Making Trade and Investment Work for People

NAECKen Ash, Director of the OECD Trade and Agriculture Directorate

Both the UN Sustainable Development Goals (SDGs) and the OECD New Approaches to Economic Challenges (NAEC) explicitly recognize that trade and investment are not goals in themselves, but are a means to an end. That desired end is stronger and more inclusive growth, better jobs for more people, and improved societal well-being. Trade and investment policies cannot deliver these outcomes alone, but they can contribute as part of a wider package of comprehensive structural policy reforms, designed in light of the specific situation in countries at various stages of development.

Global value chains (GVCs) account for an increasing share of world income, reflecting the high degree of economic interdependence among nations today. All countries have increased incomes associated with GVCs, in particular major emerging economies, but these benefits do not accrue automatically. The fragmentation of production across borders highlights the importance not just of open, predictable and transparent trade and investment policies, but also of effective complementary policies that enable less developed countries (LDCs) and small and medium enterprises (SMEs), in particular, to participate in and to benefit from GVCs. In brief, making trade and investment work for people requires a coherent and well integrated public policy agenda.

GVCs magnify the costs of protection. As goods, services, capital, data and people cross borders multiple times, the cumulative effect of a number of individually small costs imposes a significant burden on traders and on investors. These costs can result from explicit restrictions, such as tariffs, from inefficient or unnecessary border procedures, and from constraints on the flow of capital. Where foreign investment is a driver of export capacity, the cumulative effect may even discourage firms from investing, or maintaining investment, in the country. As a result, production facilities, technologies and knowhow, and jobs might move elsewhere.

In a world dominated by GVCs, there is a tendency for more, and more demanding, regulatory standards, driven by the imperative to ensure reliability, quality, and safety. The right to regulate and to protect consumers is not in question, but regulations should be science-based, proportionate and non-discriminatory. Any unnecessary costs imposed by excessive regulatory burden falls most heavily on SMEs and firms in LDCs, where the capacity to adapt is often limited. In too many cases, this can preclude effective participation in GVCs.

There would be no GVCs without well-functioning transport, logistics, finance, communications, and other business services to move goods and coordinate production along the value chain. Today, services represent over 60% of GDP in G20 economies, including 30% of the total value added in manufacturing goods. The supply of these services is often provided through investment, yet services markets remain relatively restricted in many countries, imposing high costs on domestic as well as foreign firms, limiting productivity growth, and constraining participation in GVCs unnecessarily.

GVCs also strengthen the case for unilateral policy reform. Domestic firms benefit from the expanded export opportunities that are often the aim of trade negotiations, but they also benefit from access to world class imports of intermediate goods and services. Opening your own markets, in particular for intermediate inputs, can benefit your own firms and workers. But the gains are even greater when more countries participate and markets for goods, services, capital, technology, data, ideas, and people are opened on a multilateral basis.

GVCs make evident the necessity of more coherent rules for trade and investment; this twin engine of development can only reach its full potential if other policy areas are also better aligned and in coordination with those on trade and investment. These areas include macroeconomic, innovation, skills, social and labour market policies among others. The nature of the enabling environment and complementary policies to accompany trade and investment opening depends on country specificities; while there is no ‘one size fits all’ policy recipe, there are a number of common ingredients.

Trade and investment opening are necessary but insufficient conditions for stimulating much needed and more inclusive growth, development and jobs. Accompanying policies that promote responsible business conduct and enable the needed public and private investments, in particular in people, in innovation, and in strategic physical infrastructure, help ensure not just that growth is realized, but that the benefits are shared widely.

Useful links

OECD work on trade

OECD work on investment

The productivity and equality nexus: is there a benefit in addressing them together?

NAECGabriela Ramos, Special Counsellor to the OECD Secretary-General, Chief of Staff and G20 Sherpa

Productivity growth has slowed since the crisis and inequality has been getting worse. Could they be influencing each other?

The linkages between the productivity and inequality challenges are still to be fully explored. Each may have its own solution, but there is also good reason to think that there is a nexus between them. For instance, OECD evidence suggests that wage dispersion between firms, which reflects diverging rates of productivity growth, has contributed to rising inequality of incomes between workers. At the same time, the increased prevalence of knowledge-based capital and digitalisation may have unleashed winner-take-all dynamics in key network markets, which in turn may have led, in some instances, to an increase in rent-seeking behaviour.

