Although OECD countries have made tremendous progress in recent years fostering the deployment of high-speed broadband networks, many challenges remain in terms of how to enhance and expand these networks in order to meet the growing demands of the digital economy. The availability of broadband networks is not only essential for people to participate in economic and social activities but to create opportunities for future gains in areas such as employment, education, health and improved civic engagement.
All this depends, however, on these networks being in place, connections being available at competitive prices and not limited by capacity constraints. In most places this demand is being met by the market but even in the most advanced countries gaps arise, such as in communities with sparse populations, or where there is insufficient competition due to the substantial cost of infrastructure deployment. In these instances, municipal networks, primarily fibre networks built, operated or financed by local governments, public bodies, utilities or co-operatives, are used in a number of OECD countries to provide service in towns, cities and regions.
A new report from the OECD examines experiences with municipal broadband networks in a number of countries including Australia, Denmark, Japan, Netherlands, New Zealand, the United Kingdom and the United States. Sweden, given its widespread use of municipal networks, is used as an anchor country for the analysis. The models and experience of the municipal networks in these countries have varied from being highly successful to not meeting expectations. In some cases, they have provided welcome competition by offering an alternative infrastructure or increased the geographical availability of advanced telecommunication services where none existed. Sometimes they have enabled retail competition by splitting the provision of infrastructure and services based on an open access approach. Proponents say they have contributed to cities and regions, as there are noticeable effects on social and economic developments in these locations, which the report explores.
Local governments, as well as their service providers and utilities, regard broadband networks as a way to build on their existing infrastructures in other areas such as energy provision, and improve community services in areas such as health and education. They underscore that the public sector can be a lead user of municipal networks, such as in the provision of more cost efficient home care services for the elderly, and say that the market has not moved to sufficiently provide this infrastructure. Others also regard broadband as not only enabling today’s commerce but in attracting new firms, start-ups and retaining young people and opportunities for them in these communities. In addition, they note that mobile providers take advantage of municipal network’s fibre, for the essential backhaul facilities wireless networks require, bringing forward new investment in such networks.
Nonetheless, given that extensive investment is required and that it is complex to deploy and manage high-speed broadband networks, there are substantial risks involved. This requires that the appropriate competence is in place for the organisational and financial capabilities required. Municipal networks can also raise competition issues as public money is involved in direct competition with the private sector or, in some cases, become a virtual monopoly for wholesale or retail capacity.
The report says that broadband speed matters, and that the available evidence indicates that these networks and the broader use of ICTs around them generate positive benefits, contribute to economic growth, and make firms more productive. Broadband networks can also be a substitute for some types of transport for smarter cities and contribute to the creation of new jobs and firms.
Overall, the report notes, municipal networks play a significant role in providing services for many people in OECD countries. As a result they are a viable and sometimes extremely effective way of supporting the objectives of local communities, addressing unmet demand and creating new opportunities for growth and prosperity in those communities, which otherwise would not be there.
Hannah Koep-Andrieu of the OECD’s Responsible Business Conduct Unit (@H_KoepAndrieu)
The Dodd-Frank Act and its Section 1502 on conflict minerals adopted in 2010 obliges public companies in the United States (US) to undertake supply chain due diligence and report on products containing certain minerals that may be benefiting armed groups in the Democratic Republic of the Congo (DRC). The Act’s supporters celebrate that it finally holds companies sourcing minerals from conflict zones accountable, while critics claim that implementation of the law is cumbersome and expensive for companies and that singling out the DRC and adjoining countries created an effective embargo and is hurting local producing communities.
While both accounts hold some truth, as usual the reality is much more complicated.
To assess five years of work on responsible mineral supply chains in the Great Lakes region, the OECD worked with the International Peace Information Service (IPIS) to determine the impact in eastern DRC, the region most in the spotlight. Since 2009, IPIS collected data on security conditions at over 1100 mining sites in eastern DRC (North and South Kivu provinces, Maniema, northern Katanga and southeast Province Orientale) and published interactive maps showing armed group presence at mine sites.
More due diligence tools and positive results in 3T minerals
Since the launch of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas in 2011 the number of tools, regulations, initiatives, and programmes developed to foster responsible mineral sourcing and combat the illicit exploitation of minerals has dramatically evolved. The OECD Guidance is now referenced in domestic regulations, for example in the US, and the European Union (EU) is currently drafting a regulation that is based on the Guidance. As a result, as of 2016 the US and EU markets could both be covered by mandatory provisions requiring mineral supply chain due diligence on all imported products containing tin, tungsten and tantalum (3T) and gold. Hundreds of companies and industry initiatives across the supply chain now implement the OECD’s five-step due diligence framework to ensure they produce and source responsibly.
Companies are also beginning to understand that responsible trade of minerals from areas of conflict or high-risk is possible when carrying out due diligence. However, this wasn’t always the case. Disengagement from the DRC was indeed dramatic in 2010-2011, but this was due to a number of contributing factors: the DRC President banned the mining of affected minerals for almost a year; the US legislation was adopted; new consumer and political attention was given to the issue in the OECD, the UN Security Council, the G8 and elsewhere; and new market expectations for conflict-free minerals emerged. Exports fell for tungsten from peak years in 2007 when the DRC exported 1,200 tonnes to less than 50 tonnes in 2010. Since then, the market for minerals from the region without proof of due diligence has continued to shrink, while the market for traceable, responsibly-sourced minerals has grown, suggesting that due diligence implementation is shaping global metal demand. Traceable exports of 3T now fetch almost 30% higher prices, compared to non-traceable materials.
