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Building back better: enhancing equal access to opportunities for all

by Laurence Boone, Aida Caldera Sanchez, Nikki Kergozou, Stefano Scarpetta

As some G20 countries are gradually re-opening their economies after a period of strict confinement measures, governments have the opportunity to build back better and make growth more inclusive. The COVID-19 crisis is generating new sources of inequality but also exacerbating the inequalities that existed before the crisis. Already disadvantaged groups, low-paid workers, those in non-standard forms of employment, including those in the informal sector, as well youth and many women have been disproportionally affected by the economic and social shock of the pandemic. These groups have been particularly exposed because of the nature of their jobs and because they suffer from weaker coverage by social protection tools. G20 Governments have acted quickly and boldly to provide immediate support for people and businesses, but building back better involves tackling these inequalities. Our new report prepared for the G20 discusses why these groups are disadvantaged and which levers governments can use to enhance access to opportunities for groups in more urgent need of support, including young people, women, informal and non-standard workers, low-income, low-skilled workers and SMEs (OECD, 2020[1]).

The pandemic is increasing the risk that children and young people struggle to access learning opportunities and potentially do not graduate, while those who do will find it harder to find work experience and jobs. There is a risk that confinement measures compound the inequalities in children’s learning linked to their family’s socio-economic status as parents with higher levels of education and higher income have more opportunities to telework or arrange their work schedules to spend time with their children. In the lead-up to the crisis many young people already struggled to gain a solid foothold in the labour market, with around 19% of 15-29 year-olds not in employment, education or training (NEET) on average across G20 economies (Figure 1). Young people are also often among the most affected during labour market downturns as they generally hold less secure jobs (Figure 2) (OECD, 2020[2]). While the effects of the pandemic on the labour market are just starting, the increase in the youth unemployment rate was almost double that for the entire working-age population. The youth unemployment rate increased from 14.3 to 18.6 percent between February and May across G20 countries for which data is available, compared to an increase from 6.0 to 8.2% for the working-age population1.

The first experiences of young people in the labour market is crucial: youth unemployment can have long-lasting scarring effects in terms of lower pay and higher unemployment (Bell and Blanchflower, 2011[3]; Schmillen and Umkehrer, 2017[4]). After the global financial crisis it took a whole decade, until 2017, before the youth unemployment rate returned to its pre-2008 level (OECD, 2020[2]). We can promote more equal access to opportunities for children and young people by targeting resources to disadvantaged schools and students, investing in high-quality teachers and school leaders and ensuring qualified educational staff and high staff-child ratios. Effective employment and social support, such as job search assistance and counselling, and work experience opportunities are important to help young people in their transition to the labour market. Targeted employment support and screening for barriers to access opportunities can help ensure that all young people, and particularly the most disadvantaged, receive the type and intensity of employment and welfare support that they need. Close collaboration between schools and the public and private employment services can help increase the effectiveness of these services.

Low-income, low-skill workers are being hit hard by the pandemic on multiple fronts. Low-income workers are less able to work from home, are more likely to be working in sectors affected by shutdowns and are more likely to have suffered job or earnings loss. Even in the years leading up to the crisis, low-income, low-skill workers faced the risk of being replaced by digital and automated solutions (Nedelkoska and Quintini, 2018[5]). The crisis has pushed societies even more towards greater online sales and remote working. This push is likely to speed up digitalisation and automation trends, resulting in an even larger change in the demand for skilled jobs over the coming years. Building a sustainable and inclusive recovery means investing in people. Through upskilling and reskilling, especially in digital technologies, we can make digitalisation an enabler rather than competition for these workers. This calls, however, for reducing financial, time and scheduling barriers to participation in adult learning and for making sure that education and training programmes respond to the demand for skills in today’s and future labour markets. Online training offers many opportunities to expand access to adult learning, but low-skill workers may lack the skills to make the most of this kind of training and may need extra support.

The pandemic recession has affected labour market prospects for women more than men so far. Many of the sectors most directly affected by COVID-19 are major employers of women. Even at the onset of the pandemic, women already faced difficulties accessing the same labour market opportunities as men. Women are less likely to participate in the labour market (Figure 3), and those who do work on average in jobs of poorer quality, with lower earnings and a greater incidence of part-time and informal work. These gender differences in employment rates, hours worked and hourly earnings cumulate over people’s lives into a substantial gender gap in labour income. Across advanced G20 countries with available data, this gap ranges from around 30% in Canada to over 70% in Turkey. Outside of their paid job, the COVID-19 crisis likely amplified women’s unpaid workload at home (OECD, 2020[2]). G20 countries have made significant progress to reducing the gender gap in labour force participation but the pandemic has rolled some of this back. Recovery policies need to double down on reducing gender gaps in labour force participation by expanding access to quality formal childcare, reforming paid family-leave policies and strengthening long-term care systems. Further efforts will be needed to reduce the gender gap in earnings and the incidence of low pay among women by fighting gender biases and stereotypes, by attracting more women into careers in science, technology, engineering and mathematics, and by increasing the representation of women in leadership positions.

Informal and non-standard workers, including workers on temporary contracts, in part-time jobs and the self-employed, are particularly exposed to job and income losses in any crisis (OECD, 2020[2]). At the same time, these workers often benefit less, or do not benefit at all, from social protection measures and health coverage. A sizeable share of workers undertake non-standard work (OECD, 2020[6]), while informal workers make up 33 to 91 percent of all workers in emerging G20 economies with available data (Figure 4). The crisis has highlighted the extent of this vulnerability by forcing some non-standard and informal workers to choose between protecting themselves from the virus and having an income. Many countries have recognised this difficult situation and have put in place emergency income support, scaling up means-tested assistance of last resort, introducing new ad-hoc cash transfers and providing direct support for expenses. However, these disadvantages in labour market conditions have structural roots. These workers are often faced with lower job quality and fewer opportunities for training and career development. To ensure a more resilient and inclusive economy and society, we need to help more workers get good quality jobs and benefit from social protection systems. We can do this by encouraging formal job creation, in part by ensuring effective labour market regulation that avoids unnecessarily adding to the cost of formal employment, increasing the perceived benefits of formal employment, keeping labour taxes moderate and strengthening enforcement methods and compliance. We can improve access to training and career development for these workers by making training rights portable between jobs and available to all irrespective of employment status through individual learning schemes.

