by Frank Van Tongeren, OECD Trade and Agriculture Directorate

In just six short months, the COVID-19 pandemic has swept the globe, leaving but a few island nations untouched. The virus and the measures required to contain it have left in in their wake a global economy damaged beyond what was thought possible after the financial crisis over a decade ago. Unemployment in the OECD area increased by an unprecedented 2.9 percentage points in April alone, up from 5.5% the previous month, and the recent OECD Economic Outlook projects that ‘five years or more of income growth could be lost in many countries by the end of 2021’. The pandemic has painfully reminded us of the vulnerability of the global economy to unexpected shocks.

In the early stages of the pandemic, we saw dramatic shortages in the global availability of personal protective equipment and other medical supplies due primarily to surging demand, in some cases exacerbated by trade restricting measures. This raised questions about whether the relative gains and risks from deepening and expanding international specialisation in global value chains (GVCs).

Global value chains organize the cross-border design, production and distribution processes, creating much of what we purchase and consume every day: from food and medicines to smartphones and cars. Some people now wonder whether more localised production of key goods would provide greater security against disruptions that can lead to shortages in supply and uncertainty for consumers and businesses.

Modelling the question of reshoring post-COVID

While we do not have a more ‘localised’ world at hand that we can use to compare vulnerability to shocks such as the COVID-19 pandemic, we can use economic models to explore such a counterfactual scenario and equip policy makers with information that can help them start to answer these pressing questions. Recent simulations with a large-scale OECD trade model, METRO, compare two stylised versions of the global economy: the interconnected economies regime captures production fragmentation in GVCs much as we see it today, but also taking into account the changes already resulting from the COVID-19 crisis. These include reductions in supply and productivity of labour, reductions in demand for certain goods and services, and a rise in trade costs related to new customs procedures for goods and restrictions on temporary movement of people in services. In the localised -‘turning inward’- regime, production is more localised and businesses and consumers rely less on foreign suppliers. This illustrative counterfactual world is constructed through a global rise in import tariffs to 25%, combined with national value-added subsidies equivalent to 1 % of GDP on labour and capital, directed to domestic non-services sectors to mimic rescue subsidies that favour local production. It is also assumed that, in the localised regime, firms are more constrained in switching between different sources of products they use, making international supply chains more rigid. Those assumptions create strong incentives to increase domestic production and rely less on international trade and are meant to illustrate a range of potential implications of policies that aim at more localisation.

Starting from these two baseline scenarios for future trade regimes, the models can be exposed to a ‘supply chain shock’ similar to the disruption COVID-19 caused to global supply chains. During the pandemic, disruptions to labour, transport and logistics increased the cost of exporting and importing to a similar extent. The analysis, laid out in Shocks, risks and global value chains: insights from the OECD METRO model explores how the interconnected economies and the localised regimes compare in terms of the propagation of, or insulation from such shocks. The ‘supply chain shock’ is simulated with a 10% increase in the costs of bilateral exports and imports between a given region and all other countries. Because a shock that decreases trade costs by 10% –a big drop in oil prices for instance— would have effects of the same magnitude, but in the opposite direction, both the downside and upside stability in the two regimes can be explored.

Increased localisation leads to GDP losses and makes domestic markets more vulnerable

Current debates over future trade regimes often focus on a purported trade-off between efficiency and security of supply. This model simulation study allows us to evaluate the two simulated regimes for both. It found that a localised regime, where economies are less interconnected via GVCs, has significantly lower levels of economic activity and lower incomes. Increased localisation would thus add further GDP losses to the economic slowdown caused by the COVID-19 pandemic. Furthermore, even with the support and protection offered to domestic producers under a localised regime, not all stages of production can be undertaken in the home country, and trade in intermediate inputs and raw materials continues to play an important role in domestic production. In that context, less international diversification of sourcing and sales means that domestic markets have to shoulder more of the adjustments to absorb shocks, and this translates into larger price swings and large changes of production, and ultimately to greater variability of incomes. In this sense, the more localised regime delivers neither greater efficiency nor greater security of supply.

