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Rock star economy or one hit wonder?

April 16, 2014
Image: Guy Body / New Zealand Herald, used with permission

Image: Guy Body / New Zealand Herald, used with permission

Today’s post is by Paul Conway, Director of Economics & Research at the New Zealand Productivity Commission. Paul previously spent six happy years in the OECD Economics Department.  

The broken record of recent years, “Global Financial Crisis”, is finally giving way to a classic hit about long term prospects. While it is good to see the gradual strengthening in economic growth, there is still the major challenge of lifting the long-run drivers of growth and living standards, especially given the “grey bump” of population aging in developed countries. Productivity is the most important of these drivers.

A new paper written by the OECD Economics Department and published by the New Zealand Productivity Commission challenges the way we traditionally think about lifting productivity. This paper looks at the case of New Zealand and shows that the conventional explanations of investment in physical capital and years of schooling don’t explain New Zealand’s sizable productivity gap. Yes, these are still key areas with room for improvement. But the paper points to new avenues for increasing productivity, which will have important consequences for policymakers throughout the OECD.

At the start of this year, HSBC described New Zealand as a “rock-star” economy, with growth set to outpace most developed country peers, partly due to ongoing terms of trade increases and the Christchurch rebuild following the 2010 earthquake. Labour productivity has also improved over the last few years and we have a high proportion of the workforce employed overall.

But the bigger picture remains a concern. Labour productivity growth throughout the 2000s and post-Global Financial Crisis has been low in international comparison despite a sizeable gap in productivity levels.

As the paper shows, New Zealand’s broad policy settings should generate GDP per capita 20 per cent above the OECD average, but the actual result is more than 20 per cent below average. We may be punching above our weight, but that’s only because we are in the wrong weight division!

According to the OECD, New Zealand has reasonably good policy settings, and ranks towards the top of the class on product market regulation and other indicators. Our paradox is that this hasn’t been translated into productivity performance. Canada and Denmark are in a similar situation. It seems that some of the conventional reasons for poor productivity, such as a lack of investment in physical capital or low average education, can’t fully explain what is going on.

Instead, the paper points the finger at our weak international connections, which account for over half of New Zealand’s productivity gap relative to the OECD average. New Zealand firms face reduced access to large markets and limited participation in global value chains, where the transfer of advanced technologies now often occurs. Indeed, global value chains – which can require intensive interaction and just-in-time delivery across borders – may have worsened the impact of New Zealand’s geographic isolation on trade in goods.

Most of the rest of the New Zealand’s productivity gap reflects underinvestment in knowledge-based capital. In particular, R&D undertaken by the business sector is among the lowest in the OECD, reducing the capacity for innovation and the ability of firms to absorb new ideas developed elsewhere. The quality of management is also low, with poorly run firms surviving for longer than they would in more competitive economies. This reduces the ability of firms to adjust and extract maximum productivity gains from new ideas and technologies.

These reasons for New Zealand’s poor productivity track record are interrelated – international connections and innovation go hand-in-hand. To overcome the tyranny of distance, we should be harnessing ICT and creating the ideal conditions for knowledge-based companies to grow and participate in global value chains. The cloud-based accounting software provider Xero is a good example of the new business model which can succeed in global markets.

Knowledge-based capital now plays a larger role in production than ever before. But as Alain de Serres, Naomitsu Yashiro and Hervé Boulhol point out in their OECD paper, the challenge in harnessing the increasing returns of knowledge-based capital are considerable and the costs of policy mistakes may be increasing. Adding to that, New Zealand’s small size and great distance from international markets magnify the impact of any policy weakness.

The Commission was set up in 2011 to investigate specific issues relating to New Zealand’s productivity. Three years on, our experience has been that every time we conduct an inquiry – be it on housing affordability, international freight transport, local government regulation, the services sector, or regulatory institutions and practices – we discover considerable room for improvement.

