In The Third Policeman, Flann O’Brien describes the first All Irish Bicycle, 100% locally sourced and made of cast iron. Including the tyres and pump. Given the state of Ireland’s roads at the time, the riders’ atoms got all mixed up with the saddle’s and they gradually turned half-bike themselves, even having to lean against the wall outside the pub so as not to fall over.
O’Brien had a wonderful imagination, but you can guess where he got some of his ideas from. In 1932, a few years before he wrote his masterpiece, the Irish government imposed 43 new tariffs on imported goods, including bicycles from Northern Ireland, then as now part of the UK. A reporter from The Irish Times (where O’Brien published a kind of forerunner to blogs) described how people covered their new bikes with mud to make them look old, and as Joe Joyce remarks, the main impact of the measures was to “boost an emerging smuggling industry which proved more durable than many of the protected manufacturers of the day”.
That conclusion is similar to a point made by US Trade Representative Ron Kirk last week when, with several other ministers and WTO chief Pascal Lamy, he was presenting a report just published by the OECD-led International Collaborative Initiative on Trade and Employment (ICITE): protectionism doesn’t protect anybody, it only puts up prices. Those Irish bike buyers didn’t want to pay more for protected bikes, and nobody apart from O’Brien’s mad protagonists would buy a bike on the basis that it contained no imported rubber and metals. Quite the contrary. The site of one manufacturer I looked at when preparing this article boasts that it “sources from the best suppliers around the world”, having just explained a couple of lines higher that it’s “home of some of the UK’s most famous bicycle brands”.
These days, it would in fact be hard to find a manufactured product that was made entirely by local firms from local components in any country. At last week’s meeting, New Zealand trade minister Tim Groser pointed out that in the space of 20 years, the import content of exports (the Japanese gears on those British bikes for instance) had doubled to 40%. So if you want to export, you have to import, and if you want to encourage domestic production, you need access to competitively priced intermediate goods from around the world – microprocessors, steel, cloth, whatever.
That doesn’t just apply to manufacturing. Services form the greatest share of most countries’ GDP and are increasingly being traded internationally. To stick with Ireland, it is the world’s second biggest exporter of business services after India according to the report, but it also has the world’s highest share of imported business services in output (along with Luxemburg).
What about the workers? As the title suggests, Policy Priorities for International Trade and Jobs focuses on employment, looking at the impacts of international trade on employment and working conditions, as well as growth more generally. It says that openness pays. Another minister attending the meeting, Canada’s Ed Fast, said that abolishing 1800 tariffs had helped his country create 12,000 new jobs during his government’s time in office so far. The report itself looks in detail at a dozen OECD and non-OECD countries and also includes results from a broad sample of 30 open and closed economies around the world over a 30-year period.
It concludes that whatever the criterion, trade is beneficial overall, and the effects can be felt quickly. In Africa, for instance, a one percentage point increase in the ratio of trade over GDP is associated with a short-run increase in growth of around 0.5% per year. Some arguments in the report are probably familiar to people interested in globalisation issues, but the scale of the impacts may not be. For example, between 1970 and 2000 workers in the manufacturing sector in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region.
The conclusions concerning offshoring and outsourcing are encouraging too. Studies for the UK, US, Germany and Italy suggest that off-shoring of intermediate goods has either no effect or positive effects on both employment and wages. And with so much talk of sweatshops and other negative impacts, another surprise is that trade tends to improve working conditions whether the measure is injuries on the job, child labour, informality, or effects on female labour.
So, should countries just open up to international influences and all will be well? Pascal Lamy argued that globalisation makes labour markets more volatile and many jobs more precarious. In reply, OECD Chief Economist Pier Carlo Padoan reminded everybody that the benefits of an open trade policy depend on a whole series of other policies, starting with labour market measures to aid those negatively affected, but also covering investment, governance and social protection.
You can find a four-page summary of Policy Priorities for International Trade and Jobs here
Skills are increasingly important for economic success. Technological change, globalisation and the rise of the ‘knowledge economy’ have all favoured highly skilled workers. When the recession hit, the sharpest rises in unemployment – in the UK at least – were amongst those with fewer skills. This was particularly the case for young people, with youth unemployment reaching crisis point in a number of countries. The global economy has changed, and workers across the OECD need the right skills to succeed in it.