Recent OECD analysis on The face mask global value chain in the COVID-19 outbreak offers an concrete illustration. It showed that producing face masks requires a multitude of inputs along the value chain, from non-woven fabric made with polypropylene to specialized machinery for ultra-sonic welding. While the production itself does not require high-tech inputs, localising the production of just this one good would require high capital investments which would need to be supported during periods when demand shrinks and localized production is not competitive. With current technologies it would therefore be excessively costly for every country to develop production capacity that matches crisis-induced surges in demand and which encompasses the whole value chain from raw materials through distribution for a whole catalogue of essential goods to match any potential crisis—foreseen and otherwise.

More localisation also means more reliance on fewer sources of—and often more expensive—inputs. In this regime, when a disruption occurs somewhere in the supply chain, it is harder, and more costly, to find ready substitutes, giving rise to greater risk of insecurity in supply. This is also the case for sectors that are often seen as strategic: food, basic pharmaceuticals, motor vehicles and electronics.

Work on Trade interdependencies in Covid-19 goods further supports these findings, demonstrating that no single country produces efficiently all the goods it needs to fight COVID-19. Indeed, while the United States and Germany tend to specialise in the production of medical devices, China and Malaysia are most specialised in producing protective garments.

While the argument about GVCs is often posited as one of efficiency versus security, OECD research illustrates that greater localisation fails to achieve either. The localization of production is costly for the most developed countries and virtually impossible for the less developed—while at the same time a localised regime provides less protection from the impact of shocks.

An alternative, more effective and cost-efficient solution to the challenges posed by shortages in some key equipment during demand surges may involve the combination of strategic stocks; upstream agreements with companies for rapid conversion of assembly lines during crises and supportive international trade measures.

If this crisis has taught us anything, it is that viruses, shocks, and economic consequences know no borders, and the one and best option that we have is to meet these challenges together.

References:

OECD Economic Outlook. Organisation for Economic Co-operation and Development (OECD), 24, June 2020. http://www.oecd.org/economic-outlook/june-2020/

Shocks, risks and global value chains: insights from the OECD METRO model. Organisation for Economic Co-operation and Development (OECD), 29, June 2020. https://issuu.com/oecd.publishing/docs/metro-gvc-final

The face mask global value chain in the COVID-19 outbreak: Evidence and policy lessons. Organisation for Economic Co-operation and Development (OECD), 4, May 2020. http://www.oecd.org/coronavirus/policy-responses/the-face-mask-global-value-chain-in-the-covid-19-outbreak-evidence-and-policy-lessons-a4df866d/

Trade interdependencies in Covid-19 goods. Organisation for Economic Co-operation and Development (OECD), 5, May 2020. http://www.oecd.org/coronavirus/policy-responses/trade-interdependencies-in-covid-19-goods-79aaa1d6/

By Christophe André, OECD Economics Department

The prompt and effective reaction of the Korean authorities to contain the spread of COVID-19 limited the impact of the pandemic on the economy. Strong fiscal and monetary policy measures were quickly implemented to support households and businesses. As a result, the Korean economy is set to contract much less than other OECD economies in 2020, both in a scenario with no resurgence of the pandemic (single-hit scenario) and in a scenario assuming a second global wave of infections (double-hit scenario) (Figure 1).

Nevertheless, the pandemic generates strong headwinds. Some sectors, like transport, tourism and entertainment still suffer from substantially reduced activity. Exports, traditionally a key growth engine of the Korean economy, are hit by the weakness in the global economy. Additional obstacles to the operation of global value chains, in which Korea is strongly integrated, would deal a further blow to the economy. High uncertainty is holding back investment and employment has fallen, especially for non-regular workers.

Hence, continued support for households and businesses will remain crucial until the recovery is fully under way. It will need to be carefully tailored to preserve long-term fiscal sustainability and avoid hampering the reallocation of resources towards the sectors with the strongest growth prospects. Any additional income support should be targeted towards low-income households and skills training should be provided, even beyond the crisis, to vulnerable people who lost their job. Investment in areas featuring in the recent Korean New Deal, such as 5G, telecommunication and artificial intelligence, will help boost the knowledge-based economy. Green investments are essential to tackle current problems, not least air pollution, and to ensure long-term environmental sustainability.