The Commission is working on different aspects of New Zealand’s policy settings to improve productivity and wellbeing. With small domestic markets, New Zealand would benefit from greater integration into global value chains in innovation-intensive industries with fast-moving technological frontiers. That is easier said than done, but our small size means we can be agile and the window of opportunity for global economic integration irrespective of physical distance is slowly opening.

Useful links

An International Perspective on the New Zealand Productivity Paradox, New Zealand Productivity Commission Working Paper 2014/01, by Alain de Serres, Naomitsu Yashiro and Hervé Boulhol, OECD Economics Department.

New Zealand Productivity Commission

OECD Work on New Zealand

 

Profligate spending?

April 15, 2014
by Patrick Love

Global partnership“There are few more confused policies than this Government’s on foreign aid, which has seen the budget soar by a staggering 28 per cent in the past year, to £10.6 billion. This figure, revealed by the OECD, represents probably the biggest percentage increase in a single year ever enjoyed by any department in British peacetime history. And it has happened for no obvious reason. […] The fact that the overseas aid budget is one of the few to be ringfenced often feels more like a public relations exercise than an act of good governance. Rather than boasting of their compassion, ministers should provide more concrete evidence of what our spending has achieved.” That’s the UK Daily Telegraph’s reaction to what it calls “Profligate spending on foreign aid” after seeing the latest figures published by the OECD Development Assistance Committee (DAC).

Today and tomorrow, over 1500 “development leaders” will join Enrique Peña Nieto, President of Mexico, UN Secretary-General Ban Ki-moon and OECD Secretary-General Angel Gurría in Mexico City to discuss the kind of evidence The Telegraph is asking for. The first High-Level Meeting of the Global Partnership for Effective Development Co-operation will review global progress in making development co-operation more effective; agree on actions to boost progress; and “anchor effective development co-operation in the post-2015 global development agenda” – the set of goals and policies that will take over from the UN’s Millennium Development Goals after their 2015 target date.

The UN and OECD will be presenting Making development co-operation more effective: 2014 progress report. The OECD DAC’s data show that aid rose by 6.1% in real terms in 2013 to reach the highest level ever recorded, despite continued pressure on budgets in OECD countries since the global economic crisis. Donors provided a total of $134.8 billion in net official development assistance (ODA), marking a rebound after two years of falling volumes. In all, 17 of the DAC’s 28 member countries increased their ODA in 2013, while 11 reported a decrease. Net ODA from DAC countries stood at 0.3% of gross national income (GNI.) Five countries, including the UK, met a longstanding UN target for an ODA/GNI ratio of 0.7%. At the same time, the fall in the share of aid going to the neediest sub-Saharan African countries looks likely to continue in the years to come.

The 2014 progress report looks at whether this money was well spent, based on data provided by 46 countries that receive aid, or “development co-operation” as the book sometimes calls it. This isn’t the only piece of jargon you’ll need to know to be able to understand the report. The assessment starts by looking at “country ownership”. The case of Korea, where the Global Partnership was created in 2011 at a conference in Busan, illustrates what this refers to. It means that countries receiving aid take charge of the process. Korea wanted non-military aid rather than the guns, tanks and planes it was being offered, and it insisted on focusing on large enterprises rather than the small and medium-sized businesses foreign development experts told it were the key to success. History shows that the Koreans knew better than anybody else what they needed.

Like many aspects of international cooperation, this sounds like common sense, but people involved in actual projects can often tell of money wasted because the experts didn’t know enough about local conditions – building industrial plants without bothering about where the energy to power them would come from for instance. Country ownership appears to be strengthening, but it’s too early to say whether this is translating into increased use of developing countries’ own ways of assessing results to guide cooperation.

Country ownership should reduce the number of useless projects, especially when it is combined with another Busan indicator – untying aid. Many projects that failed in their stated objectives, or contributed little to helping most people in a country improve their lives, were financed to help businesses in the donor country. The money was given on condition that it was spent in a certain way, on certain suppliers, even if the same goods or services could have been obtained more cheaply elsewhere or the funds spent on something more useful. In 2012, 79% of ODA was untied, compared with only 50% at the start of the millennium.