This makes the ministerial meeting held yesterday to discuss the new OECD skills strategy an important event. The skills strategy will guide discussion on how OECD countries can create the skilled workforces they need to compete in an international knowledge economy. So what priorities should the ministers be discussing?
For national economies to come out of the crisis, there needs to be a focus on high-level skills. Across the OECD, employment rates are higher for those with degrees than without. To create jobs in an innovation-rich economy requires specialists with postgraduate education. In many OECD countries, increasing numbers of young people are taking postgraduate degrees, and the returns to postgraduate education are often high. Those with high-level skills are more likely to be in employment, and are increasingly likely to create new jobs.
But skills are important for everyone, not just those with degrees. As the strategy shows, youth unemployment is in double digits in most OECD countries. Part of this is due to the recession, but other structural changes in some economies are exacerbating these trends. The skills required for young people entering the workplace are changing. In economies increasingly based on the service sector, young people’s first jobs are more likely to be in personal services than on a factory floor. Employers need to be confident that young people have the necessary skills in customer service, time-management and teamwork.
Young people need to develop soft skills to work, but these soft skills are often only developed while in work. The result is a Catch 22 for many young people from disadvantaged backgrounds. The solution lies in ensuring young people are properly supported when taking their first steps into the labour market, with meaningful work experience that encourages realistic expectations of employment and the skills they will need to succeed. Some OECD countries such as Germany are better at this than others.
While it is extremely important to ensure young people have the necessary skills to enter the labour market, governments also need to continue to focus efforts on lifelong learning. The international economy has undergone important changes over the past few decades. Increasingly, the economies of OECD member states are based on the production, dissemination and use of knowledge. The skills required for these new environments evolve over time, and workers need to be able to catch-up.
Yet a focus on the supply of skills is not enough. In the UK, Slovenia and Greece, over 40% of employees feel they could cope with more demanding duties at work – their skills are underutilised. Such problems are caused by poor business models and management being unable to effectively use the skills of their staff. Tackling poor skills utilisation is an important means of both raising productivity and boosting the demand for skills.
OECD Ministers face a number of significant challenges. In the short-term, they need to address economic crisis, the problems of youth unemployment and the question of how to return to growth. In the longer-term, they will also need to ensure their economies can grow sustainably. They need policies to address youth unemployment now, whilst also continuing to ensure their workforces are able to succeed in the knowledge economy. We need solutions to these difficult questions – and skills will play a crucial part in all of them.
See more blogs on skills at oecdeducationtoday
Most people would agree that (a) there is more to life than money; (b) there is more to progress than GDP growth; and (c) there is more to democracy than voting. But how can citizens make their voices heard and how can policy makers know if they’re addressing the issues that really matter?
The OECD Better Life Initiative was launched a year ago to address these concerns. The Initiative builds on a decade of international reflection on measuring the progress of societies. Its two principal elements are Your Better Life Index (BLI), an online tool that enables citizens to visualize well-being in OECD countries according to what is important to them; and How’s Life?, a report bringing together for the first time internationally comparable measures of well-being in line with recommendations in the Stiglitz-Sen-Fitoussi Commission report.
Users of Your Better Life Index “weigh” 11 topics that contribute to well-being – community, education, environment, governance, health, housing, income, jobs, life satisfaction, safety, and work-life balance – to generate their own Index. An overall description of the quality of life in each country is also provided, including how it performs across the 20 individual indicators that make up the 11 topics. Freely-accessible OECD reports and other sources of information are provided to assist those who want to learn more.
Since its launch last May, the Index has received nearly one million visits from practically every country on the planet and has been referenced internationally as a model for presenting material on measuring well-being. Feedback from users has enabled the OECD to draw initial conclusions on what is driving well-being. Users consistently rank “life satisfaction”, “education” and “health” the most highly, regardless of their country of origin, suggesting that no matter where we live, we worry and care about the same things.
