Financial regulation after the crisis: still liberal, but…

Oliver Denk, OECD Directorate for Employment, Labour and Social Affairs, and Gabriel Gomes, OECD Economics Department

In a report issued in June 2017, the Trump administration laid out its proposal for overhauling some of the regulations President Obama had enacted with a view to avoiding a financial market meltdown of the kind we saw in 2008. But what do we actually know about how financial regulation has evolved around the world since the global financial crisis?

Bank supervision has certainly been an active area of reform, not only in the US, but in many other countries. The Basel III accord, the new international regulatory framework for banks that is currently being rolled out, is one well-known testimony. Some countries took less well-publicised action to tighten up supervision, not least when oversight existed institutionally but failed to function properly in practice.

Financial policy, however, goes much beyond bank supervision. It also includes aspects such as credit controls, ease of entry into the banking sector, capital account controls and government ownership of banks. The general picture of the 30 years leading up to the crisis was one of liberalisation of domestic and international capital markets, accompanied by efforts to strengthen frameworks for bank supervision. But the various dimensions of financial policy are rarely assessed together, even though they all matter for financial markets, corporations and households.

This is precisely what we have set out to do, as we explain in our new OECD working paper. In fact, we have assembled a novel dataset on financial policies from 2006 to 2015, by building on an index from the International Monetary Fund. The index by the IMF is the most widely used measure of financial reforms in cross-country empirical research, having been used in some 200 publications. The trouble is the IMF dataset was only available up to 2005–so we have effectively extended it by another 10 years. The index has its strength in covering many different types of financial policies, though it is not overly specific on most dimensions.

What do we find? In some areas, financial policy has become less liberalised since the global crisis. Bank privatisation has seen the strongest break in trend. Governments had reduced their ownership in banks over the one to two decades before the crisis. But since then, recapitalisations in a number of countries have increased government ownership and lowered financial liberalisation in this respect, as the chart below shows.


In other areas, financial liberalisation has more or less stayed the same. Take restrictions to international capital movements. By standard measures, these had largely gone in most advanced economies before the crisis. Today, the developed world as a whole is as financially open as 10 years ago. However, some countries such as Chile, Iceland and Slovenia have tightened their capital account restrictions, even if others like Australia, Korea and Turkey have lifted theirs.

Bank supervision efforts continued to strengthen through the 2000s under the Basel accords. In many countries, this has not only changed how capital requirements are set, but also reinforced the way in which supervisory authorities assess prudential reports and statistical returns from banks through on-site and off-site examinations.

On the whole, our data suggest that the financial crisis has not undone the financial liberalisation that was achieved in the preceding three decades or so. However, it remains to be seen whether the renewed state ownership of banks is part of a temporary post-crisis phenomenon or something longer term. Governments do tend to sell off their stakes in banks when they find the opportunity, and a few countries–Austria is a good example–have now unwound their increased ownership in banks, in some cases thanks to liquidation.

Developments have been quite different for emerging market economies, in particular the BRIICS countries*, where financial liberalisation has continued at the same quite rapid pace as before the global crisis. One reason is that entry barriers into the banking sector have been lowered in some cases; other factors include stronger bank supervision and the deregulation of stock markets. Finance nevertheless remains substantially less liberalised in the BRIICS than the OECD, as the graph below demonstrates.


These are just some of the revelations of our new data, which will hopefully allow the many researchers who have been relying on the IMF dataset for quantifying financial policies to delve into an additional 10 years of observations. This is vital for tracking how policy has affected financial systems and the real economy since the crisis. If you are such a researcher and would like to use the dataset, please contact us at any time.

Further reading

Denk, O. and G. Gomes (2017), “Financial Re-Regulation since the Global Crisis? An Index-Based Assessment”, OECD Economics Department Working Papers, No. 1396, OECD Publishing, Paris

* BRIICS countries are Brazil, Russia, India, Indonesia, China, South Africa.

Abolish modern slavery!

Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20

There are 45.8 million slaves in the world today according to the 2016 Global Slavery Index, nearly four times the total number of Africans sold in the Americas during the four centuries of the transatlantic slave trade. Modern servitude goes under a variety of names such as human trafficking or compulsory labour, fulfilling the prophecy of the great abolitionist Frederick Douglass, himself a former slave, that slavery “will call itself by yet another name; and you and I and all of us had better wait and see what new form this old monster will assume, in what new skin this old snake will come forth.”

