Adrian Blundell-Wignall, Special Advisor to the OECD Secretary-General on Financial and Enterprise Affairs, argues that key corporate and financial issues must be addressed if globalisation is to work better for all. These issues are examined in the new 2017 OECD Business and Finance Outlook.
Today the debate rages about whether the decline in living standards is due to the effects of globalisation or to poor domestic policies. Both have surely played a role. But the problems often associated with globalisation (inequality, the hollowing out of the middle class, employment of less-skilled workers in advanced countries, etc.) do not originate from “openness” as such. The problem is that not all countries are open to the same degree and the playing field in the cross-border activities of businesses is not level.
Since entering WTO in 2001, China has quickly become the largest exporting nation in the world, with 14% of merchandise exports and 18% of manufacturing. Hong Kong (China), Singapore and Korea together export as much as the United States or Germany. Companies may also set up production abroad, closer to foreign markets. China has increasingly joined this model too, and is now responsible for 11% of world merger and acquisition (M&A) outflows in 2016. In recent years it has been switching away from M&A in oil and gas much more towards high technology companies.
In parallel, the number of state-owned enterprises (SOEs) among the Fortune Global 500 companies grew from 9.8% in 2005 to 22.8% in 2014. Most are domiciled in Asia, and the largest among them are Chinese banks. Distortions, resulting from subsidies and other advantages accorded to SOEs, often coming via cheaper finance from SOE banks, are important. But strong government ownership of shares in emerging economies is present across all industrial sectors. Emerging-market SOEs have greatly contributed to the current excess capacity in key materials, energy and industrial sectors, contributing to a decline in the average return on equity in many sectors and countries.
No matter where firms sit in the value chain, penetration of markets by emerging economies evokes responses from companies to move further up the value chain – forcing them to restructure and enhance technology to remain competitive. If they don’t take advantage of global economies of scale, they will in any case find themselves facing strong competition from other successful firms, whether at home or abroad. The fastest productivity growth companies are also those that take advantage of foreign sales—whether by exporting or by setting up subsidiaries that produce abroad to serve foreign markets.
There is nothing wrong with success in cross-border activities—provided of course that success is not based on unfair competition.
The leaps in productive potential can be enormous, but all of this requires investment, innovation and new technology. The company data shows that it makes no sense to try to separate these things out. The companies at the forefront of innovation and technology (as reflected in productivity growth) are often multinationals engaged in trade and foreign direct investment—they buy and sell business segments, set up to produce abroad and the export from multiple global production bases.
The losers in this story—those workers affected by reduced hours, innovative work contracts and compressed wages—belong to companies that are scattered within their own industry. It is not that the middle class as such is being hollowed out but that these ranks are swelled by those that work for less successful companies forced to restructure or exit.
Some large emerging economies have managed to pull millions of people out of poverty—and the long-term future of every country lies with continued success in this regard. Competition too is to be welcomed. Like any sporting match, let the best teams win. But also like any sporting match, the game needs to be played with the same rulebook. If the same rules do not apply to all, then fairness is put into question. If fairness is questioned, then sustainability of open trade and investment in the global economy is also put at risk.
Openness promotes opportunities for business. But the governance of trade, international investment and competition does not use a common rule book. Without this, the size and cost of the other policies needed to protect the losers will continue to be burdensome and possibly beyond reach.
This year’s OECD Business and Finance Outlook discusses many aspects of the lopsided nature of the world economy, among them: the growing role of state-owned enterprises (SOEs), uneven financial regulations, distorting capital account and exchange rate management, cross-border cartels that translate into benefits for companies and shareholders rather than into lower consumer prices, collusive behaviour in investment bank underwriting practices, corner-cutting responsible business conduct, and the bribery and corruption that distort international investment and misallocate resources.
We need improved rules of the game and enhanced international co-operation. OECD standards can play a leading role in shaping this conversation, and promoting a level playing field that ensures the benefits of globalisation are shared by all. This requires a commitment by economies participating in globalised markets to a common set of transparent principles that are consistent with mutually-beneficial competition, trade and international investment across a range of areas.
OECD Business and Finance Outlook 2017 is available at: http://oe.cd/BusinessAndFinanceOutlook2017
OECD Business and Finance Scoreboard 2017 is available at: www.oecd.org/daf/OECD-Business-and-Finance-Scoreboard.htm
By Sharan Burrow, General Secretary, International Trade Union Confederation (ITUC)
Ambitious action on climate is an imperative. The G20 leaders have a chance to reinforce the Paris Climate Agreement and raise ambition with concrete measures to ensure significant progress towards net zero economies and reap the benefits of investment now in jobs and economic growth.
