The latest economic forecasts from the OECD could be summed up in four words: More growth, more risks. The “more growth” part is perhaps the easiest to explain. According to OECD economists, the world economy should continue to strengthen its recovery over the next couple of years, albeit at a slower pace than in previous recoveries. The OECD is forecasting global growth of 2.7% for this year, rising to 3.6% for 2014 and 3.9% in 2015.
These numbers might look encouraging, but they’re down – by about half a percentage point – since the OECD’s last forecasts in May. That downward revision is due in large part to the slowing performance of the emerging economies, other than China.
Digging a little deeper, the OECD is forecasting a strengthening performance in both the United States and the euro zone, with the U.S. economy forecast to grow by 2.9% in 2014 (click on the map below for detailed data). The euro zone won’t be able to match that pace, but next year’s forecast expansion of 1% would certainly be welcome after several years of sluggish performance. By contrast, after racking up forecast growth of 1.8% this year, Japan’s pace of expansion is tipped to slow to 1.5% in 2014.
Disappointingly, the upturn in OECD economies may not do much to bring down unemployment. The jobless rate in OECD countries is projected to fall by only half a percentage point, to 7.4%, by the end of 2015, a slower decline than had been expected.
Of course, all these forecasts will only pan out if the world economy manages to avoid those risks we mentioned. Some of these will be all too familiar to regular readers of the blog, such as continued concerns over Europe’s banks. Others have emerged more recently – indeed, they’re responsible in large part for the OECD’s lowering of its growth forecasts.
The most notable, perhaps, is the increasing uncertainty over the emerging economies, other than China. Even though the emerging economies have stronger growth prospects than developed countries, they face a growing list of challenges, including less favourable demographics and diminishing opportunities for “catch-up” growth. Their vulnerability was highlighted over the summer when investors pulled out of emerging economies in expectation that the Federal Reserve, or U.S. central bank, would begin returning to the sort of “normal” monetary policies that were suspended in response to the financial crisis. In the event, that didn’t happen, but, as the latest OECD Economic Outlook points out, the turmoil that followed even discussion of it “revealed how sensitive some EMEs [emerging market economies] are to U.S. monetary policy.” For now, the situation in the emerging economies appears to have stabilised, but there must be concerns over what will happen when the U.S. does eventually change course on its monetary policy.
On a long list, two other risks are also worth noting briefly. The first concerns the political situation in the U.S., which has led to a series of showdowns between legislators and the executive. “The episode of budget brinkmanship in October 2013 has once again shaken global markets and harmed consumer confidence,” notes the Economic Outlook. To avoid a repeat, it says, “The debt ceiling needs to be scrapped and replaced by a credible long-term budgetary consolidation plan with solid political support.”
And then there’s the concern over the potential for deflation in the euro zone. To explain, prices tend to rise most of the time in developed countries – a process called inflation. By contrast, falling prices – or deflation – are much less common. If deflation kicks in, it can be very hard to turn it around – consumers may put off purchases in expectation of lower prices next month or next year, so reducing demand and creating a self-sustaining spiral. To reduce the risk of deflation taking hold, the European Central Bank cut interest rates earlier this month, which should boost demand. But, says the Economic Outlook, it should be prepared to take further measures if deflation risks intensify.
OECD Economic Outlook (2013, Vol. 2)
Tomorrow, November 19, is World Toilet Day and to celebrate I thought I‘d tell you how I fooled God when I was about four. I was playing outside and needed to go to the toilet, urgently, but realised I wouldn’t make it home in time and guessed that peeing outside was probably a sin. But in my personal theology, God was like a geostationary satellite observing the Earth from high in the sky, so I figured that if I hid under the overhang of a roof while I did the dastardly deed, I’d be OK. My relief was short-lived though as I saw with horror that I would be betrayed by the trickle seeping out into the open and He’d see me as soon as I quit my hiding place. So I edged round the building, back to the wall, then casually strolled away on the other side, whistling innocently, and leaving the Almighty to solve the mystery of the phantom pee.
It’s amusing now, but for hundreds of millions of people the world over, not being able to go to a toilet still has far more immediate consequences than divine retribution. 2.5 billion people don’t have access to a clean and safe toilet, so they improvise. For 1.1 billion people, the solution is open defecation, a practice that poses a major threat to human health, but also to economic and social development, as well as being an affront to human dignity.
As the 2010 Millennium Development Goals Report points out, indiscriminate defecation is the root cause of faecal-oral transmission of disease, which can have lethal consequences for young children. In this article, we gave the figures for what that means: in any given week, around 30,000 children under the age of five will die from water-related diseases, that’s one every 20 seconds. Unsafe water now kills more people than all forms of violence, including war, with diarrheal diseases claiming 1.8 million victims a year and causing more deaths in children under 15 than the combined impact of HIV/AIDS, malaria, and tuberculosis.
Sanitation is also a gender issue. Women and girls have a greater need for privacy than men and boys when using toilets and when bathing. Inaccessible toilets and bathrooms make them more vulnerable to rape and other forms of sexual violence, especially if they have to walk long distances at night.
