claude Trichet said that: “as a policy-maker during the crisis, I found the available models of limited help. In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools”. But even before the crisis Greg Mankiw from Harvard University lamented that “macroeconomic research of the past three decades has had only minor impact on the practical analysis of monetary or fiscal policy”.
NAEC examined the shortcomings of analytical models, and it promotes new policy tools and data. It questions traditional ideas and methods and challenges group-think and silo approaches by inviting comment and criticism from outside the Organisation, and by soliciting input from social sciences such as sociology, psychology, and history to enrich the policy discussions.
While the financial crisis struck at the core of traditional economic theory and models, it became apparent in 2016 that the failure of economic thinking and acting was far deeper and more destabilising than we thought, so part of NAEC’s mandate is to develop an agenda for inclusive and sustainable growth.
This is all the more urgent given the backlash against globalisation, increased inequalities of income and opportunities, and the negative impact of growth on the environment. We need to develop what Eric Beinhocker calls a “new narrative of growth”, one that puts people at the centre of economic policy. Therefore NAEC is helping to focus on redistribution, a concept neglected in economic analysis for many years, and helping to ensure that policy decisions improve the lives of those at the bottom of the income distribution.
It is also helping to consider the well-being of people as a multidimensional concept, which implies reconsidering important elements of the economic narrative, such as justice and social cohesion. NAEC does so by thinking “out of the box”, emphasizing the need to empower people, regions and firms to fulfil their full potential. This is at the core of the Productivity-Inclusiveness Nexus that considers how to expand the productive assets of an economy by investing in the skills of its people; and that provides a level playing field for firms to compete, including in lagging regions.
However, the challenges are too complex and interconnected for conventional models and analyses. As Andy Haldane argues, the global economy is increasingly characterised by discontinuities, tipping points, multiple equilibria, radical uncertainties and the other characteristics of complex systems. This is why a key theme of NAEC has been the complexity and interconnectedness of the economy, exemplified by the Productivity-Inclusiveness Nexus.
The contributors to this series argue that complexity and systems thinking can improve understanding of issues such as financial crises, sustainability of growth, competitiveness, innovation, and urban planning. Recognising the complexity of the economy implies that greater attention should be paid to interactions, unintended consequences, stability, resilience, policy buffers and safeguards.
Working with the European Commission and the Institute for New Economic Thinking (INET) Oxford, the NAEC initiative demonstrated in a number of workshops that complexity economics is a promising approach for delivering new insights into major public policy challenges and an exciting research agenda going forward.
The workshops offered a timely opportunity for policy-makers, academics and researchers to discuss the policy applications emerging from the study of complexity. The NAEC Roundtable in December 2016 discussed whether economics was close to a tipping point – a transition to a new behavioural complexity paradigm. There is wide agreement among economists on the limitations and the shortcomings of the rational expectations paradigm and much discussion on how to move forward.
The first phase of NAEC’s complexity work has made the case for further and deeper examination of complexity. Going forward, it will be important to demonstrate the value of complexity, systems thinking and agent-based models in a number of areas including financial networks, urban systems and the other issues highlighted in this series. The challenge is to demonstrate the value of the approach.
Complexity offers an opportunity for addressing long-held concerns about economic assumptions, theories and models. For the OECD, it also holds out the potential for creating better policies for better lives.
The OECD organised a Workshop on Complexity and Policy, 29-30 September 2016, at OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning; 29/09 afternoon; 30/09 morning
The Club of Rome’s first report, The limits to growth, appeared in 1972 and was ultimately published in thirty languages and sold over thirty million copies worldwide. It made many people aware for the first time that with continuing growth the world would eventually run out of resources. Today, 45 years later, its electrifying conclusions, which modelled the ‘overshoot and collapse’ of the global system by the mid twenty-first century, still provoke intense debates.
The report also brought international fame to the newly founded Club of Rome, which has since become a key reference point in the public memory of the 1970s and environmental discourses more generally. It boasts considerable authority as a private, non-state, and global group of experts concerned about the fate of humanity, and a wise warden for the ecological survival of planet Earth. However, this extraordinary public and academic attention has largely overlooked the constitutive entanglements with the OECD that characterise the Club’s foundation and early history.
This OECD–Club of Rome nexus needs explaining. The OECD, founded in 1961 as the successor of the Organisation for European Economic Co-operation (OEEC) that had overseen the Marshall Plan aid, soon became, in the words of one of its Directors, “a kind of temple of growth for industrialised countries; growth for growth’s sake was what mattered”. By the late 1960s, however, faced by increasing popular anxiety about unsustainable growth in Western societies, scientists and bureaucrats within the OECD launched a debate on “the problems of modern society”. The driving forces of this growth-critical and ecologically oriented debate were two of the most powerful men within the Organisation: the head of the OECD since its foundation in 1961, Secretary-General Thorkil Kristensen, and the Organisation’s long-time science director and unofficial intellectual leader, Alexander King. The topic assumed such importance that it was central to discussions at the OECD’s ministerial meetings in 1969 and 1970.
