Going for Growth: Structural Surveillance in the OECD OECD World Bank Conference on Innovation and Sustainable Growth in a Globalised World, Paris, 18-19 November 2008 Sven Blondal Sven Blondal, Economics Department, OECD
Outline of the presentation The key features of Going for Growth Methodology The results for lower-income OECD countries Conclusions 2
Going for Growth: the key features General horizontal structural t surveillance covering simultaneously all OECD countries and a number of policy areas. Evidence-based exercise anchored in a large number of empirical analysis carried out by the Secretariat (e.g. OECD Jobs Study, OECD Growth Study, studies on ageing and the determinants of R&D). International benchmarking of performance and policy settings based on cross-country comparable quantitative indicators: Performance indicators: GDP per capita, labour utilisation and its sub-components (hours worked per employed person and employment rates for different population groups), labour productivity, etc. Policy indicators: average and marginal tax rates, implicit taxes on continued work at older ages, product market regulations, etc. 3
The methodology First stage: Derivation of a set of potential ti policy priorities: Identification of relative performance of labour utilisation and labour productivity at a more and more detailed levels. Identification of relative policy settings that influence performance. The juxtaposition of relative performance and policy settings: potential policy priorities are limited to areas where current policy settings are weaker than the OECD average and the corresponding performance is also weaker than the OECD average. 4
The basic growth accounting framework GDP per capita Labour utilisation (hours worked per capita) Labour productivity (output per hour worked) Hours worked per worker Employment rate Capital deepening (capital per hour worked) Multifactor Multi-factor productivity Structural unemployment rate Labour force participation Quality of labour (skill mix ) Quality of capital (vintage and asset composition ) Pure technical progress Labour market policies Other policies Product market policies 5
Labour force participation: The policy determinants. Labour force participation, aggregate Young people, 16-24 Men, 25-54 Women, 25-54 Older workers, 55-64 Tax wedge Benefit replacement rates Minimum labour costs EPL Benefit replacement rate Tax wedges Benefit replacement rate Tax wedge PMR Tax on second earner Child care provisions Implicit tax on continued work Normal retirement age EPL Tax wedge 6
Policy-performance gaps: Lowincome countries Performance gap (standard deviation) 3 OECD average 2 1 0 OECD average -1-2 -3-2 -1 0 1 2 3 Gap in policy (standard deviation) 7
The methodology, cont. Second stage: The narrowing down of potential policy priorities to the 3 indicator-based priorities reported in Going for Growth based on: Country expertise. An empirical framework that provides the GDP per capita effects of changes. Distance from average OECD performance and policy settings. 8
Lower-income OECD countries: Performance weaknesses are on the productivity side (2006) Percentage gap with respect to US GDP per capita Effect of labour resource utilisation Effect of labour productivity Luxembourg Luxembourg Norway Norway Ireland Ireland Switzerland Switzerland Canada Canada Netherlands Netherlands Iceland Iceland Austria Austria Australia Australia Denmark Denmark Sweden Sweden Belgium Belgium United Kingdom United Kingdom Finland Finland France France Germany Germany Japan Japan EU19 EU19 Spain Spain Italy Italy Greece Greece New Zealand New Zealand Korea Korea Czech Republic Czech Republic Portugal Portugal Hungary Hungary Slovak Republic Slovak Republic Poland Poland Mexico Mexico Turkey -90-60 -30 0 30-90 -60-30 0 30-90 -60-30 0 30 Turkey 9
Lower-income OECD countries: Labour utilisation gaps Labour utilisation gaps are large in some of these countries (notably Turkey) but they may also reflect problems in measuring informal employment which is likely to be more extensive in the lower-income countries. 10
Identified policies to address productivity weaknesses Education reform to build up human capital of the future workforce so that it can take advantages of technological opportunities and engage in innovative activities. Product market reforms to strengthen competition in markets for goods and services so that companies are forced to be efficient and to innovate. 11
Distance from the technological frontier: Implications for PMR policies? The argument: Strong competition i is beneficial i for innovation close to the technological frontier as companies seek to escape competition by creating new products and processes, but it may be harmful far away from the frontier as it reduces the ability of companies to appropriate innovation rents. OECD empirical studies do not support this hypothesis; they suggest the opposite: strong competition will have particularly l strong effects in low-productivity sectors/countries as it speeds up convergence to the technological leader. 12
Low-income OECD countries: Going for Growth indicator-based policy priorities, 2007 Reform area: Mexico Turkey Poland Hungary Slovak Rep. Education x x x x x Product market x x Minimum cost of labour Employment protection legislation x x Tax wedges x x Benefit / taxes x x Implicit tax on continued work x Source : OECD, Going for Growth, 2007 13
The low-income OECD countries have relative weakness in educational attainment (1) Per cent 100 Percentage of population aged 25-34 and 45-54 A. Upper-secondary education 90 80 25-34 45-54 70 60 50 40 30 20 10 0 14
The low-income OECD countries have relative weakness in educational attainment (2) Per cent 100 B. Tertiary education 90 80 25-34 45-54 70 60 50 40 30 20 10 0 Source: OECD, Education at a Glance, 2008. 15
The low-income OECD countries have relatively strict competition- restraining regulations in product markets (2003) 3.5 Indicator scale of 0-6 from least to most restrictive Restrictiveness of economy-wide product market regulation 3.0 2.5 2.0 1.5 OECD average 10 1.0 0.5 0.0 16
Conclusion Going for Growth methodology identifies productivity to be the main weakness for lower-income OECD countries. The corrective policy priorities iti are to enhance human capital acquisition and strengthen competition in product markets. These policies increase the capacity of the workforce to import advanced technology from abroad and to innovate new products and processes. 17