The pandemic compounds pre-existing challenges, many of which are shared to various degrees by most OECD countries, notably rapid population ageing and relatively low productivity in parts of the economy. Korea has the fastest ageing population in the OECD, with the number of persons aged 65 or over projected to exceed 80% of the working-age population by 2060, the highest ratio in the OECD (Figure 2a). The shrinking working-age population will weigh on GDP growth over the coming decades. However, better mobilising labour resources, especially from women, older workers and youth, can partly counteract this trend, as well as help build a more inclusive economy and society. Moreover, each worker has the potential to create more value. While productivity is high in manufacturing, especially for information and communication technology equipment, it is lagging in services, including digital services (Figure 2b). The productivity gap between big firms and SMEs is wider than in most other OECD countries. Overall, Korea’s GDP per worker is about 20% below the OECD average, pointing to huge potential for catch-up.

As the population ages, scarcer labour resources will need to be used more effectively. Women’s employment rate is about 18 percentage points below that of men, despite very high average academic qualifications among women, especially in younger generations. Relatively low wages and weak career prospects discourage many women from working. The gender wage gap is the widest in the OECD, at about 34% in 2018, compared to an OECD average of about 13%. A number of recent government measures, in particular to enhance childcare quality, improve work-life balance and facilitate return to work after career breaks, could help reduce the gender gap. More broadly, a culture of gender equality needs to be promoted in the workplace and at home.

Koreans effectively retire at an advanced age, but often end their working lives in poor-quality non-regular jobs, after being forced to retire from their career job in their fifties. Maintaining high activity rates, while enhancing the quality of jobs for older workers, will be essential to sustain the economy’s growth potential. At the same time welfare measures are needed to increase support for the elderly who are most in need. Indeed, old-age poverty remains the highest in the OECD, with more than 40% of people aged 65 or over living in relative poverty.

Less than half of youth aged 15-29 were employed before the COVID-19 crisis, the fifth lowest share in the OECD. This reflects long studies, as more than two-thirds of youth obtain tertiary degrees, but also slow transition from education to employment. The crisis exacerbates the difficulties faced by youth entering the job market. To address skills mismatches, the government has stepped up career counselling, developed apprenticeships and vocational education (notably Meister schools) and introduced incentives for tertiary education institutions to propose more market-relevant degrees. Nevertheless, career guidance and counselling will need to be stepped up, in particular through increased resources for the public employment service and stronger involvement of employers.

Digital technologies, in which Korea is a top player, offer vast opportunities to raise firms’ productivity and people’s well-being. Policies should aim at promoting the diffusion of technology across the economy and addressing digital skills gaps. Regulatory reforms, based on the recent experiences with sandboxes, which allow waiving some regulatory obligations to encourage innovation in products or business models, could boost growth and offer people better access to valuable services, as illustrated by telemedicine during the COVID-19 crisis.

Altogether, Korea is proving exceptionally resilient during the annus horribilis the world economy is undergoing, even though the global recession is hurting exports. Korea also has strong cards to address the longer-term challenges it is facing.

References:
OECD (2020), OECD Economic Surveys: Korea 2020, OECD Publishing, Paris.
https://doi.org/10.1787/2dde9480-en

By Mathilde Pak, OECD Economics Department

When it comes to emerging digital technologies, Korea is a top player, with an outstanding digital infrastructure and a dynamic ICT sector. 5G has been introduced nationwide earlier than in any other country in the world and has spurred numerous projects supported by the governement to enhance competitiveness, innovation and the quality of life: smart factories, smart grids, smart healthcare, smart cities, smart roads. Korea also stands out for its swift and effective use of advanced digital tools to contain COVID-19 without shutting down the economy. For instance, artificial intelligence enables fast testing, mobile apps provide real-time information on locations visited by patients diagnosed with COVID-19 (Figure 1) and untact (contactless) lifestyle limits the spread of the virus. The recent New Digital Deal further supports the use of digitalisation with projects exploiting synergies between the government and the business sector, including strengthening data infrastructures, expanding data collection and usage, establishing 5G network infrastructure early, promoting untact industries and developing artificial intelligence.

However, the diffusion of digital technologies among firms and workers is slow. The digital gap between SMEs and large enterprises is wide because SMEs face obstacles to the adoption of advanced technologies, like cloud computing and big data: lack of innovation, lack of information and funds, lack of skilled workers and low access to training. This digital gap creates wide productivity gaps, weighing on economy-wide productivity, which is far below the OECD average. Moreover, the digital gap between generations is the highest among OECD countries (Figure 2). In an ageing and increasingly digitalised society, this exacerbates well-being inequalities, as part of the population is left behind.

