Par Isabelle Joumard et Christine de La Maisonneuve, Bureau Tunisie, Département des affaires économiques

La Tunisie s’est engagée dans un processus de démocratisation qu’il faut soutenir par des réformes économiques pour assurer une amélioration du niveau de vie de tous les tunisiens.

La capacité des citoyens à participer à la vie politique a fortement progressé et la représentation des femmes au parlement est plus élevée que dans la majorité des pays de l’OCDE et des pays émergents (graphique 1).

La croissance économique tarde néanmoins à redémarrer. Des facteurs spécifiques et temporaires ont pesé, notamment la faible croissance des marchés traditionnels d’exportation, des tensions sociales, la détérioration de la sécurité dans la région et la crise libyenne. La hausse du nombre de fonctionnaires et des salaires publics a soutenu temporairement la demande mais s’est traduite par une dérive des comptes publics, des équilibres externes et une montée de l’inflation. Pour relancer l’activité, la création d’emplois de qualité et la réduction des inégalités, il faut maintenant donner la priorité à la mise en œuvre des réformes structurelles.

La Tunisie jouît d’atouts indéniables, notamment des infrastructures de base bien développées par rapport aux pays de la région, une main d’œuvre relativement bien formée et une localisation géographique stratégique entre l’Europe et l’Afrique. La participation de la Tunisie dans les chaines de valeur mondiales et le dynamisme des entreprises orientées vers les marchés d’exportation en témoignent. Pourtant, ces atouts ne sont pas entièrement exploités. L’investissement reste faible et la création d’emplois est en panne (Figure 2).

Pour  relancer l’investissement, la Tunisie doit lever les obstacles réglementaires, douaniers et logistiques qui affectent particulièrement les entreprises tournées vers le marché national. La mise en œuvre de la nouvelle loi sur l’investissement est un pas dans la bonne direction mais devra être complétée par une accélération des réformes structurelles, notamment une simplification drastique du régime des autorisations, permis et licences ainsi que des procédures administratives et douanières lors du passage des biens à la frontière.

Le chômage est important, particulièrement pour les jeunes diplômés de l’enseignement supérieur ;  le taux d’emploi des femmes est faible et l’emploi informel est répandu. Une croissance plus forte ne sera pas suffisante pour créer des emplois de qualité pour tous les jeunes et autres tunisiens actuellement au chômage. Pour y parvenir, les autorités devront améliorer la qualité de l’éducation, réduire le coût du travail et moderniser les réglementations du travail.

Pour réduire les disparités de niveau de vie entre les régions côtières et les régions de l’intérieur, il faut  repenser la politique de développement régional, en valorisant les atouts spécifiques de chaque région autour du développement de pôles urbains. Le projet d’accroissement de l’autonomie et des compétences des collectivités locales représente une opportunité pour réaliser cet objectif.

References:

OCDE (2018), Études économiques de l’OCDE : Tunisie 2018 : Éditions OCDE, Paris.
http://dx.doi.org/10.1787/eco_surveys-tun-2018-fr

by Isabelle Joumard and Christine de La Maisonneuve, Tunisia Desk, Economics Department

Tunisia is firmly committed to a process of democratisation that needs underpinning by economic reforms in order to guarantee an improved standard of living for all Tunisians.

There has been a significant increase in citizens’ capacity to participate in political life, and female representation in parliament is higher than in most OECD and emerging countries (Figure 1).

Nevertheless, economic growth is struggling to recover as a result of the impact of specific and temporary factors such as low growth in traditional export markets, social unrest, greater insecurity in the region and the crisis in Libya. The increase in the number of civil servants and in the public sector payroll temporarily buoyed demand but caused the public accounts and the external balance to deteriorate, and inflation to rise. In order to revive economic activity and high-quality job creation, and to reduce inequalities, the priority must now be placed on structural reforms.

