Today’s post is from OECD Secretary-General Angel Gurría.
Six years since the onset of the Crisis many advanced countries continue to face high unemployment, sluggish growth and weak public finances. Growth is also slowing down in emerging markets.
Meanwhile, as recent revelations have demonstrated, the frayed international tax system has long allowed multinationals to plan their way around paying corporate taxes. And bank secrecy has let individuals stash money undetected, and untaxed, in hidden corners of the world.
Such practices erode the integrity of our tax systems, damage the capabilities of our governments, diminish economic growth and corrode the trust of our citizens who are the vast majority of taxpayers. The way tax is levied and spent is one of the most important levers to address social inequalities, create jobs, pay for education, infrastructure and other public services and encourage investment in innovation.
The OECD has helped put the international tax system at the forefront of the international policy agenda. Our work has been endorsed by the G20, whose leadership deserves praise and recognition for giving top priority to calling time on tax havens and recognising that an international tax framework developed 100 years ago is no longer fit for purpose.
Accounting for almost 90% of the global economy, 44 countries including the G20 have tasked the OECD with finding ways to fix this situation. Our Base Erosion and Profit Shifting (BEPS) Project aims to ensure the rules governing these systems are transparent, and that multinationals cannot exploit gaps between national tax laws or artificially shift profits to low tax jurisdictions where no real economic activity takes place.
We’re moving fast. The first results of our BEPS project were released in September and we are on track to deliver the final package of measures a year from now. These efforts will neutralise the “cash boxes” companies use to keep trillions of dollars of profits offshore and free of taxation. They will also ensure that patent boxes can’t be used to shift profits to countries where no substantial activities are carried out to generate those profits. Countries have also been spurred into action: Ireland will put an end to “double-Irish” tax planning schemes and the Netherlands will renegotiate its tax treaties with developing countries to ensure they can’t be abused by multinationals to avoid paying tax. And the European Commission has launched high-profile state-aid investigations into tax practices by its members that could breach EU law.
We have also witnessed a sea change on the tax transparency front since 2009 when strict bank secrecy was still the rule in many countries. The Global Forum on Transparency and Exchange of Information for Tax Purposes now has over 120 members. The Forum has issued over 70 compliance ratings on its members and over 500 recommendations have resulted in changes to laws and practices that will improve tax transparency worldwide.
Implementing Automatic Exchange of Information (AEOI) is the next major objective. We have developed a new global standard in close cooperation with G20 countries and 93 jurisdictions have now committed to launching automatic exchange by 2017 or 2018. Only last month in Berlin, 51 countries and jurisdictions took the first step toward implementation by signing a multilateral agreement. Luxembourg, Switzerland, Singapore and many other financial centres are already on board, and more will follow. This robust standard will allow authorities to track income and offshore assets. These efforts are bearing fruit. Voluntary disclosures by tax evaders have already yielded 37 billion euros of additional revenue to OECD and G20 countries since 2009.
Extending the benefits of these changes to developing countries is a top priority. They have a big stake in this effort but lack the resources to crack down on their own. The OECD is involving them fully in shaping the new global standards. Initiatives such as our Tax Inspectors Without Borders are specifically designed to help developing countries prevent the erosion of their tax bases and the illicit outflow of revenues through tax evasion.
Now is the moment for governments to take action in a concerted international effort. Corporate profits must be based on the true cost of developing products and services, not on clever distortive tax arrangements that favour multinationals over domestic businesses. Too many multinationals are getting away with paying as little as 1% -2% on their global profits, and in some cases paying nothing at all.
Overhauling the global tax system and its practices is fundamental if we are to deliver stronger, cleaner and fairer growth for a post-Crisis world. What happens in the next 12 months, starting with the G20 Brisbane Summit, will be critical for the success or failure of this exercise. Making historic changes means taking tough decisions and takes political courage. In the current circumstances, nothing less will do.