A common criticism of aid is that it ends up in the offshore bank accounts of kleptocrats. And the critics aren’t just in donor countries complaining that income from taxes should be spent at home. Writing in The Nigerian Voice, Gambian journalist Matthew K. Jallow argues that “… a major debilitating by-product of foreign aid to Africa is the culture of corruption that has taken root at every level of every government. Today, corruption has become the way of life in every country in Sub-Saharan Africa”. Jallow’s strategy for fighting this is transparency, accountability, and good governance. Making development co-operation more effective takes a similar view, stating that the “drive for transparency is starting to show results”, although the report also warns that there’s still a lot to be done by donors and recipients alike. “Inclusiveness” is one way to boost transparency. In other words, include non-state actors in national systems and accountability processes. Unfortunately, a government-centred, North-South perspective is still common.

Overall, the report concludes that there are some encouraging signs that “longstanding efforts to change the way development co-operation is delivered are paying off”, and that the quality of this co-operation is improving, but we still haven’t met the targets that the Global Partnership set for 2015, and we won’t meet them without more effort.

Useful links

OECD work on aid effectiveness

Fail fast, learn fast and innovate

April 10, 2014
by Patrick Love
Click to read

Click to read

Here’s a quote from Making Innovation Policy Work: Learning from experimentation, a book by the OECD and the World Bank being launched today in Washington. “River blindness is the result of a parasitic infestation of the eye. The parasite is transferred by the bite of the blackfly.” Moses Katabarwa, senior epidemiologist for the Carter Center’s River Blindness program told CNN what the disease means for people infected. They don’t all go blind, but the itching is so bad they may break clay pots to scratch themselves with, and other attempts to relieve the symptoms include pouring boiling water over themselves, or running a red-hot machete up and down the spine. It’s not a fatal disease, but as Katabarwa says, the itching, disfigurement and insomnia it provokes make life so miserable that some sufferers are driven to suicide.

The fight to eradicate river blindness (onchocerciasis) is one of the examples quoted by Making Innovation Policy Work to show how innovation can help to improve the lives of those at the “bottom of the pyramid”, the world’s poorest citizens. The disease was eliminated by 2002 in 11 West African countries thanks to the Onchocerciasis Control Programme (OCP) a 20-year programme to spray insecticide to kill the flies, but because of the extensive forest cover and larger distances, this approach was not feasible in Central and East Africa, where 70 million people were still affected. The breakthrough came thanks to a drug developed by Merck to treat cattle parasites that also proved effective against the onchocerciasis parasites. Merck was prepared to donate the drug ““to anyone who needed it, for as long as it was needed.” but didn’t have a distribution partner until 1987 when William Foege, Director of the Carter Center, agreed to lead a programme at the Task Force for Child Development and Survival, an affiliate of Emory University.

The project shows that successful innovation doesn’t just mean inventions or technologies. Logistics and programme management can be innovative too. The African Programme for Onchocerciasis (APOC), launched in 1995, pioneered a community-directed treatment through which hundreds of thousands of communities, trained by the public health systems and participating NGOs, organised and managed the treatment (as well as distributing other drugs). Another thing that was new at the time was “Africanisation”. In the 1970s programme, 75% of the OCP’s professional staff were expatriates, but by the 2000s 99% of the staff of both the OCP and APOC were African).

Another success factor was the built-in operational research component, representing 10% of the annual budget. This made it possible to adjust the programme as it evolved. For example when monitoring showed that the blackfly became resistant to the original insecticide, seven back-up insecticides were use in rotation to break the resistance. Operational research was also critical in determining whether community-based approach would be cost-effective and what level of participation would be necessary. It also mapped the disease throughout Africa so that APOC operations could be scaled up as necessary.

