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State-owned enterprises, international investment and national security: The way forward

19 July 2017

Frédéric Wehrlé and Hans Christiansen, OECD Directorate for Financial and Enterprise Affairs

For most of the past half century, countries around the world have gradually opened up to foreign investment, and with good effect. Investment from other countries has supported growth and development, created jobs and enhanced welfare. Today, as our data show, OECD economies retain only limited traditional regulatory restrictions to inward foreign investment in the form of foreign ownership ceilings and other discriminatory conditions. While many emerging economies are generally less open, they have made their legal regimes for foreign direct investment less restrictive. Ongoing monitoring by the OECD shows that these liberalisation efforts continued after the 2008 financial crisis.

However, since the 2000s, a new and opposing trend has emerged: the screening and review of foreign investment projects, particularly those by state-owned enterprises (SOEs), to mitigate risks to national security. In fact, a recent survey shows that more and more governments are introducing or enhancing screening mechanisms for inbound investment projects to identify and address perceived threats. A third of the 59 advanced and emerging economies that participate in our investment policy dialogue now operate such mechanisms. Several governments are now subjecting investment proposals involving SOEs to greater scrutiny, and at times prohibiting these investments. Some countries have established special rules for the review and admission of investments by SOEs or are considering new policies to address the issue.

Could the precedent offered by the Santiago Principles help to point a way forward? In 2008, following widely publicised concerns in some large OECD countries regarding high profile investment projects by non-OECD sovereign wealth funds (SWFs), the community of SWFs and their government owners adopted a code of good conduct, the Santiago Principles, that was motivated by a desire to ensure that countries would not use national security arguments as a cover for protectionism against foreign SWFs. A decade later, the upsurge of SOEs in global investment and related national security concerns expressed by recipient countries could motivate similar arrangements with respect to investment by foreign SOEs.

International investment by SOEs is a growing concern

The increasing participation of SOEs in the global marketplace, particularly as international investors, makes it all the more important to balance concerns about the good governance of SOEs and to maintain a level playing field. As bearers of state as well as commercial interests, SOEs may place their emphasis on strategic acquisitions, such as advanced technologies for example, on non-market terms. It is fitting therefore that the rise of SOEs should revive interest in investment policies related to national security.

Australia, for instance, screens all SOE investments, whereas it screens private investments only when they exceed a value threshold. Canada applies different trigger thresholds for the application of its net-benefit test if the investor is state-owned. The United States has established specific rules regarding SOEs as part of its national security review mechanism (CFIUS), which require investigation of all government-controlled investments concerning US businesses. Germany has just strengthened its review mechanism. France, Germany and Italy have called for EU policies to address the issue. Strengthening screening of foreign direct investment (FDI) on national security grounds is also under consideration in the Netherlands, the United Kingdom and the United States.

Heightened awareness of the implications of SOE investment has also been evident in more recent international investment agreements. The Trans-Pacific Partnership agreement (TPP), for example, dedicates an entire chapter to SOE investments, whereas in older agreements SOEs were effectively afforded a status broadly similar to that of private investors.

Governments have always been careful to secure policy space to safeguard national security needs. The OECD Codes of Liberalisation, for instance, just as many investment treaties, contain corresponding national security exceptions. These exceptions are typically self-judging, and the term “national security” is intentionally broad.

Because of the discretionary nature of invoking national security as a ground for restricting foreign investment, the OECD Guidelines for Recipient Country Investment Policies relating to National Security were issued as an OECD Recommendation in 2009. These guidelines offer a set of specific recommendations providing for non-discrimination, transparency and predictability, as well as regulatory proportionality and accountability, including effective safeguards against undue influence and conflict of interest.

Internationally agreed rules on SOEs would bring benefits

While concerns relating to SOE investments are legitimate–and many SOEs are less transparent than private firms–the imposition of outright or unqualified restrictions on SOE investments in recipient countries benefit neither host nor home countries as opportunities for mutually beneficial international investment are forgone.

Applying internationally agreed commitments to SOEs and their government owners would help reassure recipient country regulators by offering greater transparency, addressing potential distortions that may arise from state ownership, and ensuring that the SOE owners also observe high standards of governance, disclosure and accountability. In turn, these regulators could be expected to apply the same conditions to SOEs that they apply to investment proposals by privately-owned companies.

