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By Paula Garda and Michael Koelle, OECD Economics Department

Peru has made significant strides over the past two decades in reducing poverty and improving living standards, outperforming many Latin American peer countries as highlighted in the 2023 Economic Survey of Peru.  The basis for this progress was the country’s robust macroeconomic framework and ambitious structural reforms implemented in 1990s. These reforms have catalysed macroeconomic stability, high economic growth, low inflation and low public debt.

The COVID-19 pandemic, however, exposed remaining challenges. Peru experienced one of the most severe economic contractions and excess mortality rates of any country. The economy bounced back in 2021, thanks to its fiscal buffers. The recovery was short-lived and a series of shocks, including Russia’s war of aggression in Ukraine, social unrest and extreme weather events led to inflationary pressures and economic slowdown. The economy is projected to gradually recover with inflation returning to the target range by early 2024. However, Peru faces long-standing structural issues like a large informal sector, infrastructure gaps, and a weak rule of law. These not only magnify the impact of adverse shocks and socio-economic inequalities but also hold up Peru on its path towards better standards of living.

As Peru embarks on its journey towards OECD accession, the process represents a transformative opportunity for the country to design and implement a comprehensive reform agenda to foster convergence to higher living standards for all Peruvians. The 2023 Peru Economic Survey highlights four key priority areas of reforms:

Fostering Long-Term Growth

Income convergence to more advanced countries stalled in 2014 with the end of the commodity price boom, making it of utmost importance to boost productivity and investment. While commodities, particularly minerals, have fuelled past growth, there is a need to expand the economy’s productive base. High concentration of market power in a few major business groups reduces market dynamism. This calls for strengthening competition enforcement and simplifying regulations to boost productivity. Additionally, better public spending efficiency would help close infrastructure gaps and deliver essential services while boosting potential growth. This entails enhancing local government capabilities, improving infrastructure planning, and modernising the civil service to enhance overall state capacity. Strengthening the rule of law by fighting corruption and improving judicial independence and efficiency is equally important, as it not only encourages investment but also restores trust in institutions.

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Tackling Informality

The challenge of informality looms large in Peru, with around 80% of workers in informal jobs, without social and labour protection, and on the margin of the formal tax and benefit system. Though there is no silver bullet solution as the roots of informality are multi-dimensional, fostering formality through a comprehensive reform package is essential for reducing poverty and inequality, boosting productivity, and improving tax collection. Ensuring universal access to basic social benefits – health, pensions, and social assistance – for both formal and informal sector workers alike, could remove some distortions that incentivise informality. This requires increased social spending funded by general taxation instead of by social contributions that make formal job creation expensive incentivising informal job creation. Providing universal access to pensions and health services financed by general taxation offers the possibility of reducing social contributions for low-income workers, promoting formal employment, and boosting productivity. Improving access to high-quality education tackles another root cause of informality, low labour productivity. Closing the gap in learning outcomes, especially among disadvantaged students, requires improving teachers’ training and addressing school infrastructure gaps.

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Strengthening Public Finances

Peru’s current tax revenues, at 17% of GDP, lag both OECD and regional peers. A key challenge for Peru is sustaining fiscal responsibility while addressing social and infrastructure needs. Addressing this gap requires a multifaceted approach: improving spending efficiency while strengthening tax administration, reducing tax expenditures, modernizing property registries, and streamlining corporate tax schemes.

Confronting Climate Change

Climate change poses another significant challenge for Peru. The country is highly vulnerable to extreme weather events and is committed to achieving carbon neutrality by 2050. To achieve this goal, the country must combat deforestation—a major contributor to greenhouse gas emissions—and accelerate the use of renewable energy sources implementing stricter regulations and consistent price signals to reduce reliance on fossil fuels, tapping the enormous potential that the country has in this area.

As Peru navigates these multifaceted challenges, its process of accession to the OECD can offer a framework for long-term reforms that address existing vulnerabilities and allow the convergence to higher living standards. This roadmap, grounded in evidence and best practices, should build on the successes of the past, such as the robust macroeconomic setup that fuelled Peru’s economic growth. Realising this transformation demands political consensus, evidence-backed policies, and collaborative efforts.