It’s great to learn about the successes, but “learning from experimentation” also means learning from failures and mistakes – being allowed to “fail & learn fast”. The Indian government’s Akash Tablet Computer, intended to take advantage of the potential of computers and the Internet to revolutionise education in India ran into a number of design, procurement and production problems. Manufacturers didn’t have the capacity to meet the specifications for example, but they in turn argue that the specifications were unrealistic for a low-cost device. The first models were unsuccessful, but later products benefitted from a number of improvements. The project demonstrates the importance of clear specifications and testing procedures and of transparency in the procurement process.

Many of the devices were actually made in China, showing that to stimulate innovation and to get a reliable product at the lowest cost it is necessary to open procurement to the global market. That’s exactly what India did to find a cure for rotavirus, the most common cause of severe diarrhoea among infants and young children. India has the most rotavirus deaths in the world – almost 10% of all under-5 deaths. The Ministry of Science’s Department of Biotechnology lead an international effort involving public research institutes, universities, a local biotech firm and the Gates Foundation to develop India’s first indigenous rotavirus oral vaccine, that will be sold for less than a dollar a dose.

Finally, what’s true of innovation is also true for innovation policymaking and policy makers. Policy makers need to learn from experience and mistakes that they make, and understand how to encourage more entrepreneurial experimentation and appropriate risk-taking in policy making itself.

Useful links

Follow the launch of the publication live from Washington and contribute your comments

OECD work on innovation in science, technology and industry

 

 

 

PISA, we have a problem …

April 1, 2014
by Brian Keeley

Any mystified adult trying to figure out the settings of a mobile phone knows there’s only one thing to do – find someone younger. Roused from their slumbers, even sleepy-eyed teens seem instinctively to know how to set up Wi-Fi, program the dishwasher (not that they ever would) and connect that cable whatsit to the TV’s thingamajig.

But are some teens better at these tasks than others? The most recent round of the OECD’s PISA student assessments set out to investigate how well the world’s 15-year-olds do when it comes to tackling real-life, interactive problems – “creative problem solving” – so demonstrating their capacity to reason outside the classroom. Results from the assessments are released today.

If you followed the first set of results from PISA 2012 late last year, you won’t be surprised to learn that, once again, youngsters in East Asia have done very well. Top of the heap is Singapore, followed by Korea and Japan. Chinese-speaking cities and economies fill out the other top seven places. (But note the usual health warnings with these country rankings. PISA is a survey, so there are margins of error in the results; country rankings may be based on differences that are not statistically significant.)

What sort of problems were the students asked to solve? Some weren’t too dissimilar from the challenges mentioned above. Among the tasks were figuring out the fastest route on a map, operating an air-conditioner and buying subway tickets from a vending machine (click on the links or here to take the tests yourself).

Students took the tests on computers, which meant that the problems could be designed to be interactive. That allowed students to receive feedback on their efforts, which, say the PISA people, meant they had to be “open to novelty, tolerate doubt and uncertainty and dare to use intuitions”. Those sorts of attitudes and skills, it’s generally agreed, are increasingly in demand in the workplace. According to the OECD’s adult skills survey, 10% of workers have to deal every day with complex problems that require at least 30 minutes to solve.

There are some interesting contrasts between these latest findings on creative problem-solving and the previous results from PISA released late last year. In general, and not too surprisingly, students who did well in problem solving also did well in mathematics, reading and science. But, in some countries, for example the Unites States, Italy and Australia, students did rather better than might have been expected from the earlier results. This may be evidence that schools are not making the most of students’ potential in core subjects.

Another group also did better than might have been expected: students from disadvantaged families. Although they didn’t match the performance of better-off students in problem solving, they weren’t as far behind as in the traditional PISA subjects. One reason for this may be that – regardless of family background – all young people have opportunities to use and develop practical, problem-solving skills outside the classroom.

