Paolo Soro

OECD: Going for Growth Interim Report 2016

Global growth prospects remain clouded in the near term, with emerging market economies losing steam, world trade slowing down and the recovery in advanced economies being dragged down by persistently weak investments.

OECD has just published his annual “Going for Growth Interim Report” for the year 2016.

“Going for Growth” offers a comprehensive assessment to help governments reflecting on how policy reforms might affect their citizens’ well-being, and to design policy packages that best meet their objectives. The Going for Growth framework is instrumental in helping G20 countries to monitor their efforts to fulfill the pledge made in 2014 to boost their combined gross domestic product (GDP) by 2%, and to adapt their growth strategies accordingly.

This interim report reviews the main growth challenges faced by OECD and selected non-OECD countries, and takes stock of progress over the past year or so in adopting structural policy reforms to address them (Chapter 1).

In the second Chapter, the report also reviews the issues and evidence on the impact of reforms implemented in a context of persistently weak demand as well as under different cases regarding the availability or effectiveness of macroeconomic policies in supporting the reforms.

The Chapter No. 3 of the report provides an assessment of the link between income generated from GDP and income distributed to households.

As far as regards the policy reforms, according to the report, the global slowdown in productivity growth has been characterised by the widening of the dispersion of productivity growth across firms within industries, in particular between frontier firms – essentially multinational enterprises which have maintained steady productivity growth – and all other firms that operate well within the productivity frontier. Because of that, a fundamental reform is to remove barriers that stifle entrepreneurship and limit the capacity of firms to make the most of knowledge and technological diffusion.

But the main priority is to reduce unemployment, particularly in southern and central European countries, where long-term unemployment remains particularly high.

Even though progress has been made in tackling some of the main challenges, the slowdown in the pace of reforms observed in 2013-2014 has continued in 2015, even after taking into account measures that are in the pipeline but that have yet to be fully implemented. The pace of reforms has varied both across countries and policy areas. It continues to be generally higher in Southern European countries (in particular, Italy) than among Northern European countries.

Relatively more actions have been taken to lift the labour force and to improve educational outcomes, while fewer actions are observed in the areas of innovation policy, public sector efficiency or product and labour market regulation. However, recent actions taken to boost growth are unlikely to help countries with largest current account deficits to narrow their external imbalances.

Against the background of subdued global economic prospects, there is a good case for prioritising reforms that in addition to stimulate employment and productivity, can best support activities in the short term.

Aside from raising investment in public infrastructures, these include reductions of barriers to enter the services sectors with pent-up demand, reforms of benefit entitlements in the areas of health and pension, as well as reforms of housing policies and job search assistance programmes to facilitate geographic and job mobility.

In the euro area, a greater synchronisation of reforms would also help reduce the transition costs. Countries with very limited budgetary room may have to prioritise on high short-term returns or on low-cost measures.

Real GDP has tended to grow by more than real household income in the majority of OECD countries. This growth gap is partly due to factors having little policy traction, in particular the fact that consumption prices (which include VAT) have tended to rise relative to production prices over the period under consideration.

Developments in the household income share of GDP can be assessed by looking at the profile of households’ labour, capital, and secondary income share of GDP. A large number of countries have experienced a concomitant decline in the labour share of GDP, and in the share of capital income going to households, suggesting that a rising share of profits has been retained by the corporate sector instead of being redistributed to the household sector.

Yet, there are no clear links between the changes in income distribution between household, corporate and government sectors of the economy on the one hand, and the rise in income inequality within the household sector experienced by many OECD countries, on the other.

Based on these considerations expressed in the OECD report, we can infer that the recent statements of the Italian Prime Minister Renzi about the increase of income of the Italian families are misleading and do not reflect a correct analysis of the current economic situation of Italy.

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