A similar outcome to that agreed by SWFs can be achieved for SOE investments today. After all, recommendations on good practices for governance, disclosure accountability and transparency of SOEs have already been agreed under the OECD Guidelines on Corporate Governance of State-Owned Enterprises. These guidelines include specific provisions by which the legal and regulatory framework for SOEs, as well as their practices, should ensure a level playing field and fair competition in the marketplace when SOEs engage in economic activities. If translated to an international market context, and if fully implemented, these provisions could fully address the concerns of investment regulators. The last element required to emulate the “Santiago arrangement” would be to secure a commitment by SOEs to abide by these standards.

This could help convince recipient countries to keep their economies open and to uphold both the letter and the spirit of the principles of OECD guidance on national security.

The OECD stands ready to help forge a mutually beneficial and trusted arrangement for SOEs so that home and host societies can reap the benefits of international investment, while addressing important security concerns that inhibit certain investments proposed by SOEs today.

References and further reading

International Forum of Sovereign Wealth Funds (2008), the Santiago Principles

OECD (2016), State-Owned Enterprises as Global Competitors: A Challenge or an Opportunity?

OECD, OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations, 2012-2017

OECD, Corporate governance of SOEs: Guidance and research, 2011-2017

OECD, Monitoring investment and trade measures, 2008-2017

OECD, Freedom of investment at the OECD, 2007-2017

OECD (2015), OECD Guidelines on Corporate Governance of State-Owned Enterprises

OECD (2009), OECD Guidelines for Recipient Country Investment Policies Relating to National Security, Recommendation adopted by the OECD Council on 25 May 2009

OECD, FDI Regulatory Restrictiveness Index, 1997-2017

Shima, Y. (2015), The Policy Landscape for International Investment by Government-controlled Investors: A Fact Finding Survey, OECD Working Papers on International Investment, No. 2015/01, OECD Publishing, Paris.

Wehrlé, F. and J. Pohl (2016), Investment Policies Related to National Security: A Survey of Country Practices, OECD Working Papers on International Investment, No. 2016/02, OECD Publishing, Paris.

Germany’s successful G20 presidency

13 July 2017
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by Guest author

Noe van Hulst, Ambassador of the Netherlands to the OECD, Chair of the IEA Governing Board

OECD Secretary-General Angel Gurría with German Chancellor Angela Merkel at the G20 Summit 2017 in Hamburg; ©Christian Charisius/AFP

How should we assess the German presidency of the G20? Despite a complicated political situation, Chancellor Angela Merkel’s team worked with their characteristic determination or Ausdauer to achieve concrete actions and advance their three aims of building resilience, improving sustainability and assuming responsibility. The Leaders’ Declaration, Shaping an interconnected world, rightly sends the message that “we can achieve more together than by acting alone”.

 

But while the presidency was a success, it was hardly a walk in the park. Obviously, there were difficult and profound discussions on trade and investment, but isn’t that what the G20 is for? Exactly when perspectives are diverging, there is an urgent need for open and frank talks in the G20, and in the OECD for that matter. Given that background it was even more important for the communiqué to state that “we commit to further strengthen G20 trade and investment co-operation”. As I wrote in my last post, to us it is critical that G20 countries remain committed to keep markets open and fight protectionism. At the same time, we must all do much more domestically to ensure that the benefits of trade and investment are shared more widely, and internationally to achieve a more level playing field.

With respect to the last point, the G20 calls for stronger action to tackle market-distorting subsidies and excess capacities in industrial sectors. The recently created Global Forum on Steel Excess Capacity, facilitated by the OECD, is pressed to come up with concrete policy solutions by November 2017 “as a basis for tangible and swift policy action”. It’s time to deliver in this key area, and to set an example to follow for other industrial sectors with excess capacities.

As for levelling the global playing field and making supply chains more responsible and sustainable, the OECD Guidelines for Multinational Enterprises held much of the limelight as an instrument for upholding high labour, environmental and human rights standards. Important elements like exercising due diligence, access to remedy and grievance mechanisms are extensively mentioned in the G20 communiqué. Another area the G20 continues good work on is international standards on tax transparency and implementing measures to tackle Base Erosion and Profit Shifting (BEPS). This remains one of the most game-changing OECD contributions to the G20’s efforts to fix globalisation, with more to come in the future, for instance on the tax challenges raised by digitalisation.