Are you following the G20 leaders’ summit in Brisbane this weekend? The OECD Observer magazine is here to help. OECD Secretary-General Angel Gurría and Australian Treasurer Joe Hockey lead this fact-packed “300th edition” through the G20 issues on the table at Brisbane, with articles on growth (notably the 2% growth challenge), trade, gender and jobs. In our Ministerial Roundtable on employment, ministers from Australia, Germany, Korea, Spain and the US outline the actions they have been taking to create more and better jobs. Business and labour representatives add their perspectives. The edition also asks whether Europe can avoid deflation, and traces the fall in productivity growth across OECD countries since the 1960s. With Brisbane the focus of world attention, the OECD Observer casts a spotlight on Australia’s economy, and asks why the “lucky country” is also a happy one. We recount how Australia came to join the OECD (not as smooth a path as you might imagine), and outline the country’s future challenges in the Asian Century.
Today’s post is by Rolf Alter, Director of the OECD Public Governance and Territorial Development Directorate.
Six years have passed since the beginning of the global financial crisis, yet a large number of countries are still playing catch-up. The impact of the crisis, however, was not only national. Many regions are also struggling to return to the levels of prosperity that they enjoyed before the crisis. Going beyond national measures, an in-depth analysis of OECD regions reveals massive disparities within countries, with some regions faring much worse than others. OECD countries have always had some level of spatial inequality, but these disparities increased significantly since the onset of the crisis, and reducing them is now more than ever an imperative.
In order to address this challenge, the OECD established a framework to measure well-being at the local level. “How’s Life in Your Region?” presents an innovative set of tools to help policy makers benchmark the performance of their region in terms of the key indicators that define well-being for citizens. The ability to benchmark the performance of their region against other similar places should help them better target their policies and investments in order to have stronger impact on people’s daily lives.
This initiative responds to an urgent need for governments to learn lessons from the crisis. First, through its Better Life Initiative, the OECD explicitly recognises that there are indicators other than the usual economic measures (such as GDP) that capture the real aspirations and expectations of citizens. Moreover, well-being is defined by issues such as education, environmental sustainability, safety and housing that are essentially local in nature. To be effective in improving well-being, therefore, public policy needs to reflect the regional and local differences across these dimensions of well-being. The challenge that OECD has taken on is to identify a set of measures that capture well-being trends at the local level.
If used correctly, these well-being indicators have the potential not only to inform on what reforms should be focusing on, but also to track how well the implemented policies are performing. For example, the latest OECD Regional Outlook shows that in 10 OECD countries, over 40% of the national rise in unemployment since the crisis was concentrated in one region –underscoring the need to adopt a place-based policy approach to solving the severe labour market problems affecting that region.
The regional well-being initiative is a tool for government, but it is also designed to inform stakeholders outside the central government and in the non-government sector as well. While it can be tempting to leave policy makers the sole responsibility of improving well-being, it is much more effective to include various actors of society when it comes to building better communities: regional policy makers, but also the scientific community, the private sector, civil society and citizens. Regional well-being data can also be a tool to promote debate around policy choices. For that reason, the initiative also includes an effort to present data simply and clearly via the regional well-being data visualisation tool.
An example of this collaborative process can be found in Italy: when the province of Rome developed a well-being strategy in 2011, it held various meetings, forums and workshops with its constituents in order to help prioritise and determine the scale of the policy. A web-tool was created, allowing citizens to select the well-being dimensions that mattered the most to them, and ensuring that the feedback process was maintained over time.
Designing and implementing a regional well-being strategy is an iterative process. Priorities have to be established, and indicators that correspond adequately to the objectives must be selected. Progress must be monitored over time by looking at the results of the policies put in place and their evolution. Engaging a large number of stakeholders from the beginning of the initiative allows for increased ownership of the project, and therefore better accountability, legitimacy and overall efficiency. The use of indicators helps to track progress and keep momentum among stakeholders who can see that the targets they set are being reached or that new solutions are needed in cases in which the targets are not achieved.
Fostering well-being at the local level is a way to build stronger and more sustainable communities. The OECD Regional Well-Being framework provides a tool to help governments at all levels design and refine the policies that will help achieve this goal.
The OECD was created in 1961, but you can trace its origins back to the First World War, the centenary of which we’re celebrating this year, and in particular to today, Armistice Day. The Great War didn’t end formally with the signing of the Armistice on 11 November 1918, but on 28 June 1919, with the Treaty of Versailles. A year later, Australian artist Will Dyson published a prophetic cartoon about the Versailles Treaty. In Dyson’s drawing, we see a baby behind a pillar with “1940 class” written above its head, and Clemenceau, the French President, is saying “Curious! I seem to hear a child weeping”. By the time that baby was old enough to join the army, the Second World War had broken out.
