How good is your job?

EMO 2014-IMAGEToday’s post is by Mark Keese of the OECD Directorate for Employment, Labour and Social Affairs

Six years after the start of the financial crisis, employment still hasn’t got back to pre-2007 levels in many countries, and for many people working conditions have got worse, according to the OECD’s Employment Outlook 2014, released today. Talk of ‘sovereign defaults’ and the whole system unravelling has faded, but – at a personal level – the conversation of the Great Recession has become one about job loss amongst family and friends, cutbacks at work, falling wages, under-employment, insecurity, and what this means for simply trying to make ends meet.

Although the average unemployment rate in the OECD countries finally fell from 8.5% at the peak in 2009 to 7.4% and is predicted to continue to drop slightly throughout 2015, almost 45 million people are still recorded as unemployed, plus an unknown number who’ve disappeared from the unemployment statistics because they have given up looking for work. And the number of people suffering from long-term unemployment (12 months or more) has nearly doubled since 2007, reaching 16.3 million across the OECD countries in total.

Unemployment is not the only concern. Many of those who kept their jobs have also encountered more difficult times. For this reason, the Outlook investigates how the crisis has also influenced working conditions including earnings, security and job quality (measured along three dimensions: the level and distribution of earnings; employment security; and the quality of the work environment). Real wage growth has slowed, or even dropped, as a result of rising unemployment and policies that reduced or froze public sector earnings as a part of fiscal consolidation efforts. The downwards adjustment in wages has helped to improve competitiveness, rebalance current accounts and promote growth. But real wages have fallen harder than expected in some, mainly European, countries. With wages cut, people can’t purchase as much as they used to. With inflation close to zero in some countries, cutting wages further means cutting “nominal” wages: people will actually get less cash from one month to the next. The Outlook argues that wage moderation and even real wage cuts were probably needed in some countries, especially in the Eurozone, to restore competitiveness lost prior to the crisis, when wages grew more rapidly than productivity and countries accumulated large current account deficits. But there comes a point where further cuts don’t create any more jobs, but do create more hardship. What is more, wage cuts only make sense if they lead to lower prices as well. This hasn’t always happened, so policymakers need to make sure that firms don’t just hoard all the savings from lower wages, but pass them on to consumers.

A big concern is the loss of income low-paid workers and their families have suffered as a result of slower wage growth or wage cuts. The Outlook advises countries to look at who will be hit hardest, and who can least afford, wage adjustment in their future policies. Implementing or strengthening mandatory minimum wages, progressive taxation and in-work benefits would help protect those more vulnerable workers.

Non-regular employees, whose work contracts are not ‘permanent’ or ‘open-ended’ (so called “atypical” jobs), are at greater risk of under- or unemployment than regular employees. Yet unfortunately, these types of contracts are becoming more common. While there are some benefits to non-regular employment, such as increased flexibility, they don’t always outweigh the negative consequences. Contrary to belief, “atypical” jobs are not an automatic stepping stone to permanent work. In Europe, fewer than half of temporary workers actually moved into a permanent contract three years later and in countries like France, Italy or Spain the proportion is around 20%– too often, they either get pushed out of the workforce, or continue with a sequence of short-term contracts.

One reason for their lagging behind is that temporary employees of similar ages and with similar skills are 14% less likely to receive employer-sponsored training than their colleagues with permanent contracts. Countries are encouraged to reduce the large gap that exists in some countries between the employment protection of permanent and temporary workers which would help reduce the reliance by employers on temporary work. Continuing the current trends of increasing non-regular employment, with worse conditions, could lead to a decrease in human capital as skills are not developed. Some countries have already initiated reforms which effectively give non-regular employees greater protection relative to permanent workers or reduce use of such contracts, and other governments are urged to follow suit.

