You don’t want to know what they do with the bottles

Today’s post is from Liisa-Maija Harju, Environmental Coordinator in the OECD Operations Service

Each year OECD countries generate over four billion tonnes of waste. By 2020, we could be generating 45% more waste than we did in 1995.

OECD’s work on waste management focuses on promoting sustainable materials management in order to limit waste generation in the first place. According to the recent report Greenhouse gas emissions and the potential for mitigation from materials management within OECD countries, in most OECD countries, at least 4 percent of current annual GHG emissions could be mitigated if waste management practices were improved. The report focuses on municipal solid waste that forms only a portion of total waste generation across OECD countries.

Typically GHG emissions from the waste sector have accounted for 3% to 4% of total emissions in OECD member countries’ GHG emission inventories. This approach might be outdated because it only considers direct emissions primarily from landfill methane emissions and incinerators.

A systems view would be needed to assess GHG emissions associated with materials and waste because materials production, consumption and end-of-life management are so closely linked together. Looking at the whole life cycle would allow for the inclusion of GHG emissions from the acquisition, production, consumption, and end-of-life treatment of physical goods in the economy.

When viewed from a life-cycle perspective, GHG emissions arising from materials management activities are estimated to account for 55% to 65% of national emissions for four OECD member countries studied. This suggests that there is a significant opportunity to potentially reduce emissions through modification and expansion of materials management policies. The report also reminds us that basic recycling and source reduction are effective tools to reduce total GHG emissions.

How about us here at the OECD itself? The OECD Secretariat’s total  GHG footprint amounted to approximately 9332 metric tonnes CO₂-equivalent in 2010. Our GHG Inventory tool does not include waste management directly, and we don’t yet have the means to calculate the real GHG emissions savings of our waste management efforts.

Since 2008 we have sorted paper, and in the past four years the total amount of waste produced has gone down by 45%, although the baseline was exceptionally high because we moved offices over 2007-2009 when our headquarters buildings were being refurbished and the new conference centre built. In 2011 the Secretariat produced 477 tonnes of waste (of which 274 tonnes was paper waste) compared to 861 tonnes of waste in 2008 (of which 363 tonnes was paper waste). Last year we installed a machine that allows for the compression of bottle, can, cardboard, and paper waste at our facilities before transportation, cutting down the number of truck trips needed to take away the waste.

To further improve our waste management infrastructure, we will install a comprehensive sorting system for bottles and cans this June. Hopefully we will be able to switch our focus to sustainable materials management and the prevention of all the waste in the first place so that by 2020 we will be generating at least 45% less waste than we did in 2011.

Useful links

OECD work on greenhouse gas mitigation and materials management

OECD work on sustainable materials management

OECD work on material flow analysis

Nearly 8000 mortgage products were aimed at people with “impaired credit histories” in the UK in 2007

Today’s post is from James Plunkett, Secretary to the Commission on Living Standards which is hosted by the Resolution Foundation

How did inequality and household debt interact in the run up to the 2008/09 financial crisis?  Today, a new report by NIESR for the Resolution Foundation provides new evidence on that question for the UK. The new analysis confirms the severity of the borrowing situation of low income households in Britain before the crash and raises difficult questions about patterns of consumption in an era of high inequality.

The report’s key contribution is to dig beneath headline figures for household debt to describe the borrowing picture for households at different points in the income distribution. It’s well established that UK household debt, in common with many other countries, ballooned in the late 1990s and 2000s, with the aggregate savings ratio—the percentage of household disposable income that is saved—turning negative in 2008 for the first time since records began. Yet so far these headline figures have been something of a black box.

Figure 1 from today’s report shows how the decline in the household saving position played out for households in different income deciles. It suggests that the poorest 10 percent of UK households saw their saving position deteriorate catastrophically from the late 1980s onwards, falling to a staggering negative 43 percent by 2007. Put another way, these households were outspending their incomes by 43 percent each year. Even for households on low to middle incomes (those in the second to fifth deciles) the picture was bad for much longer than was previously thought. On average these households had been outspending their incomes for anywhere between ten and 20 years by the time the 2008 crisis struck.

 Figure 1

Source: NIESR analysis for the Resolution Foundation, FES

Some will dismiss these findings as unreliable and there is certainly good reason for caution on the specifics. But if the trends seen in Figure 1 do reflect the general pattern of UK spending and borrowing in the run up to the crisis, how should we interpret them?

Two main points of contention emerge between commentators, and although it’s far from definitive today’s report speaks to both. The first relates to the relative importance of income and consumption. Crudely speaking, two camps have emerged in the UK on this question. On the one hand, there are those who see the pre-crisis period as one of profligacy and spending sprees, with consumption soaring on the back of easy credit. On the other, there are those who tell a story of low income growth in which households in the bottom half were forced to borrow just to stay afloat.

Figure 2 speaks to this question. It shows how the two components of the UK savings ratio—consumption and disposable income—grew from 1997 to 2007. Certainly disposable income growth was shockingly weak for the bottom ten percent of households in this period, indeed official data suggests it was weaker still. We also know from wider work that income growth was weak or non-existent for low to middle income households in the later period from 2003 to 2008, supporting a weak incomes story.

Yet the figures on spending aren’t easy reading either. Consumption growth in the bottom half of households appears to have been surprisingly strong in this decade and even to have slightly outpaced consumption growth in the top half. We should be clear that this doesn’t mean low income households went on shopping sprees; we don’t know, for example, how much of this consumption was made up by the rising cost of essentials like food and fuel. And, importantly, we also don’t know how much of how much of this new spending in the bottom half went to service mortgages.

 Figure 2

Source: NIESR analysis for the Resolution Foundation, FES

This gets us into the second big dispute between commentators: how much of a role should we assign the housing market in these trends? Big pre-crisis declines in the UK savings ratio would be much less worrying—or at least would be worrying in a very different way—if they were driven simply by increased mortgage repayments. After all, these can be seen as another form of saving, and a pretty sensible form in a booming housing market. In this case, Figure 1 would be little more than another aspect of the UK’s housing boom, and one we can be relatively sanguine about.