SMEs are facing dramatic revenue losses and severe liquidity shortages as a result of the pandemic. Small and medium-sized enterprises (SMEs) account for the majority of overall employment and have a considerable impact on employment growth (OECD, 2019[7]; Koirala, 2019[8]). The sudden loss of revenue could translate into insolvency problems and unnecessary bankruptcy for SMEs who in normal times are viable and sound businesses. Building back better also involves creating the right conditions for SMEs to thrive. We can create these by improving access to finance, creating a business-friendly environment that creates an equal playing field across businesses of all sizes, reducing regulatory barriers and supporting women and youth entrepreneurship.

We have a chance to build back better and make growth more inclusive. But to do this, we need to tackle the inequalities that existed well before this pandemic and are now getting worse. Governments have many levers to make this happen. G20 Governments need to keep acting boldly to make sure that the recovery benefits everyone.

References

Bell, D. and D. Blanchflower (2011), “Young people and the Great Recession”, Oxford Review of Economic Policy, Vol. 27/2, pp. 241-267, http://dx.doi.org/10.1093/oxrep/grr011. [3]

Koirala, S. (2019), “SMEs: Key drivers of green and inclusive growth”, OECD Green Growth Papers, No. 2019/03, OECD Publishing, Paris, https://dx.doi.org/10.1787/8a51fc0c-en. [8]

Nedelkoska, L. and G. Quintini (2018), “Automation, skills use and training”, OECD Social, Employment and Migration Working Papers, No. 202, OECD Publishing, Paris, https://dx.doi.org/10.1787/2e2f4eea-en. [5]

OECD (2020), “Distributional risks associated with non-standard work: Stylised facts and policy considerations”, OECD Policy Responses to Coronavirus (COVID-19), https://read.oecd-ilibrary.org/view/?ref=134_134518-2bfush541w&title=Distributional-risks-associated-with-nonstandard-work-Stylised-facts-and-policy-considerations. [6]

OECD (2020), “Enhancing equal opportunities for all in G20 countries”, Background note to the G20 Framework Working Group (FWG). [1]

OECD (2020), OECD Employment Outlook 2020: Worker Security and the COVID-19 Crisis, OECD Publishing, Paris, https://dx.doi.org/10.1787/1686c758-en. [2]

OECD (2019), OECD SME and Entrepreneurship Outlook 2019, OECD Publishing, Paris, https://dx.doi.org/10.1787/34907e9c-en. [7]

Schmillen, A. and M. Umkehrer (2017), “The scars of youth: Effects of early-career unemployment on future unemployment experience”, International Labour Review, Vol. 156/3-4, pp. 465-494, http://dx.doi.org/10.1111/ilr.12079. [4]




The social exclusion of Roma in the Slovak Republic calls for immediate policy action

by Gabriel Machlica, Slovak Republic Desk, OECD Economics Department

Roma children’s paintings, Materská skola Hrebendova, Kosice

The Slovak Republic has one of the continent’s largest Roma populations. Estimates differ, but it is assumed that they account for about 8% of the population The Roma communities vary based upon geographic location and the level of integration. Nevertheless, the average level of ethnic segregation is exceptionally high and Roma face social exclusion in almost every aspect of everyday life (Table 1.1.).


The Roma can be trapped in a cycle of poverty for generations. If a child starts her or his life with limited access to education and lives in poor housing conditions, there is a high probability she will end up in poverty too. Indeed, results for Roma show exceptionally weak upward social mobility between generations. The probability that Roma born in concentrated residential area become unemployed or earn less than minimum wage in irregular work is almost 70%.



Investment in Roma integration cannot only help improve the well-being of disadvantaged groups, but also yield positive fiscal returns from improved employment prospects. The Economic Survey of the Slovak Republic shows that increasing the Roma employment rate and their productivity to the level of the general population by the end of 2060 would increase GDP by more than 12%  with the economy growing faster on average by 0.3 p.p. per year.


References

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




How can public finance reforms boost economic growth and enhance income equality?

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



Reducing regional disparities for inclusive growth

By Müge Adalet McGowan, Spain desk, OECD Economics Department

Spain 150xEnsuring the benefits of growth are spread widely requires a strong focus on greater convergence of regions in terms of income and well-being. The GDP per capita in the best performing region was around double that in the worst performing region in 2016. Income inequality and poverty rates are also high, with regional differences.

High regional dispersion in education and job outcomes, compounded by low inter-regional mobility, emerge as key drivers of regional inequalities in income and well-being (Figure 1). At the same time, productivity growth has stagnated in Spain (Figure 2). Barriers to achieving a truly single market limit productivity growth of regions, including the most advanced. Hence, the 2018 OECD Economic Survey of Spain highlights that a dual approach of enhancing both the productive and employment capacities of lagging regions is needed (OECD, 2018). Reducing regional disparities will also depend on effective coordination and sharing of best practices across regions.

Spain 2018 fig 1 main

Stronger coordination between employment and social services is key to providing effective transitions between social support schemes and employment, given the multiple barriers that the unemployed might face (Fernandez et al., 2018). Improving coordination to provide integrated support for jobseekers via a single point of contact for social and employment services and assistance would improve the effectiveness of such policies.