Responsible sourcing initiatives and the uptake of due diligence have also seen positive results on the ground; significant gains have for example been made in raising the volume of responsibly sourced 3T minerals from eastern DRC. The due diligence and traceability programme iTSCi saw an increase of traceable 3T exports from the DRC, Rwanda and Burundi from approximately 300 tonnes in 2010 to a peak of 19,500 tonnes in 2014. The first half of 2015 has seen lower exports of 7,800 tonnes, reflecting reduced incentives for miners as global commodity prices dropped. The percentage of 3T workers at mines affected by interference from non-state armed groups and public security forces dropped from 57% in 2009/10 to 26% in 2013/14 at sites visited by IPIS. This drop reflects both a cleaning up and contraction of the 3T sector in eastern DRC.
Interference at mining sites persists
While this uptake of due diligence is encouraging, interference of armed groups in mining areas continues to disrupt not only the livelihoods of well over 1 million miners and their communities but also fuels human rights violations and contributes to perpetual conflict financing. Artisanal and small-scale mining (ASM) in the DRC’s eastern provinces remains a central source of revenues for several hundred thousand people. IPIS figures suggest that more than 216,000 miners work in ASM in eastern DRC alone. In addition to direct employment, these miners each support about four to five community members.
While the news is better on 3Ts, gold remains a significant headache – in 2013/2014, four out of five artisanal miners in the eastern provinces were found to be working in the gold sector. This is partly the result of a tangible shift in production from 3T to gold since 2009. 2013/14 research also shows the strong significance of gold to conflict financing in eastern DRC, with a non-state armed group or public security force presence at 524 of around 850 gold mines (61%), compared to 59 of over 200 3T sites (27%). In terms of livelihoods and socio-economic impact, such shifts are difficult for miners and communities alike; at times gold rushes see thousands of miners migrate to a new site, stretching the already often severely limited infrastructure of rural communities in terms of access to land, water and basic housing and causing inter-communal tensions or even outright conflict.
Way ahead: Need for mining sector reforms
Companies are getting better at understanding and implementing supply chain due diligence, but governments have their role to play as well. In the context of attempts to improve governance in the sector, the advancement of mining reforms has been slow. A large majority of artisanal sites remain outside the legal trade as regulatory frameworks either stipulate that ASM is illegal or create prohibitive financial or administrative criteria for legalisation. For our work to have a real and lasting impact on the ground, formalisation, legalisation, regulatory reforms, access to land and the acknowledgement that ASM is an important rural livelihood are key; without policy change in those areas, it will be difficult to improve socio-economic and security conditions in fragile mining regions.
The OECD works to develop common understandings of due diligence standards to foster responsible business conduct, whether this is in minerals, garment and apparel, finance or agricultural supply chains. The aim of this work is not to single out regions or countries but to enable companies to carry out supply chain due diligence in all their operations globally in order to identify those areas and suppliers that carry the greatest risk of negative impacts, such as human rights abuses. Due diligence should be risk-based and progressive, meaning that companies should focus on those areas where risks are greatest and work towards a progressive improvement of due diligence practices.
Supporters and critics of the US Dodd Frank Act are both right – the challenges are enormous but there is room for optimism as the tools and initiatives to tackle the issues become increasingly widespread and refined.
2015 International Workshop on Responsible Mineral Supply Chains, Beijing, China, 2-3 December
Hosted by the China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters (CCCMC) and the OECD
The workshop will discuss the role of governments, industry associations, international partners, businesses, non-governmental organisations, and other stakeholders in promoting responsible mineral supply chains. The workshop will also launch the new Chinese Due Diligence Guidelines for Responsible Mineral Supply Chains developed as a result of co-operation between between the CCCMC and the OECD. Participants can learn about what is expected from them to implement these guidelines and participate in a consultation on audit protocols related to these guidelines. Draft agenda
Does education really pay off? Has public spending on education been affected by the economic crisis? How are education and employment related?
You’ll find the answers to these and just about any other question you may have about the state of education in the world today in Education at a Glance 2015: OECD Indicators, published today. Did you know, for example, that tertiary-educated adults earn about 60% more, on average, than adults with upper secondary as their highest level of educational attainment? Or that between 2010 and 2012, as countries’ GDP began to rise following the economic slowdown, public expenditure on education fell in more than one in three OECD countries?
This year’s edition of the annual compendium of education statistics includes more than 100 charts, 150 tables and links to another 150 tables on line. It also contains more detailed analyses of participation in early childhood and tertiary levels of education; data on the impact of skills on employment and earnings, gender differences in education and employment; educational and social mobility; adults’ ability and readiness to use information and communication technologies; how education is financed; and information on teachers, from their salaries and hours spent teaching to information on recess and breaks during the school day.
We invite you to take a good long look – and learn.
