Telling the whole truth in a post-truth environment

Gabriela Ramos, Special Counsellor to the OECD Secretary-General and Sherpa to the G20

In 2016, surprisingly for many, Oxford Dictionaries chose as their Word of the Year “post-truth”, an adjective defined as: “relating to or denoting circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief”. This runs contrary to the main tenet of the OECD, the “house of best practices” whose works and analysis depend on high quality statistics and solid empirical evidence. So how did we get here, and what does it means for our democracies?

As the OECD’s G20 Sherpa, I witnessed the evolution of what was originally a financial crisis into an economic crisis, and more recently, after eight years of low growth and very slow recovery, into a political crisis defined by the lack of trust of people in the institutions that we built over so many decades. It is also clear that the values of openness, mutual assistance, and international integration on which the OECD was founded are being questioned.

One reason for this is that while we have told “the truth and nothing but the truth”, we have not told “the whole truth”. Like people gradually enclosing themselves in media silos and social networks that only give them news and views they are comfortable with, we have been happy to rely on economic models that work with comfortingly quantitative facts on GDP, income per capita, trade flows, resource allocation, productivity, and the like. These standard economic models did not anticipate the level of discontent that was created by the skewed outcomes that they were delivering, and that have prevailed for so many years.

Our “truths” did not capture very relevant dimensions that inform people’s decisions (including recent political decisions), and particularly those that are intangible or non- measurable concepts. This is why such important issues as justice, trust or social cohesion were just ignored in the models. Indeed, neoliberal economics taught us that people are rational, and that they will always take the best decisions according to the information they have to maximize utility. And that accumulation of rational decisions will deliver the best outcome on the aggregates. In this model there is no room for emotions or for concepts like fairness or resentment.

Populism, the backlash against globalisation, call it what you will, recognises these emotions. We should do so too, especially since we actually have the data and facts that gave rise to these feelings in the first place. I am referring to the increased inequalities of income and outcomes that almost all the OECD economies experienced even before the crisis and that the crisis made worse.

If we go beyond averages and GDP per capita and look at the distributional impact of our economic decisions for instance, the picture is devastating. Up to 40 percent of people in the lowest tenth of the income distribution in OECD countries (and 60% in my own country, Mexico) have not seen their situation improve in the last decades. On top of that, lower income groups accumulate disadvantages, as their initial condition does not allow them to access quality education and health care or fulfilling jobs, while their children are facing a sombre future with less chance of improving their lot. At the OECD we have confirmed this. Our data show that if you are born into a family whose parents did not reach higher education, you have four times less chance of reaching middle school. You may encounter more health problems, and have less fulfilling jobs and lower wages. You are trapped in a vicious circle of deprivation.

Even the loosely-defined middle classes in OECD countries are fearful for their future and that of their children. They too feel betrayed and are angry that despite working hard, saving and doing everything else that was supposed to guarantee a good life, they see the fruits of success being captured by a tiny elite while they are left behind. No wonder they are attracted to solutions that resonate with their emotions and seem to give them some hope.

What should an organisation like the OECD, committed to evidence-based policy advice, do in this context? First, we must speak out when there is a deliberate misrepresentation of the facts and realities. Even if the people delivering these lies are not aware of it, it does not discharge them from the responsibility to check the evidence. Presenting a view that is based on lies by omission or on purpose should be recognised as such and not go unchallenged in the “post-truth” environment.

Second, instead of defending our selection of facts, recognise that they were also biased, and that in many instances they represented preconceived notions of how the economy functions that have been proven wrong. To rebuild trust in the facts we produce to explain social and economic phenomena, we must ensure that they really represent the whole reality and provide workable solutions. We may need to start, as the Chief Statistician of the OECD has said, “to measure what we treasure and not treasure what we measure”.

Most of all we need to understand that economic challenges are not just economic. That is why the OECD’s New Approaches to Economic Challenges (NAEC) initiative promotes a multi-dimensional view of people’s well- being, with tangible and intangible elements (including emotions and perceptions) all worthy of consideration. The NAEC agenda is ambitious, calling for a new growth narrative that recognises the complexity of human behaviour and institutions, and calls on sociology, psychology, biology, history, and other disciplines to help write this narrative and build better models to inform economic decisions.