However, Kristensen, King, and their associates around the science directorate and the Committee for Science Policy were frustrated by governments’ inability to deal with long-term and interrelated ecological problems and thus looked for allies outside the OECD. They got together with Italian industrialist and global visionary Aurelio Peccei, at that time an executive of Fiat and the managing director of both Olivetti and Italconsult, and in 1968 this elite group of engineers, scientists, and businessmen, founded the Club of Rome. They were fundamentally sceptical about the potential of existing political institutions to catalyse the controversial global debate they deemed necessary, because they regarded these institutions as the “guardians of the status quo and hence the enemies of change”. They saw themselves “faced with the extraordinary arrogance of the economist, the naivety of the natural scientist, the ignorance of the politician, and the bloody-mindedness of the bureaucrat”, all unable to tackle the ensemble of problems they had identified.
Thus, they built a transnational network to advance their view of planetary crisis both through the OECD (thus targeting key economists and ministers from member countries) and through the Club of Rome, whose reports forcefully shaped public debates. This network blurred the lines between the “official” OECD and the “private” Club, not only in terms of overlapping membership but also in terms of discourses. While the Club functioned as a “detonator”, its core members used international organisations “as transmission belts”, as Peccei explicitly put it, and thus acquired a strong leverage.
The personal overlap between the OECD and the Club of Rome in its initial phase is remarkable. Not only were three of the four persons that founded the Club working in or with the OECD (King, the Austrian systems analyst, astrophysicist, and OECD expert; Erich Jantsch; and the Swiss director of the Geneva branch of the Battelle Memorial Institute and Vice-Chairman of the OECD’s science committee Hugo Thiemann). Besides the Italian industrialist Peccei and the German industrial designer Eduard Pestel, who secured the funding from the Volkswagen Foundation for the first report, all the crucial personalities in the formative period of the Club of Rome were closely connected to the OECD. Almost the entire core group of the Club of Rome, its “executive committee” – which has been characterised as the true “motor” of the Club of Rome, and who signed Limits to growth – also had positions within the OECD.
This transnational group of experts at the interface of national governments, international organisations, and the Club of Rome formed a unique circle of elite environmentally conscious planners. Even though claiming to speak for the entire globe, they represented a very narrow fraction of the global population, in part because of their organisational base in the OECD, often dubbed the “Club of the Rich”. They were all highly-educated and largely white men and thus reproduced the tradition of upper-class gentlemen’s clubs, and all came from countries in the global North (mostly European, some US and Japan). With close ties to elite universities, transnational business, and international organisations, they acted from economic positions of privilege and power. Furthermore, the entire network had academic backgrounds in the natural sciences (in particular chemistry and physics) or engineering, with only a few trained in economics, and none in the social sciences or humanities. Finally, almost all had spent at least part of their career as national government experts or administrators.
All these factors influenced the perspective and politics of the network at the heart of the OECD–Club of Rome nexus. A more profound appreciation of the gestation, midwifery, entanglements, transfers, and tensions that characterise this nexus opens up a more complex understanding of both organisations and the actors driving them. It puts in perspective the public perception of the Club of Rome as a private, non-governmental, and global think tank by analysing its origins within an all-male elite group of engineers, scientists, and businessmen, and its intimate interrelationships and personal overlaps with the OECD, an intergovernmental organisation representing the industrialised capitalist countries. This social positioning fundamentally shaped the network’s outlook, most importantly with regard to its systemic analysis of interrelated global problems in a computer-engineering perspective, the technocratic outlook from the perspective of the global North, and top-down management approach.
How did the cradle of the Club of Rome react when its offshoot published its first report in 1972? After all, Limits to growth was consciously set up as a “detonator” to give a jolt to established governments and international organisations. At first, it did indeed impress and unsettle the OECD. But once the public debate took off, the views expressed in Limits deepened the internal fractures within the OECD and provoked hostile reactions, leading to a revitalisation of the strong pro-growth position.
The strongest force behind the backlash against the critiques of growth came with the onset of economic turmoil, soaring energy prices, and stagflation from 1973-74 onwards. While the energy shortages and their effects on industrialised countries were largely interpreted by the public as proof of the Club of Rome’s predictions, within the OECD these developments did not strengthen the faction critical of growth. On the contrary, the debate on the “problems of modern society” was choked by a combination of changing member-state interests, an attempt by the top level of the Secretariat to better position the OECD, and a shift of influence within the Organisation.
The growth critique sparked a bitter controversy between the macro-economic branch of the Organisation and the science experts and environmental scientists around King, which the latter lost when the OECD refocused on trade, energy, and growth. In particular, the publication of the Club of Rome’s first report polarised the debate to such a degree that not only the OECD but Western policy-making circles more generally returned to the promotion of quantitative growth. While the Club of Rome was born in the corridors of the OECD, its first report effectively ended these intimate relationships.
Matthias Schmelzer (2016), The Hegemony of Growth. The OECD and the Making of the Economic Growth Paradigm, Cambridge University Press
Towards an empowering state: turning inclusive growth into a global reality
Gabriela Ramos, Special Counsellor to the OECD Secretary-General and Sherpa to the G20. With thanks to Shaun Reidy, Acting Coordinator of the OECD Inclusive Growth Initiative.
This article is part of Inclusive growth: The state of the debate 2017 being published today by the UK All-Party Parliamentary Group on Inclusive Growth, that brings together reformers across politics, business, trade unions, finance, churches, faith groups and civil society, to forge a new consensus on inclusive growth and identify the practical next steps for reform.
We live in turbulent times. Nine years on from the eruption of the financial crisis, we remain stuck in a low growth trap. To make matters worse, the great upheaval in our economies has now transmuted into a profound political crisis in many countries.