There can be no doubt that a zero-carbon world is possible, but critical choices need to be made about how we manage the transition. The trade unions fought for the demand of a just transition with the result that the Paris Agreement included the requirement that national responses ensure just transition measures.
The OECD report Investing in Climate, Investing in Growth adds to the volume of evidence that there is economic advantage, there are jobs and we can secure the future for humanity.
However, the sectoral and economic transformation we face is on a scale and within a time frame faster than any in our history. And increasingly companies and investors are acting to avoid risk and build the foundations for a zero-carbon world.
Notwithstanding, stranded workers and stranded communities will result if inclusive planning which includes just transition measures does not feature in national development plans along with industry and investment strategies. We can work to prevent fear, opposition even inter-community and generational conflict if unions and community are consulted and sustainable jobs and decent work result.
People need to see a future that allows them to understand that, despite the threats, there is both security and opportunity.
The shift is on in energy. Renewable energy employed 8.1 million people around the world in 2015. And investment trends in this sector are beginning to outstrip that in fossil fuels.
But we cannot accept that workers and communities dependent on fossil fuels will be abandoned as investment shifts. These workers and their communities brought us the prosperity of today. This is why industrial transformation should generate both new sources of energy with new companies and transparent plans for existing companies to transition to renewable energy, energy storage, and energy efficiency, with the guarantee of decent work. To see new energy jobs paid a fraction of traditional energy jobs is not acceptable, and breaking down labour rights and standards is not the answer.
Beyond those vulnerable groups it is also about new industrial processes, new skills for new jobs, new investment and the opportunity to create a more equal economy that helps to reduce emissions, improves resilience and ensures the solidarity of compensation for loss and damage for those on the front lines of extreme weather events, water shortages or changing seasons.
Facilitating the social dialogue that allows government, business, trade unions and civil society groups to collaborate in national, industry and community planning for transition and decent work is the key. Clean technologies, energy efficiency, retrofitting, infrastructure built to green standards, investment, information technology and digital distributional systems, and demand management of all sectors inclusive of upstream and downstream supply chains: this is the imperative. It must be a just transition that leaves no one behind.
For coal and other fossil fuel companies in communities dependent on coal fired power stations, corporate transition with investment in new energy, new infrastructure, new industries and new jobs are vital. And some responsibility for community renewal needs to be enshrined whether directly or by exit funding arrangements.
For cities, the job opportunities are significant in green construction and retrofitting, electric mass transit and related services. It requires long-term investment, but creates jobs and drives growth.
For industry, renewable energy must be supplemented with cleaner industrial processes.
For workers, collective bargaining will ensure workers the essential support when there will be a need for redeployment, re-skilling and redeployment. Pensions for older workers must be secured. Sharing prosperity based on resource productivity must become a new tool for ensuring just wages and decent work within planetary boundaries.
For parents everywhere, a just transition can ensure strong communities and quality jobs for their sons and daughters.
There are good examples of progress emerging. And there are models for investment vehicles to secure progress but while businesses, unions and communities are acting, there are many gaps. The absence of appropriate government policies, funds and structures for a just transition makes it hard for workers, employers and communities to move forward on their own. In particular the need for targeted investment in infrastructure, regional redevelopment and social protection requires the broader scope and mandate that governments bring. Without more assertive action from governments, we risk seeing many more examples of unjust transition, with stranded workers and communities.
For governments to fulfil the Paris Climate Agreement, governments should ensure that job-related aspects of climate policies are part of their decarbonisation pathways. They should establish plans and strategies for a just transition.
This requires the urgent establishment of formal social dialogue mechanisms so that just transition strategies can be democratically designed for all levels–community, region, company and sector, and country. The ITUC has established a Just Transition Centre to support this vital social dialogue.
Just transition plans should be based on the ILO’s just transition guidelines.
And governments should establish just transition funds in all countries and for vulnerable communities, regions and sectors. The funds will support the implementation of just transition plans.
Just transition funds should cover investment in education, reskilling and retraining; extended or expanded social protections for workers and their families; and grant, loan and seed capital programmes for diversifying community and regional economies.
The G20 Financial Stability Board’s Recommendations of the Task Force on Climate-Related Disclosures should be expanded to include disclosure of just transition plans for vulnerable workers and communities, consistent with disclosure of company plans for decarbonisation and management of climate risk.
The design of public and blended investment in low emissions infrastructure with the aim of creating decent, high value work throughout the value chain and with a focus on vulnerable communities and regions.