References

OECD (2023), OECD Economic Surveys: Peru 2023, OECD Publishing, Paris, https://doi.org/10.1787/081e0906-en

By Jens Matthias Arnold and Paula Garda, OECD Economics Department

Chile’s economy has been a poster-child of Latin America for a long time. As the new Economic Survey for Chile highlights, its solid institutions have delivered macroeconomic stability and rising living standards. Per-capita incomes have more than doubled since the 1990s and are among the highest in the region. But despite all this remarkable progress, cracks have emerged on the surface. In October 2019, widespread social unrest paralysed the country and revealed deep-rooted discontent with inequalities of economic conditions and opportunities.

After the social unrest, the Covid-19 pandemic took a steep toll on lives and livelihoods, and led to the sharpest contraction of economic incomes in 40 years. In 2021, the economy recovered swiftly on the back of exceptionally strong policy support, and eventually overheated significantly, as domestic demand pushed inflation well above target. Fiscal policy is rightly consolidating this year, including a strong reduction of public expenditure. The Russian aggression on Ukraine and global supply shortages in 2022 exacerbated inflationary pressures, with rising food and energy prices pounding hard on many families as inflation rose above 14%. Monetary policy reacted swiftly and forcefully, but the monetary policy stance will have to remain restrictive for some time to bring inflation back to the target and to firmly re-anchor inflation expectations.

In the face of these extraordinary shocks, Chile’s institutions have been resilient and helped to avert worse outcomes. The social unrest of 2019 eventually gave rise to an orderly and democratic process of rewriting the country’s constitution. In a national referendum, a majority of Chileans voted in favour of this step. A first new draft constitution was rejected in a second national referendum in September 2022, but another process for drafting a new constitution is being discussed.

Significant underlying growth and inequality challenges will have to be addressed over the next years. A long-standing process of income convergence to advanced economies has gone into reverse since 2014 (Figure 1). Productivity has been stagnant or even decreasing, and boosting it has now become a key priority. Investment in new technologies has been weak, and important parts of the economy could benefit from stronger competitive forces, as cumbersome regulations hold back new firm entry and investment.

Figure 1. Income convergence has reversed

Besides boosting the engines of income growth, pressing social needs will require a growing attention to how incomes and opportunities are distributed. The quality of public education and health services needs to be improved to narrow the gap vis-à-vis private institutions. The pandemic has also highlighted significant gaps in social protection, particularly for the most vulnerable households. Ensuring some basic social protection coverage for formal and informal workers alike, while simultaneously reducing the cost of formal employment, is a key challenge. Only by addressing social protection and informality simultaneously will Chile be able to break the vicious circle where informal workers not entitled to most social protection benefits while the labour charges that finance these benefits raise the costs of creating formal jobs.

Few people have adequate old-age pensions, owing to low contributions and contribution gaps due to informal employment. Pension replacement rates were already low before the pandemic, but many pension accounts are now depleted following three rounds of extraordinary withdrawals during the crisis. A recently established universal basic pension is a key milestone: it will significantly improve pension benefits, particularly for many low-income earners. But future pension reforms should pay particular attention to formalisation incentives, while raising pension replacement rates. Income-support programmes for vulnerable households are highly fragmented, and unifying social assistance programmes into a single cash benefit scheme would allow increasing coverage and benefits.

Education is key for reducing inequalities and raising productivity at the same time. Learning outcomes remain well below the OECD average and pandemic-related school closures have exacerbated these longstanding challenges, as fewer students from vulnerable backgrounds used digital tools to remain connected. Expanding access to quality early childhood education would bridge early and often decisive gaps in cognitive and social progress and allow more women to work. Working conditions for teachers fall short of OECD average standards, with lower pay and longer working hours.

The small size of Chile’s public sector limits its ability to provide better public services and opportunities for all, and to reduce inequalities. Tax revenues of only 21% of GDP are insufficient to meet rising social demands while preserving necessary public investment in infrastructure, education and health (Figure 2). Personal income taxes, which only 20% of Chileans pay, are one explanation behind this low tax collection. Raising public revenues by several percentage points of GDP, as currently planned by the authorities, is ambitious but clearly within reach through a comprehensive tax reform.

Figure 2. Tax revenues are low

As Chile embarks on this path of reforms, many decisions are now being taken that are likely to shape the future of its society and economy for years to come. These reforms are an excellent opportunity not only for raising future incomes, but also for making future growth more inclusive and providing better opportunities for all Chileans, as discussed in the 2022 OECD Economic Survey of Chile.

Reference

OECD (2022), OECD Economic Surveys: Chile 2022, OECD Publishing, Paris, https://doi.org/10.1787/311ec37e-en.

By Nicolas Gonne and Müge Adalet McGowan, OECD Economics Department.

