Tracey Burns, Project Leader, OECD Directorate for Education and Skills
The famous slogan “KISS” urges listeners to “Keep it simple, stupid!” However, modern policy making is increasingly discovering that not keeping it simple – in fact, embracing the complex – is essential to understanding contemporary systems and making reform work.
Modern societies are made up of a growing number of diverse stakeholders who collaborate through formal and informal channels. The rapid advancement and reach of information and communication technologies has enabled them to play a much more immediate role in decision-making while at the same time the delivery of public services has become more decentralised.
This complexity brings a series of dynamics that the traditional policy cycle is not able to capture. This is not startling news: numerous critics have described the inadequacy of the traditional policy cycle in agriculture, medicine, and education for the last 30 years. What has changed, however, is a growing understanding across a much broader set of actors that we can no longer continue to operate using traditional linear models of reform.
This is not just a theoretical discussion: ignoring the dynamic nature of the governance process makes reform less effective. In education for instance, even very similar schools can react quite differently to the same intervention. A case study of the Netherlands demonstrated how some weak schools benefitted from being labelled as in need of improvement, coming together as a school community to set off a virtuous cycle to improve performance. In contrast other schools struggled when faced with the same label, with some descending into vicious cycles where teachers felt unmotivated, parents moved their children to another school, and overall performance declined. A simple model of reform and governance cannot account for this complexity.
How can complexity be identified? A seminal 2002 paper by Glouberman and Zimmerman distinguishes between three types of problems: the simple, the complicated, and the complex. A simple problem is, for example, baking a cake. For a first time baker, this is not easy, but with a recipe and the ingredients you can be relatively sure that you will succeed. Expertise here is helpful, but not required.
In contrast, a complicated problem would be sending a rocket to the moon. Here, formulas are essential and high level expertise is not only helpful, but necessary. However, rockets are similar to each other in critical ways, and once you have solved the original complicated problem, you can be reasonably certain that you’ll be able to do it again.
Both simple and complicated problems can be contrasted with a complex problem, such as raising a child. As every parent knows, there is no recipe or formula that will ensure success. Bringing up one child provides useful experience, but it is no guarantee of success with another. This is because each child is unique and sometimes unpredictable. Solutions that may work in one case may only partially work, or not work at all, in another.
Returning to the failing school example, it was the unpredictability of the dynamics inherent in the response of the schools and their communities that rendered the problem complex as opposed to merely complicated. Acknowledging the complexity inherent in modern governance is thus an essential first step to effective reform. Successful modern governance:
- Focuses on processes, not structures. Almost all governance structures can be successful under the right conditions. The number of levels, and the power at each level, is not what makes or breaks a good system. Rather, it is the strength of the alignment across the system, the involvement of actors, and the processes underlying governance and reform.
- Is flexible and able to adapt to change and unexpected events. Strengthening a system’s ability to learn from feedback is a fundamental part of this process, and is also a necessary step to quality assurance and accountability.
- Works through building capacity, stakeholder involvement and open dialogue. However it is not rudderless: involvement of a broader range of stakeholders only works when there is a strategic vision and set of processes to harness their ideas and input.
- Requires a whole of system approach. This requires aligning policies, roles and responsibilities to improve efficiency and reduce potential overlap or conflict (e.g. between accountability and trust, or innovation and risk-avoidance).
- Harnesses evidence and research to inform policy and reform. A strong knowledge system combines descriptive system data, research findings and practitioner knowledge. The key is knowing what to use, why and how.
Creating the open, dynamic and strategic governance systems necessary for governing complex systems is not easy. Modern governance must be able to juggle the dynamism and complexity at the same time as it steers a clear course towards established goals. And with limited financial resources it must do this as efficiently as possible. Although a challenging task, it is a necessary one.
The OECD is organising a Workshop on Complexity and Policy, 29-30 September, OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning; 29/09 afternoon; 30/09 morning
Today’s OECD Interim Economic Outlook warns that trade growth is slowing, contributing to another slowing of global GDP growth in 2016 and with few signs of improvement for 2017. Does it really matter? If we believe the current anti-trade, anti-globalisation rhetoric, we might shrug our shoulders and say “no”. Trade has been so maligned and demonised, some might even be pleased.