We thought there was only one truth, and we promoted it without considering that it may have had faults. We defined reality in certain ways and ignored critics to the models. We strongly, and mistakenly, believed markets were the whole answer.

I think that as economists and policymakers, we should remember that in The Wealth of Nations, Adam Smith was drawing conclusions from not just the methodology, but also the ethics and psychology he explored in The Theory of Moral Sentiments. We may need to enrich our models to ensure that the outcomes respond to people expectations, and help us to recover the most important ingredient in our societies, which is trust.

Useful links

More from Gabriela Ramos on OECD Insights

French daily Le Figaro recently included Gabriela Ramos in a feature on “The New Untouchables”, four women leading the fight against corruption and for democracy (in French)

Statistical Insights: What does GDP per capita tell us about households’ material well-being?

OECD Statistics Directorate

Although GDP per capita is often used as a broad measure of average living standards, high levels of GDP per capita do not necessarily mean high levels of household disposable income, a key measure of average material well-being of people. For example, in 2014 Norway had the highest GDP per capita in the OECD (162% of the OECD average[1]), but only 115% of the OECD average for household disposable income[2]. And in Ireland, GDP per capita was 24% above the OECD average, while household disposable income per capita was 22% below the OECD average. Conversely, in the United States GDP per capita was 34% above the OECD average while household disposable income was 46% above the OECD average. These differences between GDP per capita and household disposable income per capita reflect two important factors. First, not all income generated by production (GDP) necessarily remains in the country; some of it may be appropriated by non-residents, for example by foreign-owned firms repatriating profits to their parents. Secondly, some parts may be retained by corporations and government and not accrue to households.

International rankings of household disposable income per capita and GDP per capita can differ significantly

GDP per capita, by design an indicator of the total income generated by economic activity in a country, is often used as a measure of people’s material well-being. However, not all of this income necessarily ends up in the purse of households. Some may be appropriated by government to build up sovereign wealth funds or to pay off debts, some may be appropriated by firms to build up balance sheets, and yet some may be appropriated by parent companies abroad repatriating profits from their affiliates. At the same time, households can also receive income from abroad for example from dividends and interest receipts through investments abroad.

As such, a preferred measure of people’s material well-being is household disposable income per capita, which represents the maximum amount a household can consume without having to reduce its assets or to increase its liabilities.

The above-mentioned factors can create significant differences between measures of household disposable income per capita and GDP per capita. The United States for example see its position relative to the OECD average jump by more than 10 percentage points (46% above the OECD-average of household disposable income, compared to 34% above the OECD average of GDP per capita), ranking it 1st among OECD countries on household disposable income compared to 3rd on GDP per capita (figure 1). This reflects in part repatriated (and redistributed) profits from US multinational activities abroad but also relatively lower general government expenditure and taxes on households..

On the other hand, Norway falls from 1st on a GDP basis to 4th on a household disposable income basis while Ireland drops dramatically (from 4th to 19th). For Ireland, one of the reasons relates to the presence of a significant number of foreign affiliates of multinational enterprises (responsible for around half of private sector GDP). While Irish GDP per capita was well above the OECD-average (24% higher), Irish household disposable income was significantly below the OECD-average (22% lower). Similar differences in household disposable income per capita relative to GDP per capita can also be seen in other countries where foreign affiliates play an important role in overall GDP (and that have only limited outward foreign investment) such as Hungary and the Czech Republic. Switzerland also sees falls in its household income vs GDP ranking, partly because of the relatively large number of cross-border workers.

For Norway, however, the divergence reflects other factors, linked to the large surplus generated by the Norwegian mining sector (around 25% of total economy value added), which is invested by the Norwegian government in its sovereign wealth fund[3].

graph1-gdp-income-per-capita-900-fw

Note: Data refer to 2013 for household adjusted disposable income for Mexico, New Zealand, and Switzerland.

Developments in household disposable income per capita can also differ significantly from developments in GDP per capita

Many factors can also contribute to diverging patterns of growth between household disposable income and GDP, for instance, declining shares of compensation of employees in value-added, and rising shares of profits retained by corporations. And in real terms, differences in consumer price inflation and changes in the GDP deflator, reflecting in part evolutions in terms of trade, can also contribute to divergences. Differences in tax and redistribution policy can also play a significant role.