Tunisia has undeniable assets, notably better developed basic infrastructures than the other countries in the region, a relatively well-trained workforce and a strategic geographic location between Europe and Africa. This is reflected in its participation in global value chains and the dynamism of businesses working in the export markets. That said, the best use is not being made of these assets. Investment remains low and job creation is at a standstill (Figure 2).

To revive investment, Tunisia needs to eliminate the regulatory, customs and logistical obstacles which are primarily harming businesses focused on the domestic market. The implementation of the new law on investment is a step in the right direction but will need to be supplemented by a speeding-up of structural reforms, in particular a radical simplification of both administrative authorisations, licences and permits, and administrative and customs procedures for goods entering and exiting the country.

Unemployment is high, especially among young higher-education graduates. The employment rate for women is low, and informal employment is widespread. Stronger growth alone will not be enough to create high-quality jobs for all the unemployed young people and other Tunisian jobseekers. This can only be achieved if the authorities improve the quality of education, reduce the cost of labour and upgrade employment regulations.

To reduce the difference in living standards between the coastal regions and the inland regions, a new regional development policy is needed to leverage the specific strengths of each region around the development of urban centres. Plans to increase the autonomy and power of local authorities represent an opportunity to achieve this goal.

References:

OCDE (2018), OECD Economic Surveys: Tunisia 2018, OECD Publishing,

by Fabienne Fortanier,  Head of Trade Statistics Section, Trade and Competitiveness Statistics Division, OECD Statistics and Data Directorate.

Services comprise a growing share of international trade. Yet detailed statistics on which countries trade which services with which partners remain patchy. Although worldwide, almost all countries provide an estimate of total trade in services as part of their balance of payments and national accounts, only around 50 OECD and non-OECD countries provide some geographical breakdown in their services statistics. This means that we have no data at all for 90% of all possible bilateral services trade relationships, which reflect nearly half of the global services trade value. Moreover, even where data are available, asymmetries – where country A’s figures on exports to country B don’t match country B’s figures on imports from country A – undermine their usefulness.

To mitigate these problems, the OECD, WTO and countries have been collaborating to build a transparent and replicable global dataset of coherent bilateral trade in services statistics by main services categories. The first edition of the OECD‑WTO Balanced Trade in Services (BaTIS) dataset is now available.

Why are current official statistics on trade in services trade so patchy?

There are many reasons why trade in services data are unsatisfactory, especially compared to merchandise trade statistics. Among the most straightforward is the fact that they can be difficult to identify despite the plethora of international guidelines. Whereas the physical nature of goods means they are relatively easy to measure when they cross borders, the delivery of services is more difficult to observe – even more so when they are delivered in digital form. Data confidentiality restrictions, when only one or a few firms dominate trade in a certain services category, add another layer of complexity. But there are many more factors that cause measurement problems and asymmetries. For example, countries typically use model-based estimates for services that can only be observed indirectly, and these may differ across countries. Payments for services may not coincide with their delivery (for example in construction projects). And measurement can become even more complicated when the service is delivered between affiliated firms.

The measure explained

To reconcile asymmetries in bilateral trade in services statistics and to estimate bilateral flows where no statistics exist, BaTIS uses all available official data, and a variety of estimations, including linear interpolations and extrapolations, and econometric models, all of which are benchmarked to the officially reported totals and sub-totals.

Reported exports and imports are then reconciled using a “symmetry index” that gives more weight to those countries whose data more often agree with those of their trading partners (see our recent Statistical Insight on merchandise trade data). The balancing procedure also takes account of the reliability of different estimation methods, and gives preference to officially reported data over estimates.

Key findings

These adjustments mean that the final figure in the OECD-WTO BaTIS database for any given bilateral trade flow will differ from the figures reported by both countries, if these were originally asymmetric. Figure 1 below illustrates this for total services trade between the United States and the United Kingdom. Note that the balanced trade values fall between the two countries’ figures, and reflect trends in both.

