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What is blocking business investment and productivity growth? A fresh focus on the problems of fragmentation in the world economy

21 May 2016
by Guest author

2016-BFO-cover-350Adrian Blundell-Wignall Director of the OECD Directorate for Financial and Enterprise Affairs, gives a preview of what’s in the OECD Business and Finance Outlook scheduled for release on 9 June 2016

More than seven years after the global financial crisis reached its trough the world economy is still sputtering. Banking systems in advanced economies have been strengthened and recapitalised, regulatory reforms of financial systems are well into their implementation stage and monetary policy remains highly supportive. But the global environment has not been supportive as emerging market economies, notably China, have struggled with the reversal of the commodity “supercycle” that sustained the earlier boom and related excess capacity.  One important result has been a failure of the business sector in advanced economies to respond with new investment and restructuring needed to generate jobs and the productivity growth that can support rising incomes and employment. These are essential components of the inclusive growth we need to address challenges like climate change and rising wealth inequality.

So what is blocking business investment and productivity growth? There are many contributors which we can summarise here as “fragmentation”: the heterogeneous policies, rules, laws and industry practices that create perverse incentives and block business efficiency and productivity growth. This is the theme of the OECD Business and Finance Outlook to be released on 9 June 2016.

Fragmentation manifests itself at all levels of the global economy, from the global macro-economy and economic systems to sectoral and micro-economic issues to legal ones. This Outlook surveys a range of cases where fragmentation creates problems and suggests priorities and directions for changes that will encourage inclusive growth.

The Outlook surveys important aspects of the broad global picture: the outlook for financial markets and influences on productivity, based on a detailed examination of the performance of 11 000 of the world’s largest listed companies. The observations point to the need to rely less on monetary easing and more on structural policy initiatives to stimulate investment and productivity growth and to encourage faster diffusion of productivity advances when they occur. Issues relating to the design of one such initiative, fiscal support for business research and development, are also covered in detail.

The Outlook also goes into greater depth to examine narrower issues where the devil is often in the details.  Stock exchanges are important elements of the infrastructure for funding business investment since they not only facilitate raising new capital but add to the attractiveness of such funding by providing it with liquidity. The Outlook examines the fragmentation that has arisen from the proliferation of trading venues and issues related to ensuring fairness. It points to regulatory initiatives needed to maintain a level playing field among investors.

The emerging renewable power sector is reviewed, focusing on challenges to mobilising finance for the large expansion of the sector that will be needed as the world phases out fossil fuel-generated electricity. Many of the issues that must be addressed relate more to the framework conditions surrounding the power sector than to financial engineering. If these issues are resolved, ample capital is likely to be forthcoming to finance the needed investments. One chapter focuses on differences in life expectancy around retirement age across different socioeconomic groups and the issues they raise for the insurance industry and pension funds as well as for public policy. Rules governing access to pensions and retirement saving must be designed carefully to avoid discriminating against lower socioeconomic groups.

The Outlook also examines areas in which variations in laws and legal regimes across countries unnecessarily fragment the economic environment by treating similar activities differently. One of these is foreign bribery, where enforcement across jurisdictions covers a very wide range which creates very different economic incentives to resort to bribery. The other is investment treaties, which must be interpreted by arbitration tribunals. These tribunals effectively establish rules that modify corporate law and governance arrangements and create different classes of shareholders with different sets of rights. The current interpretation of many treaties allows covered shareholders to recover losses resulting from company damages incurred by host government actions. This in turn creates incentives that may affect companies, shareholders, creditors and capital markets, and suggests a need for consideration of how claims for such losses should be treated as a more general policy matter.

The chapters are supported by company and market data not seen before, shedding light on some of the current great policy puzzles in the world economy.

Useful links

Business-Finance-Outlook-20126-callout-350The launch of the 2016 OECD Business and Finance Outlook takes place at 9.30am CET on 9 June 2016. Register to participate or watch the live webcast



The 2016 OECD Forum on 31 May – 1 June, is entitled “Productive economies, Inclusive societies”. The Forum is organised around the three cross-cutting themes of OECD Week: inclusive growth and productivity, innovation and the digital economy, and international collaboration for implementing international agreements and standards. Register now, it’s free!

One Response leave one →
  1. Charles Kovacs permalink
    May 23, 2016

    Mr. Blundell-Wignall’s article struck me as exceptionally insightful and. of course, he is a distinguished authority in his field. I agree entirely with his article, but would tender here a few thoughts:
    1. Fragmentation is an important aspect of our problem, but so is the absence of business confidence. This is a critical element in business and investment decisions, and its absence or low level is universal, albeit for varying reasons in different countries.
    2. Structural reforms could go a long way towards increasing business confidence, provided such reforms address issues of importance to business. These are most often: excessive regulatory and reporting burdens, corruption in government, and in many countries, excessive taxation.
    3. Financial engineering will not change the fact that fossil fuel generated electricity is the cheapest way to generate power. Governmental interference, i.e. higher taxes on conventional fuel and/or subsidies for the alternatives may change this, but not without an adverse impact on growth and disposable income.
    4. Pensions are a problem as too many people have too little income after retirement. Direct payments to them would be probably cheaper and certainly more transparent, than changing what works for the majority. Strategically, this also one of the fields for structural reform as most systems were established when life expectancy was around 70 years or less. Need one say more…
    5. Bribery, be it foreign or domestic, has always been the curse of business and society although one of the three oldest and universal activities of mankind, the other two being war and prostitution. How much present initiatives will change this remains to be seen, but it would be helpful if these would be paralleled by an initiative against corruption in government. Certainly, if politicians and government officials would not take bribes, bribery would decrease.
    6. Investment treaties have developed because of a lack of trust towards the institutions of many host countries, and because the habit of sending a gunboat to protect foreign investments went out of fashion about 90 years ago. Weakening the present system will increase the risks for investors, usually in those countries that need foreign investment the most.

    The OECD could take the lead in surfacing and even addressing some or all of these issues and doing so would dovetail with Mr. Blundell-Wignall’s observations and recommendations.

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