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Behold the power of fungus… and biodiversity offsets

16 October 2014
by Guest author
Korean friendship bell with Ganoderma fungus motif

Korean friendship bell with Ganoderma fungus motif

The Convention on Biological Diversity (COP 12) is taking place in Pyeongchang, Korea, until 17 October 2014. Today’s post is from Naazia Ebrahim of the OECD Environment Directorate

When you think of biodiversity conservation, you probably think of the classic images: the polar bear, the lion, the elephant, the giraffe. The ecological community likes to call them charismatic megafauna, with only a hint of satire.

But did you know that the only thing that can neutralise the deadliest, antibiotic-resistant superbug on this planet is a fungus? Now, note that it was discovered in the soil of a Canadian national park, and it rather makes the argument (well, the anthropogenic argument) for conservation of biodiversity in all its shapes and forms by itself. Behold the power of a fungus!

Unfortunately, most biodiversity has been having a rough time of it lately.

As we have all heard recently, WWF’s 2014 Living Planet Report has reported a 52% decline in mammals, birds, reptiles, amphibians and fish overall from 1970 to 2010, while IUCN’s Red List indicates that a quarter of mammals, over a tenth of birds, and 41% of amphibians are at risk of extinction. The decline is worse in the tropics, and particularly in Latin America, where species populations have dropped by 83% since 1970. Significantly scaled up efforts will be needed if we are to reach the 2011-2020 Aichi Biodiversity Targets – agreed upon at the 2010 conference of the Convention on Biological Diversity – in time. And this is true not only for conservation, but also for the sustainable use of biodiversity and natural resources.

Here at the OECD, we’re looking at how to scale up finance for biodiversity, and how instruments for conservation and sustainable use of biodiversity can be designed and implemented in more effective ways. One instrument, biodiversity offsets, has recently been gaining much attention from government and business alike. Based on the polluter pays approach, biodiversity offsets operate under a “no-net-loss” principle, and have the potential to reduce the costs of achieving environmental objectives.

To be sure, there are difficulties. The most obvious one is that biodiversity is not like carbon: one unit emitted here does not equal one unit saved there. Biodiversity is highly specific, and often highly localised; there are many ecosystems that wouldn’t necessarily exist if ecological conditions changed slightly. So project developers need to be particularly careful at building in safeguards; offsets must be a last resort after avoidance and mitigation; offset design must adhere to strict requirements for ecological equivalence; and monitoring and verification must be extremely robust.

As we work through establishing good practice insights, we hope that biodiversity offsets will be able to provide developers with an additional tool to reduce their adverse impacts on biodiversity in a cost-effective way. That really would be a win-win – and one that would make all superbug-fighting fungi happy.

Useful links

The OECD held a workshop on biodiversity offsets in November 2013, with representation from governments, industry, and civil society. Keep an eye out for our publication, forthcoming in early 2015.

Preliminary OECD Policy Highlights on Biodiversity Offsets

Chapter on Biodiversity Offsets from Scaling up Finance Mechanisms for Biodiversity

Financial literacy: What for?

15 October 2014
by Guest author
Good morning. How can I confuse you?

Good morning. How can I cheat you?

In preparation for the 2015 Global Forum on Development, which will focus on how access to financing can contribute to inclusive social and economic development, the OECD Development Centre and the United Nations Capital Development Fund (UNCDF) have developed a series of articles exploring the key issues and dimensions of financial inclusion. Today’s post from Sarah Bel of the UNCDF Better Than Cash Alliance and James Eberlein of the OECD Development Centre highlights some of the overarching themes related to financial literacy.

Most of our problems are based on finances. Money is always an issue. I have to still provide for both my parents who are not working and make sure they are fed; I must pay their insurance policies because they no longer have the ability to pay them. I don’t earn enough money to afford all of that. - A 35-year-old man from Lesotho, interviewed as part of the UNCDF Making Access Possible initiative

Have you ever tested your financial literacy? Read what follows and you’ll get a better sense of why this matters more than you may have thought.