- Around 85% of today’s young people will complete upper secondary education over their lifetimes. In all countries, young women are now more likely to do so than men. The largest gender gap is in Slovenia, where 95% of young women are expected to graduate from upper secondary, compared to only 76% of young men. (Indicator A2)
- Around 41% of 25-34 year olds in OECD countries now have a university-level education. That proportion is 16 percentage points larger than of 55-64 year-olds who have attained a similar level of education. In many countries, this difference exceeds 20 percentage points. (Indictor A1)
- The number of students enrolled outside their country of citizenship has risen dramatically, from 1.7 million worldwide in 1995 to more than 4.5 million (Indicator C4). Some 27% of students in OECD countries who graduated for the first time from a doctoral programme in 2013 were international students, compared to only 7% for students who were awarded a bachelor’s degree. (Indicator A3)
- On average, 83% of tertiary-educated people are employed, compared with 74% of people with an upper secondary or post-secondary non-tertiary education and 56% of people with below upper-secondary education. (Indicator A5)
- OECD countries spend on average USD 10,220 per student per year from primary through tertiary education: USD 8,247 per primary student, USD 9,518 per secondary student, and USD 15,028 per tertiary student. (Indicator B1)
- The share of private funding in tertiary education has increased over the past decade. About two thirds of private funding at tertiary level comes from households through tuition fees. Tuition fees are higher than USD 2000 in more than half of the countries with available data, exceed USD 4000 in Australia, Canada, Korea and New Zealand, USD 5000 in Japan and USD 8000 in the United Kingdom and United States. (Indicator B5)
- OECD countries spent an average of 5.3% of GDP on primary to tertiary education in 2012 (including undistributed programmes by level of education). Public funding accounts for 83.5% of all spending on primary to tertiary educational institutions. Public spending on education fell in more than one out of three OECD countries between 2010 and 2012, including Australia, Canada, Estonia, France, Hungary, Italy, Portugal, Slovenia, Spain and the United States. (Indicators B2 and B3)
Early childhood education
- In most OECD countries, education now begins for most children well before they are 5 years old. Some 74% of 3-year-olds are enrolled in education across the OECD and 80% of European Union member OECD countries. (Indicator C2)
- Enrolments in pre-primary rose from 52% of 3-year-olds in 2005 to 72% in 2013, and from 69% of 4-year-olds to 85% in 2013. The enrolment rates of 4-year olds increased by 20 percentage points or more in Australia, Chile, Korea, Mexico, Poland, Russian Federation and Turkey between 2005 and 2013. (Indicator C2)
- More than half of children enrolled in early childhood development programmes attend private institutions. This can result in heavy financial burdens for parents, even when government subsidies are provided. (Indicator C2)
In the classroom
- Students receive an average of 7570 hours of compulsory education at primary and lower secondary level. Students in Denmark have the most, at over 10,000 hours, and in Hungary the least, at less than 6,000 hours.(Indicator D1)
- The average primary class in OECD countries has 21 students and 24 at lower secondary level. The larger the class size, the less time teachers spend teaching and the more time they spend on keeping order in the classroom: one additional student added to an average-size class is associated with 0.5 percentage point decrease in time spent on teaching and learning. Indicator D2)
- The statutory salaries of teachers with 15 years’ experience average USD 41,245 at primary level, USD 42,825 at lower secondary and USD 44,600 at upper secondary level. (Indicator D3)
Suzi Tart, OECD Environment Directorate
Analytics data reveals that the most popular search term on the OECD website for 2015 is “BEPS”. This stands for “Base Erosion and Profit Shifting” and refers to the latest OECD tax project making a big splash the world over. The next four top searches, in order are: “ecological footprint”; “PISA”; “GDP”; and “tax haven”. One of these things is not like the others. That would be “ecological footprint,” which has caused several employees here at the Environment Directorate to do some proverbial head scratching. Unlike the other terms, the OECD has yet to explicitly publish anything on this topic.
Website analytics go on to show that most of the visitors who are searching for “ecological footprint” end up visiting the Household Consumption project. This project is unique in that it explores how national-level policies impact household behaviour. Topics include energy use, food consumption, personal transport choices, waste generation and recycling, and water consumption. Yet the project does not specifically discuss the term “ecological footprint,” and it retains a macro-policy focus, targeting governments interested in learning which policies to implement.
Perhaps the Household Consumption project is indeed the information website visitors are searching for. Or perhaps they are looking for data on the ecological footprints of countries—data that does not currently exist in one OECD report, but would be interesting to compile together for a special edition of Environment at a Glance. The OECD currently publishes per capita-level data on several ecological footprint indicators (for example: meat consumption, greenhouse gas emissions, material resource extraction and consumption, water withdrawal, and municipal waste, to name a few), and it could easily complement these with its national-level data on aspects such as passenger transport and intensity of forest use to provide an interesting perspective on the average ecological footprint of countries’ citizens.
Another possibility is that visitors are seeking more information relating to @OECD_ENV’s recent #WhatCanIdo social media campaign, or the #EnergyPulse posts by staff on Twitter. Yet another plausible presumption is that online searchers want information on the OECD’s own ecological footprint. Since 2010, an official Greening@OECD campaign has strived to reduce the organisation’s negative environmental impact. An environmental progress report by the campaign notes that while water and waste consumption levels have gone up over time, greenhouse gas emissions related to OECD buildings have dropped 65%.
Regardless of the reason OECD website visitors have been searching for the term “ecological footprint,” it is encouraging to see that more people are concerned about the environment and are looking for ways to lessen their impact at a personal level. It is, as one might say, a step in the right direction.
Searching for “ecological footprint”? Message us on Twitter @OECD_ENV to let us help you in your search!