On climate change, a lot has been said and written about the US decision to withdraw from the Paris Agreement. But we should not forget that the US is continuing its work on clean energy (including renewables), as was recently reaffirmed in Beijing at the Clean Energy Ministerial (CEM) meeting, the Secretariat of which is housed at the IEA. Meanwhile, the other G20 countries reaffirmed their strong commitment to the Paris Agreement, so the global energy transition will keep moving forward.

All in all, the German presidency was in my view a success. Germany navigated some very difficult political waters with aplomb and achieved meaningful results. The OECD’s work and standards also received a deserved boost. As for the Netherlands, we were happy to be a “wild card” participant of this G20 and supporter of the German G20 presidency, and now look forward to supporting those of Argentina in 2018, Japan in 2019 and Saudi Arabia in 2020 in any way we can.

References and further reading:

Clean Energy Ministerial 8 (CEM8), 6–8 June 2017, Beijing, China, http://www.cleanenergyministerial.org/Events/CEM8

German G20 Presidency, https://www.g20.org/Webs/G20/EN/Home/home_node.html

Van Hulst, Noe (2017), “A new network for open economies and inclusive societies”, OECD Observerhttp://oecdobserver.org/news/fullstory.php/aid/5884/

Aid for Trade’s 2.0 upgrade

12 July 2017
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by Guest author

Access to global digital trade can give the development agenda the boost it needs, writes Jorge Moreira da Silva, Director, OECD Development Co-operation Directorate (DCD)

What does digital connectivity for sustainable development actually look like? Take the case of business owner, Praew from Thailand, who travelled 15 km each day to sell her clothes at the Chiang Mai night bazaar. At first, her attempts to move her small women-led business online to meet customers’ demands met with barriers that prevented access to the global market. In 2015, she learned how to utilise Amazon to ship worldwide and saw her profits grow by 70%, allowing her to employ others in her community. Or consider Clotel, who grew his small perfume shop to be the top online perfume retailer in Cameroon after receiving digital and management skills training. His sales went up fivefold. Chinese entrepreneur Du Qianli is another case in point: he uses his online Taobao shop to sell natural plants gathered from villagers in the Taihang Mountains, helping farmers earn extra income to send their children to school. By harnessing the power of digital connectivity, these entrepreneurs now have the power to help themselves and others in their communities out of poverty.

These are just three of 145 Aid for Trade case studies the OECD collected for the 2017 OECD-WTO Aid for Trade at a Glance. They demonstrate the aim that is at the heart of the financing for development agenda: to ensure that EVERYONE is lifted up by the mobilisation of unprecedented levels of public and private resources. Aid for Trade that supports access to digital markets is in line with the 2030 Sustainable Development Agenda, which calls for a more inclusive and interconnected world.

The joint publication casts a spotlight on how digital and physical connectivity is transforming societies, and contributing to inclusive trade and sustainable growth. Better connectivity offers more business opportunities by making it easier and less costly for business people in micro, small and medium sized enterprises (MSMEs) in developing countries to access markets.

Capitalising on connectivity to bridge the digital divide

Accessible and affordable internet connections are necessary for creating an interconnected global market in which no one is left behind. But they are not enough. To leverage the digital economy for developing countries, digital literacy, identity and financial inclusion also need to be improved.

In developing countries, information and communications technology (ICT) infrastructure continues to lag, which makes it harder to overcome the digital divide not just between developed and developing countries, but between cities and rural areas, women and men, and the educated and uneducated. Some 3.9 billion people remain offline, with only a quarter of people in Africa using the internet and only one in seven in least developed countries.

Since the launch of the Aid for Trade Initiative, a total of USD 155 billion has been disbursed for trade-related infrastructure and energy supply. Both sectors are essential for turning digital opportunities into trade realities. Cumulative disbursements in programmes to improve economic infrastructure, build productive capacity and support capacity-building in trade policies reached almost USD 300 billion since 2006. Aid for Trade commitments have increased annually by more than 10% and now stand at USD 54 billion.

While the imperative of bridging the digital divide has support among development partners, we have yet to see a concomitant rise in concessional financing for ICT projects. Official development assistance (ODA) for digital development has remained relatively stable over the last ten years at an annual average of around USD 600 million. This must change.