OECD research has highlighted how the rise in inequality over the last three decades has slowed long-term growth through its negative impact on human capital accumulation by low income families.

Since the crisis, stalled business dynamics have seen resources, including workers, being trapped in firms where they are not using their full potential. In particular, individuals with fewer skills and poorer access to opportunities are often confined to precarious and low productivity jobs or – in many emerging countries – informal ones.

In the spirit of our integrated framework on inclusive growth and our New Approaches to Economic Challenges (NAEC) initiative, at the OECD we believe that our efforts to address productivity and inequality challenges could have a better chance of succeeding if we looked at the synergies and trade-offs emerging from policies to address them. This means designing policies for each of these two core issues bearing in mind how they might impact one another and avoiding the “silo” approach through more effective and comprehensive policy packages.

We must also learn from previous policies. Traditional measures to boost productivity in competition, labour market, or regulatory frameworks would allow for the reallocation of resources to more productive activities, or for increasing productivity in specific sectors. But this may have an adverse impact on inequalities of income and opportunities, as workers better equipped to cope with change are usually those with higher skill sets. For instance, in the past, the drive towards flexible labour markets has benefited many employers, and particularly the most productive firms that have gained from an improved allocation of labour resources. But increased flexibility has also brought a greater prevalence of non-standard work. Recent OECD work on job quality highlights how low skilled individuals can be trapped in precarious low wage jobs, and receive less training.

Our approach to designing policies to ensure that individuals, firms and regions that are left behind can fulfil their full potential and contribute to a more dynamic economy, draws on OECD work from diverse policy areas. It starts from the Inclusive Growth agenda, by focusing on well-being as an ultimate objective of policy. It builds on OECD productivity work via The Future of Productivity report and efforts Towards an OECD Productivity Network. It also synchronises with the Organisation’s efforts to measure productivity more accurately at a time when traditional measures are ill-adapted to account for the full effects of rapid technological change and innovation centred on knowledge based capital, the increasing prominence of the services sector, and productivity in the public sector.

The ultimate outcome is for governments to focus on the extensive range of win-win policies that can reduce inequalities while supporting productivity growth, thereby creating a virtuous cycle for inclusive and sustainable growth. This calls for distinct but complementary policy interventions at the individual, firm, regional and country levels. What this entails in practice will vary for each country depending on its circumstances. But broadly speaking, a number of policy areas are worth considering:

First, a new approach is needed to boost productivity at the individual level so that everyone has the opportunity to realise their full productive potential. Expanding the supply of skills in the population through more equal access to basic quality education is crucial, but not enough. With rapid technological change, skills need to keep up with the demands of the market to avoid the skills mismatches which have contributed to the productivity slowdown. A broad strategy is also needed to ensure a better functioning of the labour market, promote job quality, reduce informality, allow for the mobility of workers and inclusion of underrepresented groups such as women and youth, and promote better health outcomes for everyone.

Second, for people to realise their full productivity potential, businesses have to realise theirs. While heterogeneity among firms is normal, the widening dispersion in productivity levels and its implications for aggregate productivity and workers is a cause for concern. According to our productivity report, the early 2000s saw labour productivity at the global technological frontier increase at an average annual rate of 3.5% in the manufacturing sector, compared to just 0.5% for non-frontier firms. The gap was even more pronounced in the services sector. The larger the share of business that can thrive, the more productive and inclusive our economies will be. Achieving this requires a reassessment of competition, regulatory and financial policies to ensure a level playing field for new firms relative to incumbents. It also requires policies to facilitate the diffusion of frontier innovations from leading to lagging firms.

Third, policy prescriptions will be ineffective unless they take regional and local circumstances into account. Inequalities that play out in regions, like housing segregation by income or social background, poor public transport, and poor infrastructure, can lock individuals and firms in low-productivity traps. This means that some policies to promote both productivity and inclusiveness are best undertaken at the regional level.

Finally, adopting a more holistic approach to policy requires fundamental changes to public governance and institutional structure to strengthen the ability of national governments to design policy that promotes synergies and deals with trade-offs. In highly unequal societies, governments also need to address political economy issues including the capture of the regulatory and political processes by elites that benefit from the status quo, and policies that favour the incumbents.