There is also little difference between the sexes, or between generations, although younger people (15-34) put greater emphasis on “work-life balance,” “income” and “jobs”, whereas people over 65 prioritise “health” and “the environment.” Overall, “community,” “income” and “governance” rank far lower relatively.
Your Better Life Index will be widening its coverage as it enters its second year. The geographical range will be extended to include Brazil and Russia, bringing the total number of countries covered to 36. The Index is also widening its language coverage, with a full French version which we hope will be the first of a string of versions in different languages. This will be a critical element for expanding the global user community, exponentially increasing the feedback received through completed indexes.
In fact, each year Your Better Life Index will be enriched with more factors important for measuring well-being. In response to user findings, new indicators have been added in 2012 to strengthen the “education”, “jobs”, “environment” and “housing” dimensions. Users will also be able to compile their index taking account of degrees of equality between men and women across the topics. Why is that, for example, that men earn more and work more than women, but women live longer, are often better educated and often report greater overall happiness with life? Similarly, users will be able to see other inequalities, for example, whether their income level affects how healthy they feel or how likely they are to vote.
The capacity of Your Better Life Index to make a difference in how policies are developed depends on participation. With this in mind, enhancing the user experience to encourage participation and to make feedback more immediate are emphasized. Users will now be able to compare themselves directly with others based on location, gender and age. Comments and suggestions are more than welcome. Already, as a result of user feedback, we have added an embed feature which enables journalists, bloggers and others to capture their BLI and place it directly onto web sites and blogs.
Your Better Life Index provides an innovative way of empowering and educating everyone who cares about building a stronger, cleaner and fairer world. For the public this means being better informed about policies and their effects on well-being. For policy-makers, this means a better understanding of citizen priorities in order to shape better policies. For the OECD, this means making recommendations that more accurately reflect people’s concerns.
Our challenge is to encourage more public engagement and dialogue in order to make a more meaningful impact on what policies are needed. It is a voyage of discovery and a work in progress.
Recovering from the crisis is about returning to economic growth that can sustainably deliver better lives in all senses of the word – jobs for today and the education and skills for the jobs of tomorrow, healthy environment, and equal opportunities.
Economic growth is the foundation stone, but the crisis taught us that it has to be the right kind of growth. In many countries, people are rising up – indignant about inequalities and what they see as a lack of transparency and accountability from their governments and institutions. They are calling for new approaches that focus on growth, fairness and inclusion and address corruption, the rising cost of living and social spending cuts.
Expectations are high for international organizations such as the OECD to help governments in their efforts to find sustainable solutions. It’s a daunting task, but one we can attain if governments and citizens work together. OECD Week 2012 in Paris is a key moment for achieving this and comes on the heels of the success of the OECD’s 50th Anniversary last year.
What happens during OECD Week?
OECD Week combines the annual OECD Ministerial Meeting and Forum. The Forum, a public event, brings together ministers, business, labour, civil society and academia to share policies and ideas. It feeds into the Ministerial Meeting, where government leaders and ministers discuss issues on the global agenda. Turkey’s Deputy Prime Minister, Ali Babacan, will chair this year’s Ministerial, supported by vice-chairs Chile and Poland.
Highlights of the week include the semi-annual OECD Economic Outlook, as well as three major new reports – the Skills Strategy to ensure that today’s children and young adults are well equipped for tomorrow, the final report of the Gender Initiative and the Development Strategy.
The Forum – 22-23 May
Politicians, business leaders, academics and civil society will discuss and debate ways to shift from indignation and inequality to inclusion and integrity. With record numbers of young people looking for jobs, the middle class squeezed out of the system, financial regulation failures, and faith in governments and other institutions waning, how best to restore trust and integrity in the system and find innovative paths for more sustainable, equitable and greener growth?
Which policies are delivering better lives? The OECD’s Better Life Index, launched in 2011, offers people a chance to say what matters most to them – education, jobs, a nice home, clean air, money – and see how their country measures up. An updated version of the Index, to be released at Forum 2012, includes new dimensions for gender and inequality as well as two new countries, Brazil and Russia.