This underscores the need for coordination with the private sector. The most active donors work closely with the private sector to focus their support on helping developing countries create a regulatory framework that is conducive to attract private investment in building the physical ICT infrastructure. The Addis Ababa Action Agenda (AAAA) recognises the key role that broader sources of development finance will play in reaching the Sustainable Development Goals (SDGs). More synergy between the public and private sector will be needed to lift resources from billions to trillions in support of the SDGs, and to leverage investment in ways that can truly lead to better lives for all.

The OECD is supporting implementation of the Addis Ababa agreement through transformational financing for development, such as blending aid money with private finance and developing new ways of measuring official support. While discussions about how to do this are ongoing among OECD-DAC members, what is important is that we attract additional investment for sustainable development and work together to mobilise these resources effectively, ensuring financing for development is both “fit-for-purpose” and “fit-for-future.”

References and further reading

OECD/WTO (2017), Aid for Trade at a Glance 2017: Promoting Trade, Inclusiveness and Connectivity for Sustainable Development, WTO, Geneva/OECD Publishing, Paris. http://dx.doi.org/10.1787/aid_glance-2017-en

Alibaba (2012), Alizila News: E-commerce in Rural China, https://www.youtube.com/watch?v=LKSxZZk6y28

Nkoth Bisseck, Candace (2016),Changing traders’ lives via eCommerce in Africa, https://www.youtube.com/watch?v=WsuaeYdSXjQ

Roth, David K. (2016), Aid for Trade–Case Story: Lanna Clothes Design, http://www.oecd.org/aidfortrade/casestories/casestories-2017/CS-88-Amazon-How-a-small-rural-business-in-a-developing-country-was-empowered.pdf

Third International Conference on Financing for Development (2015), Countries reach historic agreement to generate financing for new sustainable development agenda, http://www.un.org/esa/ffd/ffd3/press-release/countries-reach-historic-agreement.html

Want to catch a counterfeiter? Check your filter

11 July 2017
by Guest author

A new OECD/EUIPO study maps counterfeit trade routes, and they’re complicated, writes Bill Below from the OECD Directorate for Public Governance

The world may be getting smaller, but for counterfeiters, there are still plenty of places to hide, suggests a new joint study from the OECD/EUIPO, Mapping the Real Trade Routes of Fake Goods. Globalisation, free trade zones, an interconnected planet and vastly uneven governance arrangements are boons for counterfeiters.

Adept at exploiting failures of international co-operation and the limits of enforcement, counterfeiters game the vulnerabilities at transit points and destinations. They are capable of transforming criminal activity into an illicit mass production and distribution enterprise whose complexity is intended to obfuscate and conceal. Counterfeiters have learned to multiply in-transit operations, consolidating shipments and assembling and re-labelling products at distribution centres and in the safe havens of free-trade zones. The steady growth of these zones has equally been a boon to legitimate trade as it has been to counterfeiters and pirates.

To some, it’s considered a victimless crime, an innocent chance to sport top brands, and perhaps even a sort of comeuppance for those brands that command huge premiums. Tips on Yelp and Trip Advisor recommend the “best” places to buy fakes in any city. But those who buy them rarely imagine the reality behind their purchase.

Counterfeit trade brings with it severe economic, health, safety, security and revenue impacts. Poor and dangerous working conditions, human trafficking, money laundering, terrorist financing, environmental degradation and economic hardship characterise the economy of fakes.

Yet, with weak criminal penalties in many countries and the lure of handsome financial rewards from high demand, there is little to discourage the counterfeiter. In fact, the market is huge and growing fast. Imports of counterfeit and pirated goods were worth USD 461 billion in 2013, or around 2.5% of global trade. Developed economies are especially targeted, with fake goods amounting to up to 5% of the value of overall imports to the European Union (EU).

 

Estimated value of global trade in counterfeit goods, 2013

In 2015, nearly three quarters of all seized goods destined for the EU arrived by maritime routes. These seizures represented a retail value of EUR 325 million for 30 million intercepted items. For counterfeiters, container ships offer a high-volume, high-reward option, albeit not without risk. Maritime seizures accounted for just 3% of total seizures of EU imports, but netted over 50% of the total retail value for goods seized. With one estimate placing the number of shipping containers in service at about 23 million, that’s still a drop in the bucket.

Counterfeiters have also been quick to exploit the global explosion in e-commerce and the accompanying drop in delivery costs. In 2015, postal and express services accounted for 23% of the total retail value of all imports seized entering the EU, or EUR145 million. That number is growing, says the OECD’s Piotr Stryszowski: “Fakes concern just about any product that can be ordered on line and shipped by mail. It allows counterfeiters to distribute the risk.” Indeed, parcels containing less than ten items account for about 43% of all shipments of counterfeit goods today.