If they live in rural areas of developing countries, they also face a greater risk of being attacked by animals in the bush because women and girls tend to move quietly in order to be discreet. Snakes and other animals are then not scared away and are more likely to be surprised by the women’s presence and bite them. The solution is often to use “flying toilets” – human waste disposed of in plastic bags thrown into the open, a double source of pollution from both the wastes and the plastic bags.
Women and girls also have a much greater need for privacy and dignity when menstruating, and the taboos surrounding this in many cultures make the problems worse. Separate toilets for girls in school, for example, mean more girls are likely to attend classes in the first place, and more girls are likely to stay after puberty to complete their education. The World Toilet Day website puts it like this: “In many countries, girls stay home during their menstruation days because the absence of a safe place to change and clean themselves makes them feel unsecure … Besides the emotional stress, poor menstrual hygiene often leads to health problems such as abdominal pains, urinal infections and other diseases.”
Catarina de Albuquerque, UN expert on the right to safe drinking water and sanitation agrees: “Women and girls place higher value on the need for a private toilet than men, and thus are often willing to devote household resources to gaining such access. However, women are rarely in control of the household budget, and access to sanitation remains a low priority in many parts of the world.”
Unless policies and practices change significantly, the number of people without access to basic sanitation is expected to grow to 2.7 billion by 2015 and the world will miss the MDG target of halving the proportion of people without access. Almost 1.5 billion will still not have access to improved sanitation in 2050. The consequences for water quality are severe and made worse by the fact that progress in treating wastewater does not always keep pace with progress in collecting it, resulting in new sources of nutrients and pathogens being dumped untreated.
Issues related to water and sanitation are a priority for the OECD and you can find information here on our World Toilet Day webpage on a range of topics, including health impacts. A number of people working at the OECD are also involved through our War on Hunger Group. For example, last year the Group funded a project in Mozambique to reduce diarrhoea by at least 25% in children under the age of five by training in hygiene and changing current practices. The project also improves access to drinking water and to sanitation through the construction of protected water points and 60 family latrines. It contributes to the sustainability of the protected water points by establishing local maintenance services.
Colleagues from the War on Hunger Group told me that you need to accompany the building programme with education. Their experience suggests that, in some countries, the toilets are used as a much appreciated shed or store room, and people continue to go to the fields. The problem is the cleaning, which in some places can only be done by certain (often stigmatised) groups, such as untouchables in India.
If you’re wondering what you can do, Matt Damon has an idea:
The War on Hunger Group helps people tackle a number of problems that we in the developed countries never have to worry about, for example the fact that air pollution from cooking will soon kill more people in developing countries than malaria, tuberculosis or HIV/AIDS. This article from the OECD Observer describes how WHG contributing to a solution
* Insert your own joke about making a splash, flushed with success, etc
Before last weekend, it was tempting to believe that the Philippines could take whatever nature threw at it – an earthquake just last month, around 20 typhoons this year, and still the archipelago always seemed to bounce back.
But then came Haiyan. A Category 5 typhoon, it brought winds of around 235 kilometres per hour, a tsunami-like storm surge and intense rain. Meteorologists believe it may be the strongest storm ever recorded. As Hurricane Katrina demonstrated in 2005, even wealthy countries like the United States struggle to cope with storms like this.
For the Philippines, a much poorer country, the challenges are greater still and are exacerbated by its geography: In this archipelago of more than 7,000 islands, Haiyan didn’t make landfall once but eight times, says the UN, hitting a succession of islands in the central Visayas region. In the immediate aftermath of the storm, many islands were cut off, making it hard to determine the full scale of the calamity. The UN estimates the storm affected just under 10 million people, while the UNHCR says it displaced around 800,000. That agency says it has been receiving reports of “growing tension and trauma on the ground, especially among vulnerable women and children”.
In the aftermath of the storm, the Philippines’ experience of coping with the impact of typhoons and earthquakes will be vitally important. Also key are the lessons learned by the international community from previous disasters, notably the 2004 Asian tsunami and the 2010 Haiti earthquake.
High on that list is the need to ensure corruption doesn’t undermine relief and recovery efforts. At a time when people are dying, it might seem strange – heartless, even – to worry about corruption. But it matters. That’s because there are physical limits to the amount of humanitarian relief that can be delivered in a crisis like this. If corruption means shelter, food or medicine are being steered in the wrong direction, then they’re not going to people who desperately need them.
Regrettably, major disasters are prone to corruption. For one thing, they demand a rapid response, but at a time when the state’s services are usually overstretched. To save as many lives as possible, aid agencies may opt to act first and think later. Lack of information can mean too much assistance goes to some areas and too little to others, creating a risk of black markets.
Another problem lies in the nature of the humanitarian aid system, which consists of an enormous range of agencies, both public and private. As Peter Walker of Tufts University has written, aid agencies, especially those that rely on voluntary funding, are sometimes “drawn” to disasters as a way of raising their profile and to promote fundraising. Flush with cash, they may spend “fast and furiously” leading, again, to resources going to the wrong places.