Belgium has low income inequality overall, thanks to extensive tax and transfer policies and strong institutionalised social dialogue. However, as in other OECD countries, there is scope to improve equality of opportunities. Indeed, Belgium’s good overall performance regarding income distribution hides an unequal access to life chances, with considerable disparities according to, notably, parental background and country of origin.

Improving economic opportunities for all in Belgium would promote well-being and potential growth by better allocating talents, but also help alleviate fiscal sustainability challenges by reducing the need for redistribution. Based on new OECD evidence from survey microdata (Périlleux et al., forthcoming), the latest Economic Survey of Belgium identifies three key barriers to equal opportunities: low labour market transitions, inequity in compulsory education and a lack of affordable housing. The Survey discusses policies that can tackle these barriers, with a particular focus on the situation of vulnerable groups, such as the low-skilled, people with a migrant background and single mothers. As competencies concerning the labour market, education and housing spread across different levels of government, some recommendations are more relevant to specific regions and communities according to their policy needs and priorities.

Improving the labour market outcomes of vulnerable groups

Important reforms have contributed to increasing the participation of low wage earners and older workers in Belgium. Yet, employment gaps remain particularly large for disadvantaged groups, such as non-EU migrants, the low educated and people with disabilities (Figure 1), in part reflecting weak digital skills and low participation in training. Lifelong learning programmes and actors involved should be streamlined and vulnerable groups prioritised for face-to-face career guidance, as complexity is particularly detrimental to their participation.

Figure 1. Employment gaps are particularly large for disadvantaged groups

The planned introduction of the individual training account, as recommended in the previous Economic Survey of Belgium, is a major step in the direction of increasing lifelong learning efficiency and inclusiveness, but successful implementation requires the provision of high quality training in areas of skill needs and coordination across regions. Moreover, the use of statistical profiling tools for delivering employment services to target vulnerable groups should be expanded. As low employment rates also reflect gaps in individual support for sickness and disability beneficiaries, individual placement and support programmes should be scaled up further, conditional on their evaluation. Finally, introducing in-work benefits for low-wage workers with children would strengthen their work incentives, as low-income single parents and second earners with children face among the highest participation tax rates in the OECD.

Enhancing equal opportunities in compulsory education

Belgian students’ overall academic performance is at par with peer countries. However, student achievement strongly depends on parental background (Figure 2), leading to large disparities across schools and programmes due to a cumulative process of socio-economic self-sorting and academic selection. Schools are incentivised to diversify their student intake, but not to achieve good educational outcomes for weaker students. Reliable performance indicators and other data on successful study progression should be used to inform school funding based on educational improvements made with disadvantaged students. Moreover, schools should be further encouraged to organise programmes across the general and vocational tracks and to enable transfers between them, as low mobility between tracks reduces the prospects of students from disadvantaged backgrounds. Finally, stronger incentives and training for new teachers can reduce attrition and attract teachers to schools with a high concentration of disadvantaged pupils, through strengthening induction programmes and rewarding teaching in disadvantaged schools with financial incentives or improved and stable career prospects.

Figure 2. Student achievement strongly depends on parental background

Promoting affordability and quality on the housing market

In Belgium, housing conditions overall are among the best in the OECD according to the OECD Better Life Index. However, access to affordable housing has become increasingly challenging for low-income households, who bear a high burden from housing costs (Figure 3). The supply of social housing is too low, especially in large cities, such as Brussels, and price differentials with the private housing market hinder moves, thereby distorting work incentives. The regions should expand rental allowances to cover low-income private market tenants, while proceeding to increase the social housing stock.

Figure 3. Low-income households bear a high burden from housing costs

References

Adalet McGowan, M.  and N. Gonne (2022), “Addressing medium-term fiscal challenges to address future shocks in Belgium”, Ecoscope, Blog posted on 14 June 2022.

Gonne N. (2022), “Improving economic opportunities for all in Belgium”, OECD Economics Department Working Papers, No. 1722, OECD Publishing, Paris,
https://doi.org/10.1787/662d50d9-en

OECD (2022), OECD Economic Surveys: Belgium 2022, OECD Publishing, Paris, https://doi.org/10.1787/01c0a8f0-en.

OECD (2020), OECD Economic Surveys: Belgium 2020, OECD Publishing, Paris, https://doi.org/10.1787/1327040c-en.