Lack of full portability of social and housing rights across regions, due to prior residency requirements, contributes to low labour mobility. The 2018 OECD Economic Survey of Spain recommends ensuring full portability of these benefits across regions, by providing temporary assistance either by the region of origin or the central government.

Increasing the quality of education would improve the employability of the labour force in lagging regions and should be complemented with policies to raise job quality in regions with low-skilled jobs. For example, providing individualised support to students at the risk of failing at an early stage has contributed to lower early school leaving rates in some regions. Increasing the adaptability of workers, via lifelong learning policies better targeting the participation of low-qualified adults, would improve the matching of skills to labour market needs.

Reducing regional regulatory differences is key to achieving a truly single market and firm growth. The 2018 OECD Economic Survey of Spain recommends strengthening the implementation of Market Unity Law through enhanced cooperation and coordination across different levels of government and the assessment of the compliance of new legislation at all levels of government with the principles of the Market Unity Law. Removing the remaining barriers in some professional services would also improve competition and boost productivity.

References:

OECD (2018), OECD Economic Surveys: Spain 2018, OECD Publishing, Paris. https://doi.org/10.1787/eco_surveys-esp-2018-en.

Fernandez, R., et al. (2018), “Faces of Joblessness in Spain: A People-centred perspective on employment barriers and policies”, OECD Social, Employment and Migration Working Papers, No. 207, OECD Publishing, Paris, https://doi.org/10.1787/6149118d-en.




An empirical investigation on the drivers of income redistribution across OECD countries

By Orsetta Causa, OECD Economics department

Income inequality has increased in most OECD countries over the past two decades. This has come about both because incomes before taxes and transfers have become more unequally distributed, and because the extent of redistribution through taxes and transfers has fallen (“Income redistribution through taxes and transfers across OECD countries”). A new OECD paper by Orsetta Causa, Anna Vindicis and Oguzhan Akgun provides an empirical investigation on the drivers of the widespread decline in income redistribution across OECD countries over the last two decades.

The results suggest that the size of the redistribution system plays a major role for income redistribution, in particular on the spending side, confirming previous OECD findings. Hence, the relatively widespread decline on cash transfers to the working-age population is found to have contributed to the decline in income redistribution to the working-age population.

On the revenue side, the empirical analysis uncovers an interaction between increased economic integration and the capacity of personal income taxes to reduce income inequality. Indeed, the results suggest that stronger trade ties across countries have made a given level of tax receipt through personal income taxes less effective at reducing income inequality. The estimated marginal effect of the personal income tax to GDP (PIT-to-GDP) ratio on redistribution thus depends on the degree of countries’ openness (Figure 1): for around half of OECD countries, the effect of the PIT-to-GDP ratio on redistribution is significantly positive but this effect declines with openness levels. For a country at the OECD average level of trade openness, a one percentage point increase in the PIT-to-GDP ratio is associated with a 2% increase in redistribution. For the countries for which such effect is statistically significant, it ranges from 3.7% (USA) to around 1.5% (Korea).

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For a given overall size of the tax and transfer system, the estimation results suggest that changes in specific tax and transfer instruments have contributed to the decline in redistribution. Most important among these are:

  • Reductions in the progressivity of personal income taxes, driven by a flattening of the tax schedule in the upper-part of the wage distribution as well as by a decline in top personal income tax rates and in the taxation of dividend income at the personal level.
  • Reductions in the generosity and duration of unemployment-related transfers, including cuts to social assistance for the long-term unemployed, which have often taken place in combination with increases in spending on active labour market policies. This finding is thus likely to reflect the effect of policy reforms to boost work incentives among target groups and to shift from passive to active support for the unemployed.

At the same time, not all policy changes went in the direction of reducing redistribution: the decline in redistribution has been partly mitigated by progressive family-friendly policies, such as widespread increases in spending on early education and childcare, as well as by tax cuts to low wage earners.

These estimates are used to simulate the income redistribution effect of selected tax and transfer reform scenarios, taking into account the countries’ relative starting point in each policy area. Transfer reform scenarios deliver larger effects than tax reform scenarios. The scenarios consistently point to major redistribution gains in countries where social spending on working-age population is relatively low and/ or weakly targeted to low-income households (Figure 2). Increases in long-term unemployed- related transfers to married couples deliver major redistribution gains where these transfers are low or non-existent  (e.g. Chile, Greece, Italy, Turkey and the United States)  The magnitude of these effects reflects the large implied size of the simulated reforms for these countries and should therefore be interpreted in light of alternative policy objectives, in particular efficiency objectives in terms of job search incentives, alongside budgetary constraints.  Still, those same countries that exhibit comparatively low passive support for the long-term unemployed tend to also exhibit comparatively low active support. As a result, policy packages that would combine more generous cash transfers with more effective activation and training for jobseekers would likely meet equity and efficiency objectives. The United States and Turkey would also boost redistribution by increasing spending on early education and childcare; and so would Mexico and Japan. This would not only increase redistribution but also help narrowing gender gaps and curbing child poverty. Reforms to enhance access to quality childcare for disadvantaged families are likely to maximise policy synergies between efficiency and equity.

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References: 

Causa, O., A. Vindics and O. Akgun (2018), “An empirical investigation on the drivers of income redistribution across OECD countries“, OECD Economics Department Working Papers, No. 1488, OECD Publishing, Paris, https://doi.org/10.1787/5cb47f33-en.