The economic hardship of the last nine years has created many casualties, but chief among them has been trust – the glue that holds our societies together. Trust between different groups of people, and trust in institutions has plunged to record lows, with public belief in governments in the OECD standing at just 42% in 2016.[i] This has now spilled over into the social realm, stoking fear and provoking the rejection of global interconnectedness, trade, migration and technological progress.
Everywhere we look, globalisation is being called into question and the potential consequences of the rise of protectionist measures could scarcely be greater. The origins of this loss of faith in international integration are numerous and vary considerably from country to country, but there is a common thread running throughout: a growing sense that the global economy is delivering only for the lucky few.
International elites have categorically failed to deal with this. The benefits of globalisation and rapid technological change were understood in an overly simplistic economic framework that relied too heavily on averages and representative agent models, blurring the outcomes for different income groups.
Simplistic assumptions of how the economy operates prevented us from advancing better policies. Trade and investment became an end in itself, and the efficiency of markets became the ultimate goal of economic policy. We neglected the differentiated outcomes of policies for different income groups, and by relying on incomplete metrics – like GDP per capita alone – we ignored the distributional outcomes of the policies we undertook.
We have since learned that this was not the right choice – and we have learned it the hard way. . Policies have affected different groups in very different ways. The initiative I lead at the OECD on Inclusive Growth has charted how rising income inequalities have been blighting people’s opportunities, wasting their potential contribution to productive activity and limiting their ability to lead meaningful lives.
The numbers make for stark reading. Here in the UK, the average income of the richest 10% has gone from being eight times that of the poorest 10% in the late-1980s, up to almost ten times greater today. The situation is markedly worse at the very top, with the highest 1% of earners in the UK taking home around 20% of pre-tax national income in the last three decades.[ii]
Our report All on Board: Making Inclusive Growth Happen has set out how this reflects a more general trend seen across the OECD, where those at the top of the income distribution have pulled away from those at the bottom. We see this particularly in the period after the crisis, where across the OECD, the top 10% of income earners have managed to recover their pre-2008 income levels, while those in the middle and at the bottom have seen incomes fall and stagnate. The picture is even more troubling in terms of wealth, where the richest 10% in the OECD own around half of all household assets, whilst the bottom 40% own barely 3%. At the very top of the distribution, the Top 1%, holds a staggering 19% of total wealth.[iii]
All too often, wealth and income inequality stand in a symbiotic relationship with the intangible social trappings of success, such as cultural capital and access to parental networks. Together, they influence the key formative outcomes in children’s lives, helping to turn the unequal outcomes of one generation into the unequal opportunities of the next, affecting everything from employment to health status.
Nowhere is the damage more keenly felt than in education. OECD data shows that the children of poorer parents struggle to keep up with the social and cultural capital of their wealthier class-mates. From that initial disadvantage, many go on to lower educational attainment, with children whose parents did not complete secondary school having only a 15% chance of making it to university against a 60% chance for peers with at least one parent who had attained tertiary education.[iv] More troubling still is the fact that the very same children at a disadvantage in the education system typically go on to receive smaller salaries and, most worryingly of all, to lead shorter lives.
This is profoundly unjust. But it is not only those at the bottom who suffer when inequalities scale new heights – we all do. Of course, inequality has always been with us and it has often been presented as an engine for growth. When it derives purely from differences in efforts and investment, such an argument may have some merit, but with the levels of inequality we see today that is demonstrably not the case.
As OECD’s work on the Productivity-Inclusiveness Nexus spells out, when the poorest are unable to fulfil their potential, we all lose out on the visionary leaders, the innovators, and the economic growth that could have come to pass. Moreover, recent OECD research has highlighted how rising inequality knocked 6 to 10 percentage points of GDP growth between 1990 and 2010 across a range of OECD countries including the UK, Mexico, Finland, Italy, and the United States.[v]
With the ongoing global and technological transformation of our economies these issues are likely to be brought into starker relief. Digitalisation has the potential to unleash untold benefits for all of human kind, but if it is not managed properly, it could exacerbate inequalities by creating greater job insecurity and cementing ‘winner takes all’ dynamics in our most rapidly growing markets.
Already, since the early 90s, around half of the jobs created in the OECD have been in more insecure temporary, part-time or self-employed work. Over roughly the same period, the power of multinational firms at the global frontier to exploit their greater access to knowledge-based capital, digital technology, finance, cheap labour and low-tax jurisdictions have been able to lock-in their productive advantages. In the manufacturing sector for instance, since the early 2000s, labour productivity of OECD firms at the technological frontier has increased at an average annual rate of 3.5%, compared to just 0.5% for non-frontier firms.[vi]
Given the extent of these social and economic costs, it is hardly surprising that rising inequality has translated into growing political disaffection, anti-market sentiment and disenchantment with globalisation. In such a context, we desperately need to take action to promote inclusive growth and restore public confidence in the power of policy makers to improve people’s lives.
So what can we do to redress this situation and regain trust?
To start with, we need to listen to people. It is not enough to talk about a ‘post-truth’ environment. Or to say that people haven’t paid attention to facts and evidence. It is we that have not listened. We have to be honest with ourselves and acknowledge that the “truths” in our economic models have failed to capture much of what matters to people.
In short, we need to put people, and their multidimensional well-being, back at the centre. The OECD’s Inclusive Growth and New Approaches to Economic Challenges (NAEC) Initiatives are at the forefront of efforts to put people at the centre, to create social and economic models that provide a more accurate representation of the world around us. Today, advances in computing power are also opening up new tools to support our work, with possibilities for integrating complex systems dynamics and behavioural insights into our approaches with agent-based modelling and network analysis.