Périlleux, G., N. Gonne, S. Cassimon and M. Adalet McGowan (forthcoming), “Upward income mobility and vulnerable households in Belgium: Evidence from survey microdata”, OECD Economics Department Working Papers, OECD Publishing, Paris.

by Boris Cournede, Head of Public Finance Workstream, OECD Economics Department

Most OECD countries have very large government sectors: public expenditure amounts to 43% of economic activity, measured by GDP, on average across OECD countries. This proportion exceeds 50% in four OECD countries. The programmes on which governments spend have thus deep implications for people’swell-being and a country’s economic fortunes. Similarly, the choice and design of taxes that fund expenditure will also shape economic decisions and influence people’s  choices to work, invest and consume.

New OECD empirical work has identified lessons provided by the experience of OECD countries over the past three decades. These empirical investigations shed light on the effects of public finance on economic activity as well as on the distribution of income across households.

First, large governments can be compatible with high levels of economic activity: the condition is that governments provide their services very efficiently. The Nordic countries display the levels of government effectiveness at which governments can be large without weighing on growth. Where governments are less effective, reducing their size can be expected to lead to higher growth; however, reducing the size of government typically entails arise in income inequality, because public expenditure, and especially transfers, are a powerful equaliser of incomes.

Second, leaving aside questions about government size, many public finance reforms that change the composition of spending or the mix of taxes offer the potential to boost economic activity and household incomes:

• Some reforms can boost overall economic activity while reducing income gaps:
  • One important reform of this nature is to reduce the effective tax that low-income workers face (taking into account the withdrawal of benefits) and funding this change through proportional increases in other taxes.
  • Another reform that belongs in this win-win category for higher activity and less inequality is to increase inheritance taxes and use the proceeds to reduce other taxes proportionally.
• A number of public finance reforms can increase activity without altering income differentials, thereby “lifting all boats”roughly equally. They include:
  • Higher public investment, while reducing other spending programmes by the same amount;
  • Higher recurrent property taxes, while lowering other taxes by as much;
  • Lower effective rates of corporate income tax,while increasing other taxes.
• One public finance change that benefits the poor with no substantial effect on overall activity is to expand spending on family policy while reducing other spending programmes by the same amount.
• Finally, a number of changes to the structure of public finance can be expected to boost economic activity but widen relative income gaps yet leave no income group worse of in absolute terms. Such reforms include:
  • Lowering public subsidies, while increasing other expenditure categories by as much, giving priority to the most favourable for growth such as investment and education;
  • Lowering net wealth taxes while raising other taxes by the same amount;
  • Easing the tax burden on workers earning above-average wages while increasing other taxes to make up for the revenue shortfall.

The empirical work shows that reforms of sizes that correspond to changes that have been observed in OECD countries in the past three decades can have substantial effects on economic activity (Figure). This work can help select reform priorities in the light of their expected overall economic benefits and their distributional consequences, which will determine how inclusive, and therefore acceptable in political terms, they are likely to be. Importantly, the exact choice and design of the reforms will also have to reflect country specificities in terms of institutions and preferences.

Read more:

• Cournède, B., J.-M. Fournier and P. Hoeller (2018), “Public Finance Structure and Inclusive Growth, “  OECD Economic Policy Paper, No. 25.    https://www.oecd-ilibrary.org/economics/public-finance-structure-and-inclusive-growth_e99683b5-en
• Akgun, O., D. Bartolini and B. Cournède (2017),“The Capacity of Governments to Raise Taxes”, OECD Economics Department Working Papers, No. 1407, OECD Publishing, Paris, http://dx.doi.org/10.1787/6bee2df9-en.
• Akgun, O., B. Cournède and J. Fournier (2017),“Effects of the Tax Mix on Inequality and Growth”, OECD Economics Department Working Papers, No. 1447, OECD Publishing, Paris, http://dx.doi.org/10.1787/c57eaa14-en.
• Fournier, J. (2016), “The Positive Effect of Public Investment on Potential Growth”, OECD Economics Department Working Papers,No. 1347, OECD Publishing, Paris, http://dx.doi.org/10.1787/15e400d4-en.
• Fournier, J. and Å. Johansson (2016), “The Effect of the Size and the Mix of Public Spending on Growth and Inequality”,OECD Economics Department Working Papers, No. 1344, OECD Publishing, Paris, http://dx.doi.org/10.1787/f99f6b36-en.
• Hagemann, R. (2018), “Tax Policies for Inclusive Growth: Prescription versus Practice,” OECD Economic Policy Paper, No.24.  https://www.oecd-ilibrary.org/economics/tax-policies-for-inclusive-growth_09ba747a-en

Mr. Jon Pareliussen, Economist, Sweden/Finland desk, Economics Department

The Nordics are rightly renowned for being inclusive societies with low inequality compared to other OECD countries. However, some of the largest inequality increases over the past few decades took place in Sweden, Finland and Denmark. A newly released article  building on previous OECD work discusses how market forces, demographic trends and redistribution together shaped the income distribution of the Nordics.