The Ministerial – 23-24 May
Ministers will focus on policies for a sustainable – jobs-rich, green and equitable – economic recovery. In this context, they will discuss ways to encourage people to learn and maintain skills – the global currency of the 21st century – and encourage gender equality so women can fulfil their potential. As the economy of one country depends on the economy of all, ministers will also discuss the benefits of a more open trading system and look to strengthen partnerships with developing countries and their relationship with the Middle East and North African region.
Today’s post is from Liisa-Maija Harju, Environmental Coordinator in the OECD Operations Service
Each year OECD countries generate over four billion tonnes of waste. By 2020, we could be generating 45% more waste than we did in 1995.
OECD’s work on waste management focuses on promoting sustainable materials management in order to limit waste generation in the first place. According to the recent report Greenhouse gas emissions and the potential for mitigation from materials management within OECD countries, in most OECD countries, at least 4 percent of current annual GHG emissions could be mitigated if waste management practices were improved. The report focuses on municipal solid waste that forms only a portion of total waste generation across OECD countries.
Typically GHG emissions from the waste sector have accounted for 3% to 4% of total emissions in OECD member countries’ GHG emission inventories. This approach might be outdated because it only considers direct emissions primarily from landfill methane emissions and incinerators.
A systems view would be needed to assess GHG emissions associated with materials and waste because materials production, consumption and end-of-life management are so closely linked together. Looking at the whole life cycle would allow for the inclusion of GHG emissions from the acquisition, production, consumption, and end-of-life treatment of physical goods in the economy.
When viewed from a life-cycle perspective, GHG emissions arising from materials management activities are estimated to account for 55% to 65% of national emissions for four OECD member countries studied. This suggests that there is a significant opportunity to potentially reduce emissions through modification and expansion of materials management policies. The report also reminds us that basic recycling and source reduction are effective tools to reduce total GHG emissions.
How about us here at the OECD itself? The OECD Secretariat’s total GHG footprint amounted to approximately 9332 metric tonnes CO2-equivalent in 2010. Our GHG Inventory tool does not include waste management directly, and we don’t yet have the means to calculate the real GHG emissions savings of our waste management efforts.
Since 2008 we have sorted paper, and in the past four years the total amount of waste produced has gone down by 45%, although the baseline was exceptionally high because we moved offices over 2007-2009 when our headquarters buildings were being refurbished and the new conference centre built. In 2011 the Secretariat produced 477 tonnes of waste (of which 274 tonnes was paper waste) compared to 861 tonnes of waste in 2008 (of which 363 tonnes was paper waste). Last year we installed a machine that allows for the compression of bottle, can, cardboard, and paper waste at our facilities before transportation, cutting down the number of truck trips needed to take away the waste.
To further improve our waste management infrastructure, we will install a comprehensive sorting system for bottles and cans this June. Hopefully we will be able to switch our focus to sustainable materials management and the prevention of all the waste in the first place so that by 2020 we will be generating at least 45% less waste than we did in 2011.
How did inequality and household debt interact in the run up to the 2008/09 financial crisis? Today, a new report by NIESR for the Resolution Foundation provides new evidence on that question for the UK. The new analysis confirms the severity of the borrowing situation of low income households in Britain before the crash and raises difficult questions about patterns of consumption in an era of high inequality.
The report’s key contribution is to dig beneath headline figures for household debt to describe the borrowing picture for households at different points in the income distribution. It’s well established that UK household debt, in common with many other countries, ballooned in the late 1990s and 2000s, with the aggregate savings ratio—the percentage of household disposable income that is saved—turning negative in 2008 for the first time since records began. Yet so far these headline figures have been something of a black box.
Figure 1 from today’s report shows how the decline in the household saving position played out for households in different income deciles. It suggests that the poorest 10 percent of UK households saw their saving position deteriorate catastrophically from the late 1980s onwards, falling to a staggering negative 43 percent by 2007. Put another way, these households were outspending their incomes by 43 percent each year. Even for households on low to middle incomes (those in the second to fifth deciles) the picture was bad for much longer than was previously thought. On average these households had been outspending their incomes for anywhere between ten and 20 years by the time the 2008 crisis struck.