Conventional wisdom holds that countries with lower taxes attract higher levels of foreign direct investment (FDI). At first glance, this intuitive assumption seems to be supported by the evidence. Some tiny jurisdictions with low or no taxes on foreign investment do seem to attract more FDI than major economies, but “investment” is the wrong term for billions of dollars that flow in and out of these places as part of the strategies multinationals use to pay less tax.
A new methodology for calculating FDI has been developed at the OECD to provide a clearer and fuller picture of FDI flows. Long time series of these new generation FDI statistics are not yet available. In the meantime, we analysed the financial statements of around 10,000 multinationals to model the relationships between their capital spending; rates of return; and tax holidays and exemptions, among other factors of investment. We found that tax holidays and exemptions do matter in investment decisions, but they are not the only factor and not necessarily the most important.
At the same time, governments around the world have become increasingly concerned with “double non-taxation”, i.e., companies not paying tax in either the country where they make their profits or the country where their headquarters are. Double non-taxation is one of the targets of the OECD/G20 project to counter tax base erosion and profit shifting (BEPS). Over 120 countries have participated in the project in recognition of the fact that a country trying to tackle BEPS on its own would probably lose out to more generous rivals. With the recent release of the final BEPS package, and the ongoing work on exchange of tax information, governments are well equipped to meet this challenge. However, governments also have three additional means at their disposal to prevent tax abuses without undermining investment.
Public governance of tax incentives according to internationally-agreed best practices. The new tax chapter of the OECD Policy Framework for Investment (PFI), used by dozens of countries and regions such as the South African Development Community and the Association of Southeast Asian Nations, provides multilaterally-agreed guidance to help countries avoid potential abuses of tax incentives and resist undue pressure to offer tax incentives. The PFI calls for incentives to be granted only following a proper legislative process. The PFI also provides guidance on the implementation and administration of tax policy regarding investment, for instance on making sure different levels of government are working together, addressing capacity constraints in tax offices, establishing criteria for analysing the costs and benefits of incentives, and providing for “sunset clauses” that say how long the agreement stays in force. This ultimately works in favour of the broader business community concerned with public sector transparency and a level playing field. As this issue is of particular relevance for developing countries, the OECD, in collaboration with the IMF and World Bank, has also developed Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives for Investment.
Clarifying the degree of exposure of tax measures to investor claims under investment treaties. Many governments see investment treaties as a way to increase the investor confidence and long-term trust needed to encourage investment. However, there is concern that some investors and law firms are claiming that sovereign states who change tax regimes to phase out excessive advantages, or who enforce tax laws more energetically, are violating investment treaties and should pay compensation. Most investment treaties currently apply to tax measures, but to differing degrees. Some of these treaties – especially more recent ones – contain mechanisms that give the state parties the power to make joint determinations on individual tax measures, but these are still the exception: only 3.6% of the 2060 treaties in a sample the OECD analysed contain a clause of this kind related to tax measures. Other investment treaties limit the types of claims that can be brought against tax measures and permit, for example, only claims for expropriation.
Clarifying the scope of application of investment treaties to tax measures can help provide a more certain policy landscape for governments and investors. Under the legally binding OECD Code of Liberalisation of Capital Movements, certain tax measures can amount to a restriction to the free flow of capital and can fall within the scope of the Code. But the Code gives governments adequate policy space – for example, taxes that are not identically applied to residents and non-residents but are levied in accordance with widely accepted principles of international tax law, are not considered as a discriminatory restriction under the Code.
Violations of tax laws by investors may also be relevant to the application of investment treaties. This is because illegality of the initial investment is increasingly expressly recognised as a bar to treaty coverage and, for instance, the recently-negotiated Comprehensive Trade and Economic Agreement between the EU and Canada would limit the definition of investments to those made “in accordance with law”.
Communicating collectively to companies the expectation that they should obey not only the letter but also the spirit of tax law. The OECD Guidelines for Multinational Enterprises (the Guidelines), a set of recommendations to companies by OECD and non-OECD governments, call on enterprises to comply with both the letter and spirit of the tax laws and regulations of the countries in which they operate and not to seek or accept exemptions outside the statutory or regulatory framework related to taxation. Complying with the spirit of the law means discerning and following the intention of the legislature. Tax compliance also entails co-operation with tax authorities to provide them with the information they require to ensure an effective and equitable application of the tax laws. The Guidelines’ recommendation that enterprises should also treat tax governance and tax compliance as important elements of their oversight and broader risk management systems is reinforced by the recently revised Principles of Corporate Governance. Governments should increase their efforts to raise public awareness of the tax chapter of the Guidelines in support of their broader agenda to modernise and cooperate on tax policies.
Trade and FDI drive economic globalisation and help stimulate the growth of national economies. Fair and efficient tax systems are central to sharing the fruits of that growth equitably among nations and citizens. The challenge for governments is to put in place policies that attract investment and enable them to collect their fair share of taxes.
Noe van Hulst, Ambassador of the Netherlands to the OECD
With the eyes of the world on the G20 summit in Antalya, we are reminded how G20 has become a well-established ‘brand’ in the global governance landscape. Yet, it’s only as recently as 1999 that the G20 was created as an informal platform of “systemically significant countries” in response to the financial crisis in Asia and on the initiative of the US and Canada. For many years, the G20 remained below the radar screen, working quietly but effectively at the level of Ministers of Finance and Central Bank Governors, e.g. in the area of countering the financing of terrorism, which is still a very relevant topic. This situation changed completely in 2008 when the global financial crisis hit us all. On the initiative of French president Sarkozy and UK Prime Minister Brown, US president Bush called for the first ever G20 Leaders meeting to fight the crisis in a coordinated way and to avoid a global economic depression. What started as a one-off crisis summit, however, soon became a permanent tradition. In 2009, under the presidency of US president Obama, the Group declared that the G20 is henceforth “the premier forum for international economic cooperation”. Attention gradually shifted from fighting the crisis (2008-2010) to structural policies for a sustainable and balanced recovery of global economic growth. Although the legitimacy of the G20 as a ‘self-appointed club’ is periodically questioned, the G20 is today well-established as the only global forum where advanced and emerging economies cooperate on an equal footing.