It’s hard to conclude either way on this front but the analysis does suggest that increased mortgage borrowing isn’t the only thing driving the figures for the bottom half of households. Across the bottom five deciles of UK household income, for example, the share of households with a mortgage isn’t particularly large, ranging from 10 to 24 percent. These proportions were also pretty stable in the decade before the crisis. At least in later years, then, this wasn’t a story of more low income people taking on mortgages (though there undoubtedly were big increases in the size of each mortgage).

Where does this all leave the link between debt and inequality? We should be careful about strong conclusions when so much relies on interpretation. Overall, though, it’s not hard to see something of a dynamic of ‘keeping up with the Joneses’—or, in technical terms, evidence for the relative income hypothesis—in the consumption figures above, a dynamic that would have realised itself in part in terms of home-buying.

In fact, if there was one moment of agreement at this morning’s launch of the new research it was over the risks that now face low income households in servicing the resultant mountain of secured debt. As Jonathan Portes, Director of NIESR, pointed out, in 2007 there were around 12,000 different mortgage products on the UK market of which around two thirds (nearly 8,000) were aimed at people with ‘impaired credit histories’. Today there are none of the latter, and though the debts they made possible appear serviceable for now, that could all change quickly when rates rise. 

Useful links

OECD 2011 Economic Survey of the UK

Has the rise in debt made households more vulnerable? OECD Working paper

Divided We Stand: Why Inequality Keeps Rising

Aggressive isn’t enough, Al, you need planning too. Click to see how the tax inspectors caught Capone.

The simplest way to pay less tax is to earn less, but if you’re a multinational enterprise, there are other options, including double deductions – pay your tax in one country then deduct that sum in two or more other ones. You can also make your income disappear for tax purposes by getting a deduction in one country  that isn’t included in the calculation anywhere else. If you’re really smart you can even generate foreign tax credits for taxes you didn’t actually pay at all. The exception proves the rule, and while most OECD documents contain some warning about there being “no magic/silver bullets”, that doesn’t apply to international taxation.

The bullets are “hybrid mismatch arrangements”, hybrids for short, and although they cost the rest of us billions of dollars a year, they’re perfectly legal, for the time being anyway. The OECD’s Centre for Tax Policy and Administration and the Canada Revenue Agency have just organised a meeting with senior tax officials from OECD countries to discuss the issues raised, following the publication of an OECD study Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues.

Hybrids exploit the fact that although the economy is increasingly globalised and integrated, corporate tax systems are still running on principles established around a hundred years ago for firms operating mainly in one country, with little need to consider how different systems affected each other. International tax expert Professor Reuven S. Avi-Yonah put it like this when testifying to the US Congress Ways and Means Committee: “corporate residence is not a particularly meaningful concept, it makes little sense to base the entire US international tax regime on it.” Multinationals certainly don’t base their tax strategies on it and take advantage of mismatches between national legislations via aggressive tax planning.

The basic idea behind hybrids is to have the same money or transaction treated differently by different countries to avoid paying tax. One common feature of hybrids is dual residence, companies that are residents of two countries for tax purposes. Speaking during the debate on the UK budget earlier this year, Conservative MP Charlie Elphicke denounced the “magic roundabout” that allowed companies like Google to avoid tax, pointing out that the company “took about £2.15 billion in revenue from the UK in 2010, making an estimated £700 million profit, yet it did not pay any tax. In fact, it declared a loss of £22 million”.

Amazon is another case in point. If you look at their accounts, you’ll find that they may not actually trade in a country they do business in, since they only have a delivery company there. In Europe, the main business is based in Luxembourg, and the billions of euros in sales income generated elsewhere is not taxed in those countries.

Apart from dual residence, the other most common elements that hybrids exploit are entities, instruments and transfers. The details are complex and vary from place to place, but one firm offering to help companies avoid tax through hybrid entities, in this case limited liability companies, sums up the approach in the clearest of terms: “The [entity] allows for a real presence [in the host country], with all the normal benefits of [that country’s] legal structure and bank accounts… but reap the profits – tax free!”

A typical hybrid instrument would allow a company to treat something as debt in one country and equity in another, while hybrid transfers are arrangements that are treated as transfer of ownership or an asset in one country but only as a loan with collateral in another.

By playing off one country’s tax system against another, the most successful hybrids achieve double non-taxation – the company doesn’t pay tax anywhere, an unintended consequence if ever there was one of the tax laws of the countries concerned. It’s worth repeating that none of this is illegal. Replying to criticisms of its low tax bill, a spokesperson for Google said: “We have an obligation to our shareholders to set up a tax efficient structure, and our present structure is compliant with the tax rules in all the countries where we operate.”

That may be true, but it raises a number of issues. Obviously companies act like this to reduce the revenue tax authorities receive. The total sum isn’t known and a few jurisdictions may benefit at the expense of the rest, but some figures are available. In 2009 New Zealand settled cases involving four banks for a combined sum exceeding NZ$2.2 billion (€1.3 billion); Italy has settled a dozen cases involving hybrids for around €1.5 billion;  while in the US the amount of tax at stake in 11 foreign tax credit generator transactions has been estimated at $3.5 billion.

Then there’s the issue of fairness and trust in the tax system. A new OECD study, Taxing Wages shows that the tax burden on earnings is continuing to rise in OECD countries. Governments trying to convince workers that they have to pay for austerity measures would have a better chance of convincing them if capital income was seen to be taxed fairly. Local businesses that don’t have the multinationals’ means to use hybrids and other means of paying less tax may feel they’re being treated unfairly too, and they are at a competitive disadvantage.

What can be done? A number of countries have introduced rules which specifically deny benefits arising from hybrids by linking the domestic tax treatment of an entity, instrument or transfer involving a foreign country with the tax treatment in that foreign country. The OECD recommends such initiatives, along with two others: sharing intelligence and experience on tackling hybrid; and consider introducing or revising disclosure initiatives targeted at certain hybrids.

