The COVID-19 crisis creates an opportunity to step up digitalisation among subnational governments

By Luiz de Mello, OECD, and Teresa Ter-Minassian, OECD Fiscal Network

Recent decades have seen rapid growth of advanced digital technologies, including high-speed computing, big data, artificial intelligence, the internet-of-things and blockchain. This “digital revolution” creates significant opportunities for all levels of government to improve the delivery of public goods and services, and to raise more and better revenue.

This is particularly important in the context of the COVID-19 crisis. Fighting a pandemic while minimising the associated economic costs calls for appropriate digital infrastructure for the design and enforcement of containment measures, as well as to ensure access by the population and enterprises to critical government services. After all, subnational governments (SNGs) account for about 40% of government spending on average in OECD countries; they also play an important role in the delivery of key services that are at the heart of the policy actions being taken to slow the spread of the pandemic, including on health care and social protection.

Much of the literature has focused so far on the scope for advanced digitalisation at the central/federal level of government. In a recent OECD paper, de Mello and Ter-Minassian (2020) focus on the opportunities and challenges that digitalisation creates for SNGs.

Advanced digital technologies can help improve the quality and efficiency of subnational programmes. Geographic information systems (GIS) are being used to identify potential environmental and health risks, which is important when it comes to controlling the spread of a pandemic and avoiding its recurrence. Of particular interest is the use of sensors, to control road and railway traffic, maintain regional or local infrastructure, and monitor water and sanitation usage, just to cite a few. Digital portals facilitate SNGs’ communication with their populations and the delivery of certain public services, and well-designed information systems can strengthen all aspects of subnational public financial management, and facilitate subnational transparency and accountability.

At the same time, regional and local governments are having to operate digitally in periods of confinement and to broaden the range of services provided on-line to the population, including in some cases in the area of e-health. The case of testing, tracing and tracking through digital devices to contain the spread of COVID-19 is a case in point, where the local governments are in many cases actively involved in these efforts, and privacy/confidentiality concerns are prompting important debates among policymakers.

Digitalisation can also help to improve both shared and own subnational revenues. This is particularly important to prepare governments to restore the sustainability of the public finances, once the post-COVID-19 recovery has been firmly established. Especially promising are possibilities to introduce, or strengthen, the enforcement of consumption taxes, regional personal income taxes (PITs), or regional surcharges on national PITs; make more efficient and equitable the administration of local property taxes; and better utilise user fees for local services.

Digitalisation, however, also poses significant challenges for SNGs, whose capacities to deal with such challenges vary widely both across and within countries (see Figure). The most important constraint in many SNGs is likely to be the scarcity of requisite skills, not only in government leadership and bureaucracy, but also across the population at large. Lack of skills breeds, in turn, distrust and resistance to digitalisation.

Other significant constraints can be posed by inadequate physical infrastructure and financial resources to improve it. Less recognized, but also important, can be legal or regulatory constraints. Tackling cyber security risks, and adequately addressing citizen’s privacy concerns constitute further significant challenges.

These challenges in SNG digitalisation highlight the need for a well-structured overall strategy beginning with a stocktaking of the initial state of, and main obstacles to, digitalisation. Within these constraints, SNGs need to define priorities (e.g. which public services should be digitalised first); identify needs for legal and organisational supporting changes; define responsibilities for different tasks; set up realistic timetables for implementation; appropriate the necessary budgetary resources, and procure any needed skills and materials; and closely monitor the implementation of the strategy.

Early involvement of main stakeholders and clear communication to the public at large of expected results, are essential for securing citizens’ support for the digitalisation effort.

Moreover, co-operation among and within different levels of government can play a significant role in supporting effective and efficient digitalisation of SNGs. The case for support by national government is made more compelling by the fact that different SNGs are differently equipped to meet the challenges of digitalisation. Smaller and poorer urban, and especially remote, rural communities are more likely to suffer from skill shortages, limited connectivity and scarcity of budgetary resources.

Policy innovation is another important area for inter-governmental co-operation in the digital sphere, with considerable potential for SNGs to launch pilot programmes that can be tested and subsequently taken up by other same-level jurisdictions and/or up-scaled to other levels of administration through gradual experimentation. The pandemic is actually triggering a lot of promising innovation by SNGs that can do much to improve their preparedness to deal with future crises.