Yet, we also must recognise that economics does not have a monopoly on truth. In many countries, we have seen the bottom 40% left behind and their potential wasted. Only by recognising that mistakes have been made can we begin to build a new socio-economic narrative that goes beyond the old tropes of growth first, redistribution later; and beyond aggregate economic measures like GDP.
The false certainty provided by an all too literal interpretation of models needs to be balanced by a humbler, more grounded approach to economics that draws on the lessons of other disciplines like physics, biology, psychology, sociology, philosophy and history, to feed a richer, more nuanced policy discussion.
If we want to save open markets and globalisation, we need to re-write the rules of the economic system to make them work for everyone. We also need to bring back that much neglected concept, fairness, to the heart of the policy debate.
The role of the State is absolutely key to this discussion. We need to redefine and reimagine its role, to ensure that it is prepared for contemporary opportunities and challenges and is set up to empower people.
To begin with, we need a new approach to welfare that goes beyond just mitigating risk. The work of behavioural economists like Amos Tversky and Daniel Kahneman has shown us that people are not ‘risk averse’ so much as ‘loss averse’. If we are to create entrepreneurial societies that encourage everyone to fulfil their productive potential, we need to deploy this insight via welfare policy to reduce the consequences of failure.
To be sure, providing people with a social safety net is vital, but it is not enough. We need to move beyond this approach, to create an empowering State that serves its citizens as a launch pad by furnishing them with capacity enhancing assets.
Such a State would also seek to prevent disadvantage cascading down generations. It would recognise that its role was not simply to remove barriers to opportunities, but also to furnish people with the capacity to seize them. Crucially, it must see redistribution and social expenditure in vital areas like education and healthcare not as operating costs, but as investment in our most valuable assets – people.
In practice, this would mean deploying a coherent approach to intervention across individual’s life-cycles to provide high-quality early years education, comprehensive training throughout adult life, income and skills support to help people transition between jobs and perhaps even a universal basic income. But it wouldn’t stop there, because, when all is said and done, there is more to life than money. The key role of the State should be to support people helping them to have meaningful lives.
However we also need to face up to the big global challenges of dealing with concentration of wealth, international tax and competition issues, the mobility of tax bases, labour rights and regulatory standards. We need to ensure that globalisation is based on international rules that are respected. We have to create trade agreements that are comprehensive and, crucially, also inclusive. We must hold global firms to higher standards of responsible business conduct. OECD work on taxes, responsible business conduct, due diligence and anti-corruption will be key to ensuring better functioning global rules.
To restore the faith and trust of people in the role of governments, a priority for an empowering State must be to focus on the bottom 40%, who risk being trapped in a cycle of deprivation and lack of opportunity. We need to deploy targeted policies to help these groups access quality education, healthcare and the benefits of innovation, finance, and entrepreneurship.
Of course, giving people the chance to make the most of these opportunities is reliant on a thriving business sector. The State has a role to play to ‘crowd in’ financing in young and innovative sectors and in investing in basic R&D that will see positive spill-overs into countless other domains. We also need policies which support the diffusion of innovation through the economy, ensuring a level playing field for incumbents and challenger firms, enabling small companies to access finance, technology and high-quality skills.
Adopting such an approach will require some changes to the way we design and implement policies, with particular care taken to avoid the entrenchement of vested interests. One aspect of this will be ensuring that policy recommendations take regional and local circumstances into account. Regions and cities have a key role to play by adapting economy-wide policies to the characteristics of local communities, as well as by promoting local policies that reduce or remove the barriers limiting access to opportunities.
There is also a dire need to overcome traditional ‘silo-based’ approaches to policy making. This will require a renewed ‘whole-of-government’ push, where different government departments, agencies and ministries work together to deliver joined-up solutions as part of a coherent systemic approach.
The challenge before us is clear. Succeeding in our endeavours will demand a new approach, where political parties, and leaders from civil society and business come together to recognise that the long-term prosperity of a society depends on the success of its individual parts.
Together we can make inclusive growth a reality.