As our colleagues Hans Lundgren and Megan Kennedy-Chouane noted here on the blog after the Haiti earthquake, coordination of aid efforts is essential, especially, where possible, by the local authorities. That message is being repeated in the Philippines: As the BBC’s Mike Wooldridge wrote, “One danger to avoid, says [World Food Programme spokesman Greg Barrow], is throwing too much aid at an affected area too soon, in a way that makes it difficult for it to be absorbed … proper co-ordination is vital.” Of course, as Wooldridge, also points out, the need for coordination may need to be balanced against the need to act now: “Some chaos – at least in the early days of such a complex operation and with so many hungry people – may be inevitable.”
Unfortunately, the coordination effort will be hampered by the loss of local officials, according to The Guardian: “Local authorities are saying that so many of their officials have died, they’ve been bereaved, they are struggling to feed their own families, their vehicles are damaged.” That will only add to the pressure on the national government.
There are lessons, too, from previous disasters for people who are outside the humanitarian system but would like to help. One is to think carefully about what you donate: As Hans Lundgren and Megan Kennedy-Chouane pointed out, after the earthquake in Haiti, “Some items sent were not appropriate, including expired medication that had to be destroyed.” That message was echoed by former humanitarian aid worker Jessica Alexander, who wrote on Slate: “There is one simple way that people who want to help can help. Donate money – not teddy bears, not old shoes, not breast milk.”
Today’s post is by Moritz Ader and Miriam Allam of the MENA-OECD Governance Programme, Public Governance and Territorial Development Directorate
On December 17 2010 in Sidi Bouzid, a Tunisian town of 40,000 inhabitants, twenty-six year old Mohamed Bouazizi decided on a radical protest against the local authorities who were stopping him selling fruits and vegetables in the streets because he didn’t have a trading licence. With little prospects of getting a good job, and suffering from arbitrary constraints at the hands of officials, Bouazizi set fire to himself. His death due to severe burns has not only become known as a dramatic outcry against Ben Ali’s Tunisia, but also as the trigger of the civil uprisings that have been sweeping across countries in the Middle East and North Africa (MENA) region.
Three years later, no day passes without reminding us of the challenges faced by countries in the region. Reform efforts have proved an unprecedented commitment towards more democratic policies and governance structures in some countries, whereas daily clashes amid rival demonstrations in others reveal the fragility of this process. Why should now be the time to think about such an apparently technical matter as regulatory reform? Would governments be better advised to directly tackle the most pressing challenges, such as fighting youth unemployment and increasing citizen participation? You might even wonder what “hides” behind the somewhat cumbersome term of “regulatory reform” and how it relates to the story of Mohamed Bouazizi.
“Regulation“ is one of these buzzwords you could not escape in debates on CNN, Le Monde or at the OECD about preventing a future global financial and economic crisis of the magnitude that hit countries worldwide in the recent past. The debate about both the desirable amount and design of regulation, however, has never been limited to new laws for Wall Street.
In fact, the call for efficient and effective regulations as part of the overall reform process ultimately relates to the current transition process in MENA as it questions the set of instruments by which the Tunisian government imposed requirements on citizens (and enterprises). From this perspective, regulations include laws, formal and informal orders issued by all levels of government or bodies to which the government has delegated regulatory powers. In turn, regulatory policy defines an explicit policy to ensure high-quality regulations based on a consistent “whole-of-government” approach. Admittedly, this might still appear as being too far away from the daily concerns of the man and woman on the street in the MENA region. It is not.
At this crucial moment in the MENA region, enhancing the regulatory environment should in fact be a top priority. By assessing the current regulatory environment against key principles, such as transparency, accountability and participation, the OECD actively supports MENA countries in their transition process towards more democratic and efficient governance systems. Here is how it works.
The OECD Framework for Regulatory Policy and Governance identifies three elements for regulatory reform that have been used to assess the progress of MENA countries in implementing regulatory policy: i) core policies, ii) systems, processes and tools, and iii) actors, institutions and capacities. One way to understand that this process is at the heart of their transition process is to imagine that reforming regulations is not much different from renovating a flat.
The crumbling plaster and the living room’s fusty furniture create a gloomy atmosphere rather than a cosy haven. Obviously, your flat badly needs refurbishment and a considerable facelift. This is what the OECD framework would call your core policy. In the context of regulatory reform, the call for greater transparency and citizen participation implies that the existing stock of regulation is managed. Of crucial importance for countries in the MENA region, outdated laws need to be consigned to the history books as heavy administrative burdens often serve as entry points for corruption. At the same time, a filter in the form of regulatory impact and risk assessments must ensure that future policies fit well with the stock of existing rules and support a more open and trustful relationship between citizens and the government.
In the flat, creating a more welcoming atmosphere ultimately depends upon your talent for choosing things (new chairs, paint) that complement each other nicely. A shopping list that clearly defines how your new furniture should look would help to make sure that the renovation proceeds in accordance with your ideas. In OECD’s words, effective regulatory reform depends on systems, processes and tools which support the underlying principles of regulating and governing.
Finally, as several entities are usually involved in renovation (you wouldn’t start repainting if you were going to change the electric wiring for instance), success ultimately depends on co-operation, co-ordination, communication and consultation between the individual parties. A clear definition of the functions and roles of actors, institutions and capacities marks the third and final element of OECD’s approach for assessing regulatory reform.