The crisis has also deepened the problem of poor job quality. The groups who accumulate the most disadvantages are youth, low-skilled workers and temporary employees. Of the three, low-skilled workers are the most likely to be pushed into unemployment. Almost one in four low-skilled workers reports experiencing too many challenges at work and too few resources to cope. The Outlook suggests several actions to improve job quality. Stronger training programmes, for example, would help employees to better handle their job demands, as well as prepare supervisors with better management practices. Countries should also implement labour market policies that facilitate mobility between sectors and foster job creation. Fortunately, policymakers don’t have to choose between job quality and the quantity of jobs: several countries have proven that it’s possible to succeed in increasing both.

With so many challenges in the labour market, what can today’s employees and future employees do to better their own chances? Various skills and factors influence a person’s employment status and salary. Early on in a career, the field-specific skills gained from studying matter more. But later on, more generic skills have a stronger impact on hourly wages. For young people, education is the biggest cause of differences in hourly earnings. Experience also plays an increasingly significant role in explaining wage variation among youth. And although the evidence suggests few young people seem to combine work and study, securing some work experience even before finishing studies is shown to help land that first job. The Outlook identifies a role for policymakers and employers here, and highlights how programmes that provide work-experience are essential to ensure economic recovery. Policymakers and employers should identify the benefits of work-study programmes and take note of best practices. After all, investments in youth can help secure the future prosperity and well-being of nations.

Useful links

Depressing depression: mental illness and work

Making mental health countFormer US President, Harry Truman, once said: “It’s a recession when your neighbour loses his job; it’s a depression when you lose yours.” This rings particularly true right now, when in some countries it might not just be your neighbour but your whole street, you included, that has lost their job. In fact, being unemployed has a large negative effect on your physical and mental health, as well as on how happy you are with your life.

There have been many indications that rates of anxiety and depression have been rising since the economic crisis. Europeans reported feeling “more negative” in 2010 than in 2005-06, and one study even linked the rise in suicides to the 2008 downturn, with nearly 5000 suicides above the expected level in the following year. This has severe consequences on the population’s well-being, with mental health being a key determinant of how healthy people are and how satisfied they are with their life. For instance, over the four years to 2012, average life satisfaction declined by more than 20% in Greece and by around 12% in Italy and 10% in Spain, all countries that experienced big rises in unemployment. Looking at the OECD Better Life Index, we see that these three countries now all do poorly in life satisfaction, with Greece coming last.

The OECD’s Making Mental Health Count tells us that mental health has a huge impact on economic productivity. Not only are people with severe mental illness more likely to die younger (up to 20 years), but they are more likely to be unemployed and poor. This translates into very high costs for countries, with the total costs – direct and indirect – of mental ill-health reaching an estimated $2493 billion in 2010. In England, the overall lost earnings due to depression were estimated at £5.8 billion in 2007, and is projected to rise to £6.3 billion by 2026. Being mentally healthy is defined by the World Health Organization (WHO) as “a state of well-being in which the individual realises his or her abilities, can cope with the normal stresses of life, can work productively and fruitfully, and is able to make a contribution to his or her community.” But if you don’t have a job and you’ve more chance of being depressed, and if you are depressed you probably don’t have job. So what’s the solution?

Unfortunately, despite the enormous health, social and economic costs created by mental illness, mental health care is still not a priority in most countries. Although there has been an initiative by many countries to move people out of mental hospitals towards care in the community, which is better, there is still plenty of room for improvement. The amount of money spent on mental health care is very small. For example, mental illness is responsible for 23% of England’s total burden of disease, but only receives 13% of National Health Service health expenditures. This low spending is mainly due to lack of information on the amount of care provided and the outcomes care produces. This is because mental health problems are completely different from physical problems, and much harder to understand and measure.

This is a big issue for the well-being of countries, as around 20% of the working-age population suffers from a mental disorder. Being mentally unwell has a major impact on your quality of life, and your ability to be productive at work. Conversely, work organisation and workplace relationships can have a profound effect on your well-being and mental health. So much so, that one of Britain’s leading doctors, John Ashton, has called for the country to switch to a four-day week to reduce high levels of work-related stress, let people spend more time with their families or exercising, and reduce unemployment.