[i] Gallup World poll 2016
[ii] OECD Income Distribution Database
[iii] OECD Statistical Database
[iv] OECD (2016, forthcoming), calculations from PIAAC
[v] OECD (2015), In it Together
[vi] OECD (2015) The Future of Productivity, OECD Publishing, Paris
As well as Gabriela Ramos’s article, Inclusive growth: The state of the debate 2017 contains the following:
Welcome to the future of the political economy Rt Hon. Liam Byrne MP, Chair of the APPG on Inclusive Growth and Labour Member of Parliament for Birmingham Hodge Hill
Inclusive growth, the challenge of our times Professor Colin Hay, Co-Director of the Sheffield Political Economy Research Institute (SPERI)
Inclusive growth, a new agenda George Freeman MP, Conservative Member of Parliament for Mid Norfolk; Chairman of the Prime Minister’s Policy Board and Chairman of the Conservative Policy Forum
Inclusive growth: Turning aspiration into action Richard Samans, Member of the Managing Board, World Economic Forum
Globalisation and inclusive growth: the challenges for government and business Rt Hon. Dame Caroline Spelman MP, Vice-Chair of the APPG on Inclusive Growth and Conservative Member of Parliament for Meriden
The difference between economic growth, and economic growth for all Alison McGovern MP, Vice-Chair of the APPG on Inclusive Growth, Labour Member of Parliament for Wirral South
Social policy: a vital partner in any inclusive growth strategy Dr Hannah Lambie-Mumford, Research Fellow, Sheffield Political Economy Research Institute (SPERI)
We need to rethink economic policy to bring prosperity to the whole country Michael Jacobs, Director of the IPPR Commission on Economic Justice
Inclusive growth at city region level: a perspective from Greater Manchester Professor Ruth Lupton, Head of the Inclusive Growth Analysis Unit, The University of Manchester
Two cheers for lower food prices: Good for poor consumers and not the real issue for farmers
Jonathan Brooks, Head of Agro-food Trade and Markets Division, OECD Trade and Agriculture Directorate
What’s the difference between a Mississippi mud pie and a Haitian mud cake? The answer is mud. The mud pie is a dessert containing vast amounts of chocolate. The mud cake is literally that, mud with some salt and margarine mixed in. At one time, only pregnant women in poor areas ate mud cakes, in the hope of getting some calcium or other minerals. But following the sudden rise in food prices in 2008, mud cakes became a staple for thousands of Haitians who couldn’t afford anything else. Haiti is one of the poorest countries on Earth, but its hungry were not alone in their misery. Food riots broke out in Africa, Asia, the Middle East and Latin America and the Caribbean.
International crop prices of crop started falling in 2012. The OECD-FAO Agricultural Outlook 2016-2025 projects that over the next ten years, real prices of most agricultural products will decline slightly, but remain higher than they were prior to the 2007-08 price spike. Fundamentally, supply growth is expected to keep pace with demand growth, as population growth slows and the per capita demand for food staples becomes increasingly saturated in many emerging economies.
These projections assume continuing low oil prices and a sluggish recovery of the global economy, with abundant global food stocks to keep markets relatively stable. But merely a repetition of historic variability in oil prices, economic growth, and yields may well lead to another price spike within ten years. In addition, the uncertainties associated with climate change are starting to mount.
A major question is whether lower prices are to be welcomed, in particular whether they will benefit the world’s poor and hungry. Even before the food price crisis, when real food prices were lower than ever before, about 900 million people were not getting enough to eat (FAO). The 2007-2008 crisis was projected to add significantly to these numbers, given that the poor spend a relatively large share of their budgets on food, while the poorest farmers in the world are typically net buyers of food.
Fortunately, the worst fears were not realised and the total number of undernourished has continued to decline, to below 800 million in 2015. The impact of international price shocks was cushioned by three factors. First, domestic food markets in the poorest countries are often only partially integrated with international markets because they don’t have the ports, roads, storage facilities and other infrastructure required. This ultimately impedes development, but provides some isolation from international shocks. Second, many countries implemented policies to protect the incomes of the poor. The use of cash transfers seems to have been particularly effective at sheltering the worst off from the impact of price rises. Third, the recession of 2008-09 resulted in only mild slowdowns in most developing countries, and many of the poor could still afford to buy food.
There is an argument that while poor consumers suffer from food price rises in the short term, in the longer term farmer need higher prices for it to be profitable for them to engage with markets, while increased output generates further benefits in terms of increased employment and higher wages. However, this line or argument misrepresents the development process by failing to take account of the pressures imposed by market competition.
In developed countries, farmers who can continually reduce their costs, essentially thanks to technology such as adopting new crop varieties or exploiting economies of scale, will make profits. These profits will persist until other farmers catch up and prices fall from the cumulative impact on supply. Farmers who cannot adapt will of course be unprofitable at lower prices. This is no more than the competitive dynamic that we see in other sectors.
In developing countries, competitive pressures are mild or non-existent for subsistence farmers who are only weakly integrated with markets, but they kick in as infrastructure and local markets become more developed. Of course, few would suggest that the best way of helping developing country farmers is by failing to build rural roads, yet tariff walls and price protection can have just the same effect.
As farmers become more integrated with markets, higher long term prices reflect little more than the costs of productive factors (land, labour and capital), which means that the opportunities for profit are still confined to innovative farmers.
For farmers in both developed and developing countries, prices are therefore not the real issue. What matters is productivity. Higher rates of productivity growth lower prices in a way that is simultaneously good for consumers and beneficial for those farmers who are driving the productivity gains. “Laggards”, as Willard Cochrane termed them in 1958, face the choice of either improving their competitiveness or shifting into other economic activities.
Focusing on prices as the route towards higher incomes is in fact distracting because prices ultimately need to reflect the scarcity of natural resources. In many countries, for example, there is no pricing of water. That keeps costs low and contributes to lower prices, but also fosters unsustainable farming practices that will harm both producer and consumers in the longer run.
Lower prices are welcome to the extent that they derive from sustainable productivity growth. But from the standpoint of farmers, and the sector as a whole, prices are the wrong variable to focus on. As Paul Krugman put it: “Productivity isn’t everything, but in the long run it is almost everything”.
Food Security and the Sustainable Development Goals Jonathan Brooks on OECD Insights
Florence Wolff, OECD Statistics Directorate
Economic growth (GDP) always gets a lot of attention, but when it comes to determining how people are doing it’s interesting to look at other indicators that focus more on the actual material conditions of households. Let’s focus on a few alternative indicators to see how households in the Netherlands are doing.