Investment in public transport, renewable energy and appropriate grid and storage infrastructure, zero emissions buildings, and infrastructure for electric vehicles should be prioritised.
When 64% of people in 15 of the G20 countries in the ITUC Global Poll 2017 want their governments to do more to promote a just transition to a zero-carbon economy, the mandate is there for governments to act.
The G20 group of countries can set the direction through both individual and collective action. This is a time for leadership, and where there are reluctant leaders other must simply set the pace.
References and further reading
The Just Transition Centre is at www.ituc-csi.org/just-transition-centre
The OECD report Investing in Climate, Investing in Growth, released on 23 May, provides an analysis of how low-emission and climate-resilient development can be achieved without compromising economic growth, competitiveness or well-being. Chapter 6 of the report provides a detailed discussion of just transition issues and how governments can manage them.To read the publication, synthesis report and related material visit: www.oecd.org/environment/cc/g20-climate/
Esther Bolton, OECD Statistics Directorate
GDP growth 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 Ireland are doing.
GDP and household income
Real household disposable income per capita grew at the same pace as real GDP per capita in Q4 2016, both increasing 2.3% from the previous quarter. However, that does not mean that real GDP and real household income always grew in tandem as shown in chart 1. Real household income levels in Ireland only recently returned to their pre-crisis level (the index was 103.5 in Q4 2016 from a baseline value of 100 in Q1 2007 before the economic crisis), following more than 7 years below that level. On the other hand, real GDP per capita is up more than 27% since Q1 2007 (the index was 127.3 in Q4 2016) due to the remarkable growth rate seen in Ireland in Q1 2015.
What occurred in Ireland in 2015 reflects the growing importance of global value chains, combined with the increasing importance of “intangible assets” used in production, as multinational enterprises (MNEs), in particular, have sought to maximise profits and minimise costs, including through optimisation of their global tax burden, by (re)allocating some of their economic activities in different parts of the world. In 2015, MNEs relocated intangible assets to Ireland, where these assets are being used by Irish enterprises (including Irish affiliates of foreign MNEs) to generate value added.
This is an excellent example of why GDP should not be interpreted as an indicator of the purchasing power or the material well-being of a country. GDP is primarily a gross measure of economic activities on the economic territory of a country, and of the income generated through those activities. High levels of GDP thus do not necessarily mean high levels of income flowing to the residents nor does it mean that their growth rates will be similar(read this post for an explanation on Irish GDP large increase in 2015). A major reason is that some of the income generated by production may be repatriated to non-residents, for example in the case of income generated by affiliates of multinational enterprises.
The divergence between GDP and household disposable income can clearly be seen in Chart 1 with real GDP per capita growing sharply (by 21.3% in Q1 2015 from the previous quarter), while real household income increased by only 1.6%.
The presence of a significant number of foreign affiliates of MNEs (responsible for around half of Ireland’s business sector GDP, that is to say, excluding agriculture, most self-employment, the public sector and some financial services activity) is not the only reason why there can be a divergence between the growth of household income and GDP. Government interventions can also play a role.
As GDP was contracting throughout the quarters of 2008, household income was sustained by increased unemployment benefits and other social benefits received by households. As a result, between Q1 2008 and Q4 2008, the net cash transfers to households’ ratio showed a sharp increase; see Chart 2. Since Q4 2010 the ratio has trended down.
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) trended upward, from a low seen in Q1 2009, until Q4 2015 when it reached its peak (104.7). Since then it has been declining to 103.0 in Q4 2016, yet still 10 points higher than Q1 2009.
Despite the recent downward trend in consumer confidence, the increase in household income helped boost real household consumption expenditure per capita (chart 4), which rose 0.5% in Q4 2016 from the previous quarter (from 95.7 in Q3 2016 to 96.2 in Q4 2016). Since Q1 2013 real household consumption expenditure per capita has increased in line with developments in real household income. However, Irish households are still buying less goods and services than before the crisis.
Because household income increased more than final consumption expenditure, the households’ savings rate (chart 5), which shows the proportion that households are saving out of current income, increased 1.2 percentage points to 13.5% in Q4 2016. The ratio has been trending up since Q1 2016, suggesting that households remain cautious about their future income.
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.
The household indebtedness ratio dropped considerably since the crisis, by nearly 75 percentage points, from its highest point in Q4 2009 (230% of disposable income, compared with 155 % of disposable income in Q4 2016). This corresponds to the largest drop in the debt ratio seen amongst OECD countries. The decline was driven by a decrease in loans (primarily mortgages) and rising household income.
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, financial net worth (i.e. the excess of financial assets over liabilities) is used as an indicator of the financial vulnerability of households.