Low-income consumers must make complex financial decisions even more frequently than middle or high-income consumers, given their smaller operating margins and their limited and irregular incomes. A forthcoming report by UNCDF on Lesotho and Swaziland shows that many workers forfeit up to 40% of their income because of burdensome loan repayments. Indebtedness in the informal consumer market is often an indicator not only of poverty, but also limited financial literacy.

Yet these problems are not limited to poor consumers or low-income countries. While households in advanced and emerging economies have gained increased access to a wide range of financial products, they seldom have the capacity to fully understand and master them. In response to the growing concerns about over-indebtedness, policymakers across the world are focusing on “predatory” lending, which takes advantage of financial illiteracy to push inappropriate loans to consumers who cannot repay them. Some common-sense reforms, like those implemented in France, now require lenders to include a disclaimer (“You are responsible for paying back a loan. Verify your ability to repay the loan before borrowing.”) Additionally, all marketing material must include plain-language explanations of the long-term cost of loans (interest rate, total amount due and the final cost of the credit). South Africa’s Broad-Based Black Economic Empowerment (BBBEE) legislation has specific regulations around financial education and consumer empowerment as stipulated under the Financial Sector Codes. The purpose of these types of regulations is to improve financial capability and increase financial inclusion. But while such reforms have helped improve the protection of financial consumers, they only address part of the problem.

Many people, in developed and developing countries alike, know little about basic financial concepts and do not engage in savvy financial behaviours. An OECD paper shows that in almost all of the 14 countries across 4 continents taking part in the study, at least half of the adult population failed to identify the impact of interest compounding on their savings, and revealed that fewer than one in five people would shop around when buying financial products.

Unfortunately, the picture isn’t any brighter when it comes to young consumers. The recently published OECD PISA financial literacy assessment revealed that around one in seven students in the 13 OECD countries and economies taking part in the assessment are unable to make simple decisions about everyday spending, and only one in ten can solve complex financial tasks. This result is astonishing and requires prompt action to ensure that tomorrow’s adults understand bank statements, the long-term costs of consumer credit and how insurance works, among other basic financial services and products. Indeed, improving the financial literacy of young people will help ensure that they can benefit from savings, retirement and healthcare coverage — much-needed safety nets in the absence of parents and/or social systems. And in case you wonder if you’re any better off than a 15-year-old when it comes to financial literacy, have a look at these sample questions.

To help governments design and implement policies to increase financial skills, including among young people, the OECD and its International Network on Financial Education (INFE) developed High-level Principles on National Strategies for Financial Education, which were endorsed by G20 leaders in 2012. They encourage countries to develop nationally co-ordinated frameworks for financial education policies and provide general guidance on the main elements of an efficient national financial education strategy, such as an effective mechanism to co-ordinate with civil society and the private sector.

Governments may involve financial service providers and other key stakeholders to build the financial capabilities of young people and adults through a variety of delivery channels. Rwanda’s national strategy, for instance, underlines the importance of using not only schools to deliver financial education, but also other innovative channels to reach vulnerable, out-of-school youth. Umutanguha Finance, one of the ten institutions supported by the UNCDF initiative YouthStart, empowers teenagers to deliver financial education on issues like savings to younger children. This peer-to-peer approach is particularly useful because young people tend to listen to their peers more than adults, and the participative approach helps foster youth as agents of change in their own communities.

Financial literacy programmes can play an important role in reducing economic inequalities as well as empowering citizens and decreasing information asymmetries between financial intermediaries and their customers. Public authorities have a responsibility to develop financial education policies and set up robust financial consumer protection frameworks to ensure that consumers are informed and understand the financial products available to them. Innovations such as electronic payments are tipping the economic scales in favour of those who have, for too long, been excluded from the system. But unless consumers are equipped to make sound decisions about use of financial services, no amount of innovation will bridge the gap.