One new form is child trafficking in India. It’s designed to meet the demand for household help from the expanding middle class by taking advantage of supply from impoverished rural communities. Deepti Minch was sold to a family in Delhi. “My life was tough. I worked from six in the morning until midnight. I had to cook meals, clean the house, take care of the children and massage the legs of my employers before going to bed.”

Child labour is one of the worst forms of abuse. In the Indian case, the OECD has partnered with Nobel Laureate Kailash Satyarthi on a range of issues related to promoting children’s welfare and well-being. Mr Satyarthi and the grassroots movement founded by him, Bachpan Bachao Andolan (Save the Childhood Movement), have liberated more than 84,000 children from exploitation and developed a successful model for their education and rehabilitation. Juliane Kippenberg of Human Rights Watch describes how children have been injured and killed in mining accidents, suffered poisoning from mercury used in gold processing, and developed respiratory disease from exposure to dust. She welcomes another OECD initiative to develop practical actions to help identify, mitigate and account for the risks of child labour in the mineral supply chains, for example carry out independent third party audits on the due diligence practices among smelters and refiners.

The issues go far beyond mining. Modern slaves may be sewing the clothes you wear, growing the food you eat, and producing the gadgets that keep you entertained and informed. Around 2 million of them are working for states or rebel groups, and can become trapped in a vicious circle in which militia fight for control of precious resources such as minerals, while the profits from controlling mines fund further conflict. Consumers, business leaders, policy makers, we all have a duty to tackle this crime. And we have the tools to do so.

The 2010 US Dodd-Frank Act obliges public companies to report on products containing minerals that may be benefiting armed groups in the Democratic Republic of the Congo. The UK government recognised the scale and seriousness of the problem by passing the 2015 Modern Slavery Act.  Prime Minister Theresa May set up a government task force on modern slavery and appointed an Anti-Slavery Commissioner. In an article promising that her government will lead the way in defeating modern slavery, the Prime Minister highlights the human suffering behind the headlines: “people are enduring experiences that are simply horrifying in their inhumanity. Vulnerable people who have travelled long distances believing they were heading for legitimate jobs are finding they have been duped, forced into hard labour, and then locked up and abused.”

The UK legislators are well aware of the complexity of the task facing them, and produced a Practical Guide for companies on transparency in supply chains that recommends the OECD Guidelines for Multinational Enterprises. They point out that although the OECD Guidelines are not specifically focused on modern slavery (although the Due Diligence Guidelines do include it), “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”.

Ending slavery is made even more difficult by the size and complexity of supply chains that make it hard to identify who is responsible for ensuring rights are respected at all the locations involved in production. Workers are often employed by subcontractors or sub-subcontractors of MNEs in their own country, and unfortunately it may take a catastrophe like the collapse of garment factories at Rana Plaza in Bangladesh in 2013 to set change in motion. Following that tragedy, The OECD developed a Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector. This Guidance, elaborated through an intense multi-stakeholder process, supports a common understanding of due diligence and responsible supply chain management in the sector. One of the most notable features is that it doesn’t allow multinationals to use the failings of local contractors as an excuse: “Enterprises should…seek to prevent or mitigate an adverse impact where they have not contributed to that impact, when the impact is nevertheless directly linked to their operations, products or services by a business relationship.”

It doesn’t always take a big disaster to change things though. The OECD and FAO produced due diligence guidance for the agriculture sector that will, among other things, help newcomers to the sector, such as institutional investors, to deal with ethical dilemmas and uphold internationally agreed standards of responsible business conduct, notably in markets with weak governance and insecure land rights. For instance the guidance recognises that regardless of the legal framework in which an operation takes place, indigenous people often have customary or traditional rights based on their relationship to the land, their culture and socio-economic status.

It’s easy to see how workers would benefit from improved conditions and why consumers would choose ethically-sourced products. But it makes good business sense too. The evidence on company performance shows that the ones that behave responsibly towards their employees, the environment, and society do better than the rest.

Modern slavery is a highly internationalised affair, and to end it we need to reinforce international coordination and cooperation. As more countries and sectors step up the fight against slavery and other abuses, our experience with the MNE Guidelines and due diligence guidance is likely to be called upon increasingly. We advocate the approach pioneered in the apparel industry where we work with industry, government, worker organisations, and civil society to elaborate strategies and we have to work together to implement them. We can all learn from each other and use our shared knowledge to expose slavery and help to abolish it. As Frederick Douglass said, “It flourishes best where it meets no reproving frowns, and hears no condemning voices.”