Fortunately, there are initiatives which are trying to shine a light on this hidden issue and improve the services provided in the workplace for mental health problems. One example is the prevention and reintegration services offered by Helsana, the largest private health insurer in Switzerland. They offer companies support to develop a healthy work environment through the assessments of risk factors (including factors that can generate mental health problems) and the development of a prevention plan, as well as helping sick employees return to work. However, despite these initiatives, much more must be done.

In the meantime, if this article has made you depressed, try taking a leaf out of Edgar Allan Poe’s book, when he says: “I do not suffer from insanity, I enjoy every minute of it”.

Useful links

How’s life? 2013 – Measuring well-being

Mental health and work This series of country reports offers both a general overview of the main challenges and barriers to better integrating people with mental illness in the world of work, as well as a close look at the situation in specific OECD countries.

OECD work on health

 

The long downturn has hit labour markets hard — but it has also reshaped them

Today’s post is from James Plunkett, Director of Policy at the Resolution Foundation

First there was the crisis, then the long downturn, and now—let us hope—a labour market recovery. And as Britain and America enter the third phase of a painful economic story, a new question is coming to define political debate: how will the proceeds of the recovery be shared? The answer to this question will depend partly on the policy choices that are made in coming years. But it will also depend on underlying labour market dynamics. What kinds of jobs are mature economies creating in the early 21st century? And how have jobs markets changed since 2008? Last week a new report from the Resolution Foundation threw new light on these questions, suggesting that the downturn may have intensified an erosion of middle-skilled jobs that was already apparent before the crisis struck.

The new analysis looks at how the UK and US jobs markets were reshaped from 2008 to 2012 in a number of ways. First, it looks at how the employment shares of different occupations rose and fell in these years. From 2008 to 2012 the crisis appears to have hit middle-skilled occupations harder than others, accelerating a trend of occupational polarisation already established in academic literature. Figure 1 shows how occupations, ranked from low-skilled to high-skilled, saw their share of UK employment change over the four years. The pattern is clear: a relative decline of middle-skilled jobs while low- and high-skilled jobs expanded. Similar results are seen in the US.

Figure 1: The changing shape of the UK jobs market after the crisis

Change in Log (Employment) across the skill-distribution of UK occupations, 2008-2012

Figure 1

Notes: Skill percentiles are defined on the basis of mean wage in 2002. See Box 1 and Annex A in the full report for full methodology.

Source: Resolution Foundation and Centre for Economic Performance analysis, Labour Force Survey

Second, for the UK, the analysis reveals how the crisis has affected jobs differently depending on the types of tasks they involve. It finds that, in the UK at least, the downturn continued an erosion of routine occupations that was apparent before the crisis struck. Figure 2 shows levels of employment in routine and non-routine occupations in the UK from 2007 to 2012. While employment fell in routine occupations throughout the period, employment in non-routine roles actually rose throughout the downturn. Interestingly, real wages show the opposite pattern; they fell faster in non-routine jobs than in routine jobs. While the reasons for this are not entirely clear, it may be that employers sought to hold on to non-routine workers, doing so partly by squeezing their pay.

Figure 2: Impact of the crisis on routine and non-routine jobs

Employment, millions, 2007-2012

Figure 2

Notes: ‘Routine’ occupations are those in the top third of routine-intensity, ‘middle routine intensity’ relates to occupations in the middle third of routine-intensity, and ‘non-routine’ relates to occupations in the bottom third of routine-intensity. See Annex B of the report for full methodology for defining routine-intensity.

Source: Resolution Foundation and Centre for Economic Performance analysis, Labour Force Survey and O*Net dictionary of occupational information

Third, in both the US and UK, the downturn has played out very differently in different industrial sectors. In both economies, the middle-paying third of sectors appear to have seen employment fall from 2008 to 2012 while low- and high-paying sectors saw employment rise. In both cases, these broad patterns mask significant variation in the performance of specific sectors. In the UK in particular, there have been standout successes at the top and bottom of the labour market. At the top, Business Activities grew 15.5 per cent from 2008 to 2012 as net employment rose by 460,000. Meanwhile at the bottom, Hotels and Restaurants, the UK’s lowest paying sector, grew faster than any other sector from 2008 to 2012, seeing employment rise by 17.1 per cent.