Digital opportunities to boost productivity and well-being are numerous but are not used to their full potential. To promote the diffusion of technology, the 2020 OECD Economic Survey of Korea highlights recommendations focussing on three main areas.

First, regulations for product and service markets remain stringent, holding back innovation and new business models, as well as competition and productivity growth. The government has introduced regulatory sandboxes allowing firms in new technologies and new industries to test their products and business models without being subject to all existing legal requirements. The temporary lifting of the ban on telemedicine during the COVID-19 outbreak illustrates the potential benefits of a timely review of regulations. After four years at most, if a regulatory sandbox is considered effective and safe, it can lead to the permanent suppression of the regulation that was temporarily waived, its amendment, or the extension of the trial period. It can also lead to the creation of licences with a narrower scope, for example for FinTech companies, which could be allowed to provide some banking services without needing a full banking licence. Follow up on this strategy should allow identifying excessive regulation and revise or abolish it, notably in the case of telemedicine.

Second, subsidies to SMEs should better target innovative and productive companies. Extensive government R&D support still largely props up low-productivity companies and scale-up success is limited. Innovation vouchers in the form of a one-off payment should be provided to SMEs in manufacturing and services to commission R&D and studies on potential for new technology introduction from universities and research institutions. They would help develop innovation networks, which are still limited in Korea, and facilitate the diffusion of digital technology. In addition to promoting collaboration between SMEs and academia, collaboration between SMEs and large enterprises should be further strengthened to enhance innovation diffusion, for instance through open collaborative platforms to exchange new products, services and big data. Financial support for technology R&D should also be reallocated to commercialisation for SMEs that successfully developed new technology.

Third, addressing the lack of adequate skills and awareness of digital benefits or dangers is crucial. SMEs face a lack of skilled workers in digital fields, limited access to ICT training and insufficient awareness of managers of the potential of digital technologies. Older generations often lack digital and basic skills to participate in online activities like e-commerce. Most teachers feel they are not sufficiently prepared to use ICT for teaching, which has been a hurdle during the COVID-19 school closures. A relatively high share of individuals experience privacy violation and youth are at higher risk of cyber-bullying and addiction to ICT technologies. More specialists and high-level researchers are needed in fourth industrial revolution core technologies like artificial intelligence and big data, as well as next-generation security technologies like blockchains and quantum cryptography communication. Higher-quality ICT education and training should be provided to enable students, teachers, SME workers and older people to thrive in a digital society.

The COVID-19 outbreak is strengthening the existing trend towards digitalisation, with a growing use of artificial intelligence and remote services like telework, telemedicine and e-commerce by firms and households. Narrowing the digital gap between firms and between workers is key to bring about a more rapid diffusion of technology and to make the most of digital opportunities to raise productivity and well-being.

References:

OECD (2020), OECD Economic Surveys: Korea 2020, OECD Publishing, Paris.
https://doi.org/10.1787/2dde9480-en

Pak, M. (2020), “Promoting the diffusion of technology to boost productivity and well-being in Korea”, OECD Economics Department Working Papers, OECD Publishing, Paris, forthcoming.

By Daniela Glocker, Economist, OECD Economics Department

The recent COVID-19 pandemic and resulting containment measures have hit hard the economy and in particular tourism. Yet, the sector has good potential to support the South African economy and contribute to employment growth post-COVID-19. As tourism is a labour intensive sector that can also bring foreign currency into the country, it was identified as a priority area by the South African government. Between 1995 and 2017, international tourist arrivals doubled while employment directly related to tourism tripled. To ensure that the sector continues to play a key role in the economy following the COVID-19 pandemic, a recovery plan is being finalised focussing on stimulating demand, protecting and renewing supply and strengthening enabling capability.