Since 2010 the G20 agenda started to broaden to topics beyond strict financial and economic policy issues: e.g. agriculture and food security, trade, investment, employment, taxation, anti-corruption, energy, climate, SMEs. In parallel, we are witnessing a wider range of G20 Ministerial meetings beyond just Finance: Labour, Agriculture, Trade, Foreign Affairs, Tourism and under the current Turkish presidency recently the first ever Energy Ministers meeting.
What about the effectiveness of the G20 so far? On this key question, opinions among analysts differ. Most people agree that the G20 has been successful in tackling the global financial and economic crisis, with coordinated policies on aggregate demand, more stringent financial regulation and restraining protectionism. However, it is proving to be tougher to make significant progress on the more structural policy areas which often require sensitive domestic policy changes. A good example is the implementation of the Brisbane Growth Strategies, where the OECD Secretariat, in a joint report with IMF and World Bank Group for the Antalya summit, found that less than 50% of the policy commitments encapsulated in the National Growth Strategies have been fully implemented, raising G20 GDP by 0.8% by 2018, while the target is 2.1%. So much more needs to be done, as G20 Leaders acknowledge in their communique.
Although the G20 emphasizes its flexible and informal nature, we do see a certain degree of institutionalisation with (sous-) sherpas, working parties and expert groups. Furthermore, a growing group of stakeholders is trying to influence the G20 agenda. This group ranges from business (B20) to trade unions (L20), NGOs (C20), youth (Y20), think-tanks (T20) and since the Turkish presidency also women (W20).
The G20 doesn’t have a permanent Secretariat and instead relies on the support of established international organisations. Slowly but surely, the OECD Secretariat has evolved into what is increasingly referred to as the “quasi-Secretariat” of G20. To a certain extent, this is a natural development since the OECD has widely acknowledged strong competences in data collection, benchmarking and solid, evidence-based economic analyses in areas that are closely aligned with the broadening G20 agenda. Many of the other international organisations have a more limited mandate and competence base. Hence, OECD is uniquely positioned to make significant contributions to the G20 work on issues like (green) growth, financial regulation, climate finance, agriculture and food security, anti-corruption, employment and inequality, (green) investment and trade. The same applies to the IEA in the important field of energy which of course is closely linked to climate change. For non-G20 OECD countries, the OECD and IEA roles in the G20 provide a very important window of information and a channel for constructive engagement.
A great example of OECD’s important role in supporting the G20 work is the Base Erosion and Profit Shifting (BEPS) project. Mandated by the G20, OECD and G20 countries worked jointly for two years on an impressive set of new international tax standards and measures, addressing issues like preventing treaty shopping, country-by-country reporting, fighting harmful tax practices and many others. The final package has just now received the strong endorsement by G20 Leaders in Antalya. In my view the BEPS project is a game-changer because of the unprecedented process in which OECD and G20 countries worked on the development of new international tax standards on an equal footing. This has proven to be a very effective and inclusive way of dealing with a highly complicated and controversial topic. Even though the initial drive came from the G20, the technical work in an extended OECD Committee (with emerging and developing economies participating on an equal footing) created the necessary co-ownership from countries outside the G20. This may well provide an excellent best-practice model of how to proceed in equally complicated policy issues outside the tax area.
Turkey’s presidency of the G20 has consistently pursued the 3i’s of “Implementation, Investment, Inclusiveness”. The Antalya final communique is a clear testimony to this.
On a personal note, I want to thank the Turkish presidency warmly for including our Minister of Trade & Development Ploumen in the G20 Trade Ministerial meeting in October. As we are looking ahead to the Chinese presidency of the G20 in 2016, it seems that trade and investment cooperation will be one of the top priority areas. In the light of the worrying projections on trade growth in OECD’s latest Economic Outlook, this is highly appropriate and very welcome indeed. Surely, the OECD Secretariat can play a key role here in supporting the G20 to make tangible progress in boosting global trade and investment, which is so critical to restoring healthy growth of the global economy.
Read the Ambassador’s blog (in Dutch)
Bill White, Chair of the OECD Economic and Development Review Committee (EDRC)
The dominant school of economic thought, prior to the crisis, essentially modelled the national economy as a totally understandable and changeless machine (DSGE models). Moreover, the machine almost always operated at its optimal speed, churning out outputs in an almost totally predicable (linear) way, under the close control of its (policy) operators. While the sudden and unexpected onslaught of the current crisis, to say nothing of its unexpected depth and duration, might have been expected to have put paid to this false belief, in practice it has not. Nevertheless, the crisis has significantly increased interest in another viewpoint. Rather than being a machine, the economy should instead be viewed as a complex adaptive system, like a forest, with massive interdependencies among its parts and the potential for highly nonlinear outcomes. Such systems evolve in a path dependent way and there is no equilibrium to return to. There are in fact many such systems in both nature and society: traffic patterns, movements of crowds, the spread of crime and diseases, social networks, urban development and many more. Moreover, their properties have been well studied and a number of common features stand out. Economic policymakers could learn a great deal from these interdisciplinary studies. Four points are essential.