GDP and household income
Real household disposable income per capita increased at a slower pace than real GDP per capita in Q3 2016. Whereas real GDP per capita increased by 0.6 % from the previous quarter (the index increased from 102.2 in Q2 2016 to 102.8 in Q3 2016), real household income increased by 0.4% (the index increased from 97.1 in Q2 2016 to 97.5 in Q3 2016). The rise in household disposable income in Q3 2016 was driven by an increase in compensation of employees but this gain was somewhat offset by an increase in taxes, which explains the drop in the net cash transfers to households ratio (chart 2).
Chart 1 also provides a longer-term perspective and shows that Dutch households have yet to recover to their pre-crisis level of household income, which means that households have less purchasing power now than they had before the crisis. Also of note is that household income has been more volatile than GDP and has been trending upward since Q3 2014.
The divergent patterns between household disposable income and GDP are often related to changes in net cash transfers to households (chart 2), from government as well as from pension funds. For instance, government intervention that cushioned households’ material conditions in Q2 2009 resulted in a large increase in net cash transfers to households during that quarter (seen in chart 1 as a sharp increase in real household income in Q2 2009 compared with a slight drop in GDP). Since then, net transfers have been trending downwards slightly, mainly because of government acting to consolidate its finances.
Confidence, consumption and savings
Household disposable income is a meaningful way to assess material living standards, but to get a fuller picture of household material well-being one may also want to look at households’ consumption behaviour. Consumer confidence (chart 3) continued to rise in Q3 2016 (the index increased from 100.4 in Q2 2016 to 100.8 in Q3 2016). Coupled with a rise in real household income, this boosted real household consumption expenditure per capita by 0.7% in Q3 2016 (the index increased from 96.9 in Q2 2016 to 97.6 in Q3 2016) (chart 4). Real household consumption expenditures have been trending up since Q3 2014, in line with a similar trend in household income; however, Dutch households are still buying less goods and services per capita than they were before the crisis.
The households’ savings rate (chart 5), which shows the proportion that households are saving out of current income, was relatively stable at 12.3% in Q3 2016 indicating that Dutch households chose to spend the increase in their income in Q3 2016 on goods and services while preserving the level of their savings. Like in many other OECD countries, it is worth noting that Dutch households increased their savings during the economic crisis (with a peak at 16.9% in Q2 2009) – as a buffer to the deterioration in financial markets and the increased uncertainty over future income -, and that their savings rate has still not dropped back down to the levels observed before the crisis, indicating that Dutch households remain cautious.
Debt and net worth
The households’ indebtedness ratio, i.e. the total outstanding debt of households as a percentage of their disposable income, may reflect (changes in) financial vulnerabilities of the household sector and provides a useful yardstick to assess their debt sustainability. In Q3 2016, household indebtedness was 255 % of disposable income, slightly above the minimum reached in Q1 2016 (254.7%), yet remaining one of the highest levels among OECD countries. One reason for the high debt levels in the Netherlands relates to generous tax incentives on mortgage loans which constitute the bulk of household debt. Debt levels had been declining for several years because households redeemed relatively large amounts and took up fewer new mortgages. In the more recent period however, the decrease of the debt ratio has ended, mainly due to the revival of the housing market and the low interest rates.
When assessing households’ economic vulnerabilities, one should also look at the availability of assets, preferably taking into account both financial assets (saving deposits, shares, etc.) and non-financial assets (for households, predominantly dwellings). Because information on households’ non-financial assets is generally not available on a quarterly basis, financial net worth (i.e. the excess of financial assets over liabilities) is used as an indicator of the financial vulnerability of households.
In Q3 2016, financial net worth of households was at its highest level, at 477.4% of disposable income (chart 7) – an increase of 7 percentage points from the previous quarter, and of 214.1 percentage points since 2010. These levels are amongst the highest among the OECD. The increase in Dutch households’ financial net worth in Q3 2016 mainly reflects the increase of pension entitlements (a large proportion of Dutch households’ wealth). Not counting assets related to pensions, the financial net worth of Dutch households was 15.5% of disposable income in the third quarter of 2016. All in all, the increase in assets significantly outpaced the declining trend in households’ debt (chart 6).
The unemployment rate and the labour underutilisation rate (chart 8) also provide indications of potential vulnerabilities of the household sector. More generally, unemployment has a major impact on people’s well-being. In Q3 2016 the unemployment rate dropped to 5.8% confirming a downward trend observed since Q1 2014 when it reached a maximum of 7.8% in the period observed. The labour underutilisation rate, which takes into account underemployed workers and discouraged job seekers, is on average a little more than two times the size of the unemployment rate, indicating unmet aspirations among Dutch workers to work more. It is interesting to note that part-time employment is a long-standing characteristic of the labour market in the Netherlands: it is the OECD country with the highest part-time employment rate – with more than 35% of employed people working part-time – and where the share of involuntary part-timers (wanting full-time work) is low. This indicates the Dutch people’s preference for part-time work arrangements, in particular Dutch women, and therefore does not affect much the labour underutilisation rate.
One should keep in mind that households’ income, consumption and savings may differ considerably across various groups of households; the same holds for households’ indebtedness and (financial) net worth. The OECD is working on these distributional aspects and preliminary results can be found here and here. In addition, the Dutch Central Bureau of Statistics has information on income, consumption, and wealth broken down by household characteristics.