Useful links

Gabriela Ramos is moderating the first session of the 5th Global Forum on Responsible Business Conduct, “Responsible global supply chains through due diligence”, taking place at the OECD on 29-30 June. Watch the webcast here

We need an empowering narrative

Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20

When the subprime crisis started, most economists, and the policymakers they advised, thought it would only affect people who had bought homes they couldn’t afford. They didn’t expect that national problem to trigger a cascade of events that almost caused the collapse of the world financial system. Nor did they foresee how the financial crisis would lead to the Great Recession. Global interconnectedness and the complexity it brings were not really understood, nor were the contagion mechanisms that they can trigger and that would impact other regions of the world.

Today, we’re trying to understand how the Great Recession and the other important trends that it aggravated such as growing income and wealth inequality,  gave birth to the backlash against globalisation, and to the political crisis we are confronting in many countries, with divided societies and a lack of common purpose. At the OECD, we set up our New Approaches to Economic Challenges (NAEC) initiative to examine these failures and establish the basis of a better way of analysing economic challenges and producing policy advice based on that analysis.

The slogan of this year’s OECD Forum was “You talk, we’ll listen”, and that is what NAEC has been doing. Over the past few years, we’ve asked a wide range of people what was wrong with the way we were doing things. And they haven’t been shy about telling us!

At the Forum, we presented the views of a sample of around 20 world experts across a variety of fields – financiers managing billions of dollars, Nobel prize-winning economists, political scientists, social scientists… compiling the ideas they have shared all through the NAEC initiative.

As you’d expect from such a strong-minded group, they don’t always agree with us or each other, and we do not claim to buy all that they say. More importantly, to avoid the “herd thinking” prevailing before the crisis, and that prevented a better understanding of the imbalances that were accumulating to a tipping point, it is important to listen to those that think differently from us, and to remain open to criticism and honest exchanges.

But a number of common views do emerge from reading the draft report. Growing integration and connectedness is helping to improve living standards across the globe, but the traditional models we use to study today’s economy make too many assumptions that are at odds with the facts. The very name of these models, general equilibrium, shows that they assume that the economy is basically in balance until an outside shock upsets it. They assume that you can understand the economy by studying a representative agent whose expectations and decisions are rational.

This view is essentially linear, and the policy advice it generates is tailored to a linear system where an action produces a fairly predictable reaction. It looks at aggregate outcomes and at average results. It concentrates on flows and does not consider stocks. Real life is not like that.

Economic models that rely only on inputs such as GDP, income per capita, trade flows, resource allocation, productivity, representative agents, and so on can tell a part of the story, but they fail to capture the distributional consequences of the policies we make, and do not address the  fact that the growth process has only benefited a few. They do not capture natural depletion, or incorporate environmental damage as liabilities. On the contrary, they assume that, by growing the pie, inequality of income and opportunities will diminish (the trickle-down effect), or that you can always clean after you grow. So we need a full re-vamp of our analytical frameworks and the assumptions that we make, to better capture the reality. At the OECD we have done so by proving that income inequality harms growth.

To start with, we need different more granular information, data and analysis, and definitely, better metrics. We have to be able to check how policies will impact different income groups, communities, regions and firms. We need to get away from growth first and distribute later, or clean later. The unintended consequences of policies should be considered beforehand, and so should equity.

Traditional models do not integrate important dimensions such as justice, trust or social cohesion that are not easily measurable. In fact these models are based on an ideology or narrative that claims that people are rational, take the best decisions according to the information they have to maximize utility, and that the accumulation of rational decisions will deliver the best outcome.

Real people are not like that. Their lives are shaped by their hopes, aspirations, history, culture, tradition, family, friends, language, identity, the media, community and other influences. As these other elements are not the core of macroeconomic models, they are neglected, and the social and human sciences (psychology, history, sociology…) that can explain these variables have been put aside in the modelling work to develop economic policy options.  As the economic profession became highly quantitative, the non-measurable features of the economy were just ignored, such as people’s fears, expectations or sense of unfairness.

The world we live in is a system of systems, physical or not, that is complex. That means you have to take a systemic approach that can deal with tipping points, phase changes, emergent properties, and – very important for us – the fact that shocks do not come from outside. The system itself produces the shocks that destabilise it.

We need a new approach to economics that isn’t just about quantitative economics. An approach that integrates behavioural economics and complex systems theory, as well as economic history.

We also need a new narrative to integrate all these different, often conflicting influences. So what might such a new narrative look like? The report concludes that it should be based on the best facts and science available, and contain four stories: a new story of growth; a new story of inclusion; a new social contract; a new idealism.

The state can help empower the shift. An empowering state is one that focuses on strategic investments to allow people, firms and regions to fulfil their potential. That means putting people at the centre of our policy efforts, and broadening the objectives of policies to include not only material well-being but many other options that are important such as health, quality jobs, a sense of belonging, social cohesion, and environmental outcomes.

At the OECD we have made progress with NAEC and with the Inclusive Growth Initiative, inviting policy makers and stakeholders to consider different alternatives to the traditional framing of economic issues. We conclude that by being inclusive, economies can be more productive, and that fostering productivity growth in an inclusive manner makes growth sustainable.  We call this the “nexus” or the need to foster “inclusive productivity”. We are making the call to turn this analysis into action, but this will require a re-engineering of the institutional settings in OECD economies, getting rid of silos and having a holistic approach for the well-being of people, that is multidimensional.

The lively and informative debate with the public at the OECD Forum suggests to me that the draft report touched on a number of subjects people care deeply about. But it is still a draft and we need to continue the conversation, so please send your comments, criticisms and suggestions to us at [email protected], and we’ll keep you informed on how the discussion progresses over the coming months.

Useful links

Rain or shine, Asia needs a better umbrella of social protection

Alastair Wood and Willem Adema, OECD Directorate for Employment, Labour and Social Affairs

An Indonesian proverb says that a firm tree does not fear the storm. After the Asian Financial Crisis of 1997/98, Asian economies recovered with strong economic growth (on average 4.2% annually), which over the past decade has contributed to a decline in “absolute poverty” – here defined as those with incomes of less than USD 2 per day. The share of people living in poverty fell from over half to a third of Asia’s population, with large reductions especially in Viet Nam, China and Indonesia. Greater prosperity has also contributed to lower fertility rates and higher life expectancy. Now the challenge is to create good jobs for Asia’s increasingly educated workforce and prepare for population ageing, which will drive social spending upwards.

With increasing prosperity, the leeway for greater public social expenditure (defined broadly as support for households in difficult circumstances which adversely affect their welfare) is growing, but at 7% of GDP it remains low compared with the OECD average of 21% of GDP (our first chart). Indeed, in many Asian countries, including India and Indonesia, public social spending is often as low as 2 or 3% of GDP .

Our report on A Decade of Social Protection Development in Selected Asian Countries indicates that one of the reasons for such low social spending is related to the large number of informal workers. Indeed, the problem isn’t so much the lack of jobs (Cambodia and Nepal, for instance, have over 80% employment rates) but rather the lack of good quality jobs–meaning the quality of the working environment, earnings quality and job security,  as set out under the OECD Job Quality Framework.

Informal workers in Asia frequently work long hours for little pay, with little to no job security and without social protection coverage. These workers do not make contributions to social insurance schemes–for healthcare and pensions for example–and therefore they cannot claim health insurance benefits when they fall ill or draw a pension when they grow old. As the bulk of public social spending goes to pension and health benefits tied to formal employment, current government efforts are more likely to benefit better-off households rather than poor ones. Governments have sometimes put in place last-resort benefits but spending on such social assistance benefits (support in cash or in-kind which is targeted at low-income households) is limited as benefits are small and they are not given to everyone. Public spending on labour market programmes is even lower, and only a limited number of poor workers have access to employment guarantee schemes.

Extending social protection is clearly needed not only to further reduce poverty, but also to provide for the population’s increasing medical and financial needs. Crucially, population ageing in Asia is expected to progress at a fast pace: by 2030 there will be fewer than 7 people of working age (15-65) per senior citizen (65+), compared to more than 10 today. So what are countries doing to prepare for this challenge?

Richer Asian countries such as Japan, Korea and Singapore have long since put in place mandatory pension systems to which workers contribute during their working life. In recent years, China has arguably been particularly successful in increasing pension coverage. In addition to its pension provisions for civil servants, China’s basic urban worker pension system covered almost 9 out of 10 workers in 2015, while the basic national resident pension system (which includes the rural pensions scheme) covered 500 million people, or about 75% of the target population (see report by Queisser et al, 2016). Various measures were also used to encourage pension saving, such as subsidising contributions or making pension payments to the elderly parents of those workers who started to contribute to rural pension schemes.

In the poorer countries not many workers have had a chance to save for retirement and contributory pension systems still do not cover many workers. To fill the gap some Asian countries, such as Bangladesh, India, Nepal and Thailand, have established pension schemes targeted at low-income households, which are often the main or only system of income provision in retirement. However, coverage of such schemes is variable and the payment rates are generally low.

Increasing access to social protection is an imperative for achieving more inclusive and cohesive societies in Asia. The challenge facing many economies with a large rural sector or a large urban informal sector is overcoming administrative bottlenecks limiting coverage extension of social protection, not least because of the very limited capacity to register participants in insurance schemes and/or collect contributions from employers and employees. One approach worth considering is India’s effort of equipping all its citizens with a digital identity. This initiative, known as “Aadhaar”, is not compulsory yet, but covers about 4 out of 5 Indian citizens and addresses a range of activities from financial services, such as daily bank transfers to making benefit payments. This includes, for example, making payments to low-income households that are eligible for the “cooking gas subsidy” and “social assistance pensions”.

New technologies can represent a great opportunity for governments in Asia to leapfrog standard registration methods, track social protection eligibility, and help extend coverage to all those who need social protection most.

References and further reading

OECD (2017), A Decade of Social Protection Development in Selected Asian Countries, OECD Publishing, Paris,

OECD (2016), The OECD Job Quality Framework, .

Queisser, M.  A Reilly and Y. Hu (2016), “China’s pension system and reform: an OECD perspective”, Economic and Political Studies, 4:4, pp. 345-67.

Statistical Insights: What role for supply-use tables?

By the OECD Statistics Directorate

Supply-use tables provide the key accounting mechanism to ensure coherence between the various sources of data and approaches countries use to estimate GDP–expenditure, output and income. They also have the potential to inform a wide range of policy areas.

What are supply-use tables? Supply-use tables (SUTs) provide a detailed overview of transactions in goods and services by industries and consumers.

In the first chart, the supply table shows the total values of what industries produce and what is imported. It also shows estimates of industries’ distribution margins, taxes paid and subsidies received, which together explain the difference between basic or “factory gate” prices and the actual prices paid by purchasers.


The use table divides product values into intermediate consumption, which is the value of products being used for further processing by industries, and final consumption of finished products by households and government. It also shows other components of final demand, such as investment and exports. For each industry, the use table also shows the value added by productive activities, that is to say, the difference between final output and intermediate consumption, including compensation of employees and operating surplus or mixed income.

Why are supply-use tables useful?

Traditionally, the main use of SUTs has been to improve GDP estimates by balancing records of the supply of goods and services with those of the demand for them, thus capitalising on and confronting disparate sources of data–business surveys, household surveys, labour force surveys, administrative tax records, imputations, and so on. But their potential goes well beyond this, as SUTs provide a bird’s-eye view of the structure of the economy–who makes what, how and for whom.

In recent years, SUTs have become the key accounting tool used to generate national input-output tables, and have become essential to the construction of datasets such as those used for Trade in Value Added (TiVA) estimates and related applications, such as CO2 footprints and jobs embodied in trade. And their potential goes beyond even these high-profile applications. SUTs can, for example, help simulate and estimate the economic impact of potential price shocks, or develop productivity estimates taking account of labour, capital and intermediate inputs. Moreover, they provide the basis for simple descriptive statistics that are not typically available or collected.

Supermarkets and mark-ups

One interesting new application is to compare distribution costs and mark-ups between countries. These vary with differences in countries’ policies in the areas of competition and deregulation; the prevalence of discount stores, specialised retailers, and e-commerce; transportation infrastructure; and the cost of petrol. There may also be differences in the shares of purchases made directly from producers or local units.

The chart below compares distribution margins in France and the UK with those in Germany–where discount stores, such as Aldi and Lidl, account for over a third of the market. It shows that distribution margins for fish in France were 64% of the total price in 2013, over 40 percentage points higher than in Germany, which may reflect higher margins on fresh as opposed to frozen fish. Margins on agricultural products in the United Kingdom were somewhat lower than in Germany but higher in all other categories shown below, except pharmaceuticals. In fact, margins in Germany are significantly lower across a range of products.


Increasing e-commerce transactions can be expected to reduce margins. However, while complete data on e-commerce remain a work in progress, where anecdotal data are available, they do not appear to explain the significant cross-country differences in margins.

Where to find the data

OECD SUT data are available by industry and product on OECD.Stat under National Accounts statistics. The tables provide information by industry (at the 2 digit ISIC Rev 4 level: 89 industries) with corresponding breakdowns by products (using internationally agreed product breakdowns). They are available at the total economy level at both purchasers’ and basic prices, with separate tables breaking down the differences into trade and transport margins, and taxes and subsidies on products. Data are available for 37 countries in 2017, with more being added.

Further reading

The OECD Statistics Directorate is leading international efforts to develop extended supply-use tables that break down traditional groupings of industries in SUTs by a number of criteria, including trading status, firm size and ownership. These provide an essential tool to improve TiVA estimates and provide new insights on global value chains (GVCs), such as upstream integration of small and medium enterprises (SMEs) in GVCs, and on the trade-investment nexus.

For further information, see

Click for more Statistical Insights

Public procurement is making the world a better place—one order at a time

Bill Below, OECD Public Governance Directorate

The greatest concentration of potentially world-changing spending power does not lie in the hands of the global super-rich. It lies rather in the hands of public procurement staff working in national, regional and local governments around the world. In the OECD alone, the aggregate value of what they buy, from the lowly paperclip to public hospital locksmith services, from launch services for interplanetary probes to the interplanetary probes themselves, is estimated to be €5.8 trillion per year. That’s a lot of stuff. Indeed, the public purchase of goods and services is worth 14% of GDP in the EU and 12% of GDP in the OECD. Spending power like this has the potential to elevate public procurement, still considered by some to be a simple clerical function, into a powerful force for change.

Of course, the first job of public procurement is to provide governments and state-owned enterprises with the goods, services and works needed to meet citizens’ needs. And this still has to be accomplished while ensuring the best value for money (the famous MEAT – Most Economically Advantageous Tender). But, with such huge amounts of purchase power in play, public procurers have an opportunity—some would say an obligation—to accomplish secondary policy goals. It adds a new dimension, as well as new complexity and responsibilities, to the remit of public procurement professionals.

This presents something of a conundrum. Despite huge aggregate public procurement budgets, times are tough. Throughout the OECD, the public sector continues to downsize. Programme budgets are being cut, and public services are forced to do more with less. Asking procurement budgets to multitask can help advance important policy goals without additional allocation. But, to be successful, procurement staff will need new training and skills, something not all governments are prepared to provide.

But many governments are succeeding in using the procurement function to achieve these secondary policy goals—called strategic public procurement, or SPP.  These objectives might include promoting sustainable green growth, the development of small and medium-size enterprises, the promotion of innovation, standards for responsible business conduct or broader industrial policy objectives. Today, all OECD countries have implemented strategic procurement programmes supporting one or more of the above goals.

Take the example of innovation. Typically, innovation is a supply function originating with the private sector. One of the traditional policy tools to enhance innovation consists of providing subsidies for R&D efforts in private enterprises. But, public procurement can be used to shape markets by stimulating demand. In essence, governments can ask bidders to come up with new, innovative solutions to service delivery challenges while ensuring the diffusion of the new technology or service. In a sense, procurement staff and suppliers put their heads together to imagine new things. It’s not without risk. Think of the initial rollout of healthcare insurance exchanges in the US. But there are lots of successes, too, many documented in Public Procurement for Innovation, Good Practices and Strategies (OECD, 2017). Evidence suggests that strategic procurement of innovation is in fact more effective than simple R&D subsidies in promoting innovation, with a combination of the two being ideal.

There are caveats, however. In exchange for taking on some of the risks of R&D, participating suppliers will require a minimum of visibility and market size. When markets are too fragmented and assurances too uncertain, suppliers will back away. At the same time, procurement specialists can lack the skills to identify unmet needs and strike the right balance between the primary procurement goal and secondary policy goals. The public sector also tends to be risk averse, a desired quality when it comes to the handling of public money, but it can also be an innovation killer. The public sector needs to find ways to encourage informed risk-taking behaviour.

But the biggest risk may be that, at a time when public money is short, governments will fail to provide public procurement teams with the skills they need not just to deliver value for money but to deliver on green growth, innovation, support for SMEs and more—goals that aren’t so secondary after all.


Further reading

OECD & Public Procurement

Public Procurement for Innovation: Good Practices and Strategies

EU & OECD Conference on Strategic Public Procurement

OECD Directorate for Public Governance