 

 




Fiscal decentralisation and inclusive growth?

by Sean Dougherty, Senior Advisor, OECD Fiscal Network

Fiscaldecentral2018Over the last decade or more, many countries have experienced slowing productivity growth and a rising concentration of income. Concerns about these developments have motivated a broadening of the policy discussion about how to ensure that economic growth is made more inclusive and multidimensional. One important channel for addressing these concerns is through intergovernmental fiscal relations. By providing the “right” incentives and improving rules and practices in policy making, these institutions can shape fiscal policy and multidimensional outcomes at all government levels. The OECD Fiscal Network has recently published a volume covering these topics.

Design of decentralisation, reform options and the impact on outcomes

Earlier work published in the Fiscal Federalism Studies has shown that the stage of economic development and political economy constraints play important roles in determining the success of fiscal decentralisation. Rather than rely on unique prescriptions, policymakers should consider the importance of institutional complementarities to reap the full potential of fiscal decentralisation. The volume reinforces this message, and demonstrates the importance of considering country specificities in addition to policy design principles when reforming intergovernmental institutions and transfer systems.

Several chapters therein address the basic design of fiscal federalism and associated reforms. One overarching finding is that balanced decentralisation – that is, when the various policy functions are decentralised to a similar extent – is conducive to growth. Similarly, the efficiency of public service delivery in education and health is found to be conditional on sufficient political and institutional capacity. Balanced decentralisation allows sub-national governments to better co-ordinate policy and to reap economies of scale and scope across functions. Moreover, a country’s scope for achieving growth that is also inclusive varies widely depending on its characteristics and its public finance mix.

Spending and revenue decentralisation tends to boost economic growth for economies that have a relatively higher degree of globalisation, based on the analysis in this book. Fiscal decentralisation has a more ambiguous effect on inequality than on growth, especially for economies with a higher degree of openness. Moreover, for some countries, there is an apparent trade-off between growth and equity, when it comes to the “optimal” degree of spending and revenue decentralisation.

fiscdecjuly2018

A potential trade-off between efficiency and inequality is also examined in an analysis of education financing decisions, which looks at the link between local education funding and inequality. However, a range of country-specific policies tend to offset potential trade-offs.

“Design is in the details”

Given the complexity of cross-country results, the chapters include detailed examinations of various aspects of intergovernmental relations in Korea, the Netherlands, India and the United Kingdom. These analyses broadly mirror the cross-country findings, yet they also qualify them in terms of the difficulties in achieving various objectives. For instance, the analysis of Korea’s education financing system finds that it could benefit from more decentralised financing, both in terms of overall outcomes and equity. Empirically, heightened inequality tends to induce more spending on educational opportunitites for lower income populations. This analysis also finds that lower-scoring populations benefit the most from enhanced public educational investment.

Modelling of the Netherlands’ tax system shows that the design of local revenue collection, such as on immovable property, can have substantial distributional effects. Policy scenarios in which the tax burden is shifted towards immovable property show that the tax shift can yield a moderately positive impact on employment, minimising the distributional effects.

Empirical estimates of India’s transfer system suggests that special transfers do not achieve the objective of providing a more comparable level of public services across states at different income levels. While special purpose transfers are intended to ensure a minimum standard, the analysis finds that there are too many specific purpose transfers, and these are poorly targeted. A reform of the fiscal transfer system is suggested.

In a simulation of the UK’s local finances, not only the mix of funding sources matters for incentives, but the rules around tax and fee policy matter. Even if revenues are initially fully equalised relative to assessed spending needs, significant fiscal disparities can re-emerge in just a few years. Examining the trade-offs between equalisation and incentives inherent in sub-national finance reveals the importance of design choices.

The volume includes both cross-country studies and insights into reforms from individual countries, with several chapters written by experts closely involved in both institutional reform and the day-to-day operation of fiscal relations. The studies show how much the design of policy and institutions matters, even if reforms often happen slowly. The book is a sequel to Institutions of Intergovernmental Fiscal Relations: Challenges Ahead (OECD and KIPF, 2015), broadening and deepening the issues covered there. It also provides insights and experiences from academics and practitioners on key aspects of intergovernmental fiscal relations and how they contribute to inclusive growth. Discussions were fostered by the annual meetings of the OECD Network on Fiscal Relations Across Levels of Government.

References:

OECD and KIPF (2018), Fiscal Decentralisation and Inclusive Growth, OECD Publishing, Paris.




Stronger Growth but Risks loom large

By Álvaro S. Pereira, OECD Chief Economist ad interim, Economics Department

After a lengthy period of weak growth, the world economy is finally growing around 4%, the historical average of the past few decades.

This is good news. And this news is even better knowing that, in part, the stronger growth of the world economy is supported by a welcome rebound in investment and in world trade. The recovery in investment is particularly worth emphasising, since the fate of the current expansion will be highly dependent on how investment will perform.

Although long anticipated, the pick-up in investment remains weaker than in past expansions. The same is true for global trade, which is expected to grow at a respectable, albeit not spectacular, rate, unless it is derailed by trade tensions.

However, contrary to previous periods, 4% world growth is not due to rising productivity gains or sweeping structural change. This time around the stronger economy is largely due to monetary and fiscal policy support.

EO1.JPG

For many years, monetary policy was the only game in town. During the international financial crisis, central banks cut interest rates aggressively, injected funds into the economy and purchased assets at a record pace in an attempt to boost the economy.

In contrast, in most countries, fiscal policy remained prudent or even became contractionary. Still, historically low interest rates provided an opportunity for governments to use their available fiscal space to help foster growth, as the OECD argued forcefully in 2016. Many OECD governments are now following this advice. At first, the resources enabled by lower interest payments were used by governments to avoid cutting expenditures or raising taxes. With the improving economic situation, many governments have started to undertake additional fiscal easing.