Useful links

OECD work on aggressive tax planning

OECD work on Exchange of Information for Tax Purposes

Tax Inspectors Without Borders/Inspecteurs des impôts sans frontières The OECD’s Task Force on Tax and Development has launched an initiative to help developing countries bolster their domestic revenues by making their tax systems fairer and more effective. The OECD will  establish an independent foundation, to be up and running by the end of 2013, that will provide international auditing expertise and advice to help developing countries better address tax base erosion, including tax evasion and avoidance.

No job for a lady? Ada, Countess of Lovelace,the world’s first programmer

There used to be adverts on buses and trains saying “If u cn rd this u cd gt a rly gd job”. At the time, I nvr figured out what the jb was, but now I realise it was probably to write software for texting applications. Like everything else, sms had its origins in Victorian love poems (and if you don’t believe me, look at this). However, when clever Charles Bombaugh was writing about loving “U 2 X S,/ U R virtuous and Y’s”, the only programmer in the country had been dead for about 20 years, and the computer she wrote the algorithm for, clever Charles Babbage’s analytical engine, was never built.

The memory of Countess Lovelace (for it was she) lives on in the programming language Ada named in her honour, but today most programmers are men, or boys (they’re getting younger every day). Women account for only 30% of ICT sector employment and 20% of ICT specialist occupations. Both categories are recruiting and resisted the impacts of the crisis more than most, and companies are looking abroad to fill the gaps, either by recruiting immigrant workers or offshoring the tasks.

Companies and governments are also facing a new challenge according to a report prepared by OECD analysts Christian Reimsbach-Kounatze and Cristina Serra Vallejo: developing the competences for a “greener and smarter” economy. The link with “smarter” is obvious, but at first sight, it’s hard to see what’s green about ICT. Electronic waste is one of the fastest growing types and according to the UN, around 40 million tons of waste from electrical and electronic equipment, WEEE, are generated each year from the products we throw away. In 2005, visitors to London could see the Weee man, a 7 metre high giant composed of the estimated electrical and electronic waste one UK citizen will discard in a lifetime.

There’s also what’s sometimes called “digital waste”, the terabytes of forgotten emails, photos, videos and so on kept online. It all has to be physically stored somewhere, along with the files we actually use, and server farms and the data centres that host them have an impact on the environment through the electricity generated to run the equipment and cool the buildings. Google for instance said that its offices and data centres emitted over 1 million tons of carbon in 2010, claiming that the figure would have been twice as high without efforts to reduce its footprint.

Data centres and other ICT infrastructures are increasingly vital for all sectors of the economy, and green growth strategies will require people capable of both greening ICT itself and helping ICT to make other activities greener. ICT skills and employment: New competences and jobs for a greener and smarter economy (the OECD report mentioned above) argues that promoting ICT skills in the green and smart economy pays a double dividend by encouraging job creation and accelerating the transition to green growth.

The jobs wouldn’t just be in the sector itself. Employment in the ICT industry and employment of ICT specialist skills each accounts for up to 5% of total employment in OECD countries, but ICT intensive-users account for more than 20% of all workers in all branches. A car mechanic I know told me that when he started working 30 years ago, the first thing you did when a car came in to the repair shop (apart from telling the client it was a big job and would be ready on Tuesday) was to get your hands dirty poking around the engine or jacking it up, whereas now you start by plugging it in to a computer. And hundreds of other jobs across the whole skills range now need knowledge of ICT as well.

A clear and widely accepted definition of what a green job actually is doesn’t exist yet, therefore the report uses a definition from another OECD study: “…jobs that contribute to protecting the environment and reducing the harmful effects human activity has on it (mitigation), or helping to better cope with current climate conditions (adaptation)”.

On that basis, some of the new jobs will be in the ICT sector, writing software or developing and manufacturing environmentally efficient semiconductors and other products for instance. Other green jobs will be related to greening the economy, for example working on the systems that operate wind farms or installing and maintaining the equipment that smart buildings use to control lighting and temperature.

Given the potential of ICT to boost both green growth and employment, it’s surprising to learn that only a minority of governments are explicitly promoting green ICT-related skills and jobs according to an OECD survey.

Useful links

OECD work on ICT skills and employment

OECD work on green growth

Are boys and girls ready for the digital age? Report from OECD-PISA on how proficient 15-year-olds are in gathering and processing information from printed and digital material:

• On average, girls outperform boys in digital reading; however, the gender gap is narrower than it is for print.
• Among boys and girls with similar levels of proficiency in print reading, boys tend to have stronger digital navigation skills and therefore score higher in digital reading.

Foreigners are welcome if they foster domestic capabilities

Today in collaboration with Americas Quarterly, we’re publishing the last of a series of three articles on globalisation and the fight against poverty by Dani Rodrik, Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University.  You can read a print version in AQ’s Spring 2012 edition on social inclusion (online version here) and the first article in the series here

China’s experience offers compelling evidence that globalization can be a great boon for poor nations. Yet it also presents the strongest argument against the reigning orthodoxy in globalization, which emphasizes financial globalization and deep integration through the World Trade Organization (WTO). China’s ability to shield itself from the global economy proved critical to its efforts to build a modern industrial base, which would in turn be leveraged through world markets.

Since 1978, income per capita in China has grown at an average rate of 8.3 percent per annum—a rate that implies a doubling of incomes every nine years. Thanks to this rapid economic growth, between 1981 and 2008 the poverty rate in China (the percent of the population below the $1.25-a-day poverty line) fell from 84 percent to 13 percent, much of it from reducing rural poverty. This meant a whopping 662 million fewer Chinese in extreme poverty, a number that accounts for virtually the entire drop in global poverty over the same period.

During the same period, China transformed itself from near autarky to the most feared competitor on world markets. That this happened in a country with a complete lack of private property rights (until recently) and run by the Communist Party only deepens the mystery.

China’s big break came when Deng Xiaoping and other post-Mao leaders decided to trust markets instead of central planning. But their real genius lay in their recognition that the market-supporting institutions they built, most of which were sorely lacking at the time, would have to possess distinctly Chinese characteristics.