National governments can support subnational digitalisation efforts. This can be achieved in particular through appropriate reforms to intergovernmental fiscal relation systems, including the assignment of own tax bases to SNGs; greater clarity in the assignment of expenditure responsibilities, and the implementation of equalization transfers; by giving adequate weight to regional digital inclusion in public investment choices; by defining appropriate nation-wide standards to facilitate seamless interfaces among the national and subnational digital systems; and through technical assistance and training of subnational officials.

There is also significant scope for horizontal co-operation among SNGs. Peer support can include demonstration effects, technical assistance and joint training of officials, as well as effective interfaces among subnational digital systems in areas of common interest. Dedicated forums for inter-regional and inter-municipal dialogue on digitalisation issues, possibly under the umbrella of broader horizontal co-operation forums, can be instrumental in facilitating both the exchange of experiences and consensus building on common digitalisation issues.

The COVID-19 crisis provides an opportunity to step up the digital transformation of SNGs given the need to act steadfastly during the ongoing containment phase but also in preparation for the post-crisis recovery. The lessons that are emerging from the current experience, if put to good use, can do much to make SNGs better equipped to cope with future crises.


de Mello, L. and T. Ter-Minassian (2020), “Digitalisation Challenges and Opportunities for Subnational Governments”, OECD Working Papers on Fiscal Federalism, No. 31, OECD, Paris.

International corporate tax reform could support global tax revenues

By David Bradbury, Tibor Hanappi, Pierce O’Reilly, Ana Cinta Gonzalez (OECD Centre for Tax Policy and Administration), Asa Johansson, Stéphane Sorbe, Valentine Millot, Sébastien Turban (OECD Economics Department)

Recent economic analysis suggests that a proposed solution to the tax challenges arising from the digitalisation of the economy under negotiation at the OECD would have a significant positive impact on global tax revenues.

The analysis puts the combined effect of the two-pillar solution under discussion at up to 4% of global corporate income tax (CIT) revenues, or USD 100 billion annually. The revenue gains are broadly similar across high, middle and low-income economies, as a share of corporate tax revenues.

The analysis was released just weeks after the international community reaffirmed its commitment to reach a consensus-based long-term solution to the tax challenges arising from the digitalisation of the economy, and to continue working toward an agreement by the end of 2020, according to a Statement by the OECD/G20 Inclusive Framework on BEPS.

The Inclusive Framework on BEPS, which brings together 137 countries and jurisdictions on an equal footing for multilateral negotiation of international tax rules, decided during its January 29-30 meeting to move ahead with a two-pillar negotiation to address the tax challenges of digitalisation.

Participants agreed to pursue the negotiation of new rules on where tax should be paid (“nexus” rules) and on what portion of profits they should be taxed (“profit allocation” rules), on the basis of a “Unified Approach” under Pillar One. The aim is to ensure that multinational enterprises (MNEs) conducting sustained and significant business in places where they may not have a physical presence can be taxed in such jurisdictions. They also decided to continue discussions on Pillar Two, which aims to address remaining base erosion and profit shifting (BEPS) issues and ensure that international businesses pay a minimum level of tax.

The economic analysis and impact assessment of the Pillar One and Pillar Two proposals is being undertaken to inform key decisions on the design and parameters of the tax reform to be agreed by Inclusive Framework members as part of the negotiations underway at the OECD. The analysis covers data from more than 200 jurisdictions, including all members of the Inclusive Framework, and more than 27,000 MNE groups. Assumptions in the preliminary analysis are illustrative, and do not pre-judge decisions to be taken by the Inclusive Framework.

The analysis shows that the Pillar One reform – designed to re-allocate some taxing rights to market jurisdictions, regardless of physical presence – would also bring a small tax revenue gain for most jurisdictions. Under Pillar One, low and middle-income economies are expected to gain relatively more revenue than advanced economies, with investment hubs experiencing some loss in tax revenues. More than half of the profit re-allocated would come from 100 large MNE groups.