South Africa has rich and diverse natural and cultural assets. Still, tourism development has been challenged by the country’s geographic location and perceived safety and security issues. As the country is a long-haul destination for many large source markets, good accessibility and international openness is key to expand international tourism. Following the COVID-19 crisis, a managed re-opening is envisioned, followed by growth interventions to reclaim market share and drive long-term growth. Although South Africa’s air transport infrastructure is well developed compared to African competitors (see Figure 1), the country lags far behind in terms of international openness due to burdensome visa regulations for tourists. Tourism strategies to attract international visitors therefore have to reduce the administrative barriers and uncertainty related to visa requirements to remain globally competitive.

Once travel restrictions due to the COVID-19 pandemic are eased, potential tourists could still be deterred from selecting South Africa as a destination based on concerns around safety and security. South Africa continuously performs poorly with respect to safety and security indicators. As these indicators do not capture tourism-related incidents, credible and up-to-date information on safe areas that are easily accessible for domestic and international tourists alike should be provided. Such information could be complemented by greater visibility of safety and police personnel in main tourist areas as proposed in the recently finalised safety monitor programme. This is a welcome step as it could reduce crime against tourists, make them feel safer and portray a more positive outlook to potential tourists. A general reduction in crime will also improve the well-being of the local population.

Increasing tourist arrivals is necessary for tourism development, but the strength of the relationship between tourism and economic growth depends on the economic integration of the tourism industry in the local economy. In order to achieve inclusive growth, the economic benefits of tourism must also spread geographically –beyond mature destinations in South Africa – to create economic opportunities in less travelled and less prosperous regions. This is especially important in a country that is as spatially segregated and unequal as South Africa. To promote the geographic spread of tourists into more remote or distressed areas requires better domestic transport infrastructure. Moreover, municipalities need sufficient capacity to plan for sustainable tourism development and to provide supportive infrastructure for basic services and tourism-related activities. As unchecked tourism growth can increase the pressure on environmental resources and on housing markets and increase inequality, tourism policies need to be planned carefully and in a holistic way. Policies that are taking into account the interdependencies across different sectors and are allowing for input from different levels of government will not only create a more enjoyable visitor experience, but will also contribute to better living conditions for residents in the local tourist destination.

References:

OECD (2020), OECD Economic Surveys: South Africa 2020, OECD Publishing, Paris, https://doi.org/10.1787/2218614x.

by Gabriel Machlica, OECD Economics Department

The COVID-19 pandemic triggered the most severe economic recession since World War II, causing enormous damage to people’s health, jobs and well-being. The Slovak economy is expected to decline by more than 11% in 2020 if a second wave of infections requiring renewed lockdowns hits before the end of this year (OECD, 2020a). The pandemic could lead to lasting demand changes and structural shifts in the economy. Real per capita income will fall to the level of 2015, implying a loss of five years of income growth. The unemployment rate will reach almost 10% this year. Around 100 thousand people could lose their jobs, with vulnerable workers at risk to bear the brunt of the crisis. In Slovakia, these high-risk groups include (i) the non-standard workers, particularly the self-employed and the temporary workers, (ii) the marginalised Roma community and (iii) young people. Well-targeted labour market activation policies should be coupled with a strong social safety net, to mitigate the inevitable adjustment costs of moving towards new jobs.

Who is at risk?

Non-standard workers are vulnerable to the loss of income as a result of the widespread shutdown. Since March, approximately 26% to 40% of Slovak workers have been directly affected by containment measures (NBS, 2020; OECD, 2020c). The most affected sectors were tourism and those services involving contact between consumers and service providers. In this respect, non-standard workers are particularly vulnerable, as they have less protection, they are less likely to receive any form of income support during out-of-work periods than standard employees, and when they do receive benefits they are often significantly less generous than for standard employees (OECD, 2019a).

In Slovakia, non-standard workers accounted for one third of workers directly affected by containment measures, most of them self-employed (Figure 1). Over the last decade, the favourable tax treatment of self-employed workers led to an increase in the number of regular employment contracts disguised as self-employment contracts (Remeta et al, 2015). The share of own account self-employed workers who earn most of their income from just one client is the highest in the OECD (OECD, 2019a). The other group at high risk are temporary workers, particularly the workers with contracts of agreement for work performed outside an employment relationship, so-called ‘work agreements’. They have been significantly affected by the initial impact of the crisis (IFP, 2020). These groups are particularly vulnerable as their dismissal is less costly for employers and leaves them with less protection compared to standard workers.