China’s economy was predominantly rural in 1978. A Western-trained economist would have recommended abolishing central planning and removing all price controls. Yet without a central plan urban workers would have been deprived of their cheap rations and the government of an important source of revenue, resulting in masses of disgruntled workers in the cities and the risk of hyperinflation.

The Chinese solution to this conundrum was to graft a market system on top of the plan.

Communes were abolished and family farming restored, but land remained state property. Obligatory grain deliveries at controlled prices were kept in place, but once farmers had fulfilled their state quota they were now free to sell their surplus at market-determined prices. This dual-track regime gave farmers market-based incentives and yet did not deprive the state of revenue nor deprive urban workers of cheap food.  Agricultural productivity rose sharply, setting off the first phase of China’s post-1978 growth.

Another challenge was how to provide a semblance of property rights when the state remained the ultimate owner of all property. Privatization would have been the conventional route, but it was ruled out by the Chinese Communist Party’s ideology.

Once again, an innovation came to the rescue. Township and village enterprises (TVEs) proved remarkably adept at stimulating domestic private investment. They were owned not by private entities or the central government, but by local governments (townships or villages). TVEs produced virtually the full gamut of products, everything from consumer goods to capital goods, and spearheaded Chinese economic growth from the mid-1980s until the mid-1990s. The key to the success of TVEs was the self-interest of local governments, which would reap substantial income from their equity stake in the enterprises.

China’s strategy to open its economy to the world also diverged from received theory. The Chinese leadership resisted the conventional advice to remove trade barriers. Such an action would have forced many state enterprises to close without doing much to stimulate new investments in industrial activities. Employment and economic growth would have suffered, threatening social stability.

The Chinese decided to experiment with alternative mechanisms that would not create too much pressure on existing industrial structures. While state trading monopolies were dismantled relatively early (starting in the late 1970s), what took their place was a complex and highly restrictive set of tariffs, nontariff barriers and licenses restricting imports. These were not substantially relaxed until the early 1990s.

In particular, China relied on Special Economic Zones (SEZs) to generate exports and attract foreign investment. Enterprises in these zones operated under different rules than those that applied in the rest of the country; they had access to better infrastructure and could import inputs duty free. The SEZs generated incentives for export-oriented investments without pulling the rug out from under state enterprises.

What fueled China’s growth, along with these institutional innovations, was a dramatic productive transformation.

The Chinese economy latched on to advanced, high-productivity products that no one would expect a poor, labor-abundant country to produce, let alone export. By the end of the 1990s, China’s export portfolio resembled that of a country with an income-per-capita level at least three times higher than China’s.

Foreign investors played a key role in the evolution of China’s industries. They created the most productive firms, introduced new technology to the economy, and became the drivers of the export boom. The SEZs, where foreign producers could operate with good infrastructure and with a minimum of hassles, deserve considerable credit.

But if China welcomed foreign companies, it always did so with the objective of fostering domestic capabilities. It used a number of policies to ensure that technology transfer would take place and that strong domestic players would emerge. Early on, they relied predominantly on state-owned national champions. Later, the government used a variety of incentives and disincentives to foster joint ventures with domestic firms (as in mobile phones and computers) and expand local content (as in autos). Cities and provinces were given substantial freedoms to fashion their own policies of stimulation and support, which led to the creation of industrial clusters in Shanghai, Shenzhen, Hangzhou, and elsewhere.

Many of these early policies would have run afoul of WTO rules that ban export subsidies and prohibit discrimination in favor of domestic firms—if China had been a member of the organization. Chinese policy makers were not constrained by any external rules in their conduct of trade and industrial policies and could act freely to promote industrialization.

By the time China did join the WTO, in 2001, it had created a strong industrial base, much of which did not need protection or nurturing. China substantially reduced its tariffs in preparation for WTO membership, bringing them down from the high levels of the early 1990s (averaging around 40 percent) to single digits in 2001. Many other industrial policies were also phased out.

However, China was not yet ready to let the push and pull of global markets determine the fate of its industries. It began to rely increasingly on a competitive exchange rate to effectively subsidize these industries. By intervening in currency markets and keeping short-term capital flows out, the government prevented its currency (renminbi) from appreciating, which would have been the natural consequence of China’s rapid economic growth.

Explicit industrial policies gave way to an implicit industrial policy conducted by way of currency policy.

Asia’s economic experience violates stereotypes and yet offers something for everyone. In effect, it acts as a reflecting pool for the biases of the observer. If you think unleashing markets is the best way to foster economic development, you will find plenty of evidence for that. If you think markets need the firm, commanding hand of the government, well, there is much evidence for that too.

Globalization as an engine for growth? East Asian countries are a case in point. Globalization needs to be tamed? Ditto. However, if you leave aside these stale arguments and listen to the real message that emanates from the success of the region, you find that what works is a combination of states and markets. Globalization is a tremendously positive force, but only if you are able to domesticate it to work for you rather than against you.

You become what you produce. That is the inevitable fate of nations. Specialize in commodities and raw materials, and you will get stuck in the periphery of the world economy. You will remain hostage to fluctuations in world prices and suffer under the rule of a small group of domestic elites.

If you can push your way into manufactured and other modern tradable products, you may pave a path toward convergence with the world’s rich countries. You will have greater ability to withstand swings in world markets, and you will acquire the broad based, representative institutions that a growing middle class demands, instead of the repressive ones that elites need to hide behind.

Globalization accentuates the dilemma because it makes it easier for countries to fall into the commodities trap.

The international division of labor makes it possible for you to produce little else besides commodities, if that is what you choose to do. At the same time, globalization greatly increases the rewards of the alternative strategy, as the experiences of Japan, South Korea, Taiwan, and China amply show.

Sustained poverty reduction requires economic growth. A government committed to economic diversification and capable of energizing its private sector can spur growth rates that would have been unthinkable in a world untouched by globalization. The trick is to leverage globalization through a domestic process of productive transformation and capacity-building.