BaTiS may also alter the ranking of a country’s main trading partners. Figure 2 illustrates this for total trade in services, again focusing on US and UK exports. For example, official data for the US put the UK on a par with Canada as the US’s most important export market for services, but balanced trade data show the UK falling to third place behind Japan. Similarly, although the US remains the most important export market for the UK services, its importance is significantly smaller when seen through the lens of BaTiS, while trade with many European markets, notably Germany and Spain, is larger.

BaTIS also provides insights on which countries systematically over- or under-report services trade figures as compared to their trading partners. One prime example is Bermuda, which reported only 1.4 bn USD of services exports in 2012, compared with 26 bn, 14 bn, and 5 bn USD reported as imports from Bermuda by the US, the Netherlands, and Ireland respectively. As Bermuda’s symmetry index is much lower than those of its trading partners, total balanced services exports by Bermuda in BaTiS were 64 bn USD in 2012 – 45 times higher than Bermuda’s officially reported figure. Much of these services reflected insurance and financial services (mainly imported by the US), and royalties and licence fees (mainly imported by the Netherlands).

Figure 3 summarises the global pattern of services trade as shown in the BaTIS database.  Intra-EU transactions account for 28% of global services trade, and transactions among East Asian and the Pacific countries for another 11%. North America’s services exports are less focused on its own region: Europe and East Asia and the Pacific are more important destinations of exports. Other regions account for very little of global trade in services, with intra-regional trade accounting for only limited shares in most.

Where to find the underlying data

The OECD-WTO database currently contains data for 191 countries for all 11 main service categories in the Extended Balance of Payments Services (EBOPS) 2002 classification for 1995 to 2012.  A new dataset using the EBOPS 2010 classification will be released in 2018 and updated annually thereafter.  Further work to reduce asymmetries in official data is under way in collaboration with national statistical offices. For example, the United Kingdom and the United States are currently undertaking joint work to reduce their asymmetries in services trade (see articles by the UK Office for National Statistics “Asymmetries in trade data – diving deeper into UK bilateral trade data” and US Bureau of Economic Analysis “Understanding Asymmetries Between BEA’s and Partner Countries’ Trade Statistics”).

Further reading

• Fortanier, F., Liberatore, A., Maurer, A., Pilgrim, G. and Thomson, L. (2017) ‘The OECD-WTO Balanced Trade in Services Database’, OECD-WTO paper.

By Dorothée Rouzet, Senior Economist, OECD Economics Department

Rapid technological change – from digitalisation to artificial intelligence, 3D printing and nanomaterials – is transforming the way goods and services are produced and consumed. It will have profound implications for the dynamics of productivity, jobs, investment and trade over the next 10 to 15 years.  A new OECD report to G-20 Finance Ministers provides an overview of the implications of the changing world of work for achieving inclusive growth.

Technological breakthroughs offer huge potential to galvanise productivity and lift incomes, but these benefits have so far been slow to materialise. The key to solving this apparent puzzle is accelerating the adoption of technologies. Many firms have not yet taken advantage of digital services to improve their efficiency and reach.

Reviving technology diffusion would help bridge the productivity gap between a small minority of highly productive firms and the rest of the economy. In emerging economies, ramping up the absorption of technologies may also be the only way to jumpstart a new development path, at a time when automation and 3D printing could erode their cost advantage in manufacturing. Boosting adoption will require addressing three types of bottlenecks: the roll-out of high-quality digital infrastructure; the availability of a complementary talent pool, including high managerial and ICT skills; and policy conditions that encourage competition, experimentation and business dynamism.

While striving to reap the growth benefits of new technologies, it should also be recognised that the future of work is fraught with anxieties and fears that the “rise of the robots” may lead to mass unemployment. Automation however has not created massive job losses so far, and is unlikely to do so in the future. New and more productive jobs will emerge while others disappear, but this implies major reallocations between tasks and activities – and serious disruptions for some workers. At the same time, new forms of work in the “gig economy” are offering workers more flexibility about when, where and how they work, but may come with inferior job quality and low job security.