It may seem like a paradox that the Nordics, which are very open economies, heavily integrated in global value chains and front-runners in the use of new technologies, have not seen even more widening distributions of market incomes. However, the extent to which skill-biased technological change and other forces widening the earnings distribution of workers will actually drive up inequality depends on a number of factors, and key policies and institutions in the Nordics play a dampening role. First, institutions such as unions and collective bargaining, employment protection legislation and minimum wages dampen the direct effect of market trends on earnings. Second, higher demand for skills are met by publicly-funded higher education, increasing the supply of skilled workers and thus holding back skills premiums. Third, a widening earnings distribution among workers coincided with increasing employment, limiting the overall effect on inequality.

With a relatively modest overall impact from market forces, explanations for increasing inequality must be sought elsewhere:

• Demographic trends have been relatively strong drivers of inequality in the Nordics. Household structure, with more single-headed households has widened income dispersion in Denmark, Finland, Norway and Sweden. Ageing has increased inequality significantly in Finland, and immigration has increased inequality in Norway, Denmark and Sweden.
• Redistribution through taxes and transfers has weakened significantly in Denmark, Finland and Sweden, notably due to less insurance transfers (i.e. unemployment, sickness, disability insurance) and only partially offset by more assistance (i.e. means-tested) transfers. Income taxes have played a less important and more heroegneous role, as progressivity increased in Sweden while it decreased in Denmark and Iceland.

Technological and demographic pressures are set to continue going forward, and these challenges need to be embraced. Continued flexibility and constructiveness of the social dialogue and improvements to education are essential to seize opportunities from technological change and avoid a widening wage distribution. Making social insurance and welfare transfers more flexible and agile would improve workers’ protection in a rapidly changing world of work. Improving benefit system design so that work always pays, notably in Denmark and Finland, and linking benefits to real-time income registries are important steps to this end.

The Nordics demonstrate that equity and efficiency can be compatible if incentives are right. Low inequality and strong safety nets can even be an advantage in today’s globalised world, which requires constant adaptation. Reaping the full benefits from globalisation and technological progress requires broad support, which is easier to muster when the social dialogue is constructive and representative, when everyone is given opportunities to fulfil their potential, risks are shared and losers compensated.

References:
Pareliussen, J. K., Hermansen, M., André, C. and Causa, O. (2018), Income Inequality in the Nordics from an OECD perspective, Nordic Economic Policy Review 2018.

By Gabriel Machlica and Claude Giorno, Israel Desk, Economics Department

Inequality and relative poverty in Israel remain high, particularly among Arab-Israelis and Haredim (Ultra-Orthodox). Israel’s social policy follows a “welfare-to-work” approach to tackle poverty in order to avoid measures that may harm work incentives among the Haredi, who value the time dedicated to religious studies, and the Arabs, who have cultural barriers to female employment. The government’s strategy of encouraging employment among previously non-working families has met with substantial success. The Israeli labour market has improved markedly, and more and more Haredim and Israeli-Arabs have been able to find jobs. Moreover, the average real income of poor households has risen by almost 3% annually in the last six years, while the average annual real income of wealthier households has increased by only 2.2%.

However, inequalities remain internationally high, and the current strategy without complementary steps has its limits. Many disadvantaged workers have been able to find jobs, but their families remain poor, since in most cases these jobs are low-paid. Indeed, the share of the working poor has risen in recent years and is comparatively high (Figure 1).

This is particularly true for the Haredim and Israeli-Arabs, who earn on average only 70% and almost 90% of the median hourly wage, respectively, mostly due to the differences in skills and typically have families with only one breadwinner. Given the current tax-transfer system and large number of children in these households, especially in the Haredi community, even two full-time working spouses would not be enough to escape from poverty (Figure 2).

Therefore the current government strategy should be accompanied by additional measures. Extensive poverty in Israeli society is to a significant extent due to the wide dispersion of skills. The government should improve the education outcomes of the disadvantaged groups to boost their future productivity and wages. As the 2018 OECD Survey on Israel argues, the education system needs to become more inclusive by giving all children opportunities for good-quality education to improve their skills. The government should also focus on programmes for adults who have already left initial education without proper skills. In addition, it should further expand in-work benefits to boost take-home pay of the average eligible worker.