Useful links

This series is adapted from Dani Rodrik’s The Globalization Paradox: Democracy and the Future of the World Economy published by Norton

Americas Society – Council of the Americas

OECD work on China

Perspectives on global development (publications from the OECD Development Centre)

Natural Resources and Pro-Poor Growth: The Economics and Politics

OECD work on poverty reduction and social development

OECD work on the benefits of trade liberalisation

Protecting the tiger

Today in collaboration with Americas Quarterly, we’re publishing the second of a series of three articles on globalisation and the fight against poverty by Dani Rodrik, Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University.  You can read a print version in AQ’s Spring 2012 edition on social inclusion (online version here) and the first article in the series here

The experience of Asian tigers after the Second World War (South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand, and Indonesia) reinforced the lesson from Japan’s economic history that economic growth was achievable even if a country started at the wrong end of the international division of labor, if you combined the efforts of a determined government with the energies of a vibrant private sector.

All of these countries benefited enormously from exports, and hence from globalization. But none, with the exception of British colony Hong Kong, came even close to being free-market economies. The state played an important guiding and coordinating role in all of them.

Consider two of the most successful countries of the region: South Korea and Taiwan.

In the late 1950s, neither of these economies was much richer than the countries of Sub-Saharan Africa. South Korea was mired in political instability and had virtually no industry, having lost whatever it had to the more developed North Korea. Taiwan, too, was a predominantly agricultural economy, with sugar and rice as its main exports. The transformation that the two economies began to experience in the early 1960s placed them on a path that would turn them into major industrial powers.

In many ways, their strategies mirrored Japan’s. They required, first, a government that was single-mindedly focused on economic growth. Prior land reform in both countries had established some space for governments to act independently from landed elites.

Both countries also possessed an overarching geo-political motive. South Korea needed to grow so it could counter any possible threats from North Korea. Taiwan, having given up on the idea of reconquest of mainland China, wanted to forestall any possible challenge from the Communists. The governments in South Korea and Taiwan understood that achieving their political and military goals required rapid economic growth. Developing industrial capabilities and a strong manufactured exports base became their predominant objective.

This objective was accomplished by unleashing the energies of private business.

Even though both governments invested heavily in public enterprises during the 1960s, the investment was designed to facilitate private enterprise by providing cheap intermediate inputs, for example, and not to supplant it. One plank of the strategy called for removing the obstacles to private investment that stifled other low-income countries: excessive taxation, red tape and bureaucratic corruption, inadequate infrastructure, and high inflation. These were improvements in what today would be called the “investment climate.”

Equally important were interventionist policies, government incentives designed to stimulate investments in modern manufactures. Both governments designated such industries as “priority sectors” and provided businesses with generous subsidies. In South Korea, these largely took the form of subsidized loans administered through the banking sector. In Taiwan, they came in the form of tax incentives for investments in designated sectors.

In both countries, bureaucrats often played the role of midwife to new industries: they coordinated private firms’ investments, supplied the inputs, twisted arms when needed, and provided sweeteners when necessary. Even though they removed some of the most egregious import restrictions, neither country exposed its nascent industries to much import competition until well into the 1980s.

While they enjoyed protection from international competition, these infant industries were goaded to export almost from day one. This was achieved by a combination of explicit export subsidies and intense pressure from bureaucrats to ensure that export targets were met. In effect, private businesses were offered a quid pro quo: they would be the beneficiaries of state largesse, but only as long as they exported, and did so in increasing amounts.

If gaining a beachhead in international markets required loss-making prices early on, these could be recouped by the subsidies and profits on the home market. But importantly, these policies gave private firms a strong incentive to improve their productivity so they could hold their own against established competitors abroad.

In the third and last article in this series, I’ll look at a third example of an “unorthodox” development strategy, China’s shift from a predominantly rural, centrally-planned economy to the industrial giant we know today.

Useful links

This series is adapted from Dani Rodrik’s The Globalization Paradox: Democracy and the Future of the World Economy published by Norton

Americas Society – Council of the Americas

Perspectives on global development (publications from the OECD Development Centre)

Natural Resources and Pro-Poor Growth: The Economics and Politics

OECD work on poverty reduction and social development

OECD work on the benefits of trade liberalisation

Busan: Yes we could (The Insights blog looks at Korea’s development success)

明治大帝,before Westernisation

Today, in collaboration with Americas Quarterly, we’re publishing the first of a series of three articles on globalisation and the fight against poverty by Dani Rodrik, Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University.  You can read a print version in AQ’s Spring 2012 edition on social inclusion (AQ’s own version of the article is here).

The proximate cause of poverty is low productivity. Poor people are poor because their labor produces too little to adequately feed and house them, let alone provide adequately for other needs such as health care and education.

Low productivity, in turn, has diverse and multiple causes. It may be the result of lack of credit, lack of access to new and better technologies, or lack of skills, knowledge or job opportunities. It may be the consequence of small market size, or exploitative elites, in cahoots with the government, who block any improvement in economic conditions that would threaten their power.

Globalization promises to give everyone access to markets, capital and technology, and to foster good governance. In other words, globalization has the potential to remove all of the deficiencies that create and sustain poverty. As such, globalization ought to be a powerful engine for economic catch-up in the lagging regions of the world.

And yet, the past two centuries of globalization have witnessed massive economic divergence on a global scale. How is that possible? This question has preoccupied economists and policy makers for a long time. The answers they have produced coalesce around two opposing narratives.

One says the problem is “too little globalization,” while the other blames “too much globalization.” The debate on globalization and development ultimately always comes back to the conundrum framed by these competing narratives: if we want to increase our economic growth in order to lift people out of poverty, should we throw ourselves open to the world economy or protect ourselves from it?

Unfortunately, neither narrative offers much help in explaining why some countries have done better than others, and therefore neither is a very good guide for policy. The truth lies in an uncomfortable place: the middle. It’s a point best illustrated by the country that has contributed the most—given its overall size—to the reduction of poverty globally: China. China, in turn, learned from Japan’s example, as did other successful Asian countries.