The Roma community is highly vulnerable to economic shocks. Roma account for almost one-tenth of the population in the Slovak Republic. Their labour market outcomes are much weaker compared to the general population, but have been considerably improving in the last couple of years (Machlica et al. 2019). However, they remain at particular risk during a downturn as they are mostly low-skilled and work in seasonal, temporary jobs which are much more affected by the economic cycle. Indeed, their employment reacts much more strongly to the economic cycle (Figure 2). In addition, many Roma work in the informal economy, which increases their income insecurity, as they are not entitled to unemployment benefits when they are out of work (Gatti et. al, 2016). All these factors place Roma at a higher risk of falling into poverty when faced with a health or employment shock. This is a significant concern as the vast majority of Roma have been at risk of poverty even before the crisis and almost one-third was living in households where at least one person went to bed hungry in the past month (Machlica et al. 2019).

The crisis can significantly worsen the labour market prospects of youth as the initial labour market experience can have a profound influence on later working life. This year’s graduates will leave schools and universities with poorer chances of finding employment or work experience. This is a particular concern because of scarring effects that may lead to long-lasting negative labour market outcomes (Bell and Blanchflower, 2011; Helbling and Sacchi, 2014). Young people indeed appear most severely affected by the crisis as they generally work in less secure jobs, and are overrepresented among workers in hard-hit industries such as accommodation and food services (OECD, 2020b).

Protecting all workers

The Slovak government has rightly put in place a number of measures in response to the COVID-19 crisis, including incentives to preserve existing jobs, but the take up was much lower than in other OECD countries (Figure 3). These job retention schemes can help limit increases in unemployment and promote a quicker labour market recovery by reducing costs of matching employers to employees. However, this support should not be indefinite as it hampers the necessary reallocation of workers to new jobs (OECD, 2020a). Consumers may emerge from lockdown with new spending habits requiring new jobs, and the long-term preservation of existing jobs may not be efficient. The longer the recovery from the crisis takes, the more should the policy focus shift from “protecting jobs” towards “protecting workers”, providing them with expanded unemployment insurance and an effective activation framework to improve their employability. Strong activation policies can help mitigate some of the inevitable adjustment costs of moving towards new jobs.

Vulnerable groups require special attention. First, the government should ensure adequate social safety nets to avoid the risk of some groups falling through the cracks of existing social protection system as outlined in a recent OECD report (OECD, 2020d) In the medium term, there is a need to enforce a clear distinction between self-employed and employee status. Many OECD countries are tackling false self-employment by reducing incentives for firms and workers to misclassify employment relationships, putting in place tests and criteria for assessing employment relationships and increasing the capacity of labour inspectorates to monitor and detect breaches (OECD, 2019a).

A strong social safety net should be coupled with an extensive activation framework, which in the case of the Roma community should reflect their specific constraints such as poor health, housing and transport issues, indebtedness or limited availability of childcare. Tailored measures should offer a mix of training, counselling and mentoring programmes. Collaborating and outsourcing some of these services to non-governmental providers with a good track record of high-quality support for the Roma can help ease capacity constraints of the Public Employment Services. The OECD report on the social integration of the Roma in Slovakia suggests that more coordinated interventions in different policy areas are needed to avoid further exclusion of the Roma, as interventions in one area will not work without others (Machlica et al. 2019). For the young unemployed, training complemented by subsidies to private employers offering on-the-job training can improve skills and employability (OECD, 2019b). For example, Australia and Denmark as part of its economic response to COVID-19 have introduced wage subsidies to help companies maintain or expand their apprenticeship and in-firm training programmes (OECD, 2020b).

References

Bednarik, M., S. Hidas and G. Machlica (2019), “Enhancing the social integration of Roma in Slovak Republic”, OECD Economics Department Working Papers, No. 1551, OECD Publishing, Paris, https://doi.org/10.1787/197eb309-en.

Bell, D. and D. Blanchflower (2011), “Young people and the Great Recession.” Oxford Review of Economic Policy, Vol. 27/2, pp. 241-267

Gatti , R., S. Karacsony, I. Sandor, K. Anan, C. Ferré and C. de Paz Nieves (2016), Being Fair, Faring Better, Promoting Equality of Opportunity for Marginalized Roma, World Bank, Washington, DC

Helbling, L. and S. Sacchi (2014), “Scarring effects of early unemployment among young workers with vocational credentials in Switzerland”, Empirical Research in Vocational Education and Training, Vol.6/12, http://link.springer.com/article/10.1186/s40461-014-0012-2.