Much of what we know about fakes comes from data on seizures. But, like the skin sloughed off by a snake, this only offers a snapshot of a past that counterfeiters may have long left behind.

To shine a light on new potential routes, the OECD/EUIPO have created an index (called GTRIC-e) that ranks a country’s propensity to manufacture fake goods. To each of these economies they applied a statistical filter called RCAP-e, evaluating its comparative advantage as a producer of a given good (ten categories were selected for the study–see table above). A second filter was then applied, called RCAT-e, to calculate a given economy’s comparative advantage—and thus likeliness—of being a transit point.

For example, results point to Yemen as a primary transit point for fake pharmaceuticals entering north and east Africa via air from China, India, Saudi Arabia, Singapore and the United Arab Emirates. Macau, China is a likely transit point for fake jewellery originating in mainland China, Indonesia, Malaysia, Thailand and Viet Nam and headed to the US by mail. Counterfeit footwear manufactured in China and a number of Southeast Asian countries is likely to transit Hong Kong, China towards the EU and the US by land mail and air mail.

A comprehensive picture of geographies, product types, routes, modes of transport and destinations begins to emerge, giving experts a new window into counterfeiters’ probable movements. The authors are hopeful that their methodology will help inform policy decisions among individual governments or on a regional or global level. They also hope it can help in designing more tailored policy responses to strengthen governance frameworks.

Obviously, half a trillion dollars of fake goods translates into a lot of shipments. Identifying at least a portion of them, without bringing legitimate trade to a halt, will require more smart, targeted actions. The savvy use of statistics such as GTRIC-e, RCAT-e and RCAP-e, might just be the breakthrough the fight against fakes has been waiting for.

References and further reading

OECD/EUIPO (2016), Trade in Counterfeit and Pirated Goods: Mapping the Economic Impact, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264252653-en.

OECD/EUIPO (2017), Mapping the Real Routes of Trade in Fake Goods, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264278349-en. Click here for more information on the publication, plus a map and infographics: http://www.oecd.org/gov/risk/mapping-the-real-routes-of-trade-in-fake-goods-9789264278349-en.htm

OECD Task Force on Countering Illicit Trade (TF-CIT):

http://www.oecd.org/gov/risk/ oecdtaskforceoncounteringillicittrade.htm

OECD work on Risk Governance:

http://www.oecd.org/gov/risk/

 

Financial regulation after the crisis: still liberal, but…

29 June 2017
by Guest author

Oliver Denk, OECD Directorate for Employment, Labour and Social Affairs, and Gabriel Gomes, OECD Economics Department

In a report issued in June 2017, the Trump administration laid out its proposal for overhauling some of the regulations President Obama had enacted with a view to avoiding a financial market meltdown of the kind we saw in 2008. But what do we actually know about how financial regulation has evolved around the world since the global financial crisis?

Bank supervision has certainly been an active area of reform, not only in the US, but in many other countries. The Basel III accord, the new international regulatory framework for banks that is currently being rolled out, is one well-known testimony. Some countries took less well-publicised action to tighten up supervision, not least when oversight existed institutionally but failed to function properly in practice.

Financial policy, however, goes much beyond bank supervision. It also includes aspects such as credit controls, ease of entry into the banking sector, capital account controls and government ownership of banks. The general picture of the 30 years leading up to the crisis was one of liberalisation of domestic and international capital markets, accompanied by efforts to strengthen frameworks for bank supervision. But the various dimensions of financial policy are rarely assessed together, even though they all matter for financial markets, corporations and households.

This is precisely what we have set out to do, as we explain in our new OECD working paper. In fact, we have assembled a novel dataset on financial policies from 2006 to 2015, by building on an index from the International Monetary Fund. The index by the IMF is the most widely used measure of financial reforms in cross-country empirical research, having been used in some 200 publications. The trouble is the IMF dataset was only available up to 2005–so we have effectively extended it by another 10 years. The index has its strength in covering many different types of financial policies, though it is not overly specific on most dimensions.

What do we find? In some areas, financial policy has become less liberalised since the global crisis. Bank privatisation has seen the strongest break in trend. Governments had reduced their ownership in banks over the one to two decades before the crisis. But since then, recapitalisations in a number of countries have increased government ownership and lowered financial liberalisation in this respect, as the chart below shows.