The Versailles Treaty was harshly criticised right from the start, not least by Keynes, who had attended the conference as part of the delegation from the UK Treasury. In fact his bestselling The Economic Consequences of the Peace is one of the reasons the Treaty has such a bad reputation. Keynes’s critique is twofold. His first attack is to a large extent moral and political. He accuses the Versailles agreement of betraying US President Wilson’s “Fourteen Points” on which the peace was supposed to be built, notably concerning the reparations the defeated nations had to pay and territorial agreements concerning colonies and the European mainland. His second criticism is more economic. For peace to last, he argued, Europe’s economies had to become more integrated, and the Treaty worked against this.
Will Dyson was almost right about when the Second World War would start, but Keynes was spot on, predicting that it would happen 20 years after the 1919 signing due to the despair and economic catastrophe the Versailles Treaty would contribute to. As the Second World War drew to a close, Keynes led the British Delegation to the Bretton Woods Conference in July 1944 that would shape the post-war economy. The leaders of the Allied nations were determined to avoid the mistakes of the past and realised that the best way to ensure lasting peace was to encourage co-operation and reconstruction, and not to punish the defeated. The Bretton Woods Agreement and the institutions created to administer it such as the IMF and World Bank Group were similar in many ways to what Keynes had proposed in 1919.
The politics and economics of the immediate post-war years would give birth to the predecessor of the OECD. As the Office of the Historian of the US Department of State reminds us, “Fanned by the fear of Communist expansion and the rapid deterioration of European economies in the winter of 1946–1947, Congress passed the Economic Cooperation Act in March 1948 and approved funding that would eventually rise to over $12 billion for the rebuilding of Western Europe.” The Organisation for European Economic Cooperation (OEEC) was established to run this “European Recovery Program”, better known as the Marshall Plan, in 1947.
While US financing was important, that $12 billion would be only worth around $120 billion in today’s terms, compared, for example, to the $700 billion the Emergency Economic Stabilization Act of 2008 authorised the US Treasury to spend on the bailout following the subprime crisis. It was actually by making individual European governments recognise the interdependencies of their economies that the US made its greatest contribution to the economic rebirth of Europe.
The success of the OEEC and the prospect of carrying forward its work beyond Europe led Canada and the US to join OEEC members in signing the new OECD Convention on 14 December 1960. Others followed, starting with Japan in 1964, and now 34 member countries worldwide regard it as normal to turn to one another, within the OECD, to help identify problems, analyse them, share experiences, and devise solutions. Another 100 other countries take part in OECD work.
Most of the areas the OECD works on – employment, growth, agriculture, and so on would be familiar to economists of Keynes’s generation, although the actual mechanisms have changed radically since the OECD was created, and even more so since Keynes went to Versailles in 1919. But if you look at the “Topics” menu on www.oecd.org, you’ll see one area that a specialist from a century ago would feel familiar with. While our trade specialists for example are dealing in new concepts like trade in value added, or the industry analysts are trying to understand the information economy, my colleagues at the Centre for Tax Policy are trying to demolish an international tax system that was conceived a hundred years ago and allows big companies and rich individuals to get away with paying little or no tax. That’s a war worth fighting.
It’s clichéd to say that the most certainty you can take from any economist’s prediction is that it will be mistaken, but many got their forecasts for 2014 horribly wrong. At the beginning of this year, commentators were fairly united in hailing the ‘year of the pay rise’, with most expecting the UK’s enduring real wage squeeze to finally turn the corner, and some predicting that pay would bounce back quite rapidly over the course of the year. Two thirds of the way through 2014 this has not come to pass and the outlook has been repeatedly downgraded. For example the Bank of England now doesn’t expect a return to real wage growth until the middle of next year. Looking back, many of us are left wondering why we were all far too optimistic.
In answering this question some have pointed to the fact that the official data looks worse than other pay surveys, with pay settlements, for example, running at or above inflation during 2014. A major difference between the official Average Weekly Earnings (AWE) series and other surveys is that AWE, as well as capturing year-on-year changes in employees’ pay, will be affected by changes in the overall shape of the workforce. Do such ‘compositional’ factors shed light on what’s been happening to pay of late?