Prior to the global financial crisis (2001-2007), real economic growth in many countries outpaced growth in real household disposable income, (figure 2, panel 1). However, post crisis (2008-2014), around 60% of countries saw real household disposable income grow faster than real GDP, as governments intervened (including through automatic stabilisers) to cushion the negative impact of the crisis on households’ income. But countries hit hardest by the crisis saw real household disposable income contract at a faster pace than GDP (figure 2, panel 2).

Figure 2. Real GDP and real household disposable income, per capita

Average annual growth rates; adjusted for price changes

graph2-panel1-and-panel2-900-fw

Note: In panel 1, average annual growth rates for Mexico 2003-2007. In panel 2, average annual growth rates for New Zealand and Switzerland 2008-2013

The measures explained

Gross Domestic Product (GDP):

Gross domestic product (GDP) is the standard measure of the value added generated through the production of goods and services in a country during a certain period. Equivalently, it measures the income earned from that production, or the total amount spent on final goods and services (less imports).

Household adjusted disposable income:

Household adjusted disposable income equals the total income received, after deduction of taxes on income and wealth and social contributions, and includes monetary social benefits (such as unemployment benefits) and in-kind social benefits (such as government provided health and education).

Purchasing power parities (PPPs):

In their simplest form, PPPs are price relatives that show the ratio of the prices in national currencies of the same good or service in different countries. The Big Mac currency index from The Economist magazine is a well-known example of a one-product PPP. The Big Mac index is “the exchange rate that would mean that hamburgers cost the same in America as abroad”. For example, if the price of a hamburger in the UK is £2.29 and in the US, it is $3.54, the PPP for hamburgers between the UK and the US is £2.29 to $3.54 or 0.65 pounds to the dollar.

Where to find the underlying data

The underlying data are published in the OECD data warehouse: OECD.Stat.

Further reading

  • Bournot, S. , F. Koechlin, and P. Schreyer (2011), “2008 Benchmark PPPs measurement and uses” OECD Statistics Brief no. 17. www.oecd.org/std/47359870.pdf
  • European Commission; IMF; OECD; UN; and World Bank (2009), “System of National Accounts 2008“ http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf
  • Lequiller, F. and D. Blades (2014), Understanding National Accounts: Second Edition, OECD Publishing,Paris.
    DOI: http://dx.doi.org/10.1787/9789264214637-en
  • Ribarsky, J., C. Kang and E. Bolton (2016), “The drivers of differences between growth in GDP and household adjusted disposable income in OECD countries”, OECD Statistics Working Papers, No. 2016/06, OECD Publishing, Paris.
    DOI: http://dx.doi.org/10.1787/5jlz6qj247r8-en

Contacts

For further information please contact the OECD Statistics Directorate at [email protected]

[1] In all graphs and calculations, the following OECD-countries have been excluded, because of lack of data on household disposable income: Iceland, Israel, Luxembourg and Turkey.

[2] For convenience, household disposable income refers to household adjusted disposable income, which includes goods and services provided for free or at reduced prices by government and non-profit institutions serving households. It predominantly consists of health and education services and provides a more comparable measure, across countries and over time.

[3] Note that this suggests that some care is needed in interpreting the sustainability of household disposable income over the longer term.  Contemporaneous comparisons for example look at sustainability in the context of sustainable household finances, i.e. not building up household liabilities or reducing assets. But over the longer term persistently high government deficits or unfunded pension schemes may imply future declines in household disposable income (all other things being equal), while government surpluses may act as a buffer against potential declines (again all other things being equal).

How’s Your Life and What Matters Most to You? Going Beyond GDP

BLI InitiativeJulia Stockdale-Otarola, OECD Public Affairs and Communications Directorate

How do you judge your quality of life? What factors matter most to you?

Countries have long focused on GDP as the best proxy to measure well-being. However, governments are increasingly interested in subjective indicators for a more holistic understanding citizen well-being.

The OECD Better Life Index builds on the Stiglitz-Sen-Fitoussi Commission’s Report on the Measurement of Economic Performance and Social Progress. This report examined how both wealth and social progress can be measured beyond the use of GDP. The interactive Better Life Index tool continues these efforts by examining both material and subjective indicators of well-being.