But that would be the wrong answer. Open trade and cross-border investment are key vectors for diffusion of new technologies and competition, which are central to achieving productivity gains and improving well-being. New research published today by the OECD in conjunction with the Interim Economic Outlook suggests that a substantial part of the post-crisis slowdown in total factor productivity growth could be reversed if trade intensity were to recover. In short, weak trade is one of the factors that will keep the economy in a “low-growth” trap where sluggish trade and investment lead to diminished growth expectations and rising financial risks.
Over decades, trade has been responsible for drawing hundreds of millions of people out of poverty – and we mean one and two-dollar-a-day poverty – in emerging and developing countries. Trade could perform this same miracle for the many millions still living in abject poverty in poor countries in Asia and Africa, if other conditions are also right of course. Salaries and working conditions are almost always better in companies that trade than in those that do not, and this is true in countries at all levels of development. Households gain hugely from trade because it increases choice and reduces prices.
The prospects of millions of workers in the global economy depend on their participation in global value chains, as highlighted by statistics developed by the OECD with the WTO on Trade in Value-Added (TiVA). The main insight from these data is first, in order to export efficiently, a company has to also import efficiently. A second key insight is the importance of high quality services to support trade and trade-intensive activities. It should be of great concern that there are signs that the development of global value chains appears to have gone into reverse in recent years.
The OECD paper published today looks at the reasons for the trade slowdown and back-tracking in the development of global value chains. Several factors are at play, some of them cyclical in nature, others structural like the changing role of China in the global economy. Increasingly murky protectionism is contributing to the slowdown, as is the failure to implement any really ground-breaking global new trade initiatives for more than a decade. Without entering into a rather futile debate about when the slowdown really started or the exact contribution of structural versus cyclical drivers, let us instead ask what governments can do to reverse it.
The OECD Interim Economic Outlook calls for implementation of a package of measures to boost demand, including through collective fiscal action focussed on raising investment and productive spending, and structural reforms. Removing barriers to trade and creating the conditions for people to reap the potential benefits of trade should be at the heart of the structural reform agenda.
First, governments should put their weight behind efforts to further lower trade barriers and unnecessary trade costs by implementing the Trade Facilitation Agreement, vigorously pursuing the reduction of restrictions on services trade, including by concluding the trade in Services Agreement (TISA), co-operating to reduce costly and unnecessary regulatory differences, concluding the Agreement on Environmental Goods, and by coming to the table to deliver a good result at the 11th WTO Ministerial Conference a little over a year from now. They should reduce remaining barriers to foreign direct investment. There are unilateral, bilateral, plurilateral and multilateral channels available if governments want to provide those growth opportunities that are currently lacking.
Second, governments need to step in to ensure that the benefits of trade are fairly shared. Governments should help those affected by the churn and disruption caused by globalisation. Benefits from trade are diffuse and long-term in nature. Losses tend to be sharp and very concentrated on individuals and regions. The people most affected are sometimes those with the least capacity to adjust. An unemployed steel worker does not take much comfort from knowing that programmers in Silicon Valley are thriving, or that T-shirts and smartphones are cheaper. What he or she needs is a decent job, new training and skills, and a robust social safety net to help through the transition.
Making trade work better for more people is not just about persuading them, although clearer and more honest communication is important. It is about ensuring that the full panoply of structural policies is put to work to ensure that people are able to reap the benefits that more open trade, technology, and investment will bring. This means paying attention to infrastructure, well-functioning financial markets, education and skills, clear and transparent institutions and rule of law – all the things that make an economy nimble Trade policy cannot be made in a vacuum but rather must be part of the fabric of domestic policies. If we are not able to do this, growing public scepticism, particularly in the most advanced economies, may mean that further market opening will be difficult, if not impossible. Such a result would impoverish many across the world.
Is a country’s ability to generate and distribute income determined by its productive structure? Decades ago Simon Kuznets proposed an inverted-u-shaped relationship describing the connection between a country’s average level of income and its level of income inequality. Kuznets’ curve suggested that income inequality would first rise and then fall as countries’ income moved from low to high. Yet, the curve has proven difficult to verify empirically. The inverted-u-shaped relationship fails to hold when several Latin American countries are removed from the sample, and in recent decades, the upward side of the Kuznets curve has vanished as inequality in many low-income countries has increased. Moreover, several East-Asian economies have grown from low to middle incomes while reducing income inequality.