The analysis shows that Pillar Two could raise a significant amount of additional tax revenues. By reducing the tax rate differentials between jurisdictions, the reform is expected to lead to a significant reduction in profit shifting by MNEs. This will be important for developing economies as they tend to be more adversely affected by profit shifting than high-income economies.

The overall direct effect on investment costs is expected to be small in most countries, as the reforms target firms with high levels of profitability and low effective tax rates. The reforms would also reduce the influence of corporate taxes on investment location decisions. In addition, failure to reach a consensus-based solution would likely lead to further unilateral measures and greater uncertainty.


OECD Webcast presentation of the preliminary results of the Economic analysis and impact assessment of potential reforms to address the tax challenges arising from the digitalisation of the economy (February 2020):

OECD Secretary General Tax Report to G20 Finance Ministers and Central Bank Governors (February 2020):

Statement by the OECD/G20 Inclusive Framework on BEPS on the
Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation
of the Economy (January 2020):

Policy changes to turn the tide

by Laurence Boone, OECD Chief Economist

For the past two years, global growth outcomes and prospects have steadily deteriorated, amidst persistent policy uncertainty and weak trade and investment flows. We now estimate global GDP growth to have been 2.9% this year and project it to remain around 3% for 2020-21, down from the 3.5% rate projected a year ago and the weakest since the global financial crisis. Short-term country prospects vary with the importance of trade for each economy though. GDP growth in the United States is expected to slow to 2% by 2021, while growth in Japan and the euro area is expected to be around 0.7 and 1.2% respectively. China’s growth will continue to edge down, to around 5.5% by 2021. Other emerging market economies are expected to recover only modestly, amidst imbalances in many of them. Overall, growth rates are below potential.

The mix between monetary and fiscal policies is unbalanced. Central banks have been easing decisively and timely, partly offsetting the negative impacts of trade tensions and helping to prevent a further rapid worsening of the economic outlook. Thereby, they have also paved the way for structural reforms and bold public investment to raise long-term growth, such as spending on infrastructure to support digitalisation and climate change. However, to date, other than a few countries, fiscal policy has been only marginally supportive, and not especially of investment, while asset prices have been buoyant.

The biggest concern, however, is that the deterioration of the outlook continues unabated, reflecting unaddressed structural changes more than any cyclical shock. Climate change and digitalisation are ongoing structural changes for our economies. In addition, trade and geopolitics are moving away from the multilateral order of the 1990s. It would be a policy mistake to consider these shifts as temporary factors that can be addressed with monetary or fiscal policy: they are structural. In the absence of clear policy directions on these four topics, uncertainty will continue to loom high, damaging growth prospects.

The lack of policy direction to address climate change issues weighs down investment. The number of extreme weather events is on the rise and insufficient policy action could increase their frequency. They may lead to significant disruptions to economic activity in the short term, and long-lasting damage to capital and land, as well as to disorderly migration flows. Adaptation plans are in their infancy, while mitigation, moving away from fossil fuels, through measures such as carbon taxes, has proved technically and politically challenging. Governments must act quickly: without a clear sense of direction on carbon prices, standards and regulation, and without the necessary public investment, businesses will put off investment decisions, with dire consequences for growth and employment.

Digitalisation is transforming finance, business models and value chains, through three main channels: investment, skills and trade. So far, only a small fraction of businesses appear to have successfully harnessed the strong productivity potential of digital technologies, which partly explains why digitalisation has been unable to offset other headwinds on aggregate productivity. Reaping the full benefits of digital technologies requires complementary investments in computer software and databases, R&D, management skills and training, which remains a challenge for too many firms. Digitalisation is also affecting people and work, because it confers a huge advantage to people whose main tasks require cognitive and creative skills, and penalises those whose work has a large routine element, and at the same time generates new forms of contractual arrangements that escape traditional social protection. But the policy environment to harness new technology – concerning skill upgrading, social protection, access to communication infrastructure, digital platform development, competition in digital markets and regulation of cross-border data flows – lags behind, making it difficult to reap the benefits of digitalisation in full.