People are able to express what matters most to them based on the following 11 well-being dimensions:  housing, income, jobs, community, education, environment, civic engagement, health, life satisfaction, safety, and work-life balance. Participants can then share and compare their answers with people across 38 OECD member and non-member countries in 7 different languages.

Since its launch in 2011, the Better Life Index tool has received responses from more than 110 000 users from some 180 countries and territories. This year, the Better Life Index welcomed the inclusion of well-being data from Latvia and South Africa. The tool now includes all OECD member countries, as well as Brazil and the Russian Federation.

The OECD Better Life Index also provides pages with analysis at the country and dimension level, giving people an opportunity to examine rankings and find examples of “Better Policies for Better Lives”.

An examination of nearly 90 000 responses has found that health, education and life satisfaction are the topics that matter most in OECD countries. Regionally, education is highly valued in Latin America while work-life balance and life-satisfaction are more important to North Americans. Safety is particularly important in the Asia-Pacific. In Europe, health, community and the environment are all priorities.

Age and gender also impact what matters most to people. Men tend to assign more importance to income while women tend to value work-life balance and community. Environment, civic engagement and health gain importance later in the life cycle while life satisfaction and income are prioritised among youth.

To learn more and create your Better Life Index, visit: www.oecdbetterlifeindex.org.

Happy exploring!

Useful links

How’s Life? 2015: Measuring Well-being 

OECD Better Life Index

OECD Better Life Initiative

OECD Regional Well-Being

Measuring Multidimensional Well-being and Sustainable Development

NAECMartine Durand, OECD Chief Statistician and Director of Statistics Directorate, and Simon Scott, Counsellor in the OECD Statistics Directorate

The notion of sustainable development is profoundly multidimensional so assessing progress on sustainable development requires measures of multidimensional well-being. The number and diversity of the new Sustainable Development Goals and targets reflect the many dimensions of development (health, decent work, climate, etc.), and policy thinking must integrate these dimensions if progress is to be achieved across the board.

The OECD has long recognised the multidimensionality of people’s well-being and of the resources needed to sustain it over time. Realising that measures of total output are not adequate to assess progress in all its complexity, we have been actively researching relevant new measures of well-being and prosperity, and developing policies designed to improve people’s lives on a sustainable basis.

This effort has intensified and gained new traction in recent years as well-being has failed to improve in tandem with economic growth, leaving some people behind and exacerbating inequalities. The growing disconnect between the health of economies, as measured by GDP growth rates, and people’s experiences and perceptions of their lives has given rise to a new measurement and policy agenda to identify well-being indicators that can signal whether societies are evolving in desirable directions and at a sustainable pace.

The OECD has played a major role in this effort, in particular by developing a multidimensional well-being framework that can both gauge whether people’s lives are improving, and inform policy efforts toward this end. The framework also aims to indicate whether improvements are sustainable, and where governments and others need to invest to improve well-being now and tomorrow.

In 2011 the OECD launched its Better Life Initiative to measure progress on 11 dimensions of current well-being: health status; work and life balance; education and skills; social connections; civic engagement and governance; environmental quality; personal security; income and wealth; jobs and earnings; housing; and subjective well-being. The eleven dimensions are recognised as universal, i.e. relevant to societies across the world, irrespective of their level of socio-economic and human development. The framework focuses on people, takes distribution into account, includes both objective and subjective elements, and concentrates on outcomes as opposed to inputs and outputs.

The framework also considers resources for future well-being, thus bringing in a sustainability perspective. In particular, the OECD approach focuses on the broader natural, economic, human and social systems that embed and sustain individual well-being over time. The focus on stocks of “capital” or resources is in line with the recommendations of the Stiglitz, Sen and Fitoussi Report (2009) and other recent measurement initiatives that distinguish between well-being “here and now” and the stocks of resources that can affect the well-being of future generations “later”. Several approaches go beyond simply measuring levels of stocks to consider how these are managed, maintained or threatened. Recognising the global challenges and shared responsibilities to maintain well-being over time, they also highlight how actions taken in one country can affect the well-being of people in other countries (“elsewhere”).

The OECD well-being framework and the SDGs are highly consistent, not only in their general features – focusing on people, multidimensionality, today and tomorrow, here and elsewhere – but even in their specific dimensions.