In Q4 2016, households’ financial net worth was stable at 214 % of disposable income (chart 7). Since Q1 2009, it has been trending up driven primarily by the reduction in household debt (as seen in chart 6) and increasing financial assets (mainly pension assets and currency and deposits). Between 2009 and 2016, household financial net worth increased by around 145 percentage points. However, some caution is needed interpreting this figure since financial net worth does not take into account housing assets which saw spectacular growth due to a bubble in house prices until it burst in 2007 followed by sharp declines afterwards.
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. The unemployment rate was 7.1% in Q4 2016, pursuing the downward trend observed since Q1 2012 when it reached a peak of 15.1%. The labour underutilisation rate takes into account the share of underemployed workers and discouraged job seekers. Since Q4 2015, this rate has been twice the size of the unemployment rate, compared with around one and half time pre-crisis, indicating higher slack in the labour market.
Overall, the last quarter of 2016 saw a continued increase in Irish households’ material wellbeing with income and consumption per capita continuing to expand, a further decline in debt, an increase in financial net worth (although total net worth still remains below its pre-crisis level ) and a fall in the unemployment rate. However, the savings rate increased in line with declining consumer confidence (although consumer confidence is now much higher than its pre-crisis level). And despite the continued fall in the unemployment rate, many workers would prefer to work more, as indicated by the remaining high level of the underemployment 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.
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.
“Are the Irish 26.3% better off?”, OECD Insights post, 5 October 2016
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.
Francesca Colombo, Head, Health Division, OECD Directorate for Employment, Labour and Social Affairs
In 2010, the OECD’s influential report, Fit not Fat:Obesity and the Economics of Prevention, warned about the rapidly rising challenge of obesity and its consequences for our health.
Nearly a decade later, the situation has unfortunately not improved enough. Our new data released today (http://www.oecd.org/health/obesity-update.htm) show that the obesity epidemic has spread further, even though this has happened at a slower pace than before. Today, over half of all adults and nearly one in six children are overweight or obese in the OECD area. In the United States and Mexico, one every three adults is obese (see our chart). Social disparities persist and have increased in some countries. Less-educated women are two to three times more likely to be overweight than those with a higher level of education.
Obesity rates have grown rapidly in England, Mexico and the United States since the 1990s. The outlook for the future is worrying, as new projections show a continuing increase of obesity, if no significant change occurs. Obesity rates are projected to increase at a faster pace in Korea and Switzerland where rates have been historically low.
There are many reasons why we must tackle obesity. Obesity is a key risk factor for numerous chronic disease, such as diabetes and cardiovascular disease. The failure of health systems to tackle obesity leads to millions of deaths and disability. This also damages our economies. Obese people are less likely to be employed than normal-weight people. They are less productive at work due to more sick days and fewer worked hours, and they earn about 10% less than non-obese people (OECD/EU (2016), Health at a Glance: Europe 2016 – State of Health in the EU Cycle, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264265592-en.)
The good news is that much of this is preventable, as OECD work shows. Comprehensive policy packages, including school-based and worksite interventions, interventions in primary care settings, and broader regulatory and fiscal policies can address obesity effectively. A number of countries have recently implemented policies, ranging from tax measures (e.g. Belgium, Chile, Finland, France, Hungary, and Mexico) and subsidies to encourage active commuting instead of cars (e.g., Canada and France both at subnational level), to prescription of physical activity (e.g., France, Sweden), reformulation of food products (e.g., Canada, Chile, Korea, UK, Industry on its own) and change in portion sizes (e.g., France, Sweden, Turkey, UK, New York City ).
In the past few years, new policies to fight obesity have emerged, including communication. Improving nutrient information displayed on food labels through easy-to-understand symbol that is placed in front of pre-packaged food products can help consumers make healthier food choices. These symbols exist in Australia, Chile, Denmark, England, France, Iceland, Korea, Lithuania, New Zealand, Norway, and Sweden. Health promotion campaigns have also been spread through social media. Examples of health-promotion-dedicated website, mobile apps and online tools to help people change their behaviours can be seen in Chile, Estonia, England and the Netherlands. Some countries have reinforced the regulation of marketing of potentially unhealthy foods and sweetened beverages directed at children and young adults. Chile, Iceland, Ireland, and Mexico, for example, ban advertising of foods and beverages on television and radio during peak children audience hours. Other bans apply in schools (e.g., Chile, Spain, Turkey and Poland), in public transport (e.g., Australia) and in theatres (e.g. Norway). While the impact of these polices has not been fully evaluated yet, early evidence shows they empower people to make healthier choices, and can also affect food manufacturers’ behaviours.