1.

In other areas, financial liberalisation has more or less stayed the same. Take restrictions to international capital movements. By standard measures, these had largely gone in most advanced economies before the crisis. Today, the developed world as a whole is as financially open as 10 years ago. However, some countries such as Chile, Iceland and Slovenia have tightened their capital account restrictions, even if others like Australia, Korea and Turkey have lifted theirs.

Bank supervision efforts continued to strengthen through the 2000s under the Basel accords. In many countries, this has not only changed how capital requirements are set, but also reinforced the way in which supervisory authorities assess prudential reports and statistical returns from banks through on-site and off-site examinations.

On the whole, our data suggest that the financial crisis has not undone the financial liberalisation that was achieved in the preceding three decades or so. However, it remains to be seen whether the renewed state ownership of banks is part of a temporary post-crisis phenomenon or something longer term. Governments do tend to sell off their stakes in banks when they find the opportunity, and a few countries–Austria is a good example–have now unwound their increased ownership in banks, in some cases thanks to liquidation.

Developments have been quite different for emerging market economies, in particular the BRIICS countries*, where financial liberalisation has continued at the same quite rapid pace as before the global crisis. One reason is that entry barriers into the banking sector have been lowered in some cases; other factors include stronger bank supervision and the deregulation of stock markets. Finance nevertheless remains substantially less liberalised in the BRIICS than the OECD, as the graph below demonstrates.

2.

These are just some of the revelations of our new data, which will hopefully allow the many researchers who have been relying on the IMF dataset for quantifying financial policies to delve into an additional 10 years of observations. This is vital for tracking how policy has affected financial systems and the real economy since the crisis. If you are such a researcher and would like to use the dataset, please contact us at any time.

Further reading

Denk, O. and G. Gomes (2017), “Financial Re-Regulation since the Global Crisis? An Index-Based Assessment”, OECD Economics Department Working Papers, No. 1396, OECD Publishing, Paris

* BRIICS countries are Brazil, Russia, India, Indonesia, China, South Africa, all OECD partner countries.

Abolish modern slavery!

29 June 2017

Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20

There are 45.8 million slaves in the world today according to the 2016 Global Slavery Index, nearly four times the total number of Africans sold in the Americas during the four centuries of the transatlantic slave trade. Modern servitude goes under a variety of names such as human trafficking or compulsory labour, fulfilling the prophecy of the great abolitionist Frederick Douglass, himself a former slave, that slavery “will call itself by yet another name; and you and I and all of us had better wait and see what new form this old monster will assume, in what new skin this old snake will come forth.”

One new form is child trafficking in India. It’s designed to meet the demand for household help from the expanding middle class by taking advantage of supply from impoverished rural communities. Deepti Minch was sold to a family in Delhi. “My life was tough. I worked from six in the morning until midnight. I had to cook meals, clean the house, take care of the children and massage the legs of my employers before going to bed.”

Child labour is one of the worst forms of abuse. In the Indian case, the OECD has partnered with Nobel Laureate Kailash Satyarthi on a range of issues related to promoting children’s welfare and well-being. Mr Satyarthi and the grassroots movement founded by him, Bachpan Bachao Andolan (Save the Childhood Movement), have liberated more than 84,000 children from exploitation and developed a successful model for their education and rehabilitation. , Juliane Kippenberg of Human Rights Watch describes how children have been injured and killed in mining accidents, suffered poisoning from mercury used in gold processing, and developed respiratory disease from exposure to dust. She welcomes another OECD initiative to develop practical actions to help identify, mitigate and account for the risks of child labour in the mineral supply chains, for example carry out independent third party audits on the due diligence practices among smelters and refiners.

The issues go far beyond mining. Modern slaves may be sewing the clothes you wear, growing the food you eat, and producing the gadgets that keep you entertained and informed. Around 2 million of them are working for states or rebel groups, and can become trapped in a vicious circle in which militia fight for control of precious resources such as minerals, while the profits from controlling mines fund further conflict. Consumers, business leaders, policy makers, we all have a duty to tackle this crime. And we have the tools to do so.