As for differences between the sexes, boys generally did better than girls, especially among the top-performing students, where on average there were three boys for every two girls.

Useful links

PISA 2012 Results: Creative Problem Solving (Vol. V) (OECD, 2014)

PISA 2012

OECD educationtoday blog

Follow PISA on Twitter

 

IPCC and climate change risks: what would you do?

March 31, 2014
by Patrick Love
Click to read the report

Click to read the report

The latest Climate Change Report from the IPCC argues that human interference with the climate system is occurring, and climate change poses risks for human and natural systems. The report identifies eight major risks with high confidence, and says that each of these risks contributes to one of more of the five “reasons for concern” (RFC) the authors identify:

  1. Unique and threatened ecosystems and cultural systems.
  2. Extreme weather events.
  3. Uneven distribution of impacts, with disadvantaged people and communities facing greater risks.
  4. Global aggregate impacts, for example global biodiversity loss.
  5. Large-scale singular events, such as Arctic ecosystems or warm water coral reefs reaching an irreversible tipping point.

The report isn’t totally pessimistic, and it concludes that transformations in economic, social, technological, and political decisions and actions can enable climate-resilient pathways. It doesn’t say what the favoured options should be, and of course a mix of approaches should be taken, but we’d like your opinion on what the dominant options should be. For the sake of simplicity, we’ve labelled the options “government”, meaning intervention through regulation or taxation for example; “technology”, for example new ways to produce energy or reduce natural resource use; “behaviour”, for example consuming less or recycling more; or “markets”, for resources that become too expensive will be abandoned in favour of other solutions. You can select two options if, for example you think that technology plus markets or behaviour plus government is the best option.

Here are the eight risks.

 

Useful links

OECD work on climate change

OECD work on green growth and sustainable development

UN Framework Convention on Climate Change

Questions on social questions: the “Society at a Glance” quiz

March 18, 2014
by Guest author

Are your views on social issues based on the facts, or do you believe everything you’re told? Find out thanks to this quiz devised by Kate Lancaster, OECD editor in charge of publications dealing with social issues

Your Score:  

Your Ranking:  

Is your CEO really worth it?

March 17, 2014
by Brian Keeley
Click to find out more about OECD Integrity Week

Click to find out more about OECD Integrity Week

Who’d be a CEO? Back in the days when the legendary Jack Welch was leading General Electric – and increasing its market value by more than a third of a trillion dollars – chief executive officers were the heroes of capitalism. These days, they seem as likely to show up on top-ten lists of failure.

Consider Thorsten Heins, appointed CEO of smartphone maker Blackberry in January 2012 at a time when it was haemorrhaging market share to Apple and Samsung. Mr Heins struggled to turn things around, but by the time he was eased out 22 months later the company’s share price was down almost 60%. That, in turn, hurt Mr Heins’ own earnings, which were linked to the share price. However, considering that he walked away with a farewell package estimated at between $14 million and $16 million, there’s another question you’d have to ask: Given the chance, who wouldn’t be a CEO?

Whether their companies are winning or losing, the popular perception is that CEOs are always winning – showered with bonuses when business is booming, gently let down on golden parachutes when things are going badly.

The reality, of course, is more complicated. For every CEO with a $6,000 shower-curtain, there are others working long days in forgotten corners of desolate business parks. Still, there seems little doubt that as a class, CEOs are doing fairly well for themselves. The Financial Times reported figures from the International Labour Organisation showing that the average pay of top CEOs in Germany rose from 155 times average earnings in 2007 to 190 times in 2011. In the United States, the multiple is 508 times.

But if CEOs are overpaid (and some would argue that – compared to footballers like Wayne Rooney or Hollywood stars like Robert Downey Jr. –  they’re not) how should societies respond? One of the biggest trends in recent decades is “say on pay”, which provides company shareholders with some role in determining executive compensation. Does it work? Views differ, as was clear during a discussion earlier today at OECD Integrity Week.