The Chinese economy is structurally changing, rebalancing away from exports and manufacturing towards more consumption and services. Increasing self-sufficiency in core inputs for certain manufacturing sectors is reflecting a desire to move away from importing technology towards national production. A shift in energy utilisation to address pollution, and the rise in services also induce additional changes in Chinese demand for imports. China’s traditional contribution to global trade growth is set to slow and change in nature. While India is set to grow rapidly, its growth model is different and its contribution to global trade growth will not be enough to substitute for China as a global engine for traditional manufacturing.

Trade and investment are also structurally changing, with digitalisation and the rise of services, but also with geopolitical risks. The rise in trade restrictions is nothing new. About 1500 new trade restrictions have been implemented by G20 economies since the global financial crisis in 2008. Yet, the past two years have seen a surge in trade-restricting measures and an erosion of the rules-based global trading system, which is deep-rooted. Coupled with rising government support across a range of sectors, this induces disruptions in supply chains and reallocations of activities across countries that both exert a drag on current demand by reducing incentives to invest and undermine medium-term growth.
Against this backdrop, there is scope and an urgent need for much bolder policy action to revive growth. Reducing policy uncertainty, rethinking fiscal policy, and acting vigorously to address challenges raised by digitalisation and climate change, all have the potential to reverse the current slippery trend and lift future growth and living standards.

First, a clear policy direction for transitioning towards sustainable growth amidst digitalisation and climate challenges would trigger a marked acceleration of investment. Governments should focus not only on the short-term benefits of fiscal stimulus, but primarily on the long-term gains and to this end they should review their investment policy frameworks. The creation of national investment funds, focused on investing in the future, could help governments design investment plans to address market failures and take account of positive externalities for society as a whole. A number of governments already have dedicated funds of the sort, but their governance could be improved to ensure higher economic and social returns on investment.

Second, greater trade policy predictability and transparency could go a long way to reduce uncertainty and revive growth. For instance, there is a need to bring more transparency to the numerous forms of government support that distort international markets and to agree global rules on the transparency, predictability, reduction and prevention of such support.

Third, fiscal and monetary policies can be better activated, and to powerful effect if coordination prevails. There is scope to strengthen automatic stabilisers to preserve household income and consumption. Active coordination across the euro area would contribute to lift growth now. Moreover, should the outlook deteriorate more than we project, coordinated fiscal and monetary action across the G20, even allowing for the limited policy space some central banks have, could efficiently avert a recession, not least because coordination would bolster confidence.

The current stabilisation at low levels of economic growth, inflation and interest rates does not warrant policy complacency. The situation remains inherently fragile, and structural challenges – digitalisation, trade, climate change, persistent inequalities – are daunting. Rather, there is a unique window of opportunity to avoid a stagnation that would harm most people: restore certainty and invest for the benefit of all.

Competition in the digital age

Laurence Boone, OECD Chief Economist, Chiara Criscuolo, OECD Science and Technology Directorate, and James Mancini, OECD Directorate for Financial and Enterprise Affairs

Digital technologies have the potential to bring huge
benefits in terms of productivity, jobs and ultimately living standards. At the
same time, consumers will gain access to new, innovative, and cheaper products.
However, for digitalisation to bring benefits to all firms and citizens, we
need a healthy competitive environment, which encourages and diffuses innovation, and helps bring the
gains from technology to people.

There is a growing debate in the media and among
policymakers about how competition is functioning in digital markets, with a
focus on market power, concentration and data protection, among other concerns.
The OECD’s analysis is beginning to shed light on this important issue, and
develop policy options to harness the benefits of digitalisation.

To start with, let’s recall what makes digital markets
unique and shapes the business models and competitive dynamics in digital
sectors. These characteristics include:

  • Substantial network effects in platform markets, meaning that as the number of users grows, the value of a platform to users increases.

  • Low variable costs and high fixed costs, meaning that there are significant economies of scale and scope in digital markets.

  • Data from users playing an increasingly important role as an input and competitive asset. New firms may find that data constitutes a substantial barrier to entry in digital markets, and consumers may not be fully aware of the data collected when they use online services.

These characteristics can result in a small number of firms
holding very high market shares and potentially dominant positions in some
digital markets.