Useful links

OECD work on inequality, inclusive growth, financial education and consumer policy

UNCDF Making Access Possible, YouthStart and Better than Cash Alliance initiatives and Pacific Financial Inclusion Programme

FinMark Trust Financial Education Toolkit

The growing pains of investment treaties

13 October 2014
by Guest author
FDI-inflows-2013

Click for more FDI statistics

Today’s post is from OECD Secretary-General Angel Gurría

International investment treaties are in the spotlight as articles in the Financial Times and The Economist last week show. An ad hoc investment arbitration tribunal recently awarded $50 billion to shareholders in Yukos. EU consultations on proposed investment provisions in the Transatlantic Trade and Investment Partnership (TTIP) with the United States generated a record 150,000 comments. There is intense public interest in treaty challenges to the regulation of tobacco marketing, nuclear power and health care.

Some 3000 investment treaties provide special rights for covered foreign investors to bring arbitration claims against governments. Principles of fair and equitable treatment included in many treaties are uncontroversial as general principles of good public governance. But the treaty procedures for interpreting and enforcing them in arbitration claims for damages are increasingly controversial.

A trickle of arbitration claims under these treaties has become a surging stream. Over 500 foreign investors have brought claims, mostly in the last few years. Investor claims regularly seek hundreds of millions or billions of dollars. High damages awards and high costs have attracted institutional investors who finance claims.

Providing investors with recourse against governments is valuable. Governments can and do expropriate investors or discriminate against them. Domestic judicial and administrative systems provide investors with one option for protecting themselves. The threat of international arbitration gives substantial additional leverage to foreign investors in their dealings with host governments, especially when domestic systems are weak.

At the same time, there is mounting criticism. Arbitration cases can involve challenges to the actions of national parliaments and supreme courts. As Chief Justice Roberts of the US Supreme Court wrote earlier this year, “by acquiescing to [investment] arbitration, a state permits private adjudicators to review its public policies and effectively annul the authoritative acts of its legislature, executive, and judiciary” In a similar vein, Chief Justice French of the High Court of Australia recently noted that the judiciary in his country had not yet made any “collective input” to the design of investment arbitration and that it was time to start “catching up”. This broadening interest in the system will enrich the debate on the future of investment treaties.

Governments and business leaders are also seeking to reform treaties so as to ensure that they help attract investment, not litigation. Some major countries, such as South Africa, Indonesia and India, are terminating, reconsidering or updating what they perceive to be outdated treaties that excessively curtail their “policy space” and entail unacceptable legal risks. Germany opposes the inclusion of investment arbitration in TTIP. The B20 grouping of world business leaders recently called on the G20 to address investment treaties.

International organisations such as the OECD can help governments and others to shape the future of investment treaties. I propose the following agenda for joint action to reform and strengthen the investment treaty system.

Resolve investor claims in public. The frequently secretive nature of investment arbitration under many treaties heightens public concerns. The treaties of NAFTA countries and some other countries have instituted transparent procedures. But nearly 80% of investment treaties create procedures that fall well short of international standards for public sector transparency. This is a major weakness. In July, UNCITRAL (the United Nations Commission on International Trade Law) approved a multilateral convention on transparency. Governments can now easily make all investor claims public. Over a century ago, Lord Atkinson emphasised that a public trial is “the best security for the pure, impartial, and efficient administration of justice, the best means of winning for it public confidence and respect”. Governments – with the support of major investors — should rapidly take action to ensure that investment arbitration adopts high standards of transparency.

Boost public confidence in investment arbitration. Governments have borrowed the ad hoc commercial arbitration system for their investment treaties. But this borrowing is increasingly questioned. Sundaresh Menon, as Attorney-General of Singapore, has observed that “entrepreneurial” arbitrators are subject to troubling economic incentives when making decisions on investor state cases. Advanced domestic systems for settling disputes between investors and governments go to great lengths to avoid the appearance of economic interests influencing decisions. Investment arbitration needs to do the same.