One of the key advantages of “say on pay” – at least in theory – is that it should allow executive pay to be better linked to the company’s performance. But reporting on the experience of the United Kingdom, Martin Petrin of University College London cast doubt on whether that was really happening. According to data he presented, executive pay in leading UK companies has risen by an annual rate of 13.6% since 1998, while the share price of these companies has risen only by an annual average of 1.7%.

He also questioned another of the much-vaunted benefits of say on pay – namely, that by making executive-pay setting more transparent, it leads bosses to moderate their demands. By contrast, he said, it can lead to “ratcheting up”. This is where companies declare that since their executives are all above average (otherwise they wouldn’t have been hired), they must be paid above the median for their industry peers.

But despite the potential criticisms, the panellists generally accepted that say on pay is now an unstoppable tide. In some countries, such as the UK and Switzerland, say on pay is – to some extent – legally mandated. Others, such as France, have steered more towards self-regulation.

Denis Ranque, a leading French businessman and president of the High Committee on Business Governance, argued that hard law was not always the most effective approach. Speaking in French, he pointed out that “Enron had a system of governance where all the ethics boxes were ticked.” Rather than relying on hard law, he said, we should emphasise the role of transparency in executive-pay setting and in wider issues of corporate governance. “Just remember, whatever you do will be in the papers tomorrow. Think about your mother or your daughter’s reaction when they see it.”

But if say on pay is inevitable, it raises another question – who gets to have a say? Typically, it’s limited to shareholders, but the French academic Charley Hannoun said it may be an issue that’s of less concern to shareholders and more to stakeholders, most notably the company’s employees. After all, he argued, they were the ones most likely to be affected by the growing disparity in pay between the people at the bottom and the people at the top.

Useful links

OECD Integrity Week 2014 – a week of public events focused on integrity in business and government and the fight against corruption.

Corporate governance – OECD research and analysis

Board Practices: Incentives and Governing Risks (OECD, 2011)

Corporate governance: Lessons from the financial crisis (OECD Observer)

 

Economics’ massive magnet

March 13, 2014
by Guest author
Where boundless optimism meets bounded rationality

Where boundless optimism meets bounded rationality

Today’s post is by Professor K. Vela Velupillai of Trento University and The New School, New York

Behavioural economics challenges orthodox economics theory and its foundational assumptions regarding human behaviour, its institutional underpinnings, its poor prediction power, and its intrinsic non-falsifiability. In orthodox, theory, economic agents are assumed to be fully rational and completely informed. It’s not that they do know everything, but that they can know everything and there are means to learn – epistemology – and they know how to make the best choices for themselves (even if only probabilistically, and even if the choice (sic!) of the precise foundations of the theory of probability that underpins expected utility maximisation is colourfully ad hoc).

Individuals are assumed to have underlying orders of preference for all the alternatives which are knowable[1], although the means of getting to know them is never specified. These rational preferences are often represented by a utility function, which is assumed to be well-behaved. The “non-satiation” assumption promises that the satiation point will never be reached, at least in the economic domain. Thus, the individuals are always in a state where “more is better.

Behavioural economics originated, almost fully developed, during the 1950s, and can be classified into at least two streams – Classical and Modern. We would argue that Classical behavioural economics (CBE), pioneered by Herbert Simon (1953), presents a more radical break with the tradition than Modern behavioural economics (MBE) originating in work by Ward Edwards (1954), respectively. The two streams have different methodological, epistemological and philosophical aspects.

First, MBE assumes economic agents maximising utility with respect to an underlying preference order – to which “an increasingly realistic psychological underpinning” is attributed. The “realistic psychological underpinning”, however, is not itself based on any computational foundation, in contrast to Classical behavioural economics, in which the cognitive psychology of choice was intrinsically constrained by a machine model of computation. CBE assumes no underlying preference order. An economic agent’s decision-making behaviour, at any level and against the backdrop of every kind of institutional setting, is subject to bounded rationality and exhibits “satisficing” behaviour – a word Herbert Simon coined from “satisfy” and “suffice” to describe a strategy for reaching a decision the decider finds adequate, even if it’s not optimal in theory. Put another way, MBE remains within the orthodox neoclassical framework of optimisation under constraints; CBE is best understood in terms of decision.