These are just some examples. Most OECD countries are now using simultaneously complementary policy tools and creating synergies to promote healthier lifestyles. But there is no room for complacency. OECD countries on average still allocate only around 3% of their health budgets to public health and prevention. Addressing obesity requires investment, and comprehensive policies that target broad social and environmental determinants. Crucially, it requires strong leadership and political will.
Sassi, Franco (2010) “Fighting down obesity” OECD Observer No 281, October http://oecdobserver.org/news/fullstory.php/aid/3339/Fighting_down_obesity_.html
A widely heard criticism of carbon pricing is that it will simply hurt the poor. But just like other similar schemes with environmental aims, such as water charging, the opposite is true. It all depends on having the right policies in place.
One very effective policy for reducing air pollution and mitigating risks from climate change, such as storms, floods and sea level rise, is to raise taxes on domestic energy use. In fact, by taking just one-third of the revenues raised through such taxes to fund cash transfers, policy makers would make it easier for households to pay their energy bills, not harder.
The message that higher energy prices are indeed quite compatible with social policy objectives is the main finding from a new OECD working paper, “The impact of energy taxes on the affordability of domestic energy”.
Energy affordability is the ability of households to pay for the necessary levels of electricity and heating. While the concept of being able to pay of one’s bills has intuitive appeal, measuring affordability is challenging in practice.
The paper uses household level data covering 20, mainly European, OECD countries to analyse energy affordability at current energy prices and after a hypothetical, environmentally-related energy tax reform. It compares three indicators, which are based on expenditure shares, relative incomes, and a combination of both for the third (and strictest) indicator. The strict indicator says that households face energy affordability risk if they spend more than 10% of their disposable income on electricity and heating, and their income is less than 60% of the median income.
Energy affordability concerns are manifest at current prices. According to our strict indicator, less than 3% of Swiss households face energy affordability risk, while more than 20% in Hungary do; the median share is around 8%. Low energy affordability also results in utilities cutting off supply to households. More than 100 000 households see their electricity supply cut each year in France, Germany and Spain. In the United Kingdom more than 1.5 million households cut off their electricity supply because they cannot afford to top up pre-pay meters.
In many countries domestic energy prices are rising, partly as a result of charges that finance the expansion of renewable energies. In practice, incentives for renewables often burden poor households, particularly because the poor tend to spend a higher share of their income on electricity and heating than the rich.
Unfortunately, some politicians have used this relationship to argue against stronger emission cuts. It is a blinkered view. Using taxes to make polluters pay for their emissions actually raises revenues that can be used to support households. This has been done to good social effect in Switzerland, for example.
The simulated energy tax reform aligns prices with environmental objectives, and increases energy prices by 11.4% on average for electricity, 15.8% for natural gas, and 5.5% for heating oil. Redistributing a third of the additional revenues resulting from this reform to poor households, by means of an income-tested cash transfer, is sufficient to improve energy affordability according to the three indicators. Under the strict indicator combining expenditure shares and relative incomes , energy affordability risk would decline by more than 10% on average across all countries considered. Uniform transfers are less effective at combatting affordability problems, although affordability would still improve according to the strict indicator.
Mitigating the adverse impacts of higher energy taxes, which are needed to cut harmful carbon emissions and air pollution, on energy affordability, requires no more than one-third of the revenues raised by the higher taxes. The remaining revenue can be used to make the tax mix for other social objectives, or for more inclusive growth.
References and further reading
Flues, F. and A. Thomas (2015), “The distributional effects of energy taxes”, OECD Taxation Working Papers, No. 23, OECD Publishing, Paris, http://dx.doi.org/10.1787/5js1qwkqqrbv-en.
Flues, Florens, and Kurt van Dender (2017), “The impact of energy taxes on the affordability of domestic energy”, OECD Taxation Working Papers, No. 30, OECD Publishing, Paris, http://dx.doi.org/10.1787/08705547-en.
Kurt, Van Dender (11 October 2016), “Resistance is futile. Higher carbon process needed to guide the transition to carbon neutral growth”, OECD Insights blog, http://oecdinsights.org/2016/10/11/higher-carbon-prices-for-carbon-neutral-growth.
OECD (2016), Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems, OECD Publishing, http://dx.doi.org/10.1787/9789264260115-en.
OECD (2015), Taxing Energy Use 2015: OECD and Selected Partner Economies, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264232334-en.
OECD work on taxaxation and the environment: www.oecd.org/tax/tax-policy/tax-and-environment.htm