In the aftermath of the Industrial Revolution, globalization enabled new technologies to disseminate in areas with the right preconditions, but also entrenched and accentuated a long-term division between the core and the periphery. Once the lines were drawn between industrializing and commodity-producing countries, strong economic dynamics reinforced the division. Commodity-based economies faced little incentive or opportunity to diversify. As Jeffrey G. Williamson shows, this was very good for the small number of people who reaped the windfall from the mines and plantations that produced commodities, but not very good for manufacturing industries that were squeezed as a result. The countries of the periphery not only failed to industrialize; they actually lost whatever industry they had. They deindustrialized.

Geography and natural endowments largely determined nations’ economic fates under the first era of globalization, until 1914. One major exception to this rule would ultimately become an inspiration to all commodity-dependent countries intent on breaking the “curse.” The exception was Japan, the only non-Western society to industrialize prior to 1914. Japan had many of the features of the economies of the periphery. It exported primarily raw materials – raw silk, yarn, tea, fish – in exchange for manufactures, and this trade had boomed in the aftermath of the opening to free trade imposed by Commodore Matthew Perry in 1854. Left to its own devices, the economy would have likely followed the same path as so many others in the periphery.

But Japan had a local group of well-educated, patriotic businessmen and merchants, and even more important, following the Meiji Restoration of 1868 a government that was single-mindedly focused on economic (and political) modernization. That government was little moved by the laissez-faire ideas prevailing among Western policy elites at the time. Japanese officials made clear that the state had a significant role to play in developing the economy, even though its actions “might interfere with individual freedom and with the gains of speculators.”

Many of the reforms introduced by the Meiji bureaucrats were aimed at creating the infrastructure of a modern national economy: a unified currency, railroads, public education, banking laws, and other legislation. Considerable effort also went into what today would be called industrial policy – state initiatives targeted at promoting new industries. The Japanese government built and ran state-owned plants in a wide range of industries, including cotton textiles and shipbuilding. Even though many of these enterprises failed, they produced important demonstration effects. They also trained many skilled artisans and managers who would subsequently ply their trade in private establishments.

Eventually privatized, these enterprises enabled the private sector to build on the foundations established by the state. The government also paid to employ foreign technicians and technology in manufacturing industries and financed training abroad for Japanese students. In addition, as Japan regained tariff autonomy from international treaties, the government raised import tariffs on many industrial products to encourage domestic production.

These efforts paid off most remarkably in cotton textiles. By 1914, Japan had established a world-class textile industry that was able to displace British exports not just from the Japanese markets, but from neighboring Asian markets as well. (For varying accounts of the role played by the state and private industry in the take-off of cotton spinning in Japan, see W. Miles Fletcher and Gary Saxonhouse)

While Japan’s militarist and expansionist policies in the run up to the Second World War tarred these accomplishments, its achievements on the economic front demonstrated it was possible to steer an economy away from its natural specialization in raw materials. Economic growth was achievable, even if a country started at the wrong end of the international division of labor, if you combined the efforts of a determined government with the energies of a vibrant private sector.

In the next article, I’ll look at how the experience of Asian tigers after the Second World War (South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand, and Indonesia) reinforced the lesson.

Useful links

This series is adapted from Dani Rodrik’s The Globalization Paradox: Democracy and the Future of the World Economy published by Norton

Americas Society – Council of the Americas

Perspectives on global development (publications from the OECD Development Centre)

Natural Resources and Pro-Poor Growth: The Economics and Politics

OECD work on poverty reduction and social development

OECD work on the benefits of trade liberalisation

Comparative advantage: Doing what you do best (from the Insights blog)

Click to see the book on OECD iLibrary

Brittany, 1689. Voltaire describes how a trilingual Huron arrives on board a ship and is invited to supper by the town worthies. When asked which of his three languages he prefers, the man picks Huron. “Is it possible?” cried Miss Kerkabon. “I always thought French was the first of all languages, after Lower Breton.” “The company speculated a little on the multiplicity of languages; and all agreed that had it not been for the unfortunate affair of the Tower of Babel, all the world would have spoken French.”

Following in Voltaire’s footsteps, Dave Barry stated in 1991 that: “Americans who travel abroad for the first time are often shocked to discover that, despite all the progress that has been made in the last 30 years, many foreign people still speak in foreign languages”.

Beyond the satires about universal ethnocentrism lies an essential issue. What is at stake when we learn non-native languages and why should we bother to learn languages at all? Languages in a Global World: Learning for Better Cultural Understanding (which cites the above) explores these issues. This bulky (470-page) OECD publication is the fruit of close co‑operation with Harvard University Graduate School of Education where the man behind the project, our OECD colleague Bruno della Chiesa, also works.

The scope of the book is breathtaking: it explores language learning all across the globe, in countries ranging from Canada to Tanzania and from France to Kazakhstan. It goes well beyond (applied) linguistics to deal with history, sociology, ethnology, psychology, neuroscience, music, philosophy and ethics. For those who think that OECD publications are dull, think again. This book is witty, irreverent – and thought provoking.

Why do we learn other languages? In our globalised world, learning languages is more crucial than ever. In fact it’s vital. For a job-seeker, mastering only one language could be a drawback. Writing in The Guardian, Will Hutton points out that “In the UK, the unemployment rate for language graduates is extremely low. The labour market values them. The economy needs more people who can speak foreign languages. This is a valuable skill, whether you’re part of the global scientific community or the world trade system.”

At the country level, mastering languages can also become a competitive advantage. Look at Canada for example. Its multicultural and bilingual policies seem to give the country a competitive edge.

The world’s seven billion people speak about six thousand languages – there are over 30 times as many languages as there are states – and speaking more than one language is quite normal, with around two-thirds of the world’s children raised as bilingual speakers. Yet, some countries tend to be more monolingual than others. Why is that? Could this possibly turn into a competitive disadvantage, even when the country’s language is today’s lingua franca, English? Could it be that power (both in its present and past – colonial – form) lures nations into believing that they (still) don’t need to speak foreign languages?