Employment has already been polarising away from middle-skill jobs. Some manual and basic skills are becoming obsolete while cognitive and ICT skills are in ever higher demand. Many workers are ill-equipped to navigate this transition. For instance, in OECD countries, 55% of workers lack the basic problem-solving skills needed in a technology-rich environment. Worryingly, training programmes are not doing a good job at reaching these low-skill workers who urgently need to re-skill and up-skill. Adapting education and training to evolving needs, and supporting transitions to new jobs, will be critical to ensure that the least skilled share in the benefits of technology.

The challenges of the future of work transcend policy silos. They call for rethinking the design of policies spanning taxation, social protection, competition, innovation, skills and labour market policies. Ambitious and comprehensive policy packages will be key to help firms seize the opportunities brought by technological change, to help workers navigate the uncertainty, and ultimately to embrace the potential of rapid innovation to bring stronger and more inclusive growth.

Further reading

OECD (2018), Achieving inclusive growth in the face of digital transformation and the future of work, Report to G-20 Finance Ministers

Economic Policy Reforms: Going for Growth 2018

OECD Employment Outlook 2017

OECD Science, Technology and Industry Scoreboard 2017

by Nicola Brandt, Polish Desk, OECD Economics Department

In 2016 the Polish government introduced a large new child benefit, called “Family 500+”, with the aim to increase fertility from a low level and reduce child poverty. The benefit is universal for the second and every further child and means-tested for the first child. It more than doubles fiscal support for families, making Poland one of the top spenders in the EU concerning cash transfers for families.

It is already clear that the benefit helped to materially reduce child poverty. Extreme child poverty dropped by 3 percentage points in 2016 and the effect may well strengthen, as the benefit was paid out only starting in June of that year. It is too early to gauge the effect on births, which have been rising lately, but this could be mainly a result of the booming labour market and rising incomes. Studies for other countries find that generous family benefits can have a positive impact on fertility, although estimated effects differ widely (Brainerd, 2014).

But there may also be undesirable side effects on employment. Evidence from other countries suggests that that there can be negative effects of child benefits on female labour supply, which tend to be greater for women with lower skills (Schirle, 2015; Haan and Wrohlich, 2011). Access to affordable childcare is improving in Poland, but still very limited in many areas, in particular for the smallest children. It is hardly used at all by mothers with less than tertiary education (Figure 1). In that context child benefits can create disincentives to work for single mothers or second earners with children. This is due to its feature that the benefit is withdrawn at once when per capita family income increases beyond the eligibility ceiling. As an example, the OECD tax-benefit models suggest that an unemployed single mother of two taking up a job that pays the average wage would retain less than 20% of her earnings as a result of taxes and benefit withdrawal. If her only choice is unsubsidised private childcare, she would actually lose money.

Joint research by the Institute for Structural Research (IBS) in Warsaw and the OECD finds that the introduction of the child benefit has indeed had a negative effect on labour force participation and employment of mothers. The study compares labour force participation trends for mothers of up to two children and childless women, differentiating between single and partnered women, as female labour supply is thought to be influenced by the presence of a partner. Figure 2 shows that while in each subgroup labour force participation trends were similar for mothers and childless women prior to the introduction of the child benefit, they started to diverge markedly after that. For partnered mothers, labour force participation actually fell.

A more formal econometric analysis comparing labour force participation trends across these groups based on a difference-in-differences approach suggests that for both single and partnered mothers labour force participation might have been almost 3 percentage points higher in the absence of the child benefits in the first half of 2017. The analysis also reveals that the effect is strongest for relatively low-qualified mothers with basic vocational education or less.

While this research does imply that large child benefits can affect female labour force participation negatively, there is reason to believe that context and design matter. For example, by withdrawing the benefit for the first child more gradually the government could mitigate negative effects on labour supply. Another solution would be to make the benefit income-dependent for all children, but with a much higher eligibility ceiling as higher-earning mothers’ labour supply seems to be less affected by the benefit. Stepping up efforts to quickly extend access to affordable childcare is also likely to reduce any undesirable side effects on female labour supply.