References:

OECD (2018), OECD Economic Surveys: Israel 2018, OECD Publishing, Paris, http://dx.doi.org/10.1787/eco_surveys-isr-2018-en.

By Falilou Fall, Head of South Africa Desk, OECD Economics Department

Growth is recovering but inequality remains persistent. Growth is projected to reach 1.5% in 2018 after many years below one percent or negative in per capita terms. Low growth and high unemployment have adversely affected the well-being of South Africans. Since 2010, inequality, measured by the Gini coefficient at 0.62, has almost stagnated withering the social contract in a context of policy mistrust (Figure 1).

As pointed out by the 2017 OECD Economic Survey of South Africa, the weak growth reflects lacklustre investment and continued low business confidence and the impact of high unemployment, moderate wage increases and persistent indebtedness on sluggish household consumption (Figure 2).

Low growth and weak fiscal discipline contributed to rising public debt burden — from 41% in 2012 to 53% of GDP in 2017. The shortfalls in meeting fiscal objectives, policy uncertainty and corruption concerns in turn led to the downgrading of the government bond ratings to sub-investment level by two major rating agencies in 2017.  This makes it harder to meet the large social needs of much of the population.

The election of a new political leadership should brighten the outlook. Business and household confidence are up. Indeed, after three years of contraction, private investment is now expected to drive growth. But, growth perspectives remain too low to create enough jobs and generate enough government revenues for spending and debt reduction, while social and infrastructure needs are high.

In the short run, a more accommodative macroeconomic policy mix can boost growth. Inflation has come down throughout 2017 and, at 4.4% in January 2018, it is in the middle of the Reserve Bank’s target band. Interest rates can now be further reduced to amplify the investment pick up. Smoothing the pace of fiscal consolidation could further sustain demand and thus contribute to growth acceleration. In a low growth era, fiscal consolidation is detrimental to consumption demand, although reassuring for investors (Blanchard et al., 2013; Sutherland et al., 2012). South Africa made limited progress in fiscal consolidation over the last five years as growth kept falling.

Along with slower consolidation, budget reallocation toward more growth-enhancing investment should continue. Limiting wage growth in the public sector and subsidies and transfers to state-owned enterprises would create fiscal space for infrastructure and social investment.

Bold structural reforms are needed to increase potential growth in a longer perspective. OECD South Africa Economic Surveys (2013, 2015) have pointed to many growth boosting reforms: broadening competition in the economy, limiting the size and grip of state-owned enterprises (SOEs) on the economy, and improving the quality of the education system. Important input and technology sectors such as telecommunications, energy, transport and services in general should be opened up to more competition. In particular, telecoms or the airline company, which are in markets with enough competition could be privatised. Moreover, South Africa lacks a proper urban transport system. Putting in place a national plan to expand public transport and allowing more private operators would reduce the cost of transport on the budget and raise well-being.

Job creation remains a major challenge for the quarter of workforce without jobs. The 2017 OECD South Africa Economic survey found that boosting entrepreneurship and growing small businesses can play an important role in creating jobs. Steps have been taken to ease starting a business, but red tape remains a burden. There is room to reduce harmful product market regulations and restrictions to entrepreneurship and entry in professional services. The quality of the education system and lack of work experience contribute to gaps in entrepreneurial skills. Policies should provide more financial and non-financial support for entrepreneurs and small businesses. But, a lack of co-ordination and evaluation hampers effective policy-making.

Greater regional integration within the Southern African Development Community (SADC) could provide new opportunities for growth. Despite large growth potential, economic integration in the sub-region has not advanced much. Intra-regional trade in the Community is only 10% of total compared to about 25% in the ASEAN or 40% in the European Union. Better implementation of SADC protocols and agreements would advance integration and create jobs. Reducing non-tariff barriers by improving customs procedures and simplifying rules of origin would reduce trade costs in the region. Weak infrastructure and institutions and barriers to competition limit industrial development. More ambitious and effective infrastructure and investment policies are necessary at the regional level.

References

Blanchard, O. J., and D. Leigh. “Growth Forecast Errors and Fiscal Multipliers.” The American Economic Review 103, no. 3 (2013): 117-20.