New analysis by the Resolution Foundation comprehensively assesses the impact of the changing make-up of the workforce on wages since the mid-2000s. It looks across a number of job and employee characteristics, including sector, occupation, age, sex, qualification level and job tenure, in order to understand how much of pay growth is down to pay changes within groups, and how much is compositional – owing to a shift in the proportion of employees across groups. For example, as others have highlighted previously, recent increases in employment in lower-paid sectors and continued contraction in the finance industry are likely to have dragged down on average pay growth across all employees.
While changes in the industrial mix look to be putting downward pressure on average pay, other factors, such as strong full-time employment growth in the last 12 months, are likely to be pulling in the opposite direction. To disentangle the pushes and pulls our analysis looks at all factors together, controlling for the overlap between each, to understand the overall direction in which compositional changes are driving wages and the relative importance of different job and employee characteristics to this. The overall compositional effect is shown in the red bars in the the following chart.
We find that between 2006 and 2013 the compositional effect was always positive, acting as a boost to pay growth. This is to be expected due to long-run shifts in the workforce such as rising qualification levels – a compositional boost to pay could be regarded as a normal state of affairs. It’s sobering to think that, had it not been for these changes, Britain’s already huge pay squeeze would have been a third deeper.
However, recent months mark a departure from this trend, with the overall compositional effect turning negative for the first time in the period we’ve looked at. This is due to negative effects from factors including occupations, age and job tenure outweighing the positive impact of rising hours and qualification levels, as the chart below shows.
Some of these drag effects are probably part of a good news story – the entry and re-entry of younger and less experienced workers reflecting rapid employment growth and falling youth unemployment this year. With the UK’s employment rate having returned to its pre-recession peak these effects are likely to fall out next year – we may be observing the temporary ‘growing pains’ of recovery. By contrast, the drag effect of the shift towards lower-paid occupations – the largest single compositional factor affecting pay growth – is more worrying as it could represent a longer-term change in the labour market.
To return to our opening question, this analysis does suggest that compositional factors help explain why pay growth in 2014 has looked quite so bad. We find that without the reversal in compositional effects between 2013 and 2014, real pay in the first half of 2014 would have grown by a very modest 0.1%, rather than the 0.8% fall we’ve experienced. So there may be reasons to give those economists who called 2014 wrongly a break this time round, although 0.1% real growth hardly represents a boom.
This analysis shows the important role that the changing make-up of the workforce plays in our understanding of average pay growth, for which reason we’ll be keeping a close eye on these trends as more data becomes available. But it mustn’t hide the fact that a generalised and dramatic slowdown in pay growth within sectors and different groups of workers has been by far the biggest factor explaining falling UK wages since the financial crisis (shown by the decreasing size of the grey bars on the first chart). Ultimately, prospects for ending the pay squeeze rest on a return to productivity growth and the willingness of employers to ensure that workers obtain a fair share of these gains.
Today’s post is from Emmanuel Asomba, a consultant working on poverty reduction, human development and systematic reviews of development polices and programs.
The most prominent goal of development has been to eradicate extreme poverty. Both literally and figuratively this goal has been part of a prescriptive stroll over the past two decades, moving in a linear fashion. However, along the way, it has become clear that poverty is a multidimensional phenomenon changing across context, thus requiring multiple correspondence analysis and interventions. This is far more amenable to adaptive solutions in social change. It underlies a different vision to address, among others, the interactions between inequality and poverty, primarily to share approaches in different domains, and ultimately to enhance the interconnectedness between institutions to balance social outcomes.
With a number of components, such as behaviors and organizational parameters, needed for development to work, it is important to capture the variability of desired outcomes to adapt social and economic interventions. Proclaiming that social protection programs and job promotion have to “accommodate specificities” is not enough. The transition is to consider how aggregation happens, widening the scope of change by reviewing the relationships between cause and effect to discern how emergent practices can blend to improve rights-based/social justice platforms. This view stresses how change can unfold across converging organizational contexts.