Now that monetary policy is finally starting to return to normal, governments are stepping in to provide fiscal policy support. We can say that fiscal policy is the new game in town: three quarters of OECD countries are now undertaking fiscal easing. The fiscal stimulus in some countries is very significant, while it is less ambitious in other countries. Still, this fiscal easing will have important repercussions for the world economy. In the short run, it will add to growth. However, countries that have been experiencing longer expansions might find that this fiscal stimulus (where it is large) will also add to inflationary pressures in the medium term. Only time will tell if these short-run gains might be offset by some medium-term pain. What matters is that, in making these choices, governments are fully aware of the medium-term impact of their policies, and do not focus only on the short-term benefits from fiscal stimulus.

EO2

The strong growth we are witnessing is also associated with robust job creation in many economies. In fact, it is particularly satisfying to see that in the OECD area, unemployment is set to reach its lowest level since 1980, even though it remains high in some countries. Thanks to this robust job creation and the related intensifying labour shortages, we are now projecting a rise in real wages in many countries. This increase is still somewhat modest. However, there are clear signs that wages are finally on the way up. This is an important development, since the global crisis had a severe impact on household incomes, particularly for the unskilled and low-income workers.

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In spite of all this good news, risks loom large for the global outlook. What are these risks? First and foremost, an escalation of trade tensions should be avoided. It is worth remembering that, in part, the rise in trade restrictions is nothing new. After all, more than 1200 new trade restrictions have been implemented by G20 countries since the outset of the global financial crisis in 2007. Still, as outlined in Chapter 2, since the world economy is much more integrated and linked today than in the past, a further escalation of trade tensions might significantly affect the economic expansion and disrupt vital global value chains.

Another important risk going forward is related to the rise in oil prices. Oil prices have risen by close to 50% over the past year. Persistently higher oil prices will push up inflationary pressures and will aggravate external imbalances in many countries.

In the past few years, very low interest rates have encouraged borrowing by households and corporations in some countries and led to overvaluation of assets (e.g. houses, equities) in many others. In this context, rising interest rates might be challenging for highly indebted countries, families and corporations. Of course, this rise in interest rates has been widely anticipated and should thus not cause any major disruptions. Nevertheless, if inflation rises more than expected and central banks are forced to raise rates at a faster pace, it is likely that market sentiment could shift abruptly, leading to a sudden correction in asset prices.

A swifter rise in interest rates in advanced economies might also continue to lead to significant currency depreciation and volatility in some emerging market economies (EMEs) that are highly reliant on external financing and facing internal or external imbalances. Geopolitical tensions might also contribute to sudden market corrections or a further rise in oil prices. Brexit and policy uncertainty in Italy could add pressures to the expansion in the euro area.

What does this all mean for policy? Since private and public debt remain high in some countries, improving productivity, decreasing debt levels and building fiscal buffers is key to strengthen the resilience of economies. As monetary and fiscal policies will not be able to sustain the expansion forever and might even contribute to financial risks, it is absolutely essential that structural reforms become a priority. In the past couple of years, few countries have undertaken substantial structural reforms. Most of the countries that reformed are large EMEs, such as Argentina, Brazil and India. In the advanced economies, important labour reforms were introduced in France and a sweeping tax reform was implemented in the United States. However, as the 2018 OECD Going for Growth points out, these important exceptions do not counter the rule that reform efforts have been lagging.

Why is this important? Because the only way to sustain the current expansion and to make growth work for all is to undertake productivity-enhancing reforms. As many OECD Education Policy Reviews and OECD National Skills Strategies show, it is crucial to redesign curricula to develop the cognitive, social and emotional skills that enable success at work, and to improve teaching quality and the resources necessary to deliver those skills effectively. In many countries, investment in quality early childhood education and vocational education and apprenticeships are of particular importance. Skills-enhancing labour-market reforms are also crucial. Reforms to boost competition, improve insolvency regimes, reduce barriers to entry in services and cut red tape are also key for making our economies more dynamic, more inclusive and more entrepreneurial. Investment in digital infrastructure will also be essential in this digital age. In addition, there are significant opportunities to reduce trade costs in both goods and, in particular, services, boosting growth and jobs across the world.

In spite of stronger growth, there is no time for complacency. Structural reforms are vital to sustain the current expansion and to mitigate risks. Therefore, at this juncture of the world economy, it is truly crucial to give reforms a chance. After monetary and fiscal policies have done their jobs, it is time for reforms to sustain the expansion, to improve well-being, and to make growth work for all.

References

Economic Outlook, May 2018.

 

 




La croissance s’affermit, mais des risques assombrissent fortement l’horizon

Álvaro S. Pereira, Chef économiste de l’OCDE par intérim, Département des affaires économiques

Après une longue période de croissance atone, l’activité économique mondiale croît enfin au rythme d’environ 4 %, qui correspond à la moyenne historique des dernières décennies.

C’est une bonne nouvelle, et qui apparaît encore meilleure lorsque l’on sait que ce rebond de la croissance de l’économie mondiale est, pour partie, le résultat d’un redémarrage opportun de l’investissement et des échanges mondiaux. La reprise de l’investissement mérite tout particulièrement d’être soulignée, sachant que l’avenir de l’expansion actuelle dépendra fortement de l’évolution de l’investissement.

Bien qu’anticipé depuis longtemps, le redressement de l’investissement demeure plus timide que lors des phases d’expansion passées. Il en va de même pour les échanges mondiaux, dont on attend qu’ils progressent à un rythme respectable, sans toutefois être spectaculaire, à moins que des tensions commerciales ne viennent les mettre en péril.

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Cependant, contrairement à ce qui avait pu être observé précédemment, cette croissance mondiale de 4 % ne repose pas sur un accroissement des gains de productivité ou sur une évolution structurelle profonde. Cette fois, l’intensification de l’activité économique est dans une large mesure imputable au soutien procuré par les politiques monétaire et budgétaire.