Regulatory Reform in the Middle East and North Africa: Implementing Regulatory Policy Principles to Foster Inclusive Growth is the first progress report that assesses the implementation of OECD regulatory policy principles in the MENA region. Including Bahrain, Egypt, Jordan, Lebanon, Mauritania, Morocco, the Palestinian Authority, and Tunisia, the report provides recommendations based on the 2009 Regional Charter for Regulatory Quality and the 2012 OECD Policy Recommendation of the Council on Regulatory Policy and Governance.
The review reveals that an explicit regulatory policy in the MENA region is still in its infancy. The countries involved do not have an explicit regulatory policy. Systematic regulatory systems, processes and tools, such as Regulatory Impact Assessments, are also new to most governments in the region. The review concludes that further efforts are necessary to institutionalise regulatory policy and governance, for instance by implementing regular performance assessments of regulations.
Improving the clarity and efficiency of regulations will benefit both citizens and enterprises and mark a crucial element in the transition process of MENA countries.
Earlier this year, the Parkham Women’s Institute in the south of England invited Colin Darch to speak about piracy. To get into the spirit of things, the ladies came equipped with eye patches, parrots, cutlasses, shiver-me-timbers accents, and all the usual pirate paraphernalia. Mr Darch came to talk about being hijacked off Somalia and held hostage for 47 days. But whether the word “piracy” conjures up visions of Somali speedboats and AK47s or peg legs and the skull and crossbones, fish are probably pretty far down the list of things that spring to mind when somebody mentions pirates.
And yet, most of the “pirates” on the high seas today are involved in pirate fishing, or illegal, unreported and unregulated (IUU) fishing as it is known. As we said in the Insights book on fisheries While Stocks Last? these pirates are neither the vicious thugs portrayed by Robert Louis Stevenson nor the seductive rascals so beloved of Hollywood. All they have in common with the heroes of swashbuckling romances are ruthless, unscrupulous masters, and harsh and dangerous working conditions with more chance of getting killed than of getting rich. The International Transport Workers’ Federation gives numerous horrifying examples from fishers’ contracts. Chinese fishers from Yongchuan County in Sichuan province not only had to pay $470 to secure a place on a boat, they had to agree to have their appendix removed before going to sea and to pay $47 for the operation themselves. And remember, these are the ones who had a contract.
Fish piracy takes several forms. The “illegal” in IUU fishing is when vessels violate the laws of a fishery. “Unreported” is fishing that is undocumented or misreported to the relevant national authority or regional fisheries organisation. “Unregulated” fishing describes fishing by vessels without nationality, or vessels flying the flag of a country that isn’t a member of the regional organisation governing that fishing area or species. This is particularly attractive since many of the states offering flags of convenience are also tax havens. If you click on the unambiguously named www.flagsofconvenience.com, you’ll see how easy it is to move vessels from one register to another, even for a few months. The fact that some of the countries proposing flags are completely landlocked doesn’t seem to stop them having extensive fleets.
IUU fishing is also big business, but like any illegal activity it is hard to know exactly how much it is worth. According to some estimates, a quarter of the fish taken from the Antarctic fishing area could be IUU catches. The media regularly report scams involving millions of euros worth of fish, such as the six Scottish trawlermen convicted in 2010 of landing 15 million euros worth of illegal herring and mackerel over a three-year period.
Pirate fishing destroys the livelihood of other fishers and threatens the existence of fish species. Combating it is hard because the penalties for those caught are low compared with potential gains, and even catching them is difficult given the vast areas of ocean to be covered, the limited means of anti-piracy authorities, and the complicity of some states and customers, like the wholesalers those Scottish fishers sold their “black landings” to.
The method used in this case was “forensic accounting”, that revealed unexplained discrepancies between actual and declared incomes. Again, you probably never think of accountancy and tax inspectors when you think of the fight against piracy, but it’s a battle that’s been going on for centuries. Rudyard Kipling’s “Gentlemen” were being hunted down by King George’s tax men in the eighteenth century for smuggling brandy, tobacco and other illegal cargoes. Their modern counterparts are not just stealing fish, they’re also involved in people trafficking and drug running.
Tackling tax crime is one way of combating IUU and associated criminal activities. A report to the Third OECD Forum on Tax and Crime taking place in Istanbul on 7-8 November discusses the extent of the problem, the form it takes and what can be done about it. Offences include the evasion of import and export duties on fish and fish products transported across national borders; fraudulent claims for VAT repayments; failure to account for income tax on the profits from fishing activity; and evasion of income tax and social security contributions and false claims for social security benefits by fishers and their families.
The complexity of the fisheries sector and the number of participants means that a broad range of actions need to be taken at various levels, ranging from technical training for local tax people to international cooperation such as sharing of information. Such recommendations may sound vague, but in preparing the report, the discussions between specialists from tax administrations, customs administrations, fisheries authorities and law enforcement “already yielded significant benefits through the sharing of experiences and analyses, highlighting further areas for research and, in a number of cases, leading to specific international co-operation in tackling actual cases of tax crime and illegal, unreported and unregulated fishing”.