Figure 3 shows equivalent analysis of patterns in employment by industry for the US, where similar patterns to the UK can be seen. Employment fell in all six of the middle-paying sectors of the US economy from 2008 to 2012, while it rose in all but one of the six lowest paying sectors. Meanwhile, in both the US and UK, there were also clear impacts from the collapse in demand between in 2008 and 2012, most notably sizeable falls in employment in Construction and Manufacturing.

Figure 3: The shifting industrial make-up of US employment after the crisis

Figure 3

Source: Resolution Foundation and Centre for Economic Performance analysis, Current Population Survey, National Bureau of Economic Research

How should we interpret these findings? Certainly it is easy to overstate what is happening. Middle-skilled jobs are not ‘disappearing’ from the UK and US labour markets, either before or after the crisis—they are simply declining as a share of employment. Moreover, even as middle-skilled occupations see a relative decline, demand for middle-skilled workers will remain high as new cohorts are required to replace those retiring each year. And it is also important not to assume that a polarising labour market necessarily means rising wage inequality. This link is far from straightforward. A polarising labour market could mean rising wage inequality, as more workers are pushed into the two ends of the labour market. But it could also mean falling inequality if, for example, rising demand for low-skilled workers pushed up their pay, and the supply of high-skilled workers rises fast enough to meet growing demand.

But the bigger debate initiated by these results is over their causes. On the one hand, there will be those who argue that these findings simply reflect where we are in the economic cycle. We might expect top jobs to have been protected more than others from the downturn, while low-skilled jobs may be the first to have gained from a gradual return to growth. Middle-skilled jobs may yet bounce back. And of course, big falls in industries like construction are likely to reflect a temporary collapse in demand. On the other hand, there is also a deeper, more structural explanation for some of these trends. The sectors of health and social care are growing, and the collapse of routine jobs in the UK is hard to explain without some reference to the impact of technology. There may yet be deeper trends at work here, even if they are dominated by demand in the short-term. As the UK and US economies enter a third, recovery phase, these questions will become key to understanding how the proceeds of that recovery will play out.

Useful links

Click to read the OECD Skills Outlook 2013
OECD Skills Outlook 2013

Growth ahead, but risks are many

Click to read the reoprt
Click to read the report

The latest economic forecasts from the OECD could be summed up in four words: More growth, more risks. The “more growth” part is perhaps the easiest to explain. According to OECD economists, the world economy should continue to strengthen its recovery over the next couple of years, albeit at a slower pace than in previous recoveries. The OECD is forecasting global growth of 2.7% for this year, rising to 3.6% for 2014 and 3.9% in 2015.

These numbers might look encouraging, but they’re down – by about half a percentage point – since the OECD’s last forecasts in May. That downward revision is due in large part to the slowing performance of the emerging economies, other than China.

Digging a little deeper, the OECD is forecasting a strengthening performance in both the United States and the euro zone, with the U.S. economy forecast to grow by 2.9% in 2014 (click on the map below for detailed data). The euro zone won’t be able to match that pace, but next year’s forecast expansion of 1% would certainly be welcome after several years of sluggish performance. By contrast, after racking up forecast growth of 1.8% this year, Japan’s pace of expansion is tipped to slow to 1.5% in 2014.

Disappointingly, the upturn in OECD economies may not do much to bring down unemployment. The jobless rate in OECD countries is projected to fall by only half a percentage point, to 7.4%, by the end of 2015, a slower decline than had been expected.


Of course, all these forecasts will only pan out if the world economy manages to avoid those risks we mentioned. Some of these will be all too familiar to regular readers of the blog, such as continued concerns over Europe’s banks. Others have emerged more recently – indeed, they’re responsible in large part for the OECD’s lowering of its growth forecasts.