Pendant de nombreuses années, la politique monétaire a été le seul levier utilisé. Durant la crise financière internationale, les banques centrales ont procédé à des réductions draconiennes des taux d’intérêt, elles ont injecté des fonds dans l’économie et acquis des actifs à un rythme sans précédent dans l’espoir de donner un coup de fouet à l’activité économique.

Dans la plupart des pays, en revanche, la politique budgétaire est restée guidée par la prudence, voire est devenue restrictive. Au demeurant, le niveau historiquement bas des taux d’intérêt offrait aux pouvoirs publics l’occasion d’employer la marge de manœuvre budgétaire dont ils disposaient pour contribuer à relancer la croissance, selon la position défendue avec force par l’OCDE en 2016. Un grand nombre de pays de l’OCDE suivent désormais ce conseil. Dans un premier temps, les États ont utilisé les ressources dégagées par la diminution des versements d’intérêts pour éviter d’avoir à comprimer les dépenses ou à augmenter les impôts. La situation économique s’améliorant, nombre d’entre eux se sont désormais engagés sur la voie d’un nouvel assouplissement budgétaire.

Maintenant que la politique monétaire commence enfin à revenir à la normale, les pouvoirs publics s’emploient à soutenir l’activité par la politique budgétaire. On peut dire que la politique budgétaire est le levier qui a désormais la faveur des pouvoirs publics : les trois quarts des pays de l’OCDE s’engagent à présent sur la voie d’un assouplissement budgétaire. La relance budgétaire est très ample dans certains pays, et moins ambitieuse dans d’autres. Pourtant, cet assouplissement budgétaire aura des répercussions importantes sur l’économie mondiale. À court terme, il renforcera la croissance. Cependant, les pays ayant connu de plus longues périodes d’expansion s’apercevront peut-être que cette relance budgétaire (lorsqu’on lui donne de l’ampleur) accentue également les tensions inflationnistes à moyen terme. Seul le temps nous dira si les gains à court terme seront contrebalancés par des effets douloureux à moyen terme. Ce qui compte, c’est que les responsables de l’action gouvernementale, au moment de choisir telle ou telle option, soient pleinement conscients de l’impact à moyen terme de leurs politiques, et ne se bornent pas à considérer uniquement les avantages à court terme de la relance budgétaire.

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La forte croissance que nous observons va également de pair avec une création d’emplois vigoureuse dans de nombreuses économies. De fait, il est particulièrement satisfaisant de constater que dans la zone OCDE, le chômage devrait atteindre son plus bas niveau depuis 1980, même s’il reste élevé dans certains pays. Compte tenu de la vitalité de la création d’emplois et de l’accentuation des pénuries de main‑d’œuvre qui en résulte, nous prévoyons désormais une progression des salaires réels dans de nombreux pays. Cette hausse est encore assez timide, mais on perçoit des signes indiquant clairement que les salaires sont enfin sur une pente ascendante. Il s’agit d’une évolution importante, sachant que la crise mondiale avait eu de graves effets sur les revenus des ménages, en particulier pour les travailleurs peu qualifiés et à faible revenu.

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Malgré toutes ces bonnes nouvelles, des risques assombrissent fortement les perspectives mondiales. Quels sont-ils ? D’abord et avant tout, une escalade des tensions commerciales, qui doit être évitée. N’oublions pas que, pour une part, un recours accru à des restrictions commerciales n’a rien de nouveau. La preuve en est que plus de 1 200 restrictions nouvelles ont été instituées par des pays du G20 depuis que la crise financière mondiale a éclaté en 2007. Au demeurant, comme indiqué dans le chapitre 2, parce que l’économie mondiale est beaucoup plus intégrée et interconnectée aujourd’hui que par le passé, une nouvelle escalade des tensions commerciales pourrait porter gravement atteinte à l’expansion de l’activité économique et déclencher des perturbations dans des chaînes de valeur mondiales essentielles.

Un autre risque important est lié à l’envolée des cours du pétrole. Ceux-ci ont augmenté de près de 50 % au cours de l’année écoulée. La persistance de cette tendance intensifiera les tensions inflationnistes et accentuera les déséquilibres extérieurs dans nombre de pays.

Ces dernières années, le niveau très bas des taux d’intérêt a encouragé les ménages et les entreprises à recourir à l’emprunt dans certains pays et a abouti à une surévaluation des actifs (notamment des logements et des actions) dans beaucoup d’autres. Dans ce contexte, un relèvement des taux d’intérêt pourrait mettre en difficulté les pays, les familles et les entreprises lourdement endettés. Certes, cette augmentation des taux d’intérêt a été largement anticipée et ne devrait donc pas induire de perturbations majeures. Néanmoins, si l’inflation augmente davantage que prévu et si les banques centrales sont contraintes de relever plus rapidement les taux d’intérêt, les perceptions sur les marchés pourraient s’inverser brusquement et conduire à un ajustement brutal des prix des actifs.

Une remontée plus rapide des taux d’intérêt dans les économies avancées pourrait également entraîner encore d’importants phénomènes de volatilité et de dépréciations des monnaies dans certaines économies de marché émergentes qui sont très tributaires des financements extérieurs et sont confrontées à des déséquilibres internes et externes. Les tensions géopolitiques pourraient également favoriser de brusques corrections du marché ou un nouvel essor des cours du pétrole. Le Brexit et l’incertitude autour de l’action gouvernementale qui sera menée en Italie ne font qu’ajouter aux pressions qui pèsent sur l’expansion dans la zone euro.