Second, MBE concerns the behaviour of agents and institutions in or near equilibrium; CBE investigates disequilibrium or non-equilibrium phenomena.

Third, MBE accepts mathematical analysis of (uncountably) infinite events or iterations, infinite horizon optimisation problems and probabilities defined over s-algebras and arbitrary measure spaces; CBE only exemplifies cases which contain finitely large search spaces and constrained by finite-time horizons.

There is no doubting the success of MBE. You could characterise it as a massive magnet which attracts different resources, new tools and ways of explanations. In fact you could almost claim that MBE has already become a new mainstream economics, as a consequence of it playing the role of a revised approach of orthodox economics rather than an alternative approach. CBE on the other hand, is developed on completely different grounds from MBE.

MBE is fostered by orthodox economic theory, game theory, mathematical finance theory and recursive methods (Not, however, recursive in the rigorous sense of recursion theory, which forms a key foundation in the development of classical behavioural economics), experimental economics and neuroeconomics, computational economics and subjective probability theory[2]. It preserves the doctrine of utility maximisation and does not go beyond it or discard it (the consumer tries to get the most value possible from the smallest amount of money). Though the behavioural models do consider more realistic psychological or social effects, economic agents are still assumed to be optimising agents, whatever the objective functions may be. In other words, MBE is still within the ambit of the neoclassical theories, or is in some sense only an extension of traditional theory, replacing and repairing the aspects which proved to be contradictory.

CBE is based fundamentally on a model of computation – hence, computable economics – computational complexity theory, nonlinear dynamics and algorithmic probability theory. Unlike MBE, CBE does not try to endow the economic agent with a preference order which can be represented by utility functions; nor do equilibria or optimisation play any role in the activation of behavioural decision-making by CBE agents.

Classical behavioural economics exploits the powerful notion of “bounded rationality” proposed by Simon in 1953. Simon’s definition of bounded rationality encapsulates different notions, such as limited attention, limited cognitive capacity of computation sequential decision-making, and satisficing. For Simon, it is not evident and admissible to assume that human beings are able to exhaust all the information and make the “best” choice out of it.  To put it simply: Simon took the limits of human cognition into account and devised mathematical means of describing the roles of memory, experience and intuition in solving problems. His agents do not think in terms of infinite horizon optimisations (nobody in their right mind would!) rather they try to make good decisions for only the near future, but with long-term targets in mind.

Useful links

Behavioural economics: Classical and modern”, Ying-Fang Kao & K. Vela Velupillai, (2013): Behavioural economics: Classical and modern, The European Journal of the History of Economic Thought, DOI: 10.1080/09672567.2013.792366

OECD work on behavioural economics

 



[1] Whether there are ‘unknowable alternatives’ is never clearly specified – especially when the set of alternatives has the cardinality of the continuum, implying the invoking of some form of the axiom of choice, even in the routine implementation of an optimisation exercise. As a result, ‘the means of getting to know them’ cannot be specified in any constructive way.

[2] See, however, the caveat about probability in the first paragraph.

Signs of spring?

March 11, 2014
by Brian Keeley

Before you shift over to springtime mode, take a moment to recall the wild weather that swept across North America earlier this winter. Powered by a “polar vortex,” freezing air and storms repeatedly swept across the continent,  dumping deep piles of snow and stranding motorists in blizzards.

Something else may have been obscured by all those swirling snowflakes – the state of the economy. To explain, not only did the harsh weather make everyone’s life miserable, it also dragged down the economy in North America – shops were forced to close, flights were cancelled, people couldn’t get out of their homes. That, in turn, is reflected in the economic data for last quarter of 2013 and (probably) the first quarter of this year, which showed an unexpected dip.