The 2010 US Dodd-Frank Act obliges public companies to report on products containing minerals that may be benefiting armed groups in the Democratic Republic of the Congo. The UK government recognised the scale and seriousness of the problem by passing the 2015 Modern Slavery Act.  Prime Minister Theresa May set up a government task force on modern slavery and appointed an Anti-Slavery Commissioner. In an article promising that her government will lead the way in defeating modern slavery, the Prime Minister highlights the human suffering behind the headlines: “people are enduring experiences that are simply horrifying in their inhumanity. Vulnerable people who have travelled long distances believing they were heading for legitimate jobs are finding they have been duped, forced into hard labour, and then locked up and abused.”

The UK legislators are well aware of the complexity of the task facing them, and produced a Practical Guide for companies on transparency in supply chains that recommends the OECD Guidelines for Multinational Enterprises. They point out that although the OECD Guidelines are not specifically focused on modern slavery (although the Due Diligence Guidelines do include it), “they provide principles and standards for responsible business conduct in areas such as employment and industrial relations and human rights which may help organisations when seeking to respond to or prevent modern slavery”.

Ending slavery is made even more difficult by the size and complexity of supply chains that make it hard to identify who is responsible for ensuring rights are respected at all the locations involved in production. Workers are often employed by subcontractors or sub-subcontractors of MNEs in their own country, and unfortunately it may take a catastrophe like the collapse of garment factories at Rana Plaza in Bangladesh in 2013 to set change in motion. Following that tragedy, The OECD developed a Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector. This Guidance, elaborated through an intense multi-stakeholder process, supports a common understanding of due diligence and responsible supply chain management in the sector. One of the most notable features is that it doesn’t allow multinationals to use the failings of local contractors as an excuse: “Enterprises should…seek to prevent or mitigate an adverse impact where they have not contributed to that impact, when the impact is nevertheless directly linked to their operations, products or services by a business relationship.”

It doesn’t always take a big disaster to change things though. The OECD and FAO produced due diligence guidance for the agriculture sector that will, among other things, help newcomers to the sector, such as institutional investors, to deal with ethical dilemmas and uphold internationally agreed standards of responsible business conduct, notably in markets with weak governance and insecure land rights. For instance the guidance recognises that regardless of the legal framework in which an operation takes place, indigenous people often have customary or traditional rights based on their relationship to the land, their culture and socio-economic status.

It’s easy to see how workers would benefit from improved conditions and why consumers would choose ethically-sourced products. But it makes good business sense too. The evidence on company performance shows that the ones that behave responsibly towards their employees, the environment, and society do better than the rest.

Modern slavery is a highly internationalised affair, and to end it we need to reinforce international coordination and cooperation. As more countries and sectors step up the fight against slavery and other abuses, our experience with the MNE Guidelines and due diligence guidance is likely to be called upon increasingly. We advocate the approach pioneered in the apparel industry where we work with industry, government, worker organisations, and civil society to elaborate strategies and we have to work together to implement them. We can all learn from each other and use our shared knowledge to expose slavery and help to abolish it. As Frederick Douglass said, “It flourishes best where it meets no reproving frowns, and hears no condemning voices.”

Useful links

Gabriela Ramos is moderating the first session of the 5th Global Forum on Responsible Business Conduct, “Responsible global supply chains through due diligence”, taking place at the OECD on 29-30 June. Watch the webcast here

We need an empowering narrative

23 June 2017
by Guest author

Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20

When the subprime crisis started, most economists, and the policymakers they advised, thought it would only affect people who had bought homes they couldn’t afford. They didn’t expect that national problem to trigger a cascade of events that almost caused the collapse of the world financial system. Nor did they foresee how the financial crisis would lead to the Great Recession. Global interconnectedness and the complexity it brings were not really understood, nor were the contagion mechanisms that they can trigger and that would impact other regions of the world.

Today, we’re trying to understand how the Great Recession and the other important trends that it aggravated such as growing income and wealth inequality,  gave birth to the backlash against globalisation, and to the political crisis we are confronting in many countries, with divided societies and a lack of common purpose. At the OECD, we set up our New Approaches to Economic Challenges (NAEC) initiative to examine these failures and establish the basis of a better way of analysing economic challenges and producing policy advice based on that analysis.

The slogan of this year’s OECD Forum was “You talk, we’ll listen”, and that is what NAEC has been doing. Over the past few years, we’ve asked a wide range of people what was wrong with the way we were doing things. And they haven’t been shy about telling us!