Que faut-il en déduire pour l’action publique ? Parce que la dette publique et la dette privée demeurent élevées dans certains pays, il est primordial de rehausser la productivité, de faire baisser les niveaux d’endettement et de constituer des marges de manœuvre budgétaires pour renforcer la résilience des économies. Étant donné que les politiques monétaire et budgétaire ne permettront pas d’alimenter indéfiniment l’expansion et pourraient même contribuer à accroître les risques financiers, il est absolument essentiel que la priorité soit donnée aux réformes structurelles. Ces dernières années, rares sont les pays qui ont engagé des réformes structurelles d’envergure. La plupart de ceux qui ont mené des réformes sont de grandes économies de marché émergentes, comme l’Argentine, le Brésil et l’Inde. Du côté des économies avancées, une importante réforme du travail a été adoptée en France et une réforme fiscale de grande ampleur est entrée en vigueur aux États-Unis. Cependant, comme souligné dans l’édition 2018 d’Objectif croissance, ces exceptions notables n’empêchent pas que les réformes ont pris du retard.

Pourquoi est-ce important ? Parce que le seul moyen d’entretenir l’expansion actuelle et de faire en sorte que la croissance bénéficie à tous consiste à entreprendre des réformes destinées à améliorer la productivité. Comme le montre l’OCDE dans de nombreux Examens des politiques nationales d’éducation et Stratégies nationales sur les compétences, il est primordial de repenser les cursus pour développer les compétences cognitives, sociales et émotionnelles indispensables à la réussite dans le monde du travail, et d’améliorer la qualité de l’enseignement ainsi que les ressources nécessaires pour favoriser une acquisition efficace de ces compétences. Dans beaucoup de pays, l’investissement dans une éducation de qualité pour les jeunes enfants ainsi que dans l’enseignement professionnel et l’apprentissage revêt une importance particulière. Il est en outre capital d’entreprendre des réformes du marché du travail propres à améliorer les compétences. Des réformes axées sur l’intensification de la concurrence, l’amélioration des régimes de faillite, l’abaissement des obstacles à l’entrée dans les secteurs de services et la simplification des procédures administratives sont aussi des ingrédients essentiels pour que nos économies deviennent plus dynamiques, plus inclusives et plus propices à l’entrepreneuriat. Les investissements dans les infrastructures numériques seront aussi fondamentaux à l’ère du numérique. Par ailleurs, il existe de vastes possibilités de réduction des coûts commerciaux sur les marchés de biens mais aussi et surtout de services, laissant entrevoir des perspectives de croissance et de création d’emplois dans le monde entier.

Malgré le regain de croissance, l’heure n’est pas à l’excès de confiance. Les réformes structurelles sont la clé de la poursuite de l’expansion actuelle et de l’atténuation des risques. C’est pourquoi, à ce point de bascule pour l’économie mondiale, il est véritablement capital de donner une chance aux réformes. Les politiques monétaire et budgétaire ayant rempli leur office, le moment est venu de faire en sorte que les réformes prennent le relais et qu’elles concourent à soutenir l’expansion, à améliorer le bien-être et à produire une croissance bénéfique pour tous.

Références

Perspectives économiques, mai 2018.




Un Mayor crecimiento, aunque se advierten importantes riesgos

Álvaro S. Pereira, Economista Jefe interino, Departamento de Economía de la OCDE

Después de un largo período de débil crecimiento, la economía mundial finalmente está creciendo alrededor del 4%, cercano al promedio histórico de las últimas décadas.

Esta es una buena noticia, y es aún mejor sabiendo que, en parte, el mayor crecimiento de la economía mundial está respaldado por una recuperación positiva de la inversión y del comercio mundial. Cabe destacar especialmente la recuperación de la inversión, ya que el futuro de la actual expansión dependerá en gran medida del buen comportamiento de la inversión.

Aunque se esperaba desde hace mucho tiempo, el repunte de la inversión sigue siendo más débil que en expansiones anteriores. Lo mismo ocurre con el comercio mundial, que se espera crezca a un ritmo aceptable, aunque no espectacular, a menos que se vea frenado por las tensiones comerciales.

Sin embargo, a diferencia de períodos anteriores, el crecimiento mundial del 4% no se debe al aumento de la productividad ni a un cambio estructural radical. Esta vez, el fortalecimiento de la economía se debe en gran medida al apoyo de la política monetaria y fiscal.

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Durante muchos años, la política monetaria fue la única carta sobre la mesa. Durante la crisis financiera internacional, los bancos centrales recortaron de manera drástica los tipos de interés, inyectaron fondos en la economía y compraron activos a un ritmo récord en un intento por impulsar la economía.

En cambio, en la mayoría de los países, la política fiscal siguió siendo prudente o incluso se contrajo. No obstante, los tipos de interés históricamente bajos brindaron a los gobiernos la oportunidad de utilizar el espacio fiscal disponible para ayudar a fomentar el crecimiento, como firmemente argumentó la OCDE en 2016. Muchos gobiernos de la OCDE siguen ahora esta recomendación. En un principio, los recursos habilitados por la reducción de los pagos de intereses fueron utilizados por los gobiernos para evitar recortar gastos o aumentar los impuestos. Con la mejora de la situación económica, muchos gobiernos han comenzado a emprender una relajación fiscal adicional.