Like in many other countries, the economic crisis affected Dutch households who still haven’t recovered their pre-crisis income and consumption levels. Yet, overall, the third quarter of 2016 saw an increase of Dutch households’ material well-being, with expanding income and consumption per capita while their savings remain stable and unemployment continued to decrease.
However, to fully grasp people’s overall well-being, one should go beyond material conditions, and also look at a range of other dimensions of what shapes people’s lives, as is done in the OECD Better Life Initiative.
For many years, OECD has been focusing on people’s well-being and societal progress. To learn more on OECD’s work on measuring well-being, visit the Better Life Initiative.
Interested in how households are doing in other OECD countries? Visit our household’s economic well-being dashboard.
Alice Pittini, OECD Directorate for Employment, Labour and Social Affairs
A home is meant to be a safe and secure shelter for individuals and families, fulfilling the basic need to have a roof over your head. Yet a home is also a tradable asset, an investment from which there’s potentially big money to be made, or to be lost as the global financial crisis has shown us. Although the crisis led to a general drop in house prices in the short term, house prices have since picked up again in most countries and today they are growing faster than incomes in Austria, Canada, Germany, Luxembourg, New Zealand, Sweden, Switzerland, the United Kingdom and the United States.
Particularly in attractive metropolitan areas, house prices and rents are soaring, with a negative impact on access to opportunities and jobs, especially for people on low incomes. For example Auckland, New Zealand, has one of the most heated housing markets on the planet. Despite a recent reform increasing the taxation of housing property transfers, ‘flipping’ – i.e. the practice of buying properties and re-selling it at a much higher price over a short time span – has become increasingly common, with some properties reported as having been sold up to five times its initial value in four days. At the same time the capital is faced with an unprecedented housing affordability crisis, which led the Government to announce for the first time in its 2016 budget a four-year programme for emergency housing. Increasing house prices make it impossible for people to buy a home and step onto the property ladder, particularly young people. At the same time big cities and capitals are also faced with a shortage of affordable rental housing, and the spread of Airbnb and other short-term letting agencies is further aggravating the situation.
As a result, housing costs constitute the single highest expenditure item from the household budget, with an increase in the OECD average share of housing-related expenditure from 20.3% in 2000 to 22.9% in 2013. Housing costs represent a substantial financial burden for low-income households in many OECD and EU countries. For example, in Chile, Croatia, Greece, Portugal, Spain, the United Kingdom and the United States more than half of poor tenants (those in the bottom fifth of the income distribution) spend more than 40% of their disposable income on housing costs. Furthermore, in nearly all countries, the overcrowding rate increases as household income decreases, with countries like Hungary, Mexico, Poland and Romania experiencing overcrowding rates that are over 40% among poor households. Lack of sufficient living space for household members can significantly hamper wellbeing, with negative effects on health and on child outcomes. Worryingly, poor children are most prone to living in overcrowded dwellings, compounding their economic disadvantage and hurting their chances of succeeding in life compared with children from richer backgrounds.
Moreover, there are many people who have no permanent roof over their heads at all. Even though the homeless make up less than 1% of the total population in OECD countries surveyed, that is still a significant number of people without a home. The United States reports 564 708 homeless people, and Australia, Canada and France all report having over 100 000 in their most recent surveys. Progress on this front has been uneven in recent years, with the number falling in Finland and the United States, but increasing in Denmark, England, France, Ireland, the Netherlands and New Zealand.
Improving access to affordable housing, particularly for low-income households and those in need, is an important policy objective across OECD countries. What can countries do to meet this goal? There is no one-size-fits-all solution, but countries are implementing a range of different instruments. Most countries have housing allowances and/or social housing arrangements as well as different kinds of financial support towards homeownership. Indeed, housing allowances are now one of the most widely used instruments of housing support. At 1.4% of GDP, public spending on housing allowances in OECD countries is by far the highest in the United Kingdom, followed by France and Finland. Most countries also provide social rental housing (either directly or increasingly through supporting not-for-profit housing organisations). However, in a number of countries there has been a decline in the amount of social rental housing available, partly due to the slowdown in construction and privatisation of social housing, such as in Germany and the United Kingdom. That being said, social rental accommodation still represents over 20% of total housing in Austria, Denmark, and the Netherlands.
Grants, subsidised mortgages and mortgage guarantees are common ways to help low- and middle-income people buy homes. Chile is the country with the largest share of support to home buyers through grants, and most other countries are aiming to ease access to mortgage credit. Tax relief is another frequently used instrument for homeownership support: mortgage interest deductibility alone costs 0.5% of GDP in the United States and 2.1% of GDP in the Netherlands. However, the extent that measures supporting home buyers really target those in need varies across countries and schemes. The OECD’s new Affordable Housing Database helps countries monitor access to good-quality housing and provides governments with clear evidence to design the best combination of policy options to tackle homelessness, unaffordable housing, and overcrowding.
The perennial curmudgeon H.L. Mencken is famously misquoted as saying: “For every complex problem there is an answer that is clear, simple, and wrong.” The ability to simplify is of course one of our strengths as humans. As a species, we might just as well have been called homo reductor—after all, to think is to find patterns and organize complexity, to reduce it to actionable options or spin it into purposeful things. Behavioural economists have identified a multitude of short-cuts we use to reduce complex situations into actionable information. These hard-wired tricks, or heuristics, allow us to make decisions on the fly, providing quick answers to questions such as ‘should I trust you?’, or ‘Is it better to cash in now, or hold out for more later?’ Are these tricks reliable? Not always. A little due diligence never hurts when listening to one’s gut instincts, and the value of identifying heuristics is in part to understand the limits of their usefulness and the potential blind spots they create. The point is, there is no shortage of solutions to problems, whether we generate them ourselves or receive them from experts. And there’s no dearth of action plans and policies built on them. So, the issue isn’t so much how do we find answers?—we seem to have little trouble doing that. The real question is, how do we get to the right answers, particularly in the face of unrelenting complexity?