None of this will be easy, but it is nevertheless essential. At the OECD we believe it is time to develop a better understanding of the dynamics between two of the key issues of our time – productivity and inequality – in order to build a more resilient, inclusive and sustainable future.

Useful links

OECD Inclusive Growth Initiative

OECD Centre for Equality and Opportunity

OECD Inequality webpage

OECD Future of Productivity

OECD Productivity Statistics

From Analysis to Action – Multidimensional Country Reviews

NAECMario Pezzini, Director of the OECD Development Centre and Director ad interim of the OECD Development Co-operation Directorate, and Jan Rieländer, Head of Multidimensional Country Reviews at the OECD Development Centre

Multidimensional Country Reviews (MDCRs) support developing countries in designing development strategies that aim for high impact. These strategies address the binding constraints to development, defined as sustainable and equitable growth and well-being. A growing number of developing countries worldwide are implementing MDCRs. Many see the MDCR as a tool to implement the Sustainable Development Goals.

The OECD’s 2012 Strategy on Development put forward the MDCR as a response to a twofold challenge. First, all countries face challenges that are specific to their individual circumstances and their level of social, institutional, and economic development. Only mutual learning and the adaptation of expertise and policy advice to the inner workings and outer circumstances of a country can achieve better policies for better lives. Second, policy makers, especially from developing countries, shared feedback that while the OECD’s sector-specific policy expertise was excellent, little is offered to inform a comprehensive strategy and manage the trade-offs. Yet, key policymakers, especially at the centre of government, were seeking precisely this overarching analysis and where to prioritise efforts and in what sequence.

Shortly before the 2012 Strategy on Development, the Arab Spring shook up a number of beliefs about development. Take Tunisia for example. It had very high marks on all indicators according to the Millennium Development Goals and standard macroeconomic guidance: 3% fiscal deficit, 5% average growth since 1990, 100% primary enrolment rate since 2008, 80% healthcare coverage for its population, and a good reformer in doing business. Although of little surprise in hindsight, the uprisings revealed the need for a broader understanding of what progress means for a country. Observers had completely overlooked the importance of social cohesion, the highly unequal regional distribution of opportunities, and the inability of the institutional and productive systems to adapt to changing circumstances.

MDCRs take the essential broader view. They understand development as strengthening a society’s capabilities to consistently translate monetary, human and natural resources into well-being outcomes. The definition of well-being is inspired by the OECD’s How’s Life? framework with its 11 dimensions and concepts of quality of life and material well-being. These include income and jobs as well as subjective well-being measures of social connections, civic engagement, environmental conditions, health and education, among others. To consistently create such well-being requires a large range of capabilities in the realms of innovation, production, governance, finance and social protection, to name a few.

Countries must transition to higher levels of functioning as internal and external circumstances change if they are to successfully pursue broad-based development. A stumbling block to further development occurs whenever a given combination of capabilities, resources, and the external environment impedes a country from optimising opportunities and addressing its most imminent social and economic challenges. In this context, traditional analysis has often concentrated on investment or productivity constraints. This correctly describes a need in most cases. However, social, environmental and governance challenges are equally important and often underlie the productivity trends. High inequality, for example, translates into highly unequal school systems that weaken human capital, which implies reduced economic capabilities and lower productivity. A high concentration of economic power reduces opportunities for new activities to surface and drive change by challenging less efficient incumbents. A misuse of natural resources may be a bottleneck to further development. Low levels of trust combined with non-transparent judicial and executive government systems often lead to a social contract of the smallest common denominator that cannot underpin a transition to new engines of progress.

MDCRs have been created as a continuously evolving tool to help countries identify the core constraints among their capabilities. The MDCR then provides national policymakers and their partners with the inputs needed for a country-owned and implemented development strategy.

Aided by the toolkits of strategic foresight and governmental learning, a multidisciplinary team works together across OECD directorates to identify a country’s most important shortcomings in terms of well-being outcomes and the capabilities to produce them. Some of the capabilities that have been identified as holding back development in the MDCRs currently underway in Cote d’Ivoire, Kazakhstan, Myanmar, Philippines, Peru, and Uruguay include:

  • The capability to sustain inclusive economic growth by continuously diversifying the economy to meet the changing demands of the global marketplace (this shows up in various forms at most levels of development).
  • The capability to channel sufficient financial resources to where they can be used most productively.
  • The capability to turn the country’s human resources into human capital by equipping citizens with the skills necessary to further develop the economic, social and institutional potential of the country, given the most likely set of opportunities.
  • The capability to adapt the institutional environment to the higher level of functioning required to transition, including more reliable judicial systems, less corruption, and stronger incentives for performance in the civil service.
  • The capability to manage environmental resources to maximise natural capital while at the same time providing incentives for increased productivity.
  • The capability to sustain a social contract that overcomes the divisions between the formal and informal economies and delivers well-being and revenue by including as many citizens as possible.