English is spoken as a first language by only 7% of the world’s inhabitants. It replaced Latin as the international tongue with the rise of the British Empire and US economic expansion. Could it be overtaken in turn by the language of today’s emerging economic powerhouse, China?

By examining what is at stake in language learning, Languages in a Global World goes to the heart of what is often the subject of intense ideological debate. Language is inseparable from cultural identity. Our motivation to learn languages is driven by values and beliefs.

Is one’s national identity soluble in foreign languages and cultures? The good (or bad?) thing about language learning is that it brings awareness – of oneself, of the other, local and global awareness. You may study the world in your native language (only). Or you may live it, think it and feel it as people who speak other languages do. The real thing. The music of Shakespeare, Cervantes, Rimbaud, Musil etc. As Goethe said, “those who do not know other languages know nothing of their own”.

We can only understand the importance, richness and specificity of language and culture if we are familiar with other languages and cultures. Lorca’s amazing “duende” sounds more miraculous in Spanish than in any other language. And some (culturally resonant) words lose something when they are translated: “accountability”, “gobbledygook”,  “tartle” (Scottish), “saudade” (Portuguese), “laïcité” (French), “Torschlusspanik” (German), “hyggelig” (Danish), “mamihlapinatapei” (Yagan – Tierra del Fuego), “Iktsuarpok” (Inuit) etc.

Learning languages unveils new worlds. We not only learn how to speak but also how to relate to people in brand new cultural contexts – at subtle levels of perception, cognition and emotion. This gives a new perception of one’s self, of one’s identity and culture.  “If you don’t have another language, you are condemned to occupy the same positions, the same phrases all your life. It’s harder to outwit yourself, harder to doubt yourself in just one language. It’s harder to play” as Michael Hofmann argues.

Learning languages helps us expand our own being and be in tune with the world, or to put it another way, to truly address the other. In that respect, Languages in a Global World is reminiscent of Levinas’ philosophy of responsibility and ethics: our response to another’s face is language. It is the beginning of intelligibility and understanding. Language as an ethical commitment.

Could peace only be a few languages away? Language learning and global understanding go hand in hand. By not speaking other languages, we isolate and impoverish ourselves – economically and humanly. We lose a precious opportunity of becoming open and curious, receptive and creative. We don’t fulfil our potential and just shut up. “Drawing on my fine command of the (…) language, I said nothing.” As Robert Benchley said.

Useful links

OECD work on education

Understanding the brain: the birth of a learning science

Ahoy there, matey. How can we help?

France fought to get the “exception culturelle” recognised by the GATT,  the forerunner of the World Trade Organization, in particular to protect its own cinema against Hollywood. So it’s all the weirder that French movie distributors insist on translating titles from English into er, English. Wild Things, for instance, becomes Sex Crimes. It’s even weirder when the original uses a word of French origin in the title. Triage with Colin Farrell becomes, for French audiences, Eyes of War. However, the French are not alone, as I learned on reading this article by Quentin Cooper on the BBC website. Quentin wonders why the latest Aardman film The Pirates! In an Adventure with Scientists has been rebranded as The Pirates! Band of Misfits in the US.

The quick answer is that to many people, the subtitles are synonymous, and this isn’t surprising given the way science and scientists are often presented. You either get a man in a white lab coat staring intelligently at some exotic glassware full of scientific-looking liquid, or a wild-haired eccentric solving mile-long equations but incapable of posting a letter.

Scientific issues are regularly sensationalised, trivialised, or misunderstood by the media, with basically three types of story: breakthrough, silly or scare. Scare stories give a poor image of science, reinforcing the stereotype of the mad scientist whose research is dangerous for human health or the environment, with “Frankenstein” being used to label practically any product of genetic research for instance, even ants.

Trivia such as the scientific formula for how to make toast or write a sitcom present scientists as eccentrics and their research as futile.

Breakthrough stories give an image that is positive, but just as inaccurate as scares and trivia, ignoring the way ideas and intuitions emerge, are formulated as hypotheses and then tested, vindicated, revised or rejected over a period of time. Look at any health breakthrough article and if the full story is given, chances are that the researchers have come up with something that will take years to influence treatment, if it ever does.

At the same time, scientists must take their share of the blame too. Ananyo Bhattacharya, chief online editor of Nature argues here that if reporters wrote stories the way some scientists seem to want, few people would read science coverage. Both sides have to make an effort because an understanding of science and technology is necessary not only for those whose career depends on it directly, but also for any citizen who wishes to make informed choices about controversial issues ranging from stem cell research to global warming to genetically modified organisms to teaching the theory of evolution in schools. And new issues are bound to emerge in the years to come.

But could science do more than provide the knowledge needed to understand natural processes? A symposium organised by the Global Science Forum (GSF) at the OECD today explores new science-based tools for anticipating and responding to global crises. The premise is that new types of scientific inquiry, and new modes of science-policy interactions, are emerging based on the ability of researchers to analyse and to make reliable forecasts about policy-relevant phenomena that have, until now, been seen as lying outside the scope of useful scientific analysis.

Typically, these are systems and networks consisting of vast numbers of individual elements that interact in complicated ways, such as ecosystems, financial markets, energy networks, or societal phenomena such as urbanisation and migration.

In one sense, the symposium will simply be trying to bring policy makers up to date with developments since the last time they adopted a new set of scientific tools in the 19^th century. The social sciences that now form a natural part of government decision making were only emerging, and borrowed much of their metaphors and terminology from the existing sciences, especially physics.

We still talk about flows, masses, equilibrium and so on (there’s actually something called a “gravity model” of trade, for example). But these terms are rooted in “classical” physics, developed before relativity and quantum theory. The GSF has been working for several years now to show how the new sciences of complexity can provide insights into systems that operate not just as series of actions and reactions, but with feedback, non-linearity, tipping points, singularities and so on.

We’ll report back on tools for anticipating and responding to global crises once the summary of today’s symposium is available. In the meantime, we laugh in the face of danger!