There’s a nomenclature in the hierarchy of complexity as well as proper and improper ways of going about problem solving at each level. This is presented in the new publication “From Transactional to Strategic: Systems Approaches to Public Challenges” (OECD, 2017), a survey of strategic systems thinking in the public sector. Developed by IBM in the 2000s, the Cynefin Framework posits four levels of systems complexity: obvious, complicated, complex and chaotic. Obvious challenges imply obvious answers. But the next two levels are less obvious. While we tend to use the adjectives ‘complicated’ and ‘complex’ interchangeably, the framework imposes a formal distinction. Complicated systems/issues have at least one answer and are characterised by causal relationships (although sometimes hidden at first). Complex systems are in constant flux. In complicated systems, we know what we don’t know (known unknowns) and apply our expertise to fill in the gaps. In complex systems, we don’t know what we don’t know (unknown unknowns) and cause and effect relations can only be deduced after the fact. That doesn’t mean one can’t make inroads into understanding and even shaping a complex system, but you need to use methods adapted to the challenge. A common bias is to mistake complexity for mere complication. The result is overconfidence that a solution is just around the corner and the wrong choice of tools.
Unfortunately, mismatches between organisational structures and problem structures are common. For example, in medicine, without proper coordination, two specialists can work at cross-purposes on a single client. While the endocrinologist treats the patient’s hyperglycaemia (a complicated system) with pharmaceuticals and diet, the nephrologist might treat her kidney failure (also a complicated system) through a separate set of pharmaceuticals and dietary recommendations. Not only can these two pursuits be at odds (what may be good for the kidneys may be bad for blood sugar, for example), but both treatments can have effects on other systems of the body that may go unmonitored. Understanding these interactions and those of each treatment on the body’s individual systems as well as on the body as a joined up, holistic entity (which it certainly is) would be the broader, complex and more desirable goal.
The body politic may not be so different. Institutions have specific and sometimes rather narrow remits and often act without a broader vision of what other institutions are doing or planning. Each institution may have its specific expertise yet few opportunities for sustained, trans-agency approaches to solving complex issues.
Thus, top-down, command-and-control institutional structures breed their own resistance to the kind of holistic, whole-of-government approach that complex problems and systems thinking require. This may be an artefact of the need for structures that adapt efficiently to new mandates in the form of political appointees overseeing a stable core of professional civil servants. Also, the presence of elected or appointed officials at the top of clearly defined government institutions may be emblematic of the will of the people being heard. Structural resistance may also stem from competitive political cycles, discouraging candidates to engage in cycle-spanning, intertemporal trade-offs or commit to projects with complex milestones. In a world of sound-bites, fake news and scorched earth tactics, a reasoned, methodical and open-ended systems approach can be a large, slow-moving political target.
And that’s the challenge of approaching complex, ‘wicked’ problems with the appropriate institutional support and scale—there must be fewer sweeping revolutions or cries of total failure by the opposition. Disruption gives way to continuous progress as the complex system evolves from within. It is a kind of third way that eschews polarization and favors collaboration, that blends market principles with what might be called ‘state guidance’ rather than top-down intervention.
Global warming, policies for ageing populations, child protection services and transportation management are all examples of complex systems and challenges. To take the last example, in the US, traffic congestion is estimated to cost households USD 120 billion per year and 30 billion to businesses (OECD, 2016). But where to start? With a massive infrastructure building spree? Where would you add additional capacity? How much would you invest in roads, and how much in pubic transportation? What are the relative advantages of toll roads vs increases in gas or vehicle taxes? What are the likely effects of gas price fluctuations and the onset of fleets of electric, self-driving cars? What about the technologies that have yet to be invented? And what will be the impact of policies on income inequality, gender equality, the environment and well-being? Finally, how do you efficiently join up levels of government and all the stakeholders potentially involved?
Complex systems are hard to define at the outset and open ended in scope. They can only be gradually altered, component by component, sub-system by sub-system, by learning from multiple feedback loops, measuring what works and evaluating how much closer it takes you to your goals.
General Systems Theory (GST), that is, thinking about what is characteristic of systems themselves, sprang from a bold new technological era in which individual fields of engineering were no longer sufficient to master the breathtaking range of knowledge and skills required by emerging systems integration. That know-how gave us complex entities as fearful as the Intercontinental Ballistic Missile and as inspiring as manned space flight. Today, the world seems to be suffering from complexity fatigue, whose symptoms are a longing for simple answers and a world free of interdependencies, with clear good guys and bad guys and brash, unyielding voices that ‘tell it like it is’, a world with lines drawn, walls built and borders closed. Bringing back a sense of excitement and purpose in mastering complexity may be the first ‘wicked’ problem we should tackle.
In the meantime, we need to find a way to stop approaching complex challenges through the limits of our institutions and start approaching them through the contours of the challenges themselves. Otherwise too many important decisions will be clear, simple and wrong.