Because of these close linkages, the OECD work on well-being can be particularly useful in helping countries deliver on the SDGs agenda:

  • From a measurement perspective, the OECD framework and indicators can pinpoint specific data sets to monitor national and regional progress towards targets in OECD countries, especially where the official SDGs indicator set may be more relevant for emerging and developing economies and/or for global monitoring.
  • From a policy perspective, the framework covers several areas relevant for the SDGs where the OECD has specific long-standing expertise and instruments to offer (health, education, environment, jobs, etc.).
  • From a coherence perspective, the framework embodies a recognition that many dimensions are related and therefore must be studied together and not in isolation. This has already been central to establishing the OECD Inclusive Growth policy framework which aims to nail down the interdependencies at the policy level.

BLI and SDG

In order to make the concept of well-being more policy-actionable, work is under way to study the drivers of well-being, i.e. the policies and the individual and societal characteristics shaping each of the outcomes of interest. In addition, to help policy makers to better grasp policy trade-offs and find ways to improve both the level and distribution of well-being outcomes, the OECD has built new measures of “multidimensional living standards” that integrate the multidimensionality of the Better Life framework with a focus on the distribution of income and non-income dimensions of well-being.

The interest of such an approach lies in providing an explicit link to key structural policies and their effects on various income groups, making it possible to estimate the impact of policy packages with ambiguous net effects on the well-being of the various segments of the population. For example, both stricter climate mitigation policies and extending health insurance through higher tax may improve health outcomes but reduce household income, with the net well-being effects depending on the relative elasticities of income and health to these policy changes. Work has started in the OECD to quantify these impacts, so that net results can be seen through the multidimensional living standards metric. This approach is flexible and can be easily adapted to the SDGs framework. It provides opportunities to identify the best policy measures to reach several goals at the same time – a key challenge posed by the multidimensional character of the SDGs.

Useful links

OECD Better Life Initiative

OECD work on statistics

Capability and well-being: social protection through the lens of Buen Vivir (Living Well) in Latin America

BLI InitiativeEmmanuel Asomba, a consultant working on poverty reduction, human development and systematic reviews of development polices and programmes.

Well-being economics can provide a conceptual foundation for freedom of choice and quality of life to revamp such neo-classical yardsticks as utility, income and commodities. For governments in Latin-America, effective measures and mechanisms require an integration of a life-satisfaction concept to understand the well-being of citizens. In many aspects of life, a person’s perception of well-being is subjective, thereby broadening the differences across socio-economic and demographic groups.

Poverty reduction should be, for the most part, a process of change whereby people of various communities are able to operate freely in their wider societies. Hence poverty reduction strategies should focus on the concept of human development. For this to happen there has to be a radical shift allowing institutions to improve the political, socio-cultural, economic, and protective capabilities of the poor (Sepulveda and Nyst; JICA; Norton et al). The existing disadvantageous conditions of the poor necessitate the establishment of common properties to be used as a challenge to the vicious progression of poverty. These properties must be present in the performance, and evident in the results of, development policy (see, for example, OECD, or Deolalikar et al.)

Even though low growth has been projected for most Latin-American countries, for policy-makers, a basis for sustainable development is to blend standard frameworks, enhancing equity and efficiency, to support income redistribution and streamline investments in social protection schemes. However, to move forward with these transformational changes, and highlight the debate on the harmonisation of the capability approach, policies and institutions have to be thorough at each level of empowerment to ensure that the social status of the marginalised is truly enriched. Within this context, as suggested by some evidence, (International Poverty Centre; Philip and Rayhan), a reasonable component of policy-making is to better reflect on the factors and social influences that can fulfill basic human needs, thus improving the economic welfare of vulnerable groups.

To combat limitations on systems of implementation, evaluations of poverty reduction programmes have to identify plausible underlying variations, i.e., what are the correlations in the behaviours that people adopt in the attempt to develop their well-being over the long-term (according to the individual’s definition of well-being). The past few years have allowed development practitioners to come up with a variety of supply-side interventions to tackle poverty reduction. However, some persistent gaps highlight the need for improved understanding of individual notions in subjective well-being. An example of this is the nature of the direct connections framing the distribution of government cash transfers within households. To move the debate forward and respond adequately to changes in behaviour of programme beneficiaries, there is a need to capture the series of outcomes whereby poverty and vulnerability manifest themselves. The goal is to form points of entry for poverty reduction, expanding the scope of assessment on such values as substantive freedoms, self-respect, and the ability to live to old age.