Further reading

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

Magda, I., A. Kielczewska and N. Brandt (2018), The impact of large child benefits on female labour force supply – the case of Poland’s “Family 500+” programme.

Brainerd, E. (2014), “Can government policies reverse undesirable declines in fertility?”,  IZA World of Labor ; vol. 23, doi: 10.15185/izawol.23.

Haan, P. and K. Wrohlich  (2011), “Can child care policy encourage employment and fertility?: Evidence from a structural model. Labour Economics”, vol. 18, pp. 498-512.

Schirle, T. (2015), “The effect of universal child benefits on labour supply”, Canadian Journal of Economics/Revue canadienne d’économique, Vol. 48, No.2, pp. 437-63.

by Nicola Brandt and Pierre Guérin,  Poland Desk, OECD Economics Department

The Polish economy is in a strong position. Economic growth reached 4.6% on average in 2017 and the OECD expects it to continue at around 4% over 2018/19. A good external environment, with a solid recovery in the euro area, and the child benefits introduced in 2016, the “Family 500+” programme, are the main drivers of this strong performance. Together with a booming labour market, that has brought down the unemployment rate significantly  (Figure 1), the Family 500 + programme has also helped make economic development more inclusive, as larger parts of the population now benefit from new job opportunities and rising incomes.

In the longer run, there are challenges related to Poland’s rapidly ageing population. The recent lowering of the retirement age back to only 60 for women risks weighing on senior employment and growth prospects and heighten risks of old-age poverty, in particular for women with patchy career paths. The OECD Economic Survey of Poland argues that the government needs to step up its efforts to improve currently limited access to affordable childcare services. Insufficient institutional care for the elderly is another barrier to female employment and improved well-being for seniors.

Raising Poland’s capacity to innovate in line with the government’s Strategy for Responsible Development would help strengthen productivity growth and ensure continued convergence to higher living standards. The envisaged higher education reform with its plans to strengthen the quality of doctoral training and currently weak science-industry cooperation is crucial in this respect, as research quality and the supply of researchers do not meet top OECD standards, yet. The Economic Survey recommends a continuous increase in funding for higher education and research over time and a better link of academics’ career progression with their research and teaching achievements. The new academic exchange agency is an excellent opportunity to strengthen ties to foreign universities and the Polish research diaspora.

Too many adults have weak basic and digital skills, including managers and tertiary graduates, and vocational training suffers from weak employer engagement and insufficient alignment with labour market needs. Yet, participation in adult training is weak. Developing a national skills strategy with a strong basic skills component and engaging employers to develop more workplace-based vocational education and adult training would boost skills and help secure stronger and more inclusive growth by building the basis for faster productivity gains in Poland’s numerous micro-enterprises.

Private-sector R&D spending is low, particularly among SMEs, hindering new technology absorption and innovation. The government has stepped up the previously limited  R&D tax relief and strengthened hitherto weak venture capital investments programmes, which can be well-suited for innovative firms engaging in high risk-return projects (Figure 2).  To ensure the quality of such programmes, it will be important to strengthen impact assessment of public support for innovation. Examples from OECD countries, including Denmark, Australia, the Netherlands and New Zealand, suggest that more systematic private sector involvement into planning and monitoring innovation support programmes can help the government to identify the right policies.

Additional revenues or spending prioritisations are required to finance additional spending in higher education and research, skills, but also infrastructure and health care, and prepare for a possible decline of the availability of EU structural funds for innovation and public infrastructure programmes. Options include a stronger role for more progressive personal income taxes, more limited reliance on reduced VAT rates, and higher environmental taxes that would generate additional revenues with favourable effects on public health and environmental efficiency.