At the Forum, we presented the views of a sample of around 20 world experts across a variety of fields – financiers managing billions of dollars, Nobel prize-winning economists, political scientists, social scientists… compiling the ideas they have shared all through the NAEC initiative.

As you’d expect from such a strong-minded group, they don’t always agree with us or each other, and we do not claim to buy all that they say. More importantly, to avoid the “herd thinking” prevailing before the crisis, and that prevented a better understanding of the imbalances that were accumulating to a tipping point, it is important to listen to those that think differently from us, and to remain open to criticism and honest exchanges.

But a number of common views do emerge from reading the draft report. Growing integration and connectedness is helping to improve living standards across the globe, but the traditional models we use to study today’s economy make too many assumptions that are at odds with the facts. The very name of these models, general equilibrium, shows that they assume that the economy is basically in balance until an outside shock upsets it. They assume that you can understand the economy by studying a representative agent whose expectations and decisions are rational.

This view is essentially linear, and the policy advice it generates is tailored to a linear system where an action produces a fairly predictable reaction. It looks at aggregate outcomes and at average results. It concentrates on flows and does not consider stocks. Real life is not like that.

Economic models that rely only on inputs such as GDP, income per capita, trade flows, resource allocation, productivity, representative agents, and so on can tell a part of the story, but they fail to capture the distributional consequences of the policies we make, and do not address the  fact that the growth process has only benefited a few. They do not capture natural depletion, or incorporate environmental damage as liabilities. On the contrary, they assume that, by growing the pie, inequality of income and opportunities will diminish (the trickle-down effect), or that you can always clean after you grow. So we need a full re-vamp of our analytical frameworks and the assumptions that we make, to better capture the reality. At the OECD we have done so by proving that income inequality harms growth.

To start with, we need different more granular information, data and analysis, and definitely, better metrics. We have to be able to check how policies will impact different income groups, communities, regions and firms. We need to get away from growth first and distribute later, or clean later. The unintended consequences of policies should be considered beforehand, and so should equity.

Traditional models do not integrate important dimensions such as justice, trust or social cohesion that are not easily measurable. In fact these models are based on an ideology or narrative that claims that people are rational, take the best decisions according to the information they have to maximize utility, and that the accumulation of rational decisions will deliver the best outcome.

Real people are not like that. Their lives are shaped by their hopes, aspirations, history, culture, tradition, family, friends, language, identity, the media, community and other influences. As these other elements are not the core of macroeconomic models, they are neglected, and the social and human sciences (psychology, history, sociology…) that can explain these variables have been put aside in the modelling work to develop economic policy options.  As the economic profession became highly quantitative, the non-measurable features of the economy were just ignored, such as people’s fears, expectations or sense of unfairness.

The world we live in is a system of systems, physical or not, that is complex. That means you have to take a systemic approach that can deal with tipping points, phase changes, emergent properties, and – very important for us – the fact that shocks do not come from outside. The system itself produces the shocks that destabilise it.

We need a new approach to economics that isn’t just about quantitative economics. An approach that integrates behavioural economics and complex systems theory, as well as economic history.

We also need a new narrative to integrate all these different, often conflicting influences. So what might such a new narrative look like? The report concludes that it should be based on the best facts and science available, and contain four stories: a new story of growth; a new story of inclusion; a new social contract; a new idealism.

The state can help empower the shift. An empowering state is one that focuses on strategic investments to allow people, firms and regions to fulfil their potential. That means putting people at the centre of our policy efforts, and broadening the objectives of policies to include not only material well-being but many other options that are important such as health, quality jobs, a sense of belonging, social cohesion, and environmental outcomes.

At the OECD we have made progress with NAEC and with the Inclusive Growth Initiative, inviting policy makers and stakeholders to consider different alternatives to the traditional framing of economic issues. We conclude that by being inclusive, economies can be more productive, and that fostering productivity growth in an inclusive manner makes growth sustainable.  We call this the “nexus” or the need to foster “inclusive productivity”. We are making the call to turn this analysis into action, but this will require a re-engineering of the institutional settings in OECD economies, getting rid of silos and having a holistic approach for the well-being of people, that is multidimensional.

The lively and informative debate with the public at the OECD Forum suggests to me that the draft report touched on a number of subjects people care deeply about. But it is still a draft and we need to continue the conversation, so please send your comments, criticisms and suggestions to us at [email protected], and we’ll keep you informed on how the discussion progresses over the coming months.

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