To alter the balance more effectively, interconnections among intervention designs can boost the possibility of generating multidimensional development systems. The idea is to bring about empowerment and cooperation across several sectors and stakeholders, all of them identifying and differentiating the causes of change to come up with more than mere technical fixes. For instance, the ultimate objective of the MDGs (Millennium Development Goals) has been to promote sustainable development across the board. The broad effort of the development community consistent with the post-2015 agenda is to avoid fragmentation. This can be most apparent if human development, food security, access to education, health care, etc, can scale up, increasing relationships, operationalization, transparency and compliance across life-cycle development approaches. These elements are states of matter stemming from observations and applications of qualitative differences in social systems.
Extreme poverty and inequality are complex issues; we have good reasons to think that integrating a mix of alternatives in programming is a constructive route to support the expansion of “ecosystems” or networks of change. This outlook is a way to set the focus on context and variation (see Tony Pike). As a step forward we can test the viability of diverse approaches through the tweaking and sequencing of activities to achieve robust feedback systems.
In the world of complexity as outlined by the DAC Network on Gender Equality, the pragmatic case of Women’s Economic Empowerment (WEE) shows how we can reconcile opinions to combat the isolation caused by extreme poverty, and consequently the deprivation feeding women’s unequal control of assets and income. By emphasizing the improvement of standards of living, especially for low-income women, this concept can approach social-economic programs from a systems-perspective, i.e., adapting and iterating solutions to build local expertise and knowledge to reduce their vulnerability. In tandem with consistent policies, principles of equal rights and equity can help map new conceptions of relationships and interactions between various actors, thus shifting measures of initiatives and ownership in gender relations.
The transition moves away from simplifications, adapting organizational levels and flexibility in interventions. This approach contrasts with conventional approaches to programming by capitalizing among other things on the existence of different feedback loops to recalibrate for instance, women’s bargaining power, or their mobility. So, the idea of cause and effect is brought under new light with pathway models telling the stories of key outcomes and relationships that can generate change or be measured.
An illustration of this complexity paradigm is the way CARE shifted its corporate processes and strategy to grapple with gender equality for its agricultural portfolio targeting high-poverty households in Latin America and Africa. A critical juncture was the need to streamline operational links through gender-sensitive policies as part of the Women Empowerment in Agriculture (WEA) framework. Primarily set to encourage the role of women and girls in leadership by using adaptive paths, the emphasis was on an organization-wide change process to build a collective approach on individual rights. CARE called for the understanding of ecosystems of equal rights to adjust their poverty profiles and policy interventions.
A case in point is the implementation in 2008 of their Income Smoothing through Agricultural Marketing Interventions (ISAMI) in Uganda, involving male decision-makers in supporting women across agricultural networks. Seen through a multidimensional lens, this initiative threw a strong light on the pertinence of joint distribution of disadvantages to address women’s participation in household and community-level decision-making. By engaging local groups to address the nature of the gender division of labor, time poverty, or the gender control of labor and products of labor, this project triggered the emergence of implicit causal pathways that led to robust strategic programmatic shifts.
It evolved around three dimensions and sub-dimensions of women’s empowerment in collective marketing, namely, agency, relations and structure. Out of them came forth, a responsive logic model. It broadened feedback loops on connections and practices (cause-effect chains), thus completing CARE’s multidimensional approach with poverty income measures. The true explanation is that these parameters mapped-out a resilience ecology (Circle of Learning) changing old patterns out of emerging practices (gendered allocation of resources) regulating women’s decision influence in household, market accessibility, or the pursuit and acceptance of accountability.
Global development has to move away from linear restrictions treating complex problems in separation. Fulfilling this objective is likely to create significant advances to meet the challenges of extreme poverty. The extension of multiple perspectives can target inherent complexities, making experimentation and learning mainstream adaptive policy tools.
The Social Institutions and Gender Index (SIGI) from the OECD Development Centre is an innovative measure of underlying discrimination against women for over 100 countries. While other indices measure gender inequalities in outcomes such as education and employment, SIGI helps policymakers and researchers understand what drives these outcomes. SIGI captures and quantifies discriminatory social institutions, including early marriage, discriminatory inheritance practices, violence against women, son bias, restrictions on access to public space and restricted access to productive resources.
Applications of complexity science for public policy OECD Global Science Forum