The most notable, perhaps, is the increasing uncertainty over the emerging economies, other than China. Even though the emerging economies have stronger growth prospects than developed countries, they face a growing list of challenges, including less favourable demographics and diminishing opportunities for “catch-up” growth. Their vulnerability was highlighted over the summer when investors pulled out of emerging economies in expectation that the Federal Reserve, or U.S. central bank, would begin returning to the sort of “normal” monetary policies that were suspended in response to the financial crisis. In the event, that didn’t happen, but, as the latest OECD Economic Outlook points out, the turmoil that followed even discussion of it “revealed how sensitive some EMEs [emerging market economies] are to U.S. monetary policy.” For now, the situation in the emerging economies appears to have stabilised, but there must be concerns over what will happen when the U.S. does eventually change course on its monetary policy.

On a long list, two other risks are also worth noting briefly. The first concerns the political situation in the U.S., which has led to a series of showdowns between legislators and the executive. “The episode of budget brinkmanship in October 2013 has once again shaken global markets and harmed consumer confidence,” notes the Economic Outlook. To avoid a repeat, it says, “The debt ceiling needs to be scrapped and replaced by a credible long-term budgetary consolidation plan with solid political support.”

And then there’s the concern over the potential for deflation in the euro zone. To explain, prices tend to rise most of the time in developed countries – a process called inflation. By contrast, falling prices – or deflation – are much less common. If deflation kicks in, it can be very hard to turn it around – consumers may put off purchases in expectation of lower prices next month or next year, so reducing demand and creating a self-sustaining spiral. To reduce the risk of deflation taking hold, the European Central Bank cut interest rates earlier this month, which should boost demand. But, says the Economic Outlook, it should be prepared to take further measures if deflation risks intensify.

Useful links

OECD Economic Outlook (2013, Vol. 2)

OECD economic analysis and forecasting

OECD data on GDP growth in 3rd quarter 2013

Good jobs, bad jobs

There's bad jobs everywhere these days
There’s bad jobs everywhere these days

If you’re relaxing on the beach – and we hope you are – work may be the last thing on your mind. But once you shake the sand off your feet and head back to the “real” world, you may be struck by the flurry of depressing stories about jobs.

Take, for instance, “zero-hours” contracts, which are causing controversy in the United Kingdom. Workers on these contracts receive no guarantee of regular work or pay; instead, says the BBC, they “only work as and when they are needed by employers, often at short notice”. According to some estimates, as many as a million workers may be on zero-hours contracts in the UK, employed by everyone from Buckingham Palace  to McDonald’s.

Some workers undoubtedly like the flexibility of these contracts; others feel exploited, especially when their contract bars them from working for anyone else, a point acknowledged by British business minister Vince Cable: “Where it is a problem is … where there is an exclusive relationship with a particular employer who actually cannot provide stable employment, or indeed any employment, that stops the worker going to another company.”

Concerns about job quality aren’t restricted to the UK. Late last month, thousands of U.S. fast-food workers went on strike to protest against low wages and there have been similar actions in New Zealand. Nobody ever flipped burgers to become a millionaire, but in the past that didn’t matter so much: Fast-food jobs were mostly for teenagers or part-timers, most of whom didn’t hang around for long. That’s no longer the case, as James Surowiecki recently pointed out: These days, “more [low-wage workers] are relying on their paychecks not for pin money or to pay for Friday-night dates but, rather, to support families.”

These stories can be seen as symptomatic of what some argue is a hollowing-out of the workforce between high and low-skilled jobs. Many of the secure and reasonably paid jobs that used to sit in the middle are vanishing, victims, in part, of technological change. According to consultants McKinsey, about half of the face-to-face service jobs that people once took for granted  – bank tellers, travel agents, typists and so on – no longer exist. That, in turn, is helping to fuel the income gap in our societies (although it should be noted that other factors – such as the decline of unions and changes in taxation –also play a role).