Do not distort competition. The concept of national treatment is a core component of investment and trade agreements. It promotes valuable competition on a level playing field. Investment treaties should not turn this idea on its head, giving privileges to foreign companies that are not available to domestic companies. Governments should protect competition and domestic investment by, for example, ensuring that treaty standards of protection do not exceed those provided to investors under the domestic legal systems of advanced economies. Some case law interpretations of vague investment treaty provisions go beyond these standards, and are unrelated to protectionism, bias against foreign investors or expropriation. Governments that allow for such interpretations should either make public a persuasive policy rationale for these exceptional protections for only certain investors, or take action to preclude such interpretations of their treaties.

Eliminate incentives to create multi-tiered corporate structures. By allowing a wide range of claims by direct and indirect shareholders of a company injured by a government, most investment treaties encourage multi-tiered corporate structures. Each shareholder can be a potential claimant. Indeed, many treaties encourage even a domestic investor to create foreign subsidiaries – it can then claim treaty benefits as a “foreign” investor.

If complex structures were cost-free, perhaps it wouldn’t matter. But they aren’t. Complex structures increase the cost of insolvencies and mergers. They also interfere with the fight against bribery, tax fraud and money laundering because they can obscure the beneficial owner of the investment. Governments should promptly eliminate investment treaty incentives to create multi-tiered corporate structures.

We need international capital flows to support long-term growth through a better international allocation of saving and investment. But the investment treaty system needs to be reformed to ensure that the rights of citizens, governments, enterprises and investors are respected in a mutually beneficial way.

Useful links

OECD work on international investment

OECD work on international investment law

Legal principles applicable to joint government interpretation of investment treaties was one of the issues discussed at the March 2014 OECD Roundtable on Freedom of Investment

Changing minds

10 October 2014
by Guest author

Mental Health DayTo mark WHO World Mental Health Day, today’s post is by Emily Hewett of the OECD Health Division

Across the OECD an estimated 20% of the working-age population suffer from mental ill-health, and the social and economic impacts of this burden of illness are huge, according to the OECD’s recent publication Making Mental Health Count. Together, the direct and indirect costs of mental ill-health can exceed 4% of GDP across the OECD, driven by expenditure on medical needs and social care costs, as well as higher rates of unemployment and more absences from work. According to OECD’s Sick on the Job report, people with severe mental illness are 6 to 7 times more likely to be unemployed, while those with a mild-to-moderate illness are 2 to 3 times more likely to be unemployed.

World Mental Health Day should also be a time to look beneath these striking statistics, and think about the millions of individuals living with mental ill-health across the OECD, and worldwide.

The reality of mental ill-health is often a grim one. Mild and moderate mental illnesses such as depression or anxiety are estimated to affect around 50% of people in their lifetime. For society and economies the costs are clearly significant, but for individuals the strain can be crippling. The heavy weight of depression and anxiety can stop individuals reaching their full potential in education or at work and put huge strain on relationships with loved ones. If untreated, individuals suffering from depression or anxiety can quickly find themselves out of work and dependant on sickness or disability benefits. Sick on the Job shows that after long periods of sickness absence, individuals find it harder and harder to return to work. Furthermore, the stigma around mental illness can lead people to hide their suffering, leaving them to struggle alone.

Individuals with severe mental illnesses, like bipolar disorder or schizophrenia, experience symptoms such as hallucinations and big swings in mood, which are hard to understand and tough to control. In too many instances, treatment is restricted to ‘what’s available’, rather than the care that best suits the individual’s needs or preferences. Individuals with severe mental illness also have poorer physical health, and higher rates of cardiovascular disease, diabetes and cancer. For health systems this means higher spending on services, and for individuals having a physical and a mental illness together can mean dying up to 20 years earlier than the average for people born around the same and in similar circumstances to them.

What, then, needs to be done?