Source: NIESR analysis for the Resolution Foundation, FES
Some will dismiss these findings as unreliable and there is certainly good reason for caution on the specifics. But if the trends seen in Figure 1 do reflect the general pattern of UK spending and borrowing in the run up to the crisis, how should we interpret them?
Two main points of contention emerge between commentators, and although it’s far from definitive today’s report speaks to both. The first relates to the relative importance of income and consumption. Crudely speaking, two camps have emerged in the UK on this question. On the one hand, there are those who see the pre-crisis period as one of profligacy and spending sprees, with consumption soaring on the back of easy credit. On the other, there are those who tell a story of low income growth in which households in the bottom half were forced to borrow just to stay afloat.
Figure 2 speaks to this question. It shows how the two components of the UK savings ratio—consumption and disposable income—grew from 1997 to 2007. Certainly disposable income growth was shockingly weak for the bottom ten percent of households in this period, indeed official data suggests it was weaker still. We also know from wider work that income growth was weak or non-existent for low to middle income households in the later period from 2003 to 2008, supporting a weak incomes story.
Yet the figures on spending aren’t easy reading either. Consumption growth in the bottom half of households appears to have been surprisingly strong in this decade and even to have slightly outpaced consumption growth in the top half. We should be clear that this doesn’t mean low income households went on shopping sprees; we don’t know, for example, how much of this consumption was made up by the rising cost of essentials like food and fuel. And, importantly, we also don’t know how much of how much of this new spending in the bottom half went to service mortgages.
Source: NIESR analysis for the Resolution Foundation, FES
This gets us into the second big dispute between commentators: how much of a role should we assign the housing market in these trends? Big pre-crisis declines in the UK savings ratio would be much less worrying—or at least would be worrying in a very different way—if they were driven simply by increased mortgage repayments. After all, these can be seen as another form of saving, and a pretty sensible form in a booming housing market. In this case, Figure 1 would be little more than another aspect of the UK’s housing boom, and one we can be relatively sanguine about.
It’s hard to conclude either way on this front but the analysis does suggest that increased mortgage borrowing isn’t the only thing driving the figures for the bottom half of households. Across the bottom five deciles of UK household income, for example, the share of households with a mortgage isn’t particularly large, ranging from 10 to 24 percent. These proportions were also pretty stable in the decade before the crisis. At least in later years, then, this wasn’t a story of more low income people taking on mortgages (though there undoubtedly were big increases in the size of each mortgage).
Where does this all leave the link between debt and inequality? We should be careful about strong conclusions when so much relies on interpretation. Overall, though, it’s not hard to see something of a dynamic of ‘keeping up with the Joneses’—or, in technical terms, evidence for the relative income hypothesis—in the consumption figures above, a dynamic that would have realised itself in part in terms of home-buying.
In fact, if there was one moment of agreement at this morning’s launch of the new research it was over the risks that now face low income households in servicing the resultant mountain of secured debt. As Jonathan Portes, Director of NIESR, pointed out, in 2007 there were around 12,000 different mortgage products on the UK market of which around two thirds (nearly 8,000) were aimed at people with ‘impaired credit histories’. Today there are none of the latter, and though the debts they made possible appear serviceable for now, that could all change quickly when rates rise.
Has the rise in debt made households more vulnerable? OECD Working paper
The simplest way to pay less tax is to earn less, but if you’re a multinational enterprise, there are other options, including double deductions – pay your tax in one country then deduct that sum in two or more other ones. You can also make your income disappear for tax purposes by getting a deduction in one country that isn’t included in the calculation anywhere else. If you’re really smart you can even generate foreign tax credits for taxes you didn’t actually pay at all. The exception proves the rule, and while most OECD documents contain some warning about there being “no magic/silver bullets”, that doesn’t apply to international taxation.
The bullets are “hybrid mismatch arrangements”, hybrids for short, and although they cost the rest of us billions of dollars a year, they’re perfectly legal, for the time being anyway. The OECD’s Centre for Tax Policy and Administration and the Canada Revenue Agency have just organised a meeting with senior tax officials from OECD countries to discuss the issues raised, following the publication of an OECD study Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues.