Together, these findings undermine the empirical robustness of Kuznets’ curve, and indicate that GDP per capita is a measure of economic development that is insufficient to explain variations in income inequality. This agrees with recent work arguing that inequality depends not only on a country’s rate or stage of growth, but also on its type of growth and institutions. Hence, we should expect that more nuanced measures of economic development, such as those focused on the types of products a country exports, should provide information on the connection between economic development and inequality that transcends the limitations of aggregate output measures such as GDP.
Scholars have argued that income inequality depends on a variety of factors, from an economy’s factor endowments, geography, and institutions, to its historical trajectories, changes in technology, and returns to capital. The combination of these factors should be expressed in the mix of products that a country makes. For example, colonial economies that specialised in a narrow set of agricultural or mineral products tend to have more unequal distributions of political power, human capital, and wealth. Conversely, sophisticated products, like medical imaging devices or electronic components, are typically produced in diversified economies that require more inclusive institutions. Complex industries and complex economies thrive when workers are able to contribute their creative input to the activities of firms.
This suggests a model of heterogeneous industries in which firms survive only when they are able to adopt or discover the institutions and human capital that work best in that industry. According to this model, the composition of products that a country exports should tell us about a country’s institutions and about the quality of its human capital. This model would also suggest that a country’s mix of products should provide information that explains inequality and that might escape aggregate measures of development such as GDP, average years of schooling, or survey-based measures of formal and informal institutions.
With our colleagues from the MIT Media Lab, we used the Economic Complexity Index (ECI) to capture information about an economy’s level of development which is different from that captured in measures of income. Economic complexity is a measure of the knowledge in a society that gets translated into the products it makes. The most complex products are sophisticated chemicals and machinery, whereas the least complex products are raw materials or simple agricultural products. The economic complexity of a country depends on the complexity of the products it exports. A country is considered complex if it exports not only highly complex products but also a large number of different products. To calculate the economic complexity of a country, we measure the average ubiquity of the products it exports, then the average diversity of the countries that make those products, and so forth.
For example, in 2012, Chile’s average income per capita and years of schooling ($21,044 at PPP in current 2012 US$ and 9.8 mean years of schooling) were comparable to Malaysia’s income per capita and schooling ($22,314 and 9.5), even though Malaysia ranked 24th in the ECI ranking while Chile ranked 72nd. The rankings reflect differences in these countries’ export structure: Chile largely exports natural resources, while Malaysia exports a diverse range of electronics and machinery (see illustration here). Moreover, these differences in the ECI ranking also point more accurately to differences in these countries’ level of income inequality. Chile’s inequality as measured through the Gini coefficient (0.49) is significantly higher than that of Malaysia (0.39)
We separated the correlation between economic complexity and income inequality from the correlation between income inequality and average income, population, human capital (measured by average years of schooling), export concentration, and formal institutions. Our results document a strong and robust correlation between the economic complexity index and income inequality. This relationship is robust even after controlling for measures of income, education, and institutions, and the relationship has remained strong over the last fifty years. Results also show that increases in economic complexity tend to be accompanied by decreases in income inequality.
Our findings do not mean that productive structures solely determine a country’s level of income inequality. On the contrary, a more likely explanation is that productive structures represent a high-resolution expression of a number of factors, from institutions to education, that co-evolve with the mix of products that a country exports and with the inclusiveness of its economy. Still, because of this co-evolution, our findings emphasize that productive structures are not only associated with income and economic growth, but also with how income is distributed.
We advance methods that enable a more fine-grained perspective on the relationship between productive structures and income inequality. The method is based on introducing the Product Gini Index or PGI, which estimates the expected level of inequality for the countries exporting a given product. Overlaying PGI values on the network of related products allows us to create maps that can be used to anticipate how changes in a country’s productive structure will affect its level of income inequality. These maps provide means for researchers and policy-makers to explore and compare the complex co-evolution of productive structures, institutions and income inequality for hundreds of economies.
This article is based on Linking Economic Complexity, Institutions and Income Inequality, by D. Hartmann, M.R. Guevara, C. Jara-Figueroa, M. Aristarán, C.A. Hidalgo.