Further reading

OECD (2018), OECD Economic Surveys: Poland 2018, OECD Publishing, Paris.

http://dx.doi.org/10.1787/eco_surveys-pol-2018-en

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 Álvaro Pereira, OECD Acting Chief Economist

The global economic expansion is strengthening. Global growth is projected to increase from 3.7% in 2017 to around 4% in 2018 and 2019 in our latest Interim Economic Outlook. In many advanced and emerging G-20 economies, the growth prospects for the next two years have improved. Global trade and investment are growing faster, accompanied by robust job creation. Fiscal stimulus in the United States and Germany will further boost short-term growth. Commodity exporting emerging market economies are recovering on the back of stronger commodity prices and firmer global demand. Inflation remains low, but is likely to rise slowly as labour markets tighten.

This is welcome news. However,  there are also new tensions and new policy challenges. As the expansion progresses, monetary policy support will be reduced gradually, albeit at different speeds across major advanced economies. The likelihood of faster hikes in US policy rates has already been reflected in slightly tighter short- and long-term financing conditions. Such policy normalisation is desirable, but could expose financial vulnerabilities from accumulated debt and high asset prices. Rising interest rates could create particular challenges for emerging market economies if capital flows and exchange rates were to become more volatile.

Against the positive background, an escalation of trade tensions is a serious risk. US steel and aluminium tariffs will raise costs and harm consumers, while not solving the global overcapacity problem. Escalation of trade tensions would hurt the recovery. Safeguarding the rules-based international trading system is key.

Policymakers need to make the right choices to sustain medium-term prosperity and ensure the benefits are fairly shared by workers and households. Fiscal policy, while it remains supportive, should not excessively stimulate demand. Focusing on changes in the tax mix and spending structure holds significant potential to make growth more sustained and more inclusive in the medium term.

Keeping an eye on medium-term goals also means stepping up reform efforts to boost productivity, employment and inclusion. Some countries – Italy, France, Japan, India and Argentina  – have implemented significant reforms. However, our forthcoming Going for Growth report (to be released on 19 March) shows that in both advanced and emerging economies overall, the pace of structural reform is once again slowing, particularly on the tax and skills policies that are so important to achieving inclusive growth. Political support for reform can dwindle in good times. Yet, good times do provide an opportunity to implement ambitious policies to develop workers’ skills, promote competition, and improve the functioning and inclusiveness of labour markets so that living standards rise durably and widely across society.

Reference

OECD Interim Economic Outlook, March 2018.

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

The Israeli economy is strong. The country is enjoying its 15^th consecutive year of growth, with GDP increasing on average by 4.0% annually since 2003, i.e. faster than nearly any other OECD country. Unemployment is at historically low level, and the average standard of living is improving steadily. Rapid population growth, the rise in people with jobs, strong economic fundamentals, good economic policy settings and a dynamic high-tech sector are underpinning these impressive outcomes, which are expected to continue in the short term, according to the 2018 OECD Survey on Israel.

Today’s excellent outlook offers Israel a unique opportunity to prepare for the challenges of the future which require stronger social cohesion.  Israeli society is indeed marked by large inequalities. Almost 18% of the population live in relative poverty (i.e. with a disposable income below 50% of the median), higher than the OECD average (12.5%) and any other advanced economy. This reflects large disparities between different communities. Around half of Israeli-Arabs and Haredim are poor and live separately from the rest of the population. They have different school systems, live mostly in different cities and do not serve in the army. This leads to poor education results followed by worse labour market outcomes, notably in terms of earnings (Table 1). Haredi men have a cultural preference to engage in full-time religious studies, rather than participate in the labour market, and avoid core subjects in their school careers. Furthermore, Haredi women can work only part-time because of their large families. The majority of Israeli-Arab women also do not participate in the labour market due to cultural preferences. The result is that most Haredi and Arab families have only one breadwinner, resulting in significant problems of poverty, notably among children.

Given the high fertility of Haredi women, the share of that community in the total population is predicted to triple in the next 45 to 50 years, with the total share of Israeli-Arabs and Haredim rising from one-third to one-half over this period (Figure 1). This will have a substantial impact on Israeli economic performance, given the poor labour market outcomes and low productivity of these disadvantaged groups.