For Mercado and Leiton-Quiroga, development should go outside of old-fashioned research questions and take into account the fact that poverty is a dynamic phenomenon. In the long run, poverty reduction initiatives have to address the structural environments (attention to people rather than economies) that can either encourage or hinder the poor from acquiring capability and assets. Therefore, whether in terms of protection of rights, or the integration of community livelihood programs, public policy and institutions should move beyond income-focused universals and instead frame national development objectives to evolve around local context-specific values. The idea is to consider how individual notions of well-being come into play and to use this information to overhaul power dynamics and target social risk so as to sustain indicators of good living (work satisfaction, greater longevity, lower rates of infant mortality, or mitigation of the impacts of natural disasters).

The philosophical concept of “Buen Vivir” (transformative and human-centered goals) has helped to widen social justice and well-being in Bolivia, Ecuador, and Costa Rica in the creation of a fiscal space to serve a transformative social protection framework. By targeting poor communities and various indigenous groups, based on the satisfaction of human needs and sustainable production, this paradigm juxtaposes meaningful livelihoods and human potentialities, and sees communities as active contributors to core life values.

In Costa Rica over the past fifteen years, the housing subsidy scheme known as Bono de Vivienda (Family Housing Voucher) has managed to balance fiscal discipline and effectiveness of expenditure, refining perceptions of well-being (access to adequate housing and the institutionalisation of consciousness of choice for poor families), supported by robust social marketing campaigns. A significant piece of this puzzle is the centralisation of housing policy which has enabled greater reforms in housing financing. It has capped credit portfolios, consolidated small-scale finance, and removed distortions like fixed rates. The government emphasis on building new homes has reduced the housing deficit so that from 1995 to 2009, 14% of households were able to have access to decent housing. The impact of this subsidy program, especially for families with a monthly income of less than US$217.20 indicates that between 2001-2005, 41.5% of Costa-Rican households were able to access privately produced housing, generating, strong community mobilisation on housing and neighbourhood development.

In the most basic sense, improvement in the quality of life of citizens rests on a mix of functions. The Buen Vivir approach is about the creation of tangible measures enabling individuals or communities to access opportunities to bring about valued outcomes. By disconnecting the causes of poverty from poor people, this paradigm addresses “effectiveness” through the implementation of a long-term theory of change. Such notions as beings and doings (“functionings”) denote people’s part as members of society, reinforcing empowerment through the expansion of their freedoms.

Useful links

Latin American Economic Outlook 2016

OECD Development Co-operation Report 2013: Ending Poverty

Ten questions you should ask about life. The answers may surprise you!

The OECD has just published How’s Life? 2015: Measuring Well-being. It includes statistics on material well-being (such as income, jobs and housing) and the broader quality of people’s lives (such as their health, education, work-life balance, environment, social connections, civic engagement, subjective well-being and safety), with a special focus on child well-being, and also has a chapter on how volunteering affects well-being.

Do you know as much about life as an OECD bureaucrat? Try the quiz and find out. (You can cheat your way to happiness by looking up the answers in the book.)

Your Score:  

Your Ranking:  

Making innovation work

Innovation imperativeDirk Pilat, Deputy Director, OECD Directorate for Science, Technology and Innovation

Today, innovation is central to advanced and emerging economies alike; in many OECD countries, firms invest as much in the knowledge-based assets that drive innovation, such as software, databases, research and development, firm-specific skills and organisational capital, as they do in physical capital, such as machinery, equipment or buildings. The use of information and communication technologies has become universal in only a few decades and new applications, for citizens and businesses alike, emerge daily. But while innovation is all around us, its impact on growth and wellbeing is not always very clear. Moreover, there are growing concerns about the disruptive power of innovation, notably its impact on jobs. Ensuring that innovation contributes to growth, jobs and greater wellbeing therefore remains a challenge, as does the application of innovation to policy challenges as diverse as climate change, health or the delivery of public sector services.