The authors give concrete examples. For instance a large cash withdrawal made from a bank to pay a cash bonus to the crew of a fishing vessel was analysed by tax officials using the money laundering model found in the 2009 OECD Money Laundering Awareness Handbook for Tax Examiners and Tax Auditors (the very name strikes fear into the heart of the most ruthless pirate). The case also involved the sale of a fishing quota, which was illegal in itself. The sale was made via a company registered in an offshore jurisdiction through a bank account in an onshore financial centre. This led to a “multilateral tax compliance action” being undertaken by three countries, which demonstrated that each of the three had a different picture of the facts underlying the case. By working together, each country was able to apply its laws based on a clear understanding of the real transaction.
And if you’re wondering what happened after that misunderstanding at the Women’s Institute, the BBC has more.
Today’s post is by Mi Ah Schoyen of NOVA Norwegian Social Research and Bjorn Hvinden Professor and Head of Research at NOVA and the University of Tromso, and director of the Nordic Centre of Excellence ‘Reassessing the Nordic Welfare Model’ (REASSESS). It is published in collaboration with Bertelsmann Stiftung’s Sustainable Governance Indicators (SGI) Network
When it comes to balancing the needs of current and future generations, the Nordic welfare states have done fairly well: reforms of the pension system, low child poverty levels and public debt, and work-friendly family policies. Yet, environmental considerations remain neglected – in the Nordic countries and elsewhere in the OECD.
Few would disagree that intergenerational justice is a goal that all governments and societies should adhere to. Beyond this general consensus, the issue undoubtedly raises a number of dilemmas, which are notoriously hard to solve. The Nordic societies are far from immune to these challenges. However, there are a number of indications that this region has developed public policies which are more balanced with respect to both age and generation than in most other OECD countries.
In advanced democracies, intergenerational justice is only one of the objectives public policies are expected to meet. There are also aims such as intra-generational solidarity and fairness, gender equity, and the creation of a competitive economy combined with macroeconomic soundness. For intergenerational justice to be achieved, a simple theory suggests that successive generations (birth cohorts) – also future ones – should be treated the same. “Makes good sense!” you may think. So why are issues of intergenerational justice so hard to resolve?
First, it is difficult to account for the unborn and consequently controversy surrounds the debates about what we need to do today to achieve justice for the future. Second, the concept of intergenerational justice is typically applied in an ambiguous manner. It sometimes refers to age groups; at other times, the point of reference is to the treatment and position of successive generations or cohorts. This blurs the important distinction between age groups and generations. While you pass from one age group to another as you move through the life course, you remain part of the same generation (or birth cohort) from the day you are born until you die. Therefore, differential treatment of age groups does not necessarily violate principles of intergenerational justice. Think, for instance, of a contributory old-age pension system which by design transfers money from the working age population to the elderly. As long as current workers receive a similar level of transfers when they reach retirement, this kind of redistribution will be neutral with respect to generations. In fact, this mechanism is sometimes referred to as an implicit intergenerational contract and has until now been the most common way of organising public old age pensions.
Finally, matters are further complicated if successive cohorts differ in size. Unfortunately, this represents the rule rather than the exception. The current situation in most of the OECD world is that larger generations are followed by smaller ones, creating problems especially for old age social protection systems, which were created under the assumption of steadily growing populations. With modest fertility rates and steadily increasing life expectancy, the tax base does not grow fast enough to continue to finance public pensions in the way that was done in the past. This is the basic reason why we have seen large pension reforms in a number of OECD countries.
Pension reform has been an important policy issue also for Nordic governments. Sweden (in 1999) and Norway (in 2011) implemented comprehensive reforms of their old age pension systems. However, setting public pensions on a financially sustainable path is only part of the story of how Nordic societies seem to balance the distribution between generations and across age in a sensible way.
As the findings of the SGI Study on Intergenerational Justice in Aging Societies show, from a comparative perspective, children in the Nordic countries are doing well. Child poverty levels are relatively low and government debt is well below the OECD average (which was equal to just over 50 per cent of GDP in 2010). Note also that in the peculiar case of Norway, government debt indicators – also as they are represented in the SGI Study – are less meaningful. The country has built up a massive public fund from petroleum revenues with a market value currently approaching €600 billion!
Moreover, work-friendly family policies (including an emphasis on providing affordable care services for dependent children and elderly) have long been a priority in the Nordic countries. As a result, even though they – with the exception of Iceland – do not quite reach the replacement fertility rate of 2.1, generally, more babies are born in the Nordic countries than further south on the European continent. At the same time, female employment is high, providing a broad tax base that helps in meeting the costs of population ageing.
The Intergenerational Justice Index (IJI) includes environmental, social, economic and fiscal dimensions, as well as a measure of pro-elderly bias. Estonia ranks highest of the 29 OECD countries included in the study, the US is bottom.
Overall, while not seeing it as a super model – like the Economist actually did earlier this year – it seems fair to say that the Nordic social and economic model has managed to strike a sound balance between intra-generational and inter-generational concerns. This has been achieved by combining policies which contribute to the equalisation of life chances (e.g., free access to education, active labour market measures for the whole adult population, and a comprehensive system of social protection) with policies to foster economic competitiveness and efficiency.