In a follow-on, OECD expertise is applied by the partner country to address these shortcomings and create a more sustainable system for delivering growth and well-being. In Cote d’Ivoire, sector experts from across the OECD worked together with a strong local team in the Prime Minister’s office to design a full government action plan which addresses the needs for economic modernisation, infrastructure, a more efficient and equitable tax system, developing skills that can sustain production transformation, and a financial sector that can deliver resources to where they can be most productive.

Analysis is only the very first step. Progress requires action. With this in mind, the OECD team works closely with a core group of national policymakers and analysts throughout the MDCR. This ensures that the recommendations are well adapted to a country’s circumstances and priorities and that the policymakers are in a position to make full use of the MDCR output. The preparation of the MDCR involves a spectrum of policymakers and researchers as well as public, private, and NGO actors. They reach beyond capital cities to encompass expertise across a country. Once the analysis and recommendations are done, MDCRs go beyond just delivering a report to engaging in a true dialogue around the recommendations that build on shared prioritisation. The result is a programme that, when implemented well and in supportive circumstances, can rapidly and positively transform national welfare.

Useful links

OECD work on development

Fostering Inclusive Growth: A Golden Opportunity to Put Future Growth on a Socially Sustainable Footing

NAECLamia Kamal-Chaoui, Senior Advisor to the OECD Secretary-General and Coordinator of the Inclusive Growth Initiative and Shaun Reidy, Policy Analyst, Inclusive Growth Unit

The crisis left many a nation teetering on the edge of financial and economic catastrophe. Thankfully, governments managed to pull us back from the brink. Yet, as we have stabilised our economies, the gaping chasm between our societies’ ‘’haves’’ and ‘’have-nots’’ has come into sharp relief.

In the last seven years, in a context of prolonged fiscal retrenchment, we have watched as OECD unemployment levels hit a peak unseen in a generation and as precarious work has boomed. We have also seen inequalities of income and wealth rise to their highest levels in some 30 years. In 2012 the average income of the top 10% of earners in the OECD grew to just under ten times that of the bottom 10%, up from around 7 times in the mid-1980s. In terms of assets, the top 10% controlled half of total household wealth in 2012, with the bottom 40% owning only 3%, in the 18 OECD countries with comparable data.

To be sure, these problems did not originate with the crisis. The economic seeds of the inequality we are reaping today were sown over many years. Structural changes in the labour market, the forward march of technology, integration into global value chains, and the decline of unionisation all contributed to growing wage dispersion between high and low-skilled workers.

But it was not just bad luck that this occurred at the very moment that the traditional redistributive mechanisms of the state began to weaken, in a climate of growing fiscal pressures and increased tax competition. Specific policy choices meant some people losing out. Prior to the crisis we relied on growth to paper over the cracks. We can no longer. Yet for want of a better alternative many individuals, companies, and countries have simply returned to business as usual.

With our economies going nowhere fast, we need to take this opportunity to fundamentally re-think how we grow and who benefits from that growth. Taking its lead from the New Approaches to Economic Challenges (NAEC) project, this is precisely what the OECD’s All on Board for Inclusive Growth initiative sets out to do.

The OECD’s work on Inclusive Growth understands that GDP growth is important to improving everyone’s living standards, but it also recognises that it is not the be all and end all. We cannot continue to blindly pursue growth at all costs without a thought to who benefits from it, or to how socially sustainable it is. That is why our approach to Inclusive Growth moves beyond money alone to look at how people are faring in other areas of life that matter to their well-being like their health, jobs and disposable household income. That is also why we look past the statistically constructed ‘average person’ to get a real and clear picture of how each part of the income distribution is doing.

Our work on Inclusive Growth has made it clear that over the long-run growth will neither reach its potential, nor be sustainable if it is not inclusive. In many ways this is self-evident. Growth built on an ever smaller base, like a building built on shrinking foundations, will be gradually undermined and ultimately collapse. Whilst from a political perspective, a public growing weary of the worst excesses of inequalities will likely not tolerate them indefinitely.