In the absence of further progress in social cohesion and any further convergence of productivity and labour market outcomes of Haredim and Israeli-Arabs with the rest of the population, average Israeli incomes would fall to nearly 30% below the OECD average, almost double the current gap according to OECD estimates (Figure 2). However, if ambitious structural reforms are launched to further improve the Haredi and Israeli-Arabs’ (youth in particular) integration into society through better education and training, improved work incentives and more business-friendly environment, the gap in Israeli living standards with the OECD average could shrink below 10%.

References:

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

Geva A. (2015), Demographic Changes and their Implications for Fiscal Aggregates in the Years of 2015-2059, http://www.mof.gov.il/ChiefEcon/EconomyAndResearch/ArticlesSet/Article_20150518.pdf

By Ben Westmore and Yosuke Jin, Ireland Desk, Economics Department

The Irish economy is booming and is expected to continue expanding at healthy rates over the next few years. But as the 2018 OECD Economic Survey of Ireland highlights, the outlook is clouded with uncertainty.

Brexit could have serious implications for the Irish economy given the close economic relationship between Ireland and the UK (Figure 1). New OECD estimates suggest that a trade arrangement between the UK and EU governed by the World Trade Organisation’s Most-Favoured Nation Rules would reduce total Irish exports by 20% in some sectors such as agriculture and food.

In addition to Brexit risks, rising international tax competition is a concern for Ireland. The Irish economy has been highly successful at attracting foreign direct investment, with foreign-owned firms accounting for close to half the country’s gross value added over recent years. As a result, reductions in effective corporate tax rates in other countries may have a negative impact on the Irish economy if they encourage some multinational firms to relocate their operations elsewhere.

In this context, the importance of raising the resilience of the Irish economy cannot be overstated.

Public finances have improved noticeably, but government debt remains high and tax receipts have become more subject to volatility (Figure 2). Further reducing public debt would create scope for budgetary policy to support the economy in the event of a negative shock – such as a disorderly Brexit. This could be achieved by broadening the tax base in a growth-friendly way. For example, VAT preferential rates and exemptions should be phased out and the property tax yield raised through more regular revaluations of the tax base.

Financial sector vulnerabilities also need to be further addressed. While non-performing loans on bank balance sheets have declined by around 60% from their peak, the stock remains high. Measures that reduce judicial inefficiencies relating to the repossession of collateral and further encourage NPL write-offs will promote the efficient allocation of capital as well the ability of the banking sector to withstand any further adverse economic shocks.

Above all else, the long-term durability of the Irish economy will rely on policy reforms that encourage a broad-based recovery in productivity. Most Irish firms have experienced declining productivity over the past decade. This has largely reflected the poor performance of local firms, with the large productivity gap between foreign-owned and local enterprises having widened (Figure 3). New firm level analysis undertaken in tandem with this Economic Survey confirms this is the case (Department of Finance, 2018; the findings of this work will be discussed in more detail in a blog post over the coming days). The resilience of the Irish economy hinges on unblocking the productivity potential of these local businesses. Pruning back regulatory barriers to entrepreneurship, such as costly regulations related to commercial property and legal services, is a start. However, productivity spillovers between foreign-owned firms and local businesses also need to be fostered by encouraging the accumulation of high-level managerial skills and research and development intensity in the latter.

Creating a more sustainable growth environment will raise the ability of policymakers to confront key challenges that exist for the wellbeing of the population. Particular areas that should be a focus include health, housing and getting people into work. To address these challenges, universal healthcare coverage should be provided, stringent housing regulations that are constraining dwelling supply rationalised and some social benefits withdrawn more gradually as labour earnings rise.

References

Department of Finance (2018), “Patterns of firm level productivity in Ireland”, forthcoming.

OECD (2018), OECD Economic Surveys: Ireland 2018, OECD Publishing, Paris.