The high social and economic costs of mental ill-health demand a more robust policy response. Individuals with mental ill-health should be offered care that is timely and appropriate for their needs, which puts them at the centre of care delivery, and makes treatment choice a reality. Sick on the Job stresses the importance of making employment a core desired outcome for mental health care and the need for employment services to address widespread mental health needs among jobseekers. With appropriate training, guidance and resources, the ability of teachers and managers to provide support with mental health problems can make a huge difference to individual wellbeing, and can be decisive in whether a student or worker stays in education or work or not.

The structure of mental health services, how they are set up, funded, and delivered to the individuals who need them, needs to be strengthened. Even as national pressures, costs and priorities bear down, OECD mental health systems need enough services, enough investment, enough evidence-based care, and enough cleverly designed service delivery to make patient-centred high quality care a reality for every individual that needs it.

Making mental health a policy priority would have significant and economic benefits, but most importantly it would enhance people’s lives. We can hope that by the next World Mental Health Day we are further along the road to societies where all individuals with mental health needs get the treatment, care and support that they need.

Useful links

OECD work on mental health systems

OECD mental health and work project

Depressing depression: mental illness at work OECD Insights

Work-life imbalance OECD Insights

Dementia: a modern killer OECD Observer

In my view: Development depends on realising the potential of taxation

9 October 2014
by Guest author

Nigeria govtToday’s post from Ngozi Okonjo-Iweala, Co-ordinating Minister for the Economy and Minister of Finance, Nigeria, concludes a series of ‘In my view’ pieces written by prominent authors on issues covered in the Development Co-operation Report 2014: Mobilising resources for sustainable development. The Report is being launched today in London with the Overseas Development Institution, and you can watch the event by registering here.

Developing country governments would do well to strengthen their tax systems so they can mobilise the domestic resources they need to finance their own development. This is particularly true for African countries, where the recent trend of decreasing ODA shows no sign of reversing.

In developing countries in general, revenue administration is often hampered by weak organisational structures, low capacity of tax officials and a lack of modern, computerised, risk-management techniques. The value-added tax “gap” alone is estimated at around 50-60% in developing countries, compared with only 13% in developed countries. The International Monetary Fund (IMF) estimates that for many low-income countries, an increase in tax revenues of about 4% of GDP is attainable.

Since the 1990s, many African countries have made progress in improving their domestic tax capacities and receipts. Despite these improvements, however, there are still many revenue leaks that need to be plugged.

In Nigeria, we are making concerted efforts. Following the recent revision of our GDP to USD 510 billion, our tax-to-GDP ratio declined from 20% to about 12%, several points below the 15% tax-to-GDP threshold recommended by the IMF for satisfactory tax performance. Yet with our increasingly diversified economy, there is room to greatly improve our tax administration capacity and increase our tax revenues.

A recent diagnostic exercise to examine the bottlenecks in our tax collection processes revealed some interesting findings. For example, about 75% of our “registered” firms were not in the tax system! Moreover, about 65% of Nigeria’s registered taxpayers had not filed their tax returns over the past two years. With the support of external consultants, we are introducing remedial measures to improve tax performance and estimate that we can raise an additional USD 500 million in non-oil tax revenues in 2014.

The international community has an important role to play in supporting such efforts by developing countries, and evidence shows that this can yield impressive returns (see also Chapter 14). The OECD has found that every USD 1 of official development assistance (ODA) spent on building tax administrative capacity can generate as much as USD 1 650 in incremental tax revenues (Chapter 14). Yet to date, only limited funds have been targeted at improving tax institutions and tax policies.

To support the broader goal of mobilizing financing for the post-2015 development agenda, ODA can also be used in many other creative ways, for instance to leverage private financial resources (Chapter 11).

In my view, realising the full potential of domestic resource mobilisation in developing countries – and in Africa in particular – is central to discussions on financing the post-2015 development agenda. It will be particularly important to deploy a greater proportion of ODA in low-income countries to support their tax administration efforts. Realising this potential will require strong commitment and leadership from developing country policy makers, as well as the support of the international community.

Useful links

Find out more about the Development Co-operation Report 2014: Mobilising resources for sustainable development here and follow #DCR2014 for live coverage of the launch events on Twitter.

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