Ahora que la política monetaria está finalmente empezando a volver a la normalidad, los gobiernos están interviniendo para proporcionar apoyo con la política fiscal. Podemos decir que la política fiscal es la nueva carta que se añade a la partida: tres cuartas partes de los países de la OCDE están llevando a cabo una relajación fiscal. El estímulo fiscal en algunos países es muy significativo, mientras que en otros es menos ambicioso. No obstante, esta relajación fiscal  tendrá  importantes repercusiones para la economía mundial. A corto plazo, contribuirá al crecimiento. Sin embargo, los países que han experimentado expansiones más prolongadas podrían encontrarse con que este estímulo fiscal (en los casos en que es importante) también se sumará a las presiones inflacionarias a medio plazo. Sólo el tiempo dirá si las ganancias de corto plazo podrían verse compensadas por impactos  negativos  de medio plazo. Lo que importa es que, al tomar estas decisiones, los gobiernos sean plenamente conscientes del impacto a medio plazo de sus políticas, y no se centren únicamente en los beneficios de corto plazo de los estímulos fiscales.

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El fuerte crecimiento que estamos presenciando también está asociado a una fuerte creación de empleo en muchas economías. De hecho, es especialmente satisfactorio comprobar que en los países de la OCDE el desempleo va a alcanzar su nivel más bajo desde 1980, aunque en algunos países sigue siendo elevado. Gracias a esta sólida creación de empleo y a la consiguiente intensificación de la escasez de mano de obra, ahora se prevé un aumento de los salarios reales en muchos países, a pesar de que este aumento es todavía modesto. Sin embargo, hay señales claras de que los salarios están finalmente aumentando. Se trata de un acontecimiento importante, ya que la crisis mundial tuvo un grave impacto en los ingresos de los hogares, en particular de los trabajadores no cualificados y de bajos ingresos.

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A pesar de todas estas buenas noticias, se advierten importantes riesgos en el panorama mundial. ¿Cuáles son estos riesgos? Ante todo, debe evitarse un aumento de las tensiones comerciales. Es importante recordar que, en parte, el aumento de las restricciones comerciales no es nada nuevo. Después de todo, los países del G20 han implementado más de 1.200 nuevas restricciones al comercio desde el inicio de la crisis financiera mundial en 2007. No obstante, como se señala en el Capítulo 2, dado que la economía mundial está mucho más integrada e interconectada hoy que en el pasado, una mayor escalada de las tensiones comerciales podría afectar significativamente la expansión económica y perturbar las vitales cadenas de valor mundiales.

Mirando hacia el futuro, otro riesgo importante está relacionado con el aumento de los precios del petróleo que han aumentado cerca del 50% en el último año. Esta persistente subida incrementará las presiones inflacionarias y agravará los desequilibrios externos en muchos países.

En los últimos años, los extremadamente bajos tipos de interés han alentado el endeudamiento de los hogares y las empresas en algunos países, y han dado lugar a la sobrevaloración de activos (por ejemplo, viviendas, acciones) en muchos otros. En este contexto, los crecientes los tipos de interés podrían ser un reto para los fuertemente endeudados países, familias y empresas. Además, esta subida de los tipos de interés se ha anticipado ampliamente y, por lo tanto, no debería causar ninguna perturbación importante. Sin embargo, si la inflación aumenta más de lo previsto y los bancos centrales se ven obligados a subir los tipos de interés a un ritmo más rápido, es probable que la confianza del mercado cambie bruscamente, dando lugar a una repentina corrección de los precios de los activos.

Una subida más rápida de los tipos de interés en las economías avanzadas también podría seguir provocando una depreciación significativa de la moneda y volatilidad en algunas economías emergentes (EMEs) ya que dependen en gran medida de la financiación externa y se enfrentan a desequilibrios internos o externos. Las tensiones geopolíticas también podrían contribuir a correcciones repentinas del mercado o a una nueva subida de los precios del petróleo. Brexit y la incertidumbre política en Italia podrían añadir presiones a la expansión en la zona del euro.

¿Qué significa todo esto para la política? Dado que la deuda pública y privada sigue siendo elevada en algunos países, la mejora de la productividad, la disminución de los niveles de deuda y la creación de amortiguadores fiscales son clave para fortalecer la resiliencia de las economías. Puesto que las políticas monetaria y fiscal no podrán sostener la expansión de manera permanente e incluso podrían acentuar los riesgos financieros, es absolutamente esencial que las reformas estructurales se conviertan en una prioridad. En los últimos dos años, pocos países han emprendido reformas estructurales sustanciales. La mayoría de los países que aplicaron reformas son grandes EMEs, como Argentina, Brasil e India. En las economías avanzadas, se introdujeron importantes reformas laborales en Francia, y se aplicó una amplia reforma fiscal en los Estados Unidos. Sin embargo, como señala la publicación de la OCDE Going for Growth, de 2018, éstas importantes excepciones no contradicen la regla de que los esfuerzos de reforma han sido rezagados.

¿Por qué es esto importante? Porque la única manera de mantener la expansión actual y hacer que el crecimiento funcione para todos es emprender reformas que aumenten la productividad. Como demuestran numerosos estudios de la OCDE sobre la revisión de políticas educativas (Education Policy Reviews) y las estrategias nacionales de la OCDE en materia de competencias (National Skills Strategies), es fundamental rediseñar los planes de estudio para desarrollar las competencias cognitivas, sociales y emocionales que permiten el éxito en el trabajo, y mejorar la calidad de la enseñanza y los recursos necesarios para impartir esas competencias de manera eficaz. En muchos países, la inversión en educación de calidad para la primera infancia, la formación profesional y los programas de aprendices revisten especial importancia. También son cruciales las reformas del mercado laboral que mejoren las habilidades. Las reformas para impulsar la competencia, mejorar los regímenes de insolvencia, reducir los obstáculos a la entrada en el sector de los servicios y reducir la burocracia también son fundamentales para hacer que nuestras economías sean más dinámicas, más incluyentes y más emprendedoras. La inversión en infraestructura digital también será esencial en esta era digital. Además, existen importantes oportunidades para reducir los costes del comercio de bienes y, en particular, de los servicios, impulsando el crecimiento y el empleo en todo el mundo.

A pesar