First, all complex systems fail regularly; that is, they fall into crisis. Moreover, the literature suggests that the distribution of outcomes is commonly determined by a Power Law. Big crises occur infrequently while smaller ones are more frequent. A look at economic history, which has become more fashionable after decades of neglect, indicates that the same patterns apply. For example, there were big crises in 1825, 1873 and 1929, as well as smaller ones more recently in the Nordic countries, Japan and South East Asia. The policy lesson to be drawn is that, if crises are indeed inevitable, then we must have ex ante mechanisms in place for managing them. Unfortunately, this was not the case when the global crisis erupted in 2007 and when the Eurozone crisis erupted in 2010.
Second, the trigger for a crisis is irrelevant. It could be anything, perhaps even of trivial importance in itself. It is the system that is unstable. For example, the current global crisis began in 2006 in the subprime sector of the US mortgage market. Governor Bernanke of the Federal Reserve originally estimated that the losses would not exceed 50 billion dollars and they would not extend beyond the subprime market. Today, eight years later and still counting, the crisis has cost many trillions and has gone global. It seems totally implausible that this was “contagion”. Similarly, how could difficulties in tiny Greece in 2010 have had such far reaching and lasting implications for the whole Eurozone? The global crisis was in fact an accident waiting to happen, as indeed was the crisis within the Eurozone. The lesson to be drawn is that policy makers must focus more on interdependencies and systemic risks. If the timing and triggers for crises are impossible to predict, it remains feasible to identify signs of potential instability building up and to react to them. In particular, economic and financial systems tend to instability as credit and debt levels build up, either to high levels or very quickly. Both are dangerous developments and commonly precede steep economic downturns.
Third, complex systems can result in very large economic losses much more frequently than a Normal distribution would suggest. Moreover, large economic crisis often lead to social and political instability. The lesson to be drawn is that policymakers should focus more on avoiding really bad outcomes than on optimizing good ones. We simply do not have the knowledge to do policy optimisation, as Hayek emphasized in his Nobel Prize lecture entitled “The pretence of knowledge”. In contrast, policymakers have pulled out all the stops to resist little downturns over the course of the last few decades. In this way, they helped create the problem of debt overhang that we still face today. Indeed, the global ratio of (non-financial) debt to GDP was substantially higher in 2014 than it was in 2007.
Fourth, looking at economic and financial crises throughout history, they exhibit many similarities but also many differences. As Mark Twain suggested, history never repeats itself but it does seem to rhyme. In part this is due to adaptive human behaviour, both in markets and on the part of regulators, in response to previous crises. While excessive credit growth might be common to most crises, both the source of the credit (banks vs non-banks) and the character of the borrowers (governments, corporations and households) might well be different. Note too that such crises have occurred under a variety of regulatory and exchange rate regimes. Moreover, prized stability in one area today (say payment systems) does not rule out that area being the trigger for instability tomorrow. Changes in economic structure or behaviour can all too easily transform todays “truth” into tomorrow’s “false belief”. The lesson to be drawn is that policymakers need eternal vigilance and, indeed, institutional structures that are capable of responding to changed circumstances. Do not fight the last war.
It is ironic that the intellectual embrace of complexity by economic policymakers should lead to such simple policy lessons. Had they been put into practice before the current crisis, a lot of economic, social and political damage might have been avoided. As Keynes rightly said “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood”. Nor is the hour too late to embrace these ideas now. The recognition that the pursuit of ultra-easy monetary policies could well have undesirable and unexpected consequences, in our complex and adaptive economy, might lead to a greater focus on alternative policies to manage and resolve the crisis. Absent such policies, the current crisis could easily deepen in magnitude rather than dissipate smoothly over time. This is an outcome very much to be avoided, but it will take a paradigm shift for this to happen.
Complexity of the economy: research and policy implications Workshop organised on 26-27 October 2015 by the OECD New Approaches to Economic Challenges project with GloComNet
Economic growth (GDP) always gets a lot of attention, but when it comes to determining how people are doing it’s interesting to look at other indicators that focus more on the actual material conditions of households. This blog looks into how households in Italy are doing by looking at a number of alternative indicators.
GDP and Household Income
Chart 1 shows how much GDP and household income have declined since the first quarter of 2007, just before the start of the economic crisis, with this period representing the baseline value 100. For the most recent quarter, Q2 2015, GDP per capita, which adjusts economic growth for the size of the population, increased 0.3% from the previous quarter. The index increased from 87.9 in Q1 2015 to 88.2 in Q2 2015, which is still around 12 percentage points below the pre-crisis level. Real household disposable income per capita increased at the same pace as real GDP per capita in Q2 2015 (0.3%), with the index increasing from 86.6 in Q1 2015 to 86.8 in Q2 2015. Real household income has moved in tandem with real GDP per capita: in Q2 2015 the household income index was 13 percentage points below the baseline of Q1 2007. This means that households have less purchasing power now that they had before the crisis. Chart 1 also shows that over the last 8 years, GDP and household income have declined in more quarters than they have grown.