OECD (2013), OECD Economic Surveys: South Africa, OECD Publishing, Paris.
http://dx.doi.org/10.1787/eco_surveys-zaf-2013-en

OECD (2015), OECD Economic Surveys: South Africa, OECD Publishing, Paris. http://dx.doi.org/10.1787/eco_surveys-zaf-2015-en

OECD (2017), OECD Economic Surveys: South Africa, OECD Publishing, Paris. http://dx.doi.org/10.1787/eco_surveys-zaf-2017-en

Sutherland, D., P. Hoeller and R. Merola (2012), “Fiscal Consolidation: How Much, How Fast and by What Means?“, OECD Economic Policy Papers, No. 1, OECD Publishing, Paris.
http://dx.doi.org/10.1787/5k9bj10bz60t-en

Antoine Goujard and Paula Garda, OECD Economics Department, Chile/Colombia desk

Chile has been one of the fastest-growing economies in the OECD in recent decades. Sound macroeconomic management, bold structural reforms, such as trade and investment liberalisation, and buoyant natural-resource sectors, supported fast convergence in living standards (Panel A). However, progress has slowed: declining productivity gains are limiting prospects for rising incomes and better-quality jobs; and inequality remains stubbornly high (Panels B and C).

Chile is at a turning point if it is to continue raising the living standards of all. The 2018 OECD Economic Survey of Chile projects a solid expansion of the economy by 2.9% in 2018 and in 2019. Chile will benefit from more favourable global economic conditions and stronger world trade. The rebound in copper prices will also support short-term growth.

The cyclical recovery offers a key opportunity to address the country’s low and stagnant productivity and its persistently high inequality. An ambitious reform agenda could increase GDP per capita by over 5% in ten years and lower inequality, notably through better-quality jobs, according to OECD estimates. This calls for increasing competitive pressures and incentives for innovation, reducing the administrative burden, improving labour market regulations and raising social spending and the employability of all by more training.

Greater productivity would be a major boost for broader-based export growth (Chapter 1 of the Survey). Competition and simplified administrative procedures, notably licences and permits, are key for better competitiveness. The simplification process should include more stakeholders and stronger ex-ante and ex-post evaluations (OECD, 2016). Systematic reviews of competitive pressures and additional technical assistance and mentoring for young and smaller firms would support entrepreneurship and ease access to export markets. Together with higher and well-targeted support for R&D, this will raise innovation and productivity growth. At the same time, further infrastructure investment, notably in intermodal connections, railways and digital networks (OECD, 2017a), are needed to bridge remaining connectedness gaps and to reduce congestion.

Chile has to do more to realise the full potential of its people. Productivity boosting reforms need to go hand-in-hand with measures to raise skills and make the labour market more inclusive (Chapter 2 of the Survey). The recent education reforms will support teaching quality and skills, lowering inequalities (OECD, 2017b). However, continuing to strengthen the quality of education and developing apprenticeships would improve opportunities for all. Female employment and the skills of the youth would benefit greatly from better access to early childcare and extended daycare opening hours. Providing additional relevant training for vulnerable workers would support productivity and employment, notably for women, the lower skilled and the youth. Lower restrictions on permanent contracts and broader access to unemployment insurance would also ease labour market adjustment for workers and firms and increase quality-jobs, thereby reducing informality and boosting well-being.

Further reading:

OECD (2018), OECD Economic Surveys: Chile 2018, OECD publishing.

OECD (2017a), Infrastructure Governance Review: Chile – Gaps and governance standards of public infrastructure, OECD publishing.

OECD (2017b), Education in Chile, Reviews of National Policies for Education, OECD publishing.

OECD (2016), OECD Reviews of Regulatory Reform – Regulatory Policy in Chile, Government Capacity to Ensure High –Quality Regulation, OECD publishing.

by Agnès Cavaciuti, Tomasz Kozluk, Dorothée Rouzet, Nicolas Ruiz and William Witheridge, OECD Economics Department

As G20 Finance Ministers and Central Bank Governors meet in Washington, there are signs that the growth prospects for their economies are improving. Recent indicators point to rising business confidence and industrial production in many countries, and fiscal initiatives in major economies are helping to support activity.

A pick-up for the global economy in 2017 would be very welcome after five years of sluggish growth, but we have not yet decisively escaped the low-growth trap. Productivity and wage growth remain weak, and inequality and political uncertainties are high. Financial vulnerabilities and policy risks could derail the recovery. In short, the G20 has yet to achieve its objective of strong, sustainable, balanced and inclusive growth.