Of course, this isn’t the first time that technology has destroyed jobs – remember the Luddites. But, historically, each wave of technology also created new types of jobs – think of app developers, social media strategists and (if you can bear the thought) “chief listening officers”. On balance, the gains have outweighed the losses, which is part of the reason why our societies have tended to become wealthier over time.

But will this pattern continue? Not everyone is convinced. At the Massachusetts Institute of Technology, Erik Brynjolfsson and Andrew McAfee argue that the balance has begun to tilt: “They believe that rapid technological change has been destroying jobs faster than it is creating them,” reports David Rotman. They also believe that the rewards from work are increasingly divided between winners and – for want of a better word – losers: “Someone who creates a computer program to automate tax preparation might earn millions or billions of dollars while eliminating the need for countless accountants,” writes Rotman.

To be sure, the idea of making this link is not new, and it features strongly in research by the OECD, the IMF (pdf) and many others. Indeed, it was identified as far back as the 1970s by the economist Jan Tinbergen, who argued that the way incomes were distributed across society reflected in part a “race between technology and education”. When technology was winning, more rewards went to fewer people; when education was winning, more people were able to make use of technology in their work, and the rewards were spread much further.

At the moment, technology seems to be winning, which is one reason why you hear so many calls for more investment in education. But the MIT researchers seem to go further, arguing that today’s technologies and “digital versions of human intelligence” may prove to be permanent game changers: “I would like to be wrong,” Andrew McAfee says, “but when all these science-fiction technologies are deployed, what will we need all the people for?”

Useful links

OECD work on income inequality and skills

What the BRICS need: Education, employment, equality, and soft infrastructure

Click to go to the Summit website
Click to go to the Summit website

To mark today’s opening of the Fifth BRICS Summit in Durban, South Africa, the Insights blog, in collaboration with Sustainable Governance Indicators (SGI) News, is publishing an interview with Helmut Reisen, former Head of Research at OECD Development Centre and author of Economic Policy and Social Affairs in the BRICS, just published by SGI and the Bertelsmann Foundation.

SGI News: Dr. Reisen, this week South Africa will host this year’s summit of the emerging BRICS economies – Brazil, Russia, India, China and South Africa. Is the nation of the Cape of Good Hope still a model for sustainable development?

Helmut Reisen: South Africa certainly has a number of positive characteristics. It has been a parliamentary democracy since the ANC came into power, and it has a well-developed government administration at the highest level. When you look at social issues, however, especially in the areas of health, education, social inclusion and the labour market, significant weak points are visible, as it is reflected in the BRICS study of the Sustainable Governance Indicators of the Bertelsmann Stiftung.

SN: What do you mean by weak points?

HR: Pandemic prevention is deficient, as is the general access to health institutions. This is also due to a lack of social inclusion. There are still very strong racial divisions, which are broken at best by a black elite. Within the black population there is profound inequality, and social integration remains also difficult. South Africa has the highest level of social inequality worldwide – not just within the BRICS nations. In this respect, one can understand how social conflict arises; in the mines, for example. That is also due to a very high unemployment rate, and youth unemployment rate, which can in turn be traced back to insufficient education reforms.

SN: Where are South Africa‘s biggest problems in relation to education?

HR: Primary and secondary education in South Africa is not especially good. And tertiary education has little regard to demand, especially in respect of engineering and other scientific degrees that are important for sustainable development. This leads to a so-called “skills mismatch”, because what is offered by the education system is not what is demanded by an emerging nation exhibiting sustainable growth. On the other hand, for example, there are relatively good educational opportunities in the finance industry. Universities in South Africa are not bad. But there is a structural defect, and access to universities is far from equal. This inequality is present not only in the tertiary sector, but also at the levels below that.

SN: What needs to happen in terms of policy?

HR: What’s required is an improvement in the quality of public schools, which are attended by the underprivileged segments of the population. There is also a lack of vocational training, which is something that distinguishes Germany, for example. In the secondary and tertiary sectors, there is a need for more attention to be paid to ensuring that the capabilities that are taught are those that are also important for the private sector.