The primary income of households fell in Q2 2015 compared with the previous quarter. Although there was a slight increase of income for the self-employed, this was entirely offset by a drop in net property income received (mainly due to a decrease in dividends received). . The fact that households experienced an increase in disposable income in Q2 2015 was mainly due to cash social benefits received by households, as can be seen in chart 2, which shows the net cash transfers to households.
Chart 2 also shows that the decline in the net cash transfers to households ratio from Q4 2011 to Q3 2012 corresponded to a time when household disposable income was falling faster than GDP, as shown in chart 1.
Confidence, Consumption, and Savings
Household disposable income is a meaningful way to assess material living standards, but to get a fuller picture of household economic well-being it is interesting to also look at households’ consumption behaviour. Chart 3 shows that consumer confidence remained broadly stable in Q2 2015 at 101.5 suggesting that with two consecutive quarters of positive economic growth consumers continued to be relatively confident about their economic situation. This confidence coupled with a rise in household income helped real household consumption expenditure per capita increase by 0.4% in Q2 2015 (chart 4), with the relevant index increasing from 89.4 in Q1 2015 to 89.7 in Q2 2015, the strongest quarterly growth rate since Q3 2010. However, Italian households are still buying less goods and services to meet their own everyday needs than they were before the crisis.
The households’ savings rate (chart 5), which shows the proportion that households are saving out of current income, decreased 0.1 percentage point in Q2 2015, as compared to the prior quarter, showing that households used their entire increase in income to consume goods and services. The households’ savings rate in Q2 2015 was 11.1%, 3.9 percentage points lower than the peak reached in Q1 2009 (during the depth of the economic crisis). Since Q1 2009, the declining trend in the savings rate reflects households’ need to trade-off between saving and consumption as income kept falling.
Debt and net worth
The households’ indebtedness ratio, i.e. the total outstanding debt of households as a percentage of their disposable income, is a measure of (changes in) financial vulnerabilities of the household sector and can be helpful in assessing households’ debt sustainability. In Q2 2015, household indebtedness in Italy (chart 6) was 82.5% of disposable income, a marginal increase of 0.1 percentage point from the prior quarter showing that households financed some of their consumption by increasing their debt.
A growing debt ratio is often interpreted as a sign of financial vulnerability. However, when assessing vulnerabilities, one should also look at the availability of assets, preferably taking into account both financial assets (saving deposits, shares, etc.) and non-financial assets (for households, predominantly dwellings). Because information on households’ non-financial assets is generally not available on a quarterly basis, financial net worth (i.e. the excess of financial assets over liabilities) is used as an indicator of the financial vulnerability of households.
In Q2 2015, financial net worth of households (chart 7) in Italy was 280.1% of disposable income, 3.5 percentage points less than Q1 2015. The decrease in the second quarter was mainly due to holding losses on debt securities on the asset side and an increase in household debt (mainly trade credits). This resulted in a slight deterioration of the households’ financial net worth in Q2 2015.
The unemployment rate and the labour underutilisation rate (chart 8) also provide indications of potential vulnerabilities of the household sector. More generally, unemployment has a major impact on people’s well-being. In Q2 2015, the unemployment rate remained stable at 12.4%, the same rate as the previous quarter. The labour underutilisation rate was 28.9% in Q2 2015, well above the standard unemployment rate and remained unchanged compared with the first quarter.
One should keep in mind that households’ income, consumption and savings may differ considerably across various groupings of households; the same holds for households’ indebtedness and (financial) wealth. The OECD is working on these distributional aspects and preliminary results can be consulted here and here.
As shown above, in order to properly measure people’s material well-being, looking beyond economic growth is essential. The economic crisis has hit hard for households in Italy. The unemployment rate remains high and income and consumption levels have yet to recover to pre-crisis levels. Yet, the second quarter of 2015 shows a slight improvement in households’ material well-being. To fully grasp people’s overall well-being, one should even go beyond material conditions, and look at a range of other characteristics that shape what people do and how they feel. For more than 10 years, OECD has been focusing on people’s well-being and societal progress. To learn more on OECD’s work on measuring well-being, visit the Better Life Initiative web site.
Interested in how households are doing in other OECD countries? Visit our households’ economic well-being dashboard.
OECD Economic Outlook November 2015: Emerging market slowdown and drop in trade clouding global outlook
Global growth prospects have clouded this year. Global growth has eased to around 3%, well below its long-run average. This largely reflects further weakness in emerging market economies (EMEs). Deep recessions have emerged in Brazil and Russia, whilst the ongoing slowdown in China and the associated weakness of commodity prices has hit activity in key trading partners and commodity exporting economies, and increased financial market uncertainty.
Global trade growth has slowed markedly, especially in the EMEs, and financial conditions have become less supportive in most economies.
Growth in the OECD economies has held up this year, at around 2%, implying a modest reduction in economic slack, helped by an upturn in private consumption growth. However, business investment remains subdued, raising questions about future potential growth rates and about the extent to which stronger growth in the advanced economies can help to overcome cyclical weakness in the EMEs.
Sharp slowdown in EMEs is weighing on global activity and trade, and subdued investment and productivity growth is checking the momentum of the recovery in the advanced economies. Supportive macroeconomic policies and lower commodity prices are projected to strengthen global growth gradually through 2016 and 2017, but this outcome is far from certain given rising downside risks and vulnerabilities, and uncertainties about the path of policies and the response of trade and investment.