The OECD is organising a Workshop on Complexity and Policy, 29-30 September, OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning; 29/09 afternoon; 30/09 morning
This post, by Stefano Scarpetta, Director of the OECD Directorate for Employment, Labour and Social Affairs, is also the editorial of the “International Migration Outlook 2016”, published today.
The public is losing faith in the capacity of governments to manage migration. Opinion polls in a wide range of countries suggest that the share of the public holding extreme anti-immigration views has grown in recent years and that these extreme views are more frequently heard in public debates. In part, this is due to the perception that no end is in sight for large migration inflows and that countries have lost control over them. People are concerned about the short-term impact of large inflows of migrants, and refugees in particular, and many feel that migration is threatening their economic, social as well as personal security. Common concerns are that migration is unmanaged and borders are not secured; immigrants stretch local services, such as social housing, health and education, to the detriment of local populations; immigration benefits the rich, with the poor finding themselves competing with immigrants for jobs, and wages for low-skilled work depressed; and many migrants do not want to integrate and may even oppose the values of host societies.
In most countries though, refugee flows are still a relatively small part of overall migration. The OECD has collected a wealth of evidence showing that the medium and longer term effects of migration on public finance, economic growth and the labour market are generally positive. But this message is not getting through. However much the demographic and macro-economic arguments for migration are true, they seem abstract and long-term to many people. As a result, they have only a limited impact on public opinion, and mainly preach to the converted. Governments need to develop better, more practical arguments if they are to counter anti-immigration voices.
The truth of the matter is that migration is a fact of life and is here to stay. About 120 million people living in OECD countries were born elsewhere and one person out of five is either a migrant or was born to a migrant parent. More than 4 million new permanent migrants settled in OECD countries each year on average over the past decade.
If we want to reap the full benefits of migration and to heal the social schisms that seem to be appearing in too many countries, action is needed from policy makers on three main fronts.
Countries must acknowledge and address the fact that the impact of migration is not the same for everyone.
Immigrants are nearly always concentrated in specific regions and urban areas – often the most disadvantaged ones. The local impact of large-scale immigration may be far stronger than what is observed at the national level, and may be working in a different direction. In particular, this edition of the OECD International Migration Outlook shows that large sudden inflows of migrants can aggravate longstanding structural problems and bottlenecks in local infrastructure, such as housing, transportation and education. Similarly, although this is not usually the case, in some circumstances, large numbers of low-skilled migrants arriving in a particular area may have a negative impact on the local labour market prospects of low-skilled residents already present. Scaling up those local public services stretched by increased numbers of migrants is a necessary part of an effective policy response, as is ensuring that minimum wages and other labour market regulations are applied rigorously.
Global challenges need global solutions. Leaving individual countries to deal with massive inflows, as recently witnessed with the refugee crisis, cannot address the problems adequately. International co-operation needs to be stepped up, with different countries making different contributions.
Needs must be identified and addressed more rapidly at both the global and local level. Adapting to higher migration flows can take time, during which political resistance builds up. If authorities fail to respond quickly to emerging migration challenges, as witnessed during the recent refugee surge in Europe, the impression that migration and (lack of) integration are out of control becomes entrenched.
Preparing for future developments requires:
- Better anticipation of future flows and the corresponding needs for infrastructure and capacity, at all levels.
- Pre-commitment to take appropriate actions. When a migration crisis hits, it often takes too long to agree on even ad hoc actions at the international level. Countries should consider stronger pre-commitment before a crisis becomes unmanageable. Here, lessons from other global challenges are illuminating; for example, systems are in place to identify global health challenges and to ensure that they are addressed in a co-ordinated and systematic way.
- Adapting policies to reflect crisis situations. This issue is considered at length in the OECD International Migration Outlook. For example, a range of policy responses to address large movements of refugees and migrants are available, but one which has not yet been exploited in any substantial way is the use of legal alternative pathways to reduce irregular flows.
- We need a new generation of effective migration policies adequate to the challenges of the 21st century. These policies must be global, because no country can deal with large, unexpected migration flows alone and in isolation. And local, because policies must promote quick and effective integration of those who are going to stay in the local community; and address the specific concerns of those who feel they do not experience direct benefits from migration and fear that it will challenge the basic values of the host society.
Unless systematic and co-ordinated action is taken in a timely way to acknowledge and vigorously address these concerns, migration policy will continue to seem abstract and elitist, at best trailing behind the problems it is supposed to be addressing. And, as is already apparent, the result is likely to be a more strident political populism.