IFP (2020), “Trh práce v karanténe“ Komentár 2020/10, Institute of Finacial Policy, Ministry of Finance of the Slovak Republic, 2020

NBS (2020), “Ekonomické dôsledky uzavretia odvetví s intenzívnym osobným kontaktom”, Analytický komentár č. 81, 4. mája 2020,   https://www.nbs.sk/_img/Documents/_komentare/AnalytickeKomentare/2020/AK81_Koronavirus_Obmedzenia_odvetvi_s_intenzivnym_kontaktom.pdf

OECD (2020a), OECD Economic Outlook, Volume 2020 Issue 1, https://doi.org/10.1787/0d1d1e2e-en.

OECD (2020b), OECD Employment Outlook 2020: Worker Security and the COVID-19 Crisis, OECD Publishing, Paris, https://doi.org/10.1787/1686c758-en.

OECD (2020c), “Distributional risks associated with non-standard work: Stylised facts and policy considerations”  Chapter  English 03 Jul 2020  OECD  in OECD Economic Outlook, Volume 2020 Issue 1

OECD (2020d), “Supporting livelihoods during the COVID-19 crisis: Closing the gaps in safety nets”  OECD Publishing, Paris,http://www.oecd.org/coronavirus/policy-responses/supporting-livelihoods-during-the-covid-19-crisis-closing-the-gaps-in-safety-nets-17cbb92d/

OECD (2019a), OECD Employment Outlook 2019: The Future of Work, OECD Publishing, Paris, https://doi.org/10.1787/9ee00155-en.

OECD (2019b), OECD Economic Surveys: Slovak Republic 2019, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-svk-2019-en.

Remeta, J., et al. (2015), “Moving Beyond the Flat Tax – Tax Policy Reform in the Slovak Republic”, OECD Taxation Working Papers, No. 22, OECD Publishing, Paris, https://doi.org/10.1787/5js4rtzr3ws2-en.

By Boris Cournède, Federica De Pace and Volker Ziemann, OECD Economics Department

The COVID-19 pandemic has hit the housing sector particularly hard, but governments have swiftly responded with an array of measures to alleviate the negative consequences of the crisis for tenants, borrowers, builders and lenders. Most, if not all, of these measures are meant to be temporary. If they are maintained for too long, they can stand in the way of a robust recovery and/or impair the responsiveness of the housing market to the evolving needs of society. This blog reviews new OECD evidence of the impact of the COVID-19 crisis on construction and discusses policy trade-offs between the objectives of preserving short-term housing affordability for tenants and mortgage-holders, facilitating mobility and ensuring sufficient, environmentally sustainable supply. The full study is available on the OECD “Tackling the coronavirus” online hub: Housing Amid Covid-19: Policy Responses and Challenges.

The COVID-19 crisis has severely hit the housing sector

The spread of the COVID-19 pandemic destabilised the real estate sector throughout the world. Containment measures involved total or partial shutdowns of construction sites in many countries, and the associated income and revenue losses for households and enterprises adversely affected the outlook for the different segments of the property market, depending on the timing and stringency of confinement and the severity of the public health crisis, which differed across countries.

New OECD analysis draws on Google Trend data to mimic the construction sector’s Purchasing Managers’ Index (PMI) for a wide range of countries for which the PMI is not available. The results confirm the slump in the construction sector’s confidence during confinement but also suggest that the conditions have improved markedly across most countries, without, however, reaching February levels (Figure 1). It is noteworthy to remember that, following the original PMI’s definition, a positive reading of the index only suggests that activity is expanding not that output has come back to pre-crisis levels. It will certainly take some time in many countries before residential construction reaches pre-COVID-19 volumes. Besides, there remains considerable uncertainty about the extent to which the economic slump is going to weigh on future demand and the prospects of the sector at large.

Governments have introduced rescue and support measures

With the onset of the COVID-19 crisis, governments responded with a host of specific measures to protect mortgage-holders and tenants in addition to the support from social safety nets. A number of countries also intervened to help the post-crisis recovery of the construction sector (Figure 2). In most countries, emergency support involved a suspension of eviction procedures, temporary forbearance of rent and mortgage payments, and in some cases moratoria on utility payments. Most governments, at both national and local levels, also took specific steps to shelter the homeless during the lockdown.