The outlook for the EMEs is a key source of global uncertainty at present, given their large contribution to global trade and GDP growth. In China, ensuring a smooth rebalancing of the economy, whilst avoiding a sharp reduction in GDP growth and containing financial stability risks, presents challenges. A more significant slowdown in Chinese domestic demand could hit financial market confidence and the growth prospects of many economies, including the advanced economies.
For EMEs more broadly, challenges have increased, reflecting weaker commodity prices, tighter credit conditions and lower potential output growth, with the risk that capital outflows and sharp currency depreciations may expose financial vulnerabilities. Growth would also be hit in the euro area, as well as Japan, where the short-run impact of past stimulus has proved weaker than anticipated and uncertainty remains about future policy choices.
There are increasing signs that the anticipated path of potential output may fail to materialise in many economies, requiring a reassessment of monetary and fiscal policy strategies. The risk of such an outcome underlines the importance of implementing productivity-raising structural policies, alongside measures to reduce persisting negative supply effects from past demand weakness in labour markets and capital investment, whilst ensuring that macroeconomic policies continue to support growth and stability. Early and decisive actions to spur reductions in greenhouse gas emissions via predictable paths of policy including tax reforms, or public investment programmes, or action on research and development might also help to support short-term growth and improve longer-term prospects.
Redefining an industrial revolution: OECD 2015 Green Growth and Sustainable Development Forum (14-15 December 2015, Paris)
Ryan Parmenter, OECD Environment Directorate
Besides the sound of whistling steam, what comes into your head when you hear the term “industrial revolution”? Some might think of new innovative technologies and processes, or even economic growth. Others might think of environmental degradation. Just type “industrial revolution” into Google Images and you’ll quickly see both of these perspectives.
The images of the industrial revolution highlight the new steam-powered trains as well as the innovative factories that drove large-scale societal change. Yet, those same images also show blackened skies due to the increased use of coal. These images are similar to those landscapes described by F. Scott Fitzgerald’s The Great Gatsby (the “valley of ashes”) or even in Dr. Seuss’ The Lorax.
But, what if things were done differently? What if an industrial revolution occurred without negatively affecting the environment, and in fact helped to reach green goals cost effectively, faster and at scale needed to bring about meaningful change?
Environmental performance can be a founding principle rather than an afterthought. Innovative technologies to improve productivity and performance could be developed using a systems approach, rather than being pursued in sectoral or technological isolation. Exciting possibilities are emerging. One example is the pursuit of a biobased economy. This is about seeking to transition from a fossil-based to a bio-based economy by using biomass for non-food applications. This requires innovative applications in chemicals, materials, transport fuels, electricity and heat. Another example is smart grids. But even this approach is evolving to consider larger systematic opportunities available through smart cities. These are examples of where the innovation complementarities are considered in order to maximise the benefits across technologies and sectors.
Innovative businesses can also be encouraged by policy. As demonstrated in the past, incremental improvements in existing technologies as well as radical or disruptive technological change are necessary for an industrial revolution. Therefore, it is important to identify the right policy mix to support both types of innovation. Policies need to encourage new green businesses to enter the market and existing businesses to improve their productivity and environmental performance or else exit the market. This is a critical balance as environmental policies can at times benefit new entrants to the market, or favour existing firms (i.e., incumbents) through practices such as ‘grandfathering’ legislation. The nature and level of government policies will have a direct impact on the dynamics of firms entering and exiting the market – ultimately shaping the nature of innovation activities.
Big data sources
The increasing number of unconventional and “big” data sources could be used to drive greener growth. Evolving technologies for satellites and now even cellphones are rapidly expanding the number of opportunities available to collect information needed for air pollution monitoring or real-time resource use (e.g. energy and water). For example, drones can now be used to gather increasingly detailed information in order to green the agriculture sector. Other examples of exploiting new sources of data exist in the energy, transportation, water sectors as well as others. To be successful, the technical, regulatory and policy implications of these data sources must be considered, while addressing how the information is collected and ensuring its confidentiality.
Public engagement, International co-operation & Measurement
Public engagement should be considered fundamental to ensure that risks are managed and that trust is established in the process of pursuing innovative and green technologies. New forms of governance and adjustments to the regulatory system may be required to ensure that human health and safety is protected while allowing for emerging technologies to be used. International co-operation can also be used to develop innovative processes and technologies. Environmental impacts such as climate change do not respect international borders and neither do the benefits of green innovations. This requires the use of the appropriate mechanisms and incentives to encourage co-operation. The effective measurement of innovation is also an important consideration. Meaningful government support needs to be established based on credible information. Decisions need to be made on how and when government support is provided, both to encourage successful innovations and also to end support when initiatives are unsuccessful.
So, for those interested in exploring any of these issues, or more broadly considering how to foster a green industrial revolution, it will be worthwhile to plan a trip to the OECD Green Growth and Sustainable Development Forum* in Paris this December.
This year’s theme for the OECD Green Growth and Sustainable Development Forum is “Enabling the next industrial revolution: systems innovation for green growth”. Rather than a large trade fair style event, the Forum allows for in-depth discussions between those advising and lobbying governments. The objective is to share policy analysis and experience among countries and the community of green growth and sustainable development practitioners. Through these shared experiences and analysis, key knowledge gaps can be identified to inform future work in this important area. Given that the Forum will be taking place directly on the heels of the COP21 negotiations in Paris, the timing is perfect for considering the best ways of encouraging a green industrial revolution. Those interested can register for the Forum here.