Eduardo Pisani, Director General of IFPMA – the International Federation of Pharmaceutical Manufacturers and Associations.
Antibiotics have made modern medicine possible. Before the discovery of penicillin in 1928 and the recognition of its therapeutic potential, there were few tools doctors could use when patients came to them with common or minor infections from simple paper cuts. Today, complex medical interventions are made possible by the use of antibiotics.
However, seventy years on, the rise of antimicrobial resistance (AMR) is threatening the effectiveness of these tools. A hallmark of antibiotics is that they lose their effectiveness over time as bacteria naturally evolve and mutate and so become resistant to the medicine’s power. Estimates from the UK Review Team on AMR predict that the death toll from drug-resistant infections could rise from 700,000 today to 10 million by 2050, and that the burden put on healthcare systems would amount to trillions of dollars.
These statistics and scale of the challenge of tackling antimicrobial resistance may seem daunting, but they have certainly galvanised action. In many ways, the global pharmaceutical industry is already at the forefront of leading action to address antimicrobial resistance.
In January this year, a major milestone in the global response to AMR was achieved, when over 100 companies and 13 associations signed the Declaration by the Pharmaceutical, Biotechnology and Diagnostics Industries on Combating Antimicrobial Resistance. The Industry Declaration set out three key commitments. First, to reduce the development of drug resistance; second, to increase investment in R&D to meet global public health needs; and third, to improve access to high-quality antibiotics and vaccines for all. The industry also called on governments to commit to allocating the funds needed to create a sustainable and predictable market for these technologies while also implementing the measures needed to safeguard the effectiveness of antibiotics. There is a clear need for global coordination of stewardship, conservation, hygiene, and the creation and use of new commercial and incentive models for antibiotics, vaccines and diagnostics, to be delivered through local action.
The Declaration is a living document, and to keep up the pace with the evolving landscape of scientific breakthroughs and policy action, it will be updated every two years. Alexander Fleming himself is said to have called the discovery of penicillin “a triumph of accident”. Since, we’ve moved from analyzing basic samples of mold to developing new molecules through innovative private-public partnerships. As bacteria are getting “smarter”, researchers spend hundreds of hours in the lab to develop new medicines to address drug resistance. With 34 antibiotics and infection preventing vaccines within the global pipeline, the opportunity to bring resistance under control is within reach.
In one of the most comprehensive analyses to date on the scope of drug resistance, the World Health Organization points out that there are major gaps in actions needed across all 6 regions in order to prevent the misuse of antibiotics and reduce the spread of antimicrobial resistance. Perhaps one of the most eye-opening findings is that few countries (34 out of 133 surveyed) have comprehensive national plans to tackle AMR. While antibiotic resistance is a serious global threat, it does not provoke the same sense of urgency for all countries.
It is evident that there is no “one-size-fits-all” approach, and that governments need to acknowledge the global principles for action and implement them at local level. There are some countries that are already leading the way, but not all may start from the same level playing field. In Europe, there are countries such as Sweden, the Netherlands or the UK, who have invested in taking concrete actions to meet ambitious targets on AMR. In Africa, for instance, there is a real need for more and better data to understand the magnitude of AMR, while China is looking to increase training for consumers and medical professionals on proper use of antibiotics. Furthermore, the IFPMA Health Partnerships Directory lists over 20 case-studies of collaborative initiatives to combat AMR.
These issues are at the top of agenda of the forthcoming UN High-Level Meeting on AMR, where UN member states will be summoned to maintain a strong political commitment to tackle this global health threat.
IFPMA has an event in the margins of this meeting, where we will discuss how the biopharmaceutical industry will deliver on the commitments laid down in the Declaration. Building on the Declaration, over a dozen leading biopharmaceutical companies have developed a roadmap which lays out a number of practical steps in four key areas: reducing manufacturing pollution; addressing inappropriate use; improving global access; and developing a broad R&D ecosystem. Without collective action and local implementation of plans, we cannot expect real change. But when the global community rolls up their sleeves, we are that much stronger in tackling AMR.
Antimicrobial resistance: millions of lives and trillions of dollars? Jim O’Neill, Commercial Secretary to the UK Treasury, author of the Review on Antimicrobial Resistance