Crisis-response measures are needed but involve policy trade-offs

While meeting an important objective of supporting tenants and borrowers during the crisis, several measures pose difficult policy trade-offs over the medium term (Figure 3). For example, if they are maintained for an extended period, measures that aim to preserve near-term affordability may create disincentives for the maintenance and expansion of the housing stock, as well as thwarting residential and labour mobility in the longer term. They may also undermine economic and financial resilience.

Measures that preserve housing affordability for mortgage-holders and tenants in the short term can have adverse longer-term side-effects. They can undermine resilience or compromise the long-term functioning of the housing market. If maintained for too long, tax advantages for mortgage-holders feed into house prices, creating instability and eroding affordability. A tightening of rent controls makes it more difficult for people who don’t already rent a dwelling to rent one and over time exacerbates housing shortages. Public authorities would do well to adopt a calendar for the phasing-out of COVID19-related tax advantages for mortgage holders and rental-market restrictions. Doing so would avoid letting emergency measures become new bottlenecks to the long-term efficiency of housing markets that would ultimately undermine affordability, inclusiveness and sustainability objectives.

By contrast, expanding capital spending on social housing, coupled with provisions ensuring that eligibility is portable, can generate benefits for both near-term affordability and long-term supply with limited adverse consequences for mobility. Furthermore, this kind of direct intervention in the market provides an opportunity for governments to promote and accelerate the spread of construction techniques that are aligned with environmental-transition sustainability objectives.

Furthermore, easing land-use restrictions is a way of facilitating the recovery of homebuilding and better aligning the supply of housing with evolving demand and the needs of society. Reforms to ease land-use restrictions deliver greater benefits if conducted within an integrated spatial planning framework across government sectors and hierarchies. The goal should be to encourage housing construction and improve affordability while enhancing neighbourhood liveability and avoid excessive spatial divergence in the access to public services, transportation systems and social infrastructure. Fostering residential construction could also accelerate the transition to a low-carbon economy provided that the new buildings are required to comply with sufficiently ambitious environmental standards.

Facilitating construction and redevelopment would also allow accommodating the possible long-term change in housing demand that the COVID-19 crisis may prompt. There is a possibility that the COVID-19 crisis may lead to lasting mutually linked changes in housing demand and work organisation. Preferences could shift in favour of living in lower-density areas and working remotely. This could slow or even reverse urban-rural divergences. First, such a shift would relieve demand pressures in overly-dense areas. Second, flexible workplace amid more teleworking would free office space for conversion to residential units in city centres, provided land use can accommodate the change. The combination of such demand and supply effects could reduce regional home price differentials and contribute to reducing residential segregation.

References:

Bétin, M. and V. Ziemann (2019), “How responsive are housing markets in the OECD? Regional level estimates”, OECD Economics Department Working Papers, No. 1590, OECD Publishing, Paris, https://dx.doi.org/10.1787/1342258c-en. [6]

Causa, O. and J. Pichelmann (2020), “Should I stay or should I go? Housing and residential mobility across OECD countries”, OECD Economics Department Working Papers forthcoming. [5]

Causa, O., N. Woloszko and D. Leite (2019), “Housing, wealth accumulation and wealth distribution: Evidence and stylized facts”, OECD Economics Department Working Papers, No. 1588, OECD Publishing, Paris, https://dx.doi.org/10.1787/86954c10-en. [2]

Cavalleri, M., B. Cournède and E. Özsöğüt (2019), “How responsive are housing markets in the OECD? National level estimates”, OECD Economics Department Working Papers, No. 1589, OECD Publishing, Paris, https://dx.doi.org/10.1787/4777e29a-en. [4]

Cournède, B., S. Sakha and V. Ziemann (2019), “Empirical links between housing markets and economic resilience”, OECD Economics Department Working Papers, No. 1562, OECD Publishing, Paris, https://dx.doi.org/10.1787/aa029083-en. [3]

OECD (2020), Policy responses to the Covid-19 crisis, http://oe.cd/covid19tablesocial. [1]