The most innovative feature of the SGI Study is the inclusion of an environmental impact indicator in the assessment of intergenerational justice across countries. While a common dimension in discussions of environmental policy and sustainable development, ecological concerns rarely enter assessments of the welfare state and social justice more broadly.
The environmental impact of human activities reported in the SGI Study on the basis of countries’ Ecological Footprint, gives a rather mixed result for the Nordic countries. We get an intergenerational picture which is less positive than when considering only the welfare state more narrowly. It is important to note that several kinds of indicators have been defined for measuring different aspects of environmental performance. Country rankings are sensitive to the choice of indicator. For instance, if we instead rank countries according to the Environmental Performance Index, the Nordic countries all appear in the top quintile. We are not in a position to judge which indicator is superior, since that probably depends on your specific purpose. However, we strongly encourage further debates and research on the linkages between social and environmental policy and their outcomes. In this regard the SGI Study offers a welcome contribution.
Paying for the Past, Providing For the Future: Intergenerational Solidarity OECD Ministerial Meeting on Social Policy, May 2011
Today’s post is by Markus Schuller of Panthera Solutions, a participant in the recent OECD Financial Roundtable.
On October 17, delegations from the OECD’s 34 member countries, central bankers and financial market actors met to talk about financial fragmentation (geographical and sectoral segmenting) at the semi-annual OECD Financial Roundtable. It was an interesting discussion on how serious fragmentation was and how much financial integration we need, but the focus turned quickly on financial regulation, with the lobbyists talking their book (they could have sent a recording and saved themselves the time and expense of coming to Paris).
In the Eurozone for example, financial fragmentation means that a company in the peripheral countries will face higher financing costs than it would in one of the core countries of the currency union, for the same level of idiosyncratic risks and opportunities. This prompts the question of whether financial fragmentation hampers economic convergence and contributes to the painfully slow recovery.
Fragmentation isn’t necessarily negative: it can for instance allow more accurate pricing of the different, separable components of a system. But since the early 1980s, the increasingly global exchange of goods and services has relied on a more globally-integrated banking system and financial markets to allocate real economy resources. As a consequence, inter-connectivity increased, separability decreased.
Nationally-based regulation was clearly not the best framework to deal with the emerging financial system, but instead of a multilateral approach, governments listened to the banks’ “self-regulation” mantra, in harmony with the 1980s deregulation zeitgeist advocated by Reaganomics and Thatcherism.
It didn’t work. The dysfunctionality of self-regulation is not a specific characteristic of the banking industry. In numerous industries we got cartelization, price rigging and other forms of wheeling and dealing. In the banking industry, the combination of globalization, deregulation and digitization led to balance sheet inflation, followed by a fast-increasing gap between real economy utility and financial markets profiteering. We also got what Nassim Taleb and Warren Buffett called participants with “no skin in the game” – not playing with their own money. The people making the decisions didn’t stand to lose anything personally if they got it wrong. Investors and taxpayers took the hits for “Too-Big-To-Fail” institutions.
The blame game between market participants is still hard fought, especially between the big banks which are impacted most by the current re-regulation wave and governments. The banks complain about insufficient international coordination for the new set of rules. Governments blame the banks for socializing losses and accuse them of being responsible for the current regulatory countermovement.
Ladies and gentlemen, you both screwed up. But a couple of examples allow us to see that it didn’t happen overnight.
First, the repeal of the 1933 Glass-Steagall-Act (GSA) that prevented US investment banks operating as universal banks, contrary to their European peers. In the 1980s, European institutions aggressively entered the US underwriting market with competitive offers, thanks to significantly larger balance sheets and higher gearing (debt to equity) and started taking IPO business away from US banks. In 1999, insisting lobbying by US banks bore fruit and Glass-Steagall was repealed.
Second, investment banking partnership. For over 100 years, US investment banks were organized as private partnerships. Partners clearly understood the meaning of being finally responsible, as they ultimately had to pay for mistakes with their private wealth. Merrill Lynch went public in 1971, Bear Stearns followed in 1985, Morgan Stanley in 1986 and Lehman Bros in 1994. Goldman Sachs was waiting until GSA was repealed and got listed in 1999. These changes in status can be seen as a sign that the banks had less “skin in the game”. Or as the last stage of a rocket blasting them into irresponsibility.
Governments thought they were doing the market – or at least their largest party donors – a favor by loosening regulatory norms. Banks took this an invitation for unethical behavior and for unproductive profit maximization as far as the real economy is concerned. Big central banks had managed to position themselves as independent guardians of a stable monetary system. Now, almost as innocent bystanders, they (that is you and I) have to pick up the bill for both blame-game parties. The central banks pay with their independence.
The re-regulation wave symbolizes the attempts of governments and regulators to level the playing field with financial market participants. These attempts lack proper international coordination, for two reasons I explained in my contribution to the Roundtable.