But this winter blip looks to be masking what is otherwise a fairly rosy picture for major G7 developed economies, according to the OECD’s latest economic assessment. The assessment, released today, argues that economic growth in the G7, including, of course, Canada and the United States, is probably strengthening, despite fluctuations caused by the one-off winter weather (and the U.S. government slowdown in October) and an imminent tax revision in Japan.

There’s less encouraging news for the emerging economies. According to the OECD economists, a number of these economies are now experiencing a “marked loss of momentum”. As these economies now account for more than half of the world economy, that’s likely to curb global growth.

 Interim outlook

Source: Interim Economic Assessment, 11 March 2014.

Overall, then, first-half growth for the G7 economies looks set to be well up on the equivalent periods in 2012 and ’13. But, largely as a result of those one-offs, it’s likely to fall below second-half 2013 growth (although the OECD economists don’t rule out the possibility that this apparent dip in momentum may be due to more than just snow).

The performance of the Eurozone countries, however, continues to be spotty. Germany is doing well and is forecast to see annualised growth of 3.7% in the first quarter, but France will hover around 1% while Italy will be slightly under 1%. And while  unemployment is showing encouraging signs of easing elsewhere, it’s showing little signs of improvement in the Eurozone.

What about the risks to all these forecasts? As we noted recently, the Great Recession highlighted failings in forecasting at the OECD and other international institutions. In response, forecasts now place a much greater emphasis on why they could be wrong, either because they’re too optimistic or too pessimistic.

On the positive side, the OECD economists are encouraged by signs that political tensions in Washington over government financing and the debt ceiling have eased, and by indications that Europe’s troubled banks are stabilising.

On the downside, and despite the progress so far of “Abenomics,” they’re concerned by the continuing challenges that Japan is facing from its huge public debt. The Eurozone, too, is not out of the woods, while China may be facing a risk of a “sharp slowdown”.

And, of course, there’s the continuing question of how emerging economies will respond to the slow return to normal monetary policy, especially in the U.S.  The impact of the “taper” was clear in these economies both last year and in January, with currency weakness and falling prices for bonds and equities in a number of emerging economies. If these problems continue or worsen, that could be bad news for the global economy.

Useful links

OECD Interim Assessment

OECD economic analysis and forecasting

What’s the difference? Try our International Women’s Day quiz and find out!

March 7, 2014
by Patrick Love
Admit it, you're surprised

Admit it, you’re surprised!

“How abominable before God is the Empire or Rule of Wicked Woman, yea, of a traitress and bastard.” That’s the opening of John Knox’s 1558 diatribe The First Blast of the Trumpet against the Monstrous Regiment of Women in which he explains that “To promote a Woman to bear rule, superiority, dominion or empire above any realm, nation or city is
A. Repugnant to nature.
B. Contumely to God.
C. The subversion of good order, of all equity and justice.
(It’s not a multiple choice, all these are the correct answer) and that “Woman in her greatest perfection was made to serve and obey man, not to rule and command him.”

How much has changed since, and how much do you know about it? Try the quiz to find out. If you’d like some help finding the answers, try the following:

OECD work on Gender

Wikigender “a project initiated by the OECD Development Centre to facilitate the exchange and improve the knowledge on gender equality-related issues around the world.”

DAC network on gender equality “the only international forum where experts from development co-operation agencies meet to define common approaches in support of gender equality and women’s empowerment.”

Social Institutions and Network Index (SIGI) “first launched by the OECD Development Centre in 2009 as an innovative measure of the underlying drivers of gender inequality for over 100 countries. Instead of measuring gender gaps in outcomes such as employment and education, the SIGI instead captures discriminatory social institutions”

You’ll learn why the correct answer is correct if that’s the one you pick, but you may also learn something from an incorrect choice (other than it’s wrong).

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