Hybrids exploit the fact that although the economy is increasingly globalised and integrated, corporate tax systems are still running on principles established around a hundred years ago for firms operating mainly in one country, with little need to consider how different systems affected each other. International tax expert Professor Reuven S. Avi-Yonah put it like this when testifying to the US Congress Ways and Means Committee: “corporate residence is not a particularly meaningful concept, it makes little sense to base the entire US international tax regime on it.” Multinationals certainly don’t base their tax strategies on it and take advantage of mismatches between national legislations via aggressive tax planning.
The basic idea behind hybrids is to have the same money or transaction treated differently by different countries to avoid paying tax. One common feature of hybrids is dual residence, companies that are residents of two countries for tax purposes. Speaking during the debate on the UK budget earlier this year, Conservative MP Charlie Elphicke denounced the “magic roundabout” that allowed companies like Google to avoid tax, pointing out that the company “took about £2.15 billion in revenue from the UK in 2010, making an estimated £700 million profit, yet it did not pay any tax. In fact, it declared a loss of £22 million”.
Amazon is another case in point. If you look at their accounts, you’ll find that they may not actually trade in a country they do business in, since they only have a delivery company there. In Europe, the main business is based in Luxembourg, and the billions of euros in sales income generated elsewhere is not taxed in those countries.
Apart from dual residence, the other most common elements that hybrids exploit are entities, instruments and transfers. The details are complex and vary from place to place, but one firm offering to help companies avoid tax through hybrid entities, in this case limited liability companies, sums up the approach in the clearest of terms: “The [entity] allows for a real presence [in the host country], with all the normal benefits of [that country’s] legal structure and bank accounts… but reap the profits – tax free!”
A typical hybrid instrument would allow a company to treat something as debt in one country and equity in another, while hybrid transfers are arrangements that are treated as transfer of ownership or an asset in one country but only as a loan with collateral in another.
By playing off one country’s tax system against another, the most successful hybrids achieve double non-taxation – the company doesn’t pay tax anywhere, an unintended consequence if ever there was one of the tax laws of the countries concerned. It’s worth repeating that none of this is illegal. Replying to criticisms of its low tax bill, a spokesperson for Google said: “We have an obligation to our shareholders to set up a tax efficient structure, and our present structure is compliant with the tax rules in all the countries where we operate.”
That may be true, but it raises a number of issues. Obviously companies act like this to reduce the revenue tax authorities receive. The total sum isn’t known and a few jurisdictions may benefit at the expense of the rest, but some figures are available. In 2009 New Zealand settled cases involving four banks for a combined sum exceeding NZ$2.2 billion (€1.3 billion); Italy has settled a dozen cases involving hybrids for around €1.5 billion; while in the US the amount of tax at stake in 11 foreign tax credit generator transactions has been estimated at $3.5 billion.
Then there’s the issue of fairness and trust in the tax system. A new OECD study, Taxing Wages shows that the tax burden on earnings is continuing to rise in OECD countries. Governments trying to convince workers that they have to pay for austerity measures would have a better chance of convincing them if capital income was seen to be taxed fairly. Local businesses that don’t have the multinationals’ means to use hybrids and other means of paying less tax may feel they’re being treated unfairly too, and they are at a competitive disadvantage.
What can be done? A number of countries have introduced rules which specifically deny benefits arising from hybrids by linking the domestic tax treatment of an entity, instrument or transfer involving a foreign country with the tax treatment in that foreign country. The OECD recommends such initiatives, along with two others: sharing intelligence and experience on tackling hybrid; and consider introducing or revising disclosure initiatives targeted at certain hybrids.
Tax Inspectors Without Borders/Inspecteurs des impôts sans frontières The OECD’s Task Force on Tax and Development has launched an initiative to help developing countries bolster their domestic revenues by making their tax systems fairer and more effective. The OECD will establish an independent foundation, to be up and running by the end of 2013, that will provide international auditing expertise and advice to help developing countries better address tax base erosion, including tax evasion and avoidance.