In a push to address these challenges, under the Chinese Presidency in 2016 the G20 agreed to an Enhanced Structural Reform Agenda. This comprised G20 priority areas and guiding principles for structural reform, and a system of quantitative indicators to track the evolution of policy settings and outcomes. The OECD was tasked to assess progress and has just delivered the first report under the G20’s Enhanced Structural Reform Agenda to Ministers and Governors. It provides an overview of collective G20 progress and individual notes assessing progress for each G20 member country since the onset of the crisis.

The report shows that the G20 has made progress recently in a number of areas. Emerging economies have undertaken significant reforms to boost productivity by promoting trade and competition, improving infrastructure and encouraging innovation. In advanced economies, policy actions have generally focused on boosting employment and skills after labour markets were hit by the crisis. Employment outcomes are mixed, with the share of people in work having fallen since the crisis in China, India, Japan and the US, but increased in Germany, Indonesia, Turkey and the UK. However, overall productivity performance for the G20 has been disappointing, with labour productivity growth falling significantly since the crisis.

While inequality has been decreasing for the G20 collectively, it has increased within many G20 countries. Poor outcomes and stagnation for people with low and middle incomes, particularly in advanced economies, raise concerns that many are not sharing in the gains from growth. Some progress has been made on environmental sustainability, but G20 countries have yet to act in order to achieve the long-term objectives set out in the Paris agreement.

In addition, we should be concerned about a waning of ambition on structural reform –for example, the OECD’s recent Going for Growth 2017 report shows that the pace of reforms has slowed in recent years. In particular, the G20’s policy actions can be stepped up on promoting trade and investment openness, reforming tax structures and improving public spending efficiency. Much more can also be done to achieve greater inclusiveness through pro-growth structural reforms and reform packages that reduce inequalities.

The specific structural reform priorities under the G20’s Enhanced Structural Reform Agenda differ across countries, but each G20 country can pursue more ambitious policy packages to boost productivity and inclusiveness together. By identifying the areas where progress is needed, this report helps countries to develop and deliver ambitious Growth Strategies for the Hamburg Summit in July. Doing so would help to ensure a strong recovery and put the global economy on a higher and more inclusive growth path.

References

OECD Technical Report on Progress on Structural Reform Under the G-20 Enhanced Structural Reform Agenda, April 2017.

OECD Going for Growth 2017, March 2017.

By Jens Arnold, Head of Brazil Desk at the OECD Economics Department and Hervé Boulhol, Head of Pensions and Population Ageing at the OECD’s Directorate for Employment, Labour and Social Affairs

Pensions have been successful in reducing old-age poverty well below the population-wide average, and below the OECD average (Figure 1). At present, all pension recipients – and this includes around 90% of those aged 65 and above – receive at least the minimum wage, which is more than 5 times as much as the poverty line of BRL 170 (equivalent to USD 55).

However, Brazil’s old-age pension system already costs more than 10% of GDP, despite the country’s young – but rapidly ageing – population.  The combined annual shortfall of the pension schemes is close to 4.5% of GDP, contributing substantially to the budget deficit. If the current parameters of the system remain unchanged, spending on pensions for private-sector workers alone would increase by almost 3% of GDP by 2030, and by almost 5% of GDP by 2040. Taking into account the public sector amplifies imbalances, which will make the system financially unsustainable.  An in-depth reform is necessary and inevitable.

Several policy measures could contribute to containing pension expenditures. Raising Brazil’s low average retirement ages of 56 years for men and 53 years for women appears urgent, by introducing a binding minimum retirement age. Many OECD countries are now gradually moving their normal retirement ages beyond 65 years for men and women. In contrast to Brazil’s pension system, all public pension schemes in OECD countries include a minimum retirement age.

Brazil also stands out for high pension benefits relative to working-age incomes, in particular for low-wage earners, paid at low retirement ages (Figure 2). In the OECD, an average-wage full-career worker will get a pension paying 53% of pre-retirement earnings at the age of 65.5 years, compared to 70% for men and 53% for women in Brazil at age 55 and 50, respectively. Moreover, the minimum pension benefit is equal to the minimum wage, which has led to real increases in the minimum pension of almost 90% over the last 10 years. The minimum pension is available after 35 years of contribution or from age 65 after only 15 years of contribution.

References

OECD (2017). Pension Reform in Brazil. OECD Policy Memo, Paris: OECD, available at http://www.oecd.org/eco/surveys/reforming-brazil-pension-system-april-2017-oecd-policy-memo.pdf