Useful links

Global Science Forum:  “Applications of Complexity Science For Public Policy: New Tools for Finding Unanticipated Consequences and Unrealized Opportunities”

“Future Global Shocks: Improving Risk Govenance”

The symposium marks the 20th anniversary of the Global Science Forum and the 100th meeting of the OECD Committee for Scientific and Technological Policy

They're right to be worried

Today’s post is from Erwin van Veen of the International Network on Conflict and Fragility, established in 2009 as a subsidiary body of the OECD Development Assistance Committee and Ann Fitz-Gerald, a senior academic with Cranfield University’s Department of Management and Security.

The excitement in Juba when South-Sudan declared its independence in 2011 has given way to anxiety now that the two Sudans seem close to falling into the “conflict trap” where countries with recent experience of conflict are more likely to fall back into conflict. On April 10, the South Sudanese People’s Liberation Army (SPLA) took control of Heglig, an oil town on the border between Sudan and South-Sudan. It is unclear whether this is another incident in a long series, or the spark that will explode the powder keg. But it is urgent to assess whether anything can be done to prevent a slide back to violent conflict.

The natural response of the international community when faced with such escalations of violence is to call for restraint and dialogue, which is precisely what the UN Secretary-General Ban Ki Moon, the US government and the African Union’s mediator Thabo Mbeki have done. However, to assess whether this call for dialogue is likely to be heeded, at least two questions need to be answered.

First, how much pressure is the international community willing and able to exercise? This is difficult to assess from the outside, but it is likely that key global players such as the US and UN may prioritize Syria and Iran over Sudan. Regionally, the situation is hardly more favourable with Kenya and Ethiopia embroiled in Somalia and Egypt focused on domestic issues. Libya’s chaos ensures a ready supply of highly mobile manpower and weapons, as evidenced by the situation in Mali. Calls for dialogue may sound louder than the pressure and support the international community can actually generate.

Second, is dialogue welcomed by participants? Political dialogue requires a sufficient degree of commitment from both parties to have a chance of success. Several considerations must be taken into account here. To start with, the trail of broken agreements and promises between Sudan and South-Sudan is a long one and mistrust runs deep.  Recent analysis suggests that the SPLA has been stockpiling weapons and that both the SPLA and the Sudanese Armed Forces are arming South Sudanese rebel militia groups. However, little reliable analysis is available on what exactly is happening in the contested border areas. One also needs to take into account that South-Sudan has limited diplomatic capacity to tell its side of the story. Publicly, however, both sides state they welcome dialogue, which the international community can capitalize on. Yet it is also clear that they are gearing up for other scenarios.

In addition, South-Sudan may well take the view that it now must defend its hard-won independence. The country took a drastic step in January by shutting down its oil production in protest over transit fees, and escalation may well be one of its few strategic options left. The South has proven before that it can survive with food distribution lines cut off and oil wealth denied – large parts of its territory have no electricity anyhow – but its leaders would have to make radical political and financial decisions and be accountable to their people for the ensuing hardship. South-Sudan’s domestic peacebuilding and statebuilding agenda would certainly suffer setbacks, its recent commitment to the International Dialogue on Peacebuilding and Statebuilding notwithstanding.

And yet, on the face of it, there seem to be sufficient common interests to provide a basis for dialogue.  For one, the human suffering and economic damage of renewed conflict will be huge. Collier and Chauvet have conservatively estimated the domestic and regional cost of a civil war to amount to about $85 billion. Two thirds of the economic damage resulting from states descending into conflict accounts for external spillovers that hurt neighbours. This is the figure against which Sudan, South-Sudan and their neighbours must gauge their appetite for dialogue and war.

In short, the signs are not hopeful that calls for dialogue can or will be heeded. What can the international community do to help prevent another war? Three lessons stand out from the international intervention in the FYR Macedonia in 2001, one of the most successful examples of conflict prevention.

Co-ordinated, fast action between the OSCE, NATO and EU proved critical for an integrated political-security response that was sufficiently context specific. In the case of Sudan, it would be easy to argue that UNMIS and the AU need to swiftly deploy peacekeeping troops into disputed areas like Heglig and that their mediators must immediately commence facilitating a longer-term process to resolve the range of outstanding issues.  However, a lesson from the last few years is that third party intervention, of the UN in particular, has not always been welcomed by Sudan. Moreover, President Kiir stated on April 12 in the South-Sudanese parliament that he had rejected calls from several international leaders, including Ban Ki-Moon, to pull his troops out of Heglig. Hence, a leading UN role near the contested border seems unlikely. In keeping with the model which kept the pre-Comprehensive Peace Agreement (CPA) talks on track, an alternative option could be that the Intergovernmental Authority on Development (IGAD) partners’ forum steps up and provides an AU-led initiative with logistical, financial and advisory support. The UN could consider supporting this quietly from behind the scenes.

Strong leadership is essential. Kenya kept the many pre-CPA talks on track and helped realize several goals towards the CPA, such as the Machakos protocol of 2002. Such leadership was also a key ingredient of the successful international intervention in FYR Macedonia, where Mr Van der Stoel, personal envoy of the OSCE chair, enjoyed the confidence of all parties. Kenya may not be able to fulfil this role again at this point. In that case, Ethiopia remains one of the few parties trusted by both sides. If it could convince the presidents of Sudan and South-Sudan to work towards a political agreement, the tide might be turned and Ethiopia would render the region a very valuable service. Given the trail of broken promises, however, the conflict must be addressed at the highest levels, and it would help if both sides could refrain from any aggression towards Ethiopian peacekeepers patrolling Abeyei.

Finally, the intervention in FYR Macedonia showed that confidence building is vital. This could begin with credible and verifiable information being collected and shared from the conflict-affected border area. Rumours spread quickly, feeding distrust and possibly catalyzing ill-considered action. An international monitoring mission, possibly IGAD sponsored and AU-supported, might be a way out of this conundrum – but speed will be of the essence.

Useful links

OECD work on peacebuilding, statebuilding and security