SN: How does South Africa compare to other emerging nations with respect to education policy?

HR: In this respect, South Africa has been left behind. And that’s the case even though at 20 percent, expenditure on education makes up the largest component of the South African budget. In comparison to Brazil, Russia, India and China, South Africa exhibits the worst performance in education and employment policy.

SN: How do the BRICS nations generally stack up in your examination of their economic and social policy?

HR: The BRICS nations perform worse in the long-term indicators – that is, the social indicators – than in the short-term indicators such as fiscal space and macroeconomic solidity. In that respect, if sustainability is under threat in the BRICS nations, it is under pressure in the social sector. It is not threatened on the economic side to the same extent as in Europe for instance. To some extent, however, the social deficits can be traced back to the growth process itself.

SN: How is that?

HR: Emerging countries are generally large countries, and exhibit a dual structure. That means that on the one hand they have a rural, or informal urban, sector with very low productivity, and on the other hand a formal urban sector with high productivity. The growth and development process is characterised by a necessary transfer of resources such as labour and capital from these unproductive sectors to the productive sectors. This process leads to a temporary – and by temporary I don’t mean short-term, but rather for a number of years or decades – to greater social inequality. This inequality occurs between the rural and urban sectors, and also within the urban sector. These are relatively unavoidable processes which are very strong and which can at best be cushioned by good policy.

SN: Which country has managed that?

HR: Brazil, for example. There, under the administration of Lula and before that Cardoso, you could see a pronounced and strong-willed program targeted at fighting poverty and hunger. Brazil is alone among the BRICS nations in managing to stem the tendency towards growing inequality, especially through the transfer of money to the poorest population groups.

SN: In the SGI BRICS study, Brazil is also at the top of the BRICS nations when it comes to social policy.

HR: Right, followed by China. Then Russia. In that field, the real problem children are India and South Africa.

SN: And how do things look in terms of economic policy?

HR: China is ahead of the pack in this regard. China is a successful developing country. It always had governments that involved themselves in development strategies. The experiences in China show that in certain settings the state can intervene with strength and be successful – for example, through financial instruments, subsidies and its industrial policy. China is easily the best-governed country within BRICS – despite a high level of state control, and despite a relatively restrictive policy in respect of direct investment. Brazil and India are next in line for economic policy in the SGI study. Russia is well behind here.

SN: Why?

HR: It’s predominately because Russia has failed to build a coherent development strategy. Everything happens on a discretionary and short-term basis. Russia mainly survives on resource rents and hasn’t proven capable of diversifying the economy.

SN: What are the biggest political challenges facing all the BRICS nations at the moment?

HR: The differences within the BRICS countries are significant, but there are at least three challenges which they all share. All of the countries are large and have a dual structure. That means that the fiscal equalisation between the central government and the regional authorities is very important. And this has not, to date, been addressed in an optimal manner in the BRICS nations. It must be conducted so that the regional authorities are delegated tasks that are sensibly funded by means of fiscal transfer. Otherwise, the regional authorities will fail to perform their task, or will attempt to fund it in another way. This encourages corruption.

SN: And secondly?

HR: The BRICS nations must pay more attention to the skills mismatch in the labour market, to ensure that the education sector doesn’t ignore modern industries. That is indispensable for strengthening industrial competitiveness which allows countries access to higher value-added segments in the modern global production networks. The third aspect is industrial innovation policy. This depends on diversification. It requires a new form of infrastructure in addition to the so-called “hard infrastructure” in the fields of energy and transport. This is “soft infrastructure”: Respect of property rights, individual freedoms, and democracy, to name just a few. These factors are similarly decisive with regards to the sustainable development of the BRICS countries.

Interview by Rosa Gosch. Translated from German by Rogan O’Shannessy.