Governments and regulators need to decide whether they want to use their systemically relevant banks as a tool for geostrategic power or for establishing an efficient market. Officially, the latter is the goal. In off-the-record conversations though, some officials express concern at the fast rise of banks from emerging economies, especially Asian banks, in terms of balance sheet and market capitalization, allowing their governments to use them as strategic options in the global power game. Given that, the argument goes, developed market representatives should not to be too restrictive regarding their own systemically relevant banks.
The second reason is more fundamental: economics is a social science, and the same goes for finance as a subset of economics. We are dealing with human behavior and social interactions that cannot be modeled using the deterministic approach of natural sciences, where for instance gravity always pulls the apple down from the tree. In systems theory, we would call that a trivial machine, but we’d have to call humans and human society “non-trivial”. With us, the same inputs can lead to different outputs. Pity the poor regulators trying to tame a moving, non-trivial social construct while being in motion themselves. Even when assuming high technical competence, high ethical standards and a strong will for implementation, this is an extremely complex task. Consequently, a lasting, single-shot version of re-regulation cannot be expected, and all financial market participants are currently paying the price for a culture of irresponsibility.
While developed market governments fail to make it clear explicitly whether they’re going for the geostrategic power option or for efficient markets, an implicit preference for the power option remains, and the foundation for further social and economic collateral damage is laid.
Finanzielle Fragmentierung. Mein Beitrag. Markus Schuller
In the last of three postings on wealth distribution, we ask who benefits from the relentless rise of the rich.
Even in the world of high-flying soccer salaries, the deal announced late this summer between Real Madrid and Welsh player Gareth Bale was eye-popping – £85 million (about $120 million). The 24-year-old will now earn at least 10 times more in a week than the average British worker earns in a year.
Mr Bale is rich – not Bill Gates-rich – but rich. He’s also typical of many of today’s high-earners in that he’s making his own money. In previous centuries, high incomes typically came from inherited wealth. That’s why so many of Jane Austen’s characters never seem to work – they don’t need to: Their wealth is invested instead in government bonds that reliably pay an income of between 4 and 5% a year. In Pride and Prejudice, a would-be suitor reminds Elisabeth Bennet that unless she marries, her wealth will produce an income of only £40 a year: “… one thousand pounds in the 4 per cents, which will not be yours till after your mother’s decease, is all that you may ever be entitled to.”
If she were alive today, Lizzy Bennet might be running her own business and earning her own money. In that, she would be a typical member of today’s set of top earners – the 1% – which as Chrystia Freeland has written, “consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition …”.
Over the past few decades, these winners have done quite nicely for themselves, most notably in English-speaking countries: In 1980, the top 1% of income recipients in the U.S. earned 8% of all pre-tax income; by 2008, their share had risen to 18% and it rose in many other OECD countries too. Several factors have worked in their favour: lower taxes; technological advances that reward skilled workers; the emergence of a global market for talent; and rising executive salaries.
But here’s a question: Are all these jet-setting meritocrats really worth it?
Historically, various justifications have been offered for income inequality – in other words, people earning more than others. As Branko Milanovic notes in The Haves and the Have-Nots, J.M. Keynes retrospectively justified 19th century inequalities by arguing that the rich had not wasted their money on fripperies but, instead, “like bees, they saved and accumulated”, so providing capital for investment, which ultimately benefited everyone.
Arguments today aren’t all that dissimilar. T.J. Rodgers, founder of Cypress Semiconductors, recently defended his own wealth by pointing to the money he had reinvested in his own firm and in new businesses, such as a restaurant in his home town that created 65 jobs. “How much more do I need?” he asked. “How many more jobs do you want?”
In essence this is an appeal to the idea of “economic efficiency” – inequality may not always be popular, the argument goes, but it ensures a society’s economic resources are put to their best use. The most influential thinker in this area was probably the economist Arthur Okun, who in the 1970s argued that there was a “big trade-off” between equality and efficiency: Reduce the wage gap by raising taxes or minimum wages and you kill people’s incentives to work hard and risk losing some of that tax money in the “leaky bucket” of government.
That argument still appeals to many, but it has its detractors. Based on an analysis of growth patterns in a number of countries, IMF economists Andrew Berg and Jonathan Ostry concluded that “when growth is looked at over the long-term the trade-off between efficiency and equality may not exist.” While some inequality is necessary to ensure markets run efficiently, the economists argue, too much can destroy growth.
Among the downsides of rising inequality, they say, are that it may pave the way for financial crises, as many argue it did in the run up to the 1929 Wall Street Crash; it may also fuel political instability, as in Brazil earlier this year; and it “may reflect poor people’s lack of access to financial services, which gives them fewer opportunities to invest in education and entrepreneurial activity.”
Indeed, that last point is increasingly invoked. As Joseph Stiglitz has written, “growing inequality is the flip side of … shrinking opportunity,” a view echoed earlier this year by Alan Krueger, then-chairman of the U.S. President’s Council of Economic Advisers: “In a winner-take-all society, children born to disadvantaged circumstances have much longer odds of climbing the economic ladder of success.”
But if we accept the idea – and not everyone does – that too much inequality benefits the rich and hurts the poor we’re left with another question: How much inequality is “too much” inequality? Economists may have their own views but, ultimately, that’s a question only politicians and societies can answer.
