Can you have your green cake and eat it too? Environmental policies as an ingredient for economic growth

Green Forest gateau
Green Forest gateau

Today’s post is by Maroussia Klep of the OECD Environment Directorate

In today’s hard times, policy-makers can find it difficult to sell their environmental policies. To many, these policies represent a burden on the economy. They might secure the well-being of our grandchildren, sceptics argue, but risk preventing the growth we badly need today.

In this context, recent OECD findings provide renewed optimism. As revealed by thorough economic assessments, well-designed green policies not only secure long-term wellbeing, but can uphold current productivity levels too. In other words, it is possible to increase the economic pie and make it greener at the same time.

As ecological concerns gained momentum in the last decades, many studies have attempted to identify the impacts of environmental policies on the economy, with varying conclusions. In the United States for instance, scholars tried to relate the economic slowdown in the 1970s to the introduction of such policies; but their results were largely inconclusive. On the opposite side, economist Michael Porter suggested in a 1991 article that stringent policies could actually increase competitiveness: “strict environmental regulations do not inevitably hinder competitive advantage against rivals”, says Porter, “indeed, they often enhance it.”

In a report published this month, OECD splits the difference. The in-depth empirical analysis across OECD countries in the last twenty years revealed that well-designed green policies can sustain current levels of productivity growth.

When new policies are put in place, the more productive and technologically advanced firms are usually those able to reap the most benefits. They have indeed the firepower to seize market opportunities and rapidly adopt new technologies. Besides, once technological improvements are realized in an industry, the positive economic effects will often spread out across industries and countries via integrated production chains. According to OECD, these positive outcomes can be further encouraged if environmental policies offer flexibility for compliance, a reason to favour market-based instruments (such as taxes) over rigid regulations and standards.

In parallel, the less productive and technologically advanced firms may require more investment in order to comply with regulations, and may even have to drop out of the market if they are unable to adapt to changing conditions. In a competitive market, such entry and exit should lead to a swift reallocation of capital and sustain overall industry productivity.

It is therefore essential for policy-makers to support market competition. In particular, the design of environmental policies should as far as possible guarantee a level-playing field among competitors.

This brings us back to our recipe: which are the key ingredients for a “growing green cake”?

First and foremost, OECD argues, legislators shall ensure that the burdens imposed on competition by new policies are minimised and do not inhibit the entry of new and potentially cleaner firms and technologies. As highlighted in the report, countries such as Canada, New Zealand and Israel could further reduce the high administrative costs imposed on new entrants and facilitate access to environmental licences. In the same vein, instruments that favour incumbents, such as subsidies based on past performance, may put young firms at a disadvantage and impede market entry.

But the report also provides encouraging examples. In many countries, green policies and economic wellbeing go already hand in hand. The Netherlands, Switzerland and Austria, for instance, have implemented relatively stringent environmental policies that remain competition-friendly. For this, they have set measures to facilitate market access for new entrants, minimize red-tape and provide fair and equal conditions to all market players. These successful case studies can inspire policy-makers in OECD countries and beyond when designing green policies or revising existing ones.

Of course, the priority of environmental policies is to secure long-term sustainability. However, if the right conditions are put in place, greening the economy while upholding today’s growth trends could become a piece of cake.

Useful links

The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness? by Ambec et al. in the Review of Environmental Economics and Policy

Eurasia: The Silk Road to Competitiveness

Leveraging their comparative advantage
Leveraging their comparative advantage

Today’s post is by Antonio Somma and Vanessa Vallée of the OECD Global Relations Secretariat’s Private Sector Development Division

Seen from a sweltering hotel lobby surrounded by palm trees, the view could be considered somewhat surprising. Turquoise beach? Sand covered surfers? No, try a snow swept tundra and ultra modern skyscrapers plated with 10-story TV screens. We’re in Astana, Kazakhstan and it’s February. Welcome to today’s Eurasia, land of contrasts.

Twenty-five years ago the story was different.  Most of the thirteen economies of Eurasia taking part in the OECD Eurasia Competitiveness Programme shared the same Soviet institutions which kept a lid on economic, political and social differences. Today the lid is off and divergences between countries are growing as they race to find a place in the global economy. Take the income gap:  In 1990, average GDP per capita for the region was $4670 USD with the richest country four times better off than the poorest. By 2010, the gap had widened to almost seven times (if Afghanistan is excluded) between the region’s growth leader, Belarus, and Tajikistan.

Some had an initial advantage, with countries like Kazakhstan, Azerbaijan, Uzbekistan and Turkmenistan possessing significant oil/gas and mineral reserves that are profitably feeding a voracious world market. However, the resource blessing could turn into a curse and compromise long-term prosperity if countries do not diversify and find new sources of growth.

Other Eurasia countries have had to find alternate paths to economic development.  Economies like Ukraine and Belarus have leveraged existing capabilities inherited from Soviet times such as a strong industrial base and a scientific tradition to become significant players in chemicals, aviation, machinery and IT programming.  Georgia has been named one of the world’s top business climate reformers after jumping from 112th to 9th place in only eight years (2005-2013) and after major achievements in e-government is now leading on the use of smart phone apps for m-government. Yet despite its strong performance on reform, Georgia’s GDP per capita trails the regional average by almost forty percent. And many of the region’s entrepreneurs are still struggling to attract needed investment and financing.

Differences notwithstanding, the countries from the region share a host of common comparative advantages:  almost universal literacy rates, proximity to major markets such as China, the EU, Turkey and Russia, and a willingness to accept new ways of living and working thanks to centuries of ethnic diversity. Today’s diverse Eurasia is poised to become a new frontier for economic opportunity but the challenge remains of how to tap all of its countries’ potential.

Eurasian governments have requested the OECD’s support in analysing their economies and proposing concrete solutions to help them diversify, increase productivity, and link up to global value chains. This is all the more relevant today as Russia – a major trading partner for the region – is in talks with the OECD about accession. It is in the interest of all to bring economies of the region up to global standards in areas like business conduct, taxation, investment and government regulation.

At the end of this month, leaders from Eurasia will launch a new initiative to collectively track progress on competitiveness reform in the region. While experience shows that applying OECD recommendations can help to establish confidence in an economy, this is no guarantee of success. However, the fact that these countries are planning to implement the peer review process shows they are aware that there is a lot to learn from each other. This is perhaps the key for Eurasia to find its own unique path to growth and prosperity.

Useful links

The OECD Eurasia Competitiveness Programme 2013 Ministerial Conference “Implementing Policies for Competitiveness in the Eurasia Region”, will take place in Warsaw on 27-28 June co-hosted by the government of Poland and the OECD.  Follow it on Twitter https://twitter.com/OECD_psd and via #eurasia2013.