The new OECD report The Innovation Imperative – Contributing to Productivity, Growth and Well-being draws on work on innovation across the OECD and argues that policy makers can do better in marshalling the power of innovation. While firms make the bulk of the investments that drive innovation, government action is key to making innovation work for growth and wellbeing. Policy makers need to foster a sound environment for innovation across the economy; invest in the foundations for innovation, such as research, skills and knowledge infrastructure; help in overcoming critical barriers to innovation; and ensure that innovation ultimately contributes to growth and greater well-being.

One of the difficulties to making innovation work is that it relies on a mix of policies for innovation that go considerably beyond research and innovation alone. The precise mix will depend on the national and institutional context of each country, the level of economic and social development, and the prevailing barriers to innovation. It will also need to be adapted to the specific challenges of different sectors and policy areas, whether public or private, e.g. agriculture, energy, health, education or the public sector. A number of policy areas are particularly important across all of these:

Effective skills strategies: Innovation should ultimately contribute to increasing people’s well-being. It also rests on people that have the knowledge and skills to generate new ideas and technologies, bring them to the market, and implement them in the workplace, and that have the skills to adapt to structural changes across society. However, the OECD Survey of Adult Skills shows that two out of three workers do not have the skills to succeed in a technology-rich environment. A broad and inclusive education and skills strategy is therefore essential.

Development of a sound, open and competitive business environment that encourages investment in technology and in knowledge-based capital, that enables innovative firms to experiment with new ideas, technologies and business models, and that helps successful firms to grow and reach scale. However, policy – ranging from R&D tax credits to environmental regulations – too often favours incumbents, which reduces experimentation, delays the exit of less productive firms, and slows the reallocation of resources from less to more innovative firms. It also delays the introduction of breakthrough innovations in the economy, which is particularly problematic for areas in need of radical change, such as energy. Moreover, it tends to limit job creation: young firms account for over 40% of all new jobs in OECD economies and could probably create even more given the right policy framework.

Sustained public investment in an efficient system of knowledge creation and diffusion. Public investment in research is essential for innovation; most of the key technologies in use today, including the Internet and genomics, have their roots in public research. While such investment has held up reasonably well during the crisis, it is now declining in many OECD countries as these engage in fiscal consolidation and focus more on short-term benefits. As the world faces long-term challenges like climate change and ageing, now is not the time for policies for innovation to be driven solely by short-term benefits.

More balanced support for business innovation: OECD governments have increased their emphasis on R&D tax incentives in recent years, and these now amount to almost 40 billion USD across the OECD. Such incentives often do not meet the needs of young, innovative firms and risk amplifying cross-border tax planning by multinational firms. Better design can help, but governments also need to strengthen support through competitive and transparent grants as a complement to tax incentives. These are more suited to the needs of young innovative firms, can foster cooperation across the innovation system, and can be directed towards areas were government support can have the highest impact.

Increased access and participation in the digital economy. Digital technologies offer a large potential for innovation, growth and greater well-being and can affect also every part of economy and society. However, policy action is needed to preserve the open Internet, address privacy and security concerns, and ensure access and competition. Digitally enabled innovation also requires new infrastructure such as broadband, spectrum and new Internet addresses.

Sound governance and implementation, including a commitment to learning from experience. The impact of policies for innovation depends heavily on their governance and implementation, including the trust in government action and the commitment to learn from experience. Policies for innovation operate in a complex, global, dynamic and uncertain environment, where government action will not always get it right. A commitment to monitoring and evaluation of policies, and to learning from experience and adjusting policies over time, can help ensure that government action is efficient and reaches its objectives at the least possible cost.

Clearly, there is no magic bullet to strengthen innovation performance. However, concentrating policies on these areas for action will help governments in fostering more innovative, productive and prosperous societies, help increase well-being, and strengthen the global economy in the process.

Useful links

Data Driven Innovation: Big Data for Growth and Well-Being

OECD Science, Technology and Industry Outlook 2014

OECD Reviews of Innovation Policy offer a comprehensive assessment of the innovation system of individual OECD member and partner countries, focusing on the role of government. They provide concrete recommendations on how to improve policies which impact on innovation performance, including R&D policies. Each review identifies good practices from which other countries can learn.