However, it is important to recognise that a firm having a
large share of a given market is not automatically a cause for concern. In
fact, it may simply be the reward for having the most innovative ideas, or
attracting the highest number of users to increase the usefulness of a digital
platform. As long as the large market share is not defended through
anticompetitive conduct, and the market is accessible enough for new entrants,
the market can function well.

However, there are some signs that markets are becoming less
dynamic than before

  • First,
    the OECD and others have found that mark-ups (defined as the ratio of unit
    price over marginal cost) charged by firms are increasing. This could be an
    indicator that competitive intensity is weaker than before.

  • Second, there is evidence that fewer start-ups are being created, particularly in the digital sector, which also has implications for the entrenchment of large firms, as shown in Figure 1 below.

  • Third,
    there has been an acceleration of M&A activity that focuses on digital
    firms (see Figure 2 below). Many mergers can have broadly procompetitive
    benefits, for example in terms of innovation. But there is concern about
    transactions involving small start-ups that are not captured by competition
    authorities, and which may have anticompetitive effects.

  • Fourth,
    there are signs that the largest firms are earning an increasing share of
    revenues. While revenue concentration is not a very meaningful indicator of
    competition on its own, in combination with the other evidence above, it may
    suggest that something is changing about competitive dynamics in markets.

The OECD is working to understand
the implications of these findings, especially the role of digitalisation. There
is currently no single “smoking gun”, whether technological entry barriers,
regulatory distortions to competition, or firm misconduct. A variety of factors
may be at play.

In the meantime, policymakers can take
steps to address competition risks in digital markets.

First, there are opportunities to strengthen competition law enforcement. Agencies may need to adjust merger notification thresholds to ensure they capture potentially anticompetitive acquisitions of digital start-ups. They will also require vigilance in assessing merger harms associated with dynamic competition (i.e. effects on potential future competition) and innovation, as well as addressing potential abusive conduct by firms.  Ex-post assessments of merger decisions can also help authorities review the analysis and tools used in past cases in order to draw lessons going forward. Authorities may also need additional tools to analyse and detect novel forms of firm misconduct, such as algorithmic collusion.

Second, we need to consider whether
current legislative frameworks are themselves contributing to problems
regarding digital competition. For example, the OECD is adapting its
Competition Assessment Toolkit to assist policymakers in identifying regulatory
barriers to competition in digital sectors. The adapted toolkit for digital
markets will be released later this year.

Third, new policy solutions may be
needed to protect and promote competition in digital markets, such as data
portability measures. Such measures could potentially help innovative new firms
overcome the barriers to entry associated with data, and empower consumers by
reducing switching costs. New business models could emerge that involve paying
consumers for their data, allowing them to share in the value generated by
their online activities.

Consumer and data protection
regulators can also address growing consumer concerns about digital firms while
at the same time promoting competition. This can include clarifying the rights
consumers have, and ensuring that they are given meaningful opportunities to
exercise those rights through fair contracting standards and default options

Fourth, competition authorities can
strengthen cooperation with international counterparts given the global scale
of many digital businesses. Investigation and advocacy cooperation is also
needed with consumer protection and data protection authorities, who may be
dealing with overlapping concerns. The OECD has a range of resources for
competition authorities on emerging digital
competition issues
, assessing
their past decisions, and using non-enforcement

More broadly, policymakers must
ensure that the fundamentals are in place for new businesses to succeed, namely
by ensuring the right skills mix in the economy, keeping administrative burdens
to a minimum, and promoting broadband internet access.

OECD will be jointly hosting with the French Ministry of the Economy and Finance, and the French Autorité de la concurrence, a conference exploring many of these issues on June 3, 2019. The conference, Competition in the Digital Economy, will be webcast, and available to watch during and after the event here.

Further reading

Bajgar, M., et al. (2019), “Industry Concentration in Europe and North America”, OECD Productivity Working Papers, No. 18, OECD Publishing, Paris,

Calvino, F. and C. Criscuolo (2019), “Business dynamics and digitalisation”, OECD Science, Technology and Industry Policy Papers, No. 62, OECD Publishing, Paris,

More resources on the digital economy, innovation and competition