Useful links

OECD work on South Africa

Education Quality and Labour Market Outcomes in South Africa OECD Economics Department Working Paper

Helmut Reisen debates the role of the BRICS with Bertelsmann Foundation’s Justine Doody

SGI Network

Helmut Reisen’s Shifting Wealth blog

So, how’s it going?

OECD prepares for brainstorm

It’s a big day here today, with French President François Hollande and senior ministers coming to find out what the heads of the OECD, World Bank, IMF, WTO and ILO have to say about the global economic outlook as well as the European and French economies. They’re discussing policies needed to return to growth, redress global imbalances, improve competitiveness and alleviate the social impact of the crisis.

We talked about the OECD’s views here in an article called “Doom and gloom” on the May interim global economic outlook. The main worry was that the euro area crisis is dragging down the rest of the world economy through its impacts on trade and business and consumer confidence. The World Bank agrees. Their Global Economic Prospects says that “resurgence of tensions in the Euro Area is a reminder that the after effects of the 2008/09 crisis have not yet played out fully. Financial market uncertainty and fiscal consolidation associated with the high deficits and debt levels of high-income countries are likely to be recurring sources of volatility for the foreseeable future as it will take years of concerted political and economic effort before debt to GDP levels of the United States, Japan and many Euro Area countries are brought down to sustainable levels.”

The World Bank’s sister organisation, the IMF supports its sibling, and the OECD. The Global Financial Stability Report (GFSR) says that “risks to financial stability have increased since the April 2012 GFSR, as confidence in the global financial system has become very fragile. Although significant new efforts by European policymakers have allayed investors’ biggest fears, the euro area crisis remains the principal source of concern.”

Austerity is among these efforts, but the OECD warned that although this is a medium-term policy designed to help public finances, it acts as a drag on short-term economic activity, and can even start a negative feedback loop whereby activity is weaker than expected when planning the budget, so less tax comes in and there is overspending, and then the need for more consolidation, which acts as a drag…

The ILO calls this the “austerity trap” in the latest World of Work Report, and outlines a similar vicious circle to the one the OECD described: “Austerity has, in fact, resulted in weaker economic growth, increased volatility and a worsening of banks’ balance sheets leading to a further contraction of credit, lower investment and, consequently, more job losses. Ironically, this has adversely affected government budgets, thus increasing the demands for further austerity.”

The ILO estimates that there is still a deficit of around 50 million jobs compared to the pre-crisis situation, and “It is unlikely that the world economy will grow at a sufficient pace over the next couple of years to both close the existing jobs deficit and provide employment for the over 80 million people expected to enter the labour market during this period.”

As you’ve no doubt noticed, there’s a general air of pessimism about these reports, and even the efforts that have been made to address the issues that caused the crisis in the first place don’t generate much enthusiasm. Financial sector reform for instance, leaves a lot to be desired according to the IMF, because although there has been some progress over the past five years, financial systems have not come much closer to being more transparent, less complex, and less leveraged. “They are still overly complex, with strong domestic interbank linkages, and concentrated, with the too-important-to-fail issues unresolved.”

Developing and emerging economies did comparatively better than the more developed economies during the crisis, but even there are worrying signs, with the World bank warning that in a new crisis no developing country would be spared, particularly those with strong reliance on worker remittances, tourism, commodities or those with high levels of short-term debt or medium-term financing requirements. Even without a full-blown crisis, elevated fiscal deficits and debts in high-income countries and their very loose monetary policies mean that the external environment for developing economies is likely to remain characterized by volatile capital flows and heightened investor uncertainty.

But let’s end of a positive note. The WTO’s figures reveal that world merchandise exports increased by 5% in 2011 in volume terms. The United States remains the world’s biggest trader (in value terms), with imports and exports totalling $3,746 billion in 2011. China and Germany rank second and third respectively. Exports of commercial services grew by 11% in value terms. The United States is the world’s largest trader, with $976 billion of services trade in 2011.

See you next year, if President Hollande’s suggestion to make this an annual event is adopted.

Useful links

OECD work on the economy

OECD work on employment

OECD work on finance

OECD work on trade