Previous articles in Rich Man, Poor Man:
Reducing income inequality while boosting economic growth: Can it be done – from the OECD’s Going for Growth 2012
Incomes, by Peter Hoeller (OECD, 2012)
Divided We Stand: Why Inequality Keeps Rising (OECD, 2011)
OECD work on income inequality
Today’s post is from Gert Wehinger of the OECD’s Directorate for Financial and Enterprise Affairs
Investors’ behaviour on stock markets has been likened to the irrationality described in Charles Mackay’s 1841 classic Extraordinary Popular Delusions and the Madness of Crowds. But there is also a more positive view of what crowds can achieve. In his 2005 book The Wisdom of Crowds, James Surowiecki argued that “diversity and independence are important because the best collective decisions are the product of disagreement and contest, not consensus or compromise.” Diversity and disagreement certainly characterise this year’s Nobel prize for economics, even if Eugene F. Fama, Lars Peter Hansen and Robert J. Shiller shared the award “for their empirical analysis of asset prices”.
Fama’s work is based on the idea that asset returns should be impossible to predict if asset prices reflect all relevant information. He tested empirically (and found new methods like event studies to do so) the efficient markets hypothesis (EMH), for which he and his followers found ample evidence. That is, in the very short run, like a day or a week, if all available information is incorporated in share prices, you cannot beat the market. While he accepts that there are factors like information or transaction costs that weaken the pure EMH, any anomalies – like the difference between value and growth stocks he analysed in a 1998 paper – are explained within the same rational investor framework, and risk factors would account for the differences. However, such anomalies (or “market imperfections”) may open up short-run arbitrage opportunities (that Fama himself exploits in his fund-management firm). Hedge funds and algorithmic traders in particular thrive on these imperfections.
Thus, Fama’s EMH is perhaps a great insight for theorists and algo-traders, but it is, in principle, tautological and often becomes useless in practice (yes, algo traders can also go bust) where market anomalies can go beyond rationality. While these anomalies still tend to leave markets unpredictable, the reasons underlying such unpredictability may be quite different from the agnostic view of market rationality, that deprives the researcher almost by definition from gaining better insights into the “true” functioning of markets and a better understanding of longer-term price movements, including bubbles.
Shiller thought outside the EMH box by exploring departures from Fama’s efficient market rationality using insights from behavioural finance (many of the ideas were developed by the 2002 Laureates Daniel Kahneman and Amos Tversky). Such departures, if they can be identified in asset prices, may open up arbitrage opportunities by rational investors to take advantage of misperceptions of irrational investors. While rational arbitrage trading would push prices back toward the levels predicted by non-behavioral theories, this is still not the world as described by Fama, where rational information is processed immediately. In Shiller’s framework, bubbles can not only exist, but there is also a possibility that they can be identified.
Hansen has tested many of these theories in his generalised method of moments (GMM) framework. If you cannot forecast stock prices, maybe you can find patterns in their volatility or other statistical moments that can be exploited. Hansen found, for example, that asset prices fluctuate too much for a rational expectations-based model to hold. This work has been carried forward in several ways, for example improving measures of risk and attitudes towards risk that may change depending on the economic situation. This is just one example of how this research can generate new insights about human behaviour more broadly.
Shiller showed the importance of social psychology for finance and economics using evidence from investor surveys. In the 2005 edition of his book Irrational exuberance, Shiller extended his analysis to real estate, arguing that the real estate market was irrationally overvalued, and he predicted large problems for financial institutions with the eventual burst of the real estate market “bubble”. But he was also aware of the problems a bursting stock market bubble would have on retirement income from pension plans that rely on equity investments, and he wondered about the “curious lack of public concern about this risk.” More generally, he also pointed out that the “tendency for speculative bubbles to grow and then contract can make for very uneven distribution of wealth” that may even make us “question the very viability of our capitalist and free market institutions”. He saw an important role for policy to address these issues.
The first line of policy defence against asset price bubbles is monetary policy, but bubbles are hard to identify and policy makers are reluctant to ‘prick’ a bubble. Robert Lucas, the 1995 Nobel Prize winner, noted that the main lesson from the efficient market hypothesis “for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them.” (The Economist, Aug 6th 2009)
The Prize Committee in its decision seemed to want to reconcile a short-run and a long-run theory of asset prices, with Fama’s finding of that stock prices are unpredictable in the short run and Shiller showing that there is some predictability in the long run (Fama would not dispute that idea in principle as his own research found that stock returns become more predictable the longer the period considered).
But knowing that Fama as recently as January 2010) defiantly denied the existence of asset price bubbles because they cannot be identified and predicted, and Shiller (along with others) recognises bubbles and calls the EMH argument that stock prices reflect fundamentals “one of the most remarkable errors in the history of economic thought”, it will be interesting to see how the the three laureates interact on stage at the award ceremony in December in Stockholm.
Perhaps Hansen will have to play the role of a mediator with a humble remark like the one he made shortly after hearing about his award: “We are making a little bit of progress, but there’s a lot more to be done.”
OECD Journal Financial Market Trends