These dawning realisations have led to the issue of inequality gaining increasing political traction. Many citizens are concerned about the implications of increasingly unequal societies and many governments have started to talk about the issue. Much of that talk has been about promoting equality of opportunity. Such talk is to be welcomed, but talking about opportunity is not enough. We also need to focus on outcomes.

Inequalities of opportunity and of outcome are two sides of the same coin. The unequal outcomes of one generation tend to become the inequality of opportunity of the next. Simply giving a child from a poor background access to the same opportunities as a wealthy counterpart will not suffice. The balance of life chances is stacked against children from lower-income backgrounds. Children born into poorer families suffer from any number of disadvantages in relation to their richer peers: they are likely to have poorer diets, more likely to be bullied in school, have parents with shorter formal education and to live in workless households. Overcoming these obstacles can be nigh on impossible.

Dealing with this calls for a much more comprehensive approach to Inclusive Growth that does not only give people equal opportunities, but also bestows them with the ability to make the most of those opportunities. The OECD’s Framework for Inclusive Growth aims to help policy makers do just that, setting out to assess the effects of policies on income and non-income outcomes simultaneously. The Framework seeks to enhance policy makers’ understanding of the trade-offs and synergies that exist between pro-inclusiveness and growth-friendly policies.

In practice, pursuing Inclusive Growth calls for an approach that promotes the creation of high-quality jobs. An approach that understands the benefits of flexibility for employers and employees, but also grasps the importance of ensuring that a workforce is properly protected and supported by a strong social safety net, and activation policies to help people back into work. It calls for an approach that recognises the importance of increasing skills and improving education, but also sees that such efforts will be of little value if investment is not forthcoming to create skilled jobs in sufficient numbers. It also calls for an approach that underlines the value of progressive taxation to make sure no one is left behind.

Of course, each country has different goals and priorities, and distinct preferences as far as inequality is concerned. But we also need to have critical awareness about where country preferences come from. In many instances there is a clear danger of elites, who have an important role in setting national preferences, determining the political direction of travel for their own ends. Transparent and accountable government and well-structured institutions are key to avoiding that risk.

By pursuing Inclusive Growth we can empower individuals, ensuring that everyone benefits from growth, and that everyone has the chance to contribute to growth in the future. Businesses stand to gain just as much from this. Companies rely on healthy, well-educated, productive workforces to succeed, and they rely on effective labour market policies to help supply them. Inclusive Growth means more and better resources for businesses to draw on.

Now governments need to move this agenda forwards. With the Crisis fresh in the memory and inequality grabbing the world’s attention we have a golden-opportunity to put growth on a socially sustainable footing, and turn greater inclusiveness into a strong driver of economic growth. We cannot afford to let this chance go to waste.

 

Useful links

OECD Inclusive Growth Initiative

OECD Centre for Equality and Opportunity

OECD Inequality webpage

Turning the Tide towards Inclusiveness

NAECStefano Scarpetta, Director of the OECD Employment, Labour and Social Affairs Directorate

A rising tide lifts all boats, or so many used to think. But the evidence suggests that over the past three decades in a large number of advanced and emerging countries economic growth has disproportionally benefited people who are already relatively well-off, leaving the lower- middle-class lagging behind.

Today the average income of the richest 10% of the population across the OECD is almost ten times that of the poorest 10%. We observe also a worrying pattern: in each of the past three decades the gap has increased by one factor – it was 7:1 in the 1980s, 8:1 in the 1990s and 9:1 in the 2000s.

These averages hide large differences across countries, from a ratio to 6:1 in Nordic countries, to 19:1 in the US, almost 30:1 in Mexico and Chile and beyond 50:1 in South Africa and other emerging economies. But over the past decades we have observed a convergence towards higher levels of income inequality (although some emerging economies have managed to reduce income inequality, albeit from very high levels). The situation is even worse when we look at the distribution of household wealth. Comparable data collected for the first time by the OECD for 18 OECD countries show that the top 10% of households owned half of all total household wealth in 2012, while the bottom 40% owned a meagre 3%.

Not only do high levels of income inequality challenge social cohesion, they also tend to reproduce themselves from one generation to the next. This happens largely because they hinder the opportunities of the lower middle-class to access the same education and health opportunities as their better-off counterparts. The gap in educational outcomes between individuals from a low socio-economic background and those with median and high background increases dramatically as one moves from a more egalitarian to more unequal country. Similarly, a new set of OECD data shows that at age 25, men with university education can expect to live almost 10 years longer than men with primary education. Surely we can agree that people’s life chances should not essentially boil down to their wealth, age, gender, or place of residence.

The risks posed by such lopsided growth are evident. Our recent publication In it Together revealed that economies grow more slowly when lower earners get left behind – and we are talking about as much as 40% of the population. The rise in inequality observed between 1985 and 2005 in 19 OECD countries knocked 4.7 percentage points off their cumulative growth between 1990 and 2010.

The implication is that if we want to achieve our full growth potential, we need to promote equality of opportunities rather than just relying on redistribution of income and wealth. In all countries, and particularly in advanced ones, redistribution still greatly reduces income inequality – typically through taxes and transfers such as unemployment and other social benefits. Yet, in recent decades, the effectiveness of redistribution has weakened in many countries. It is important to put a renewed focus on it, through effective and well-targeted transfers as well as by making sure that the rich and the very rich in particular pay their fair share of taxes.

But policies also need to do more to address inequalities at their roots, ensuring that people can access high-quality education and health services while having a reasonable prospect of finding good-quality jobs, regardless of their social backgrounds.

Improving access to pre-school care and education – and its quality – for children and youth in lower-income households is a key first step in all countries. Too many young people are leaving education without basic skills, even in some of the richest countries. The proportion is put at 24% in the United States, 22% in Norway and 14% in Switzerland.

But promoting equality of opportunities is not just about education. It is also important to promote inclusion in the labour market for underrepresented groups, like women and youth. Concerning women, for example, we need to stop talking about equal pay for equal work and just make it happen. We also need to better support families in areas like parental leave and childcare to ensure that both parents can balance their work-life commitments.

The situation of young people in labour markets has become a growing cause of concern since the financial crisis struck. In 2014, 14% of youth were not working, studying or in training in the OECD, but this share reaches 25% in Italy and Greece and even higher in some emerging economies. To avoid scarring effects on their long-term employment prospects, and for the sake of intergenerational justice and social stability, our societies need to offer our young people a better deal, especially those with low skills and from migrant families. To tackle high youth unemployment, we need to be ambitious and use well-targeted activation strategies and measures to encourage firms to provide high-quality apprenticeships, internship programmes and training opportunities.

Moreover, only focusing on increasing the number of jobs is not enough. To make sure that growth is inclusive, countries need to ensure that good education is rewarded by access to productive and rewarding jobs; jobs that offer career and investment possibilities; jobs that are stepping stones rather than dead ends. There is a lot that labour market policies can and should do to address labour market segmentation, improve working conditions and foster skills recognition and a better match of wages with productivity.

Inevitably, policy mixes will vary between countries, responding to their individual economic and political circumstances. There are a number of win-win policies – good for growth and inclusiveness. But, equally inevitably, countries may also face trade-offs between policies to boost growth in the short-run and those to improve the distribution of growth dividends. However, given the scale of the inequality challenges we face and its impact on long-term growth, we need to exploit synergies and complementarities of policy in different areas, while addressing possible short-term trade-offs, for a better and more inclusive future.

Useful links

OECD Centre for Opportunity and Equality.

In It Together: Why Less Inequality Benefits All OECD (2015)

The Romeo and Juliet of Economic Transformation

NAECDouglas Frantz, OECD Deputy Secretary-General

Let’s begin with a proposition: The United Nation’s Sustainable Development Goals (SDGs) and the OECD’s New Approaches to Economic Challenges (NAEC) initiative were made for each other. They are the Romeo and Juliet of economic transformation.

Consider first the SDGs. Last September at the UN, world leaders adopted an ambitious, 15-year blueprint for a better world. The goals are broad, universal and, indeed, potentially transformative. They envision nothing less than saving our planet for future generations, ending extreme poverty and hunger, and creating a healthier, safer, more inclusive world.

I say “potentially transformative” because achieving these sweeping objectives will require an unprecedented global effort. Decisions made by our governments in the next few years will determine the quality of life for generations to come around the globe.

But this is not a matter of the rich countries extending a hand to the poor ones – or dictating development approaches and policies. This time around, the leaders of the world’s rich countries and its poor countries must work together to find common solutions that recognize our interdependence as well as our independence.

Tackling the 17 goals in the UN’s 2030 Agenda for Sustainable Development will require new thinking in developed and developing countries alike, among leaders and civil society, in the corporate boardrooms and the village halls. The innovations will require fundamental changes in our patterns of consumption and production, and a recognition that we are all in this together.

Indeed, each individual goal — and the means of meeting it — will need to be viewed through the lens of policy coherence. This requires understanding that decisions made on one goal will have an impact on other goals. It’s a vision that is less straightforward and simple than conventional practices.

As Kitty van der Heijden of the World Resources Institute told the NAEC workshop at the OECD in January, actions by all will have to benefit all.

We can say with certainty that the SDGs require dynamic new approaches to economic challenges.

This brings us to the second prospective partner in this marriage: The OECD’s New Approaches to Economic Challenges, or the NAEC. The objective of the NAEC is to stimulate new thinking on integrated, multi-dimensional solutions to the world’s most intractable economic and social problems.

The approach is rooted in the principles that we must make tough decisions together and that we must understand the impact of one policy decision on other decisions, which is not always obvious or considered. The NAEC weighs the impact of uncertainty, spill overs, trade-offs and systemic risks in an effort to transform mind sets, policies and ultimately economies.

Will this marriage work? The NAEC provides an intellectual and practical framework for precisely the coherent, cooperative and universal approach required to achieve the targets set forth in the SDGs. And, like the SDGs themselves, this framework can be applied by all of us and to all of us – OECD members, emerging and developing countries and international organizations working to find solutions.

Words are cheap and the challenges are huge. But the opportunities to make the world a better place are very real — if we make the right decisions.

Progress is possible on a global scale. We have seen it. The agreement reached in Paris in December on combating climate change was a big step forward, though there remains a long way to go if we are to stop killing our planet.

The Millennium Development Goals showed what could be accomplished by focusing global attention on developing countries – child mortality rates were cut by more than half, so was the number of people living on less than $1.25 a day, to name just two results.

In the narrowest sense, the SDGs are an extension of that unfinished anti-poverty effort. Clearly, rich countries still need to help the poorest countries. The SDGs don’t absolve us of that responsibility.

But the SDGs represent a very different agenda. Yes, the SDGs ask developed countries to redouble their efforts on behalf of developing countries, especially the poorest of the poor. Equally important, however, they require us to take a hard look at ourselves. No country can say that we it has no work to do when it comes to improving our societies. In the eyes of the SDGs, we are all developing countries.

Indeed, the SDGs are the mirror in which we see our own policies and performance reflected. The picture isn’t pretty in some categories. For instance, we all need to do a better job of fostering inclusive growth and adopting sustainable consumption patterns. We all need to make sure that, at the very least, our policies do no harm to the rest of the world.

These dual objectives of the SDGs – helping others while helping ourselves — are where the OECD and the NAEC initiative are the right match. No organization is better equipped to work with both developed and developing countries than the OECD. We have been doing it for more than half a century.

At the same time, the fundamental and dynamic re-thinking of the path to solving global economic challenges embodied in the NAEC provides the right methodology for tackling the interrelated complexities of the 2030 Agenda.

In short, the integrated approach prescribed by the NAEC recognises our global responsibility to find universal solutions to the challenges of the SDGs. Our self-interest demands that we do so.

Returning to our star-crossed lovers, it seems self-evident that the SDGs and the NAEC, like Romeo and Juliet, were made for each other. Our job is to bring the Montagues and Capulets together and make sure there is a better outcome this time.

Useful links

New Approaches to Economic Challenges (NAEC)

NAEC Seminar Series

The Importance of a Policy Coherence Lens for Implementing the Sustainable Development Goals

NAECEbba Dohlman, Senior Advisor, Policy Coherence for Development, OECD

The 2030 Agenda for Sustainable Development and the Addis Ababa Action Agenda call upon all countries to “pursue policy coherence and an enabling environment for sustainable development at all levels”. Sustainable Development Goal 17 – on the means of implementation – includes a Target to “enhance policy coherence for sustainable development” (PCSD). The OECD defines PCSD as an approach and policy tool to integrate the economic, social, environmental, and governance dimensions of sustainable development at all stages of domestic and international policy making. PCSD aims to increase governments’ capacities to foster synergies across economic, social and environmental policy areas; identify trade-offs; reconcile domestic policy objectives with internationally agreed objectives; and address the spillovers of domestic policies.

Policy coherence for sustainable development is fundamental to ensure that progress achieved in one SDG contributes to progress in other SDGs, and to avoid the risk of progress in one goal at the expense of another. PCSD is critical to:

  • Consider the economic, social and environmental costs and unintended consequences of policy decisions. For example, the USD 55-90 billion annual support for fossil fuels in OECD countries incentivise further CO2 emitting fossil fuels rather than investment in renewables; contribute to climate change; aggravate pollution and health risks; and waste money that could be reallocated for more targeted spending on the poor while contributing to global climate objectives.
  • Identify effective uses of diverse sources of finance other than ODA. While ODA remains crucial for the least developed countries and most vulnerable populations, it now represents only 20% of the developed world’s financial engagement with developing countries. PCSD can help to make best use of existing resources, including more effective fiscal administrations, higher tax income; remittances; trade and investment; more direct access to capital markets; low interest debt; and addressing illicit flows.
  • Shed light on critical sectoral interactions to achieve SDGs and Targets. PCSD can help to inform how efforts to attain a goal in one sector would affect (or be affected by) efforts in another sector, for example between water (SDG6), food (SDG2), and energy (SDG7). Agriculture is the largest user of water at the global level; energy is needed to produce and distribute both water and food; and the food production and supply chain accounts for almost one third of total global energy consumption. Policy decisions made in these sectors can have significant impacts on each other and tensions may arise from real or perceived trade-offs between various objectives. Improved water and energy services reduce the burden on women and young girls who often spend several hours each day collecting water and gathering biomass for cooking, thus freeing up time for their participation in education and income generation activities. The provision of cleaner water and energy services is also linked to improvements in the health, micro-enterprise activity, and agricultural productivity of women, thereby spurring overall national economic development.
  • Deal with systemic conditions and disablers that hamper sustainable development. Illicit financial flows for example are a major disabler for sustainable development. In many countries of origin, they are a symptom of governance failures, weak institutions, and corruption, but also of other systemic conditions in recipient countries that allow IFFs to thrive, such as tax havens and secrecy jurisdictions. A PCSD lens can inform actions at international level to support a fairer and more transparent global tax system; and curb tax avoidance strategies which in most cases are legal but unfairly take advantage of the interaction between tax rules of different countries. At the national level, success will depend on the quality of domestic regulations, institutions and capabilities to identify, track, and fight tax evasion, money laundering and corruption.

The multi-sectoral and transformative nature of the 2030 Agenda for Sustainable Development will require institutions to be able to work across policy domains (horizontal coherence) and governance levels from local to global (vertical coherence). It requires policies that systematically consider sectoral inter-linkages (synergies and trade-offs) and effects (here and now, elsewhere, and tomorrow). The OECD’s analytical framework can help inform decision-making and support policy-makers and stakeholders to design policies that systematically consider:

  • The roles and responsibilities of different actors as well as the diverse sources of finance – public and private, domestic and international – for achieving sustainable development outcomes.
  • The policy inter-linkages across economic, social and environmental areas, including the identification of synergies, contradictions and trade-offs, as well as the interactions between domestic and international policies.
  • The non-policy drivers, i.e. the enablers (that contribute to) and disablers (that hamper) sustainable development outcomes at the global, national, local and regional levels.
  • The policy effects “here and now”, “elsewhere”, and “later”. This captures ways in which the pursuit of well-being today in one particular country may affect the well-being in other countries or of future generations (the long-term impact of policies at national and global levels).

Analytical Framework for Policy Coherence for Sustainable Development

PCSD

Against this background, the OECD is developing PCSD Framework, a self-assessment policy toolkit, aimed at providing policy-makers with practical guidance on: (i) setting up institutional mechanisms for coherence, including political commitment and leadership, coordination capacity and monitoring systems; (ii) managing policy interactions at different levels to detect and resolve policy conflicts; (iii) addressing contextual factors that enable or impede coherence for sustainable development; and (iv) anticipating the unintended consequences of policy decisions. It includes thematic modules on Food Security, Illicit Financial Flows and Green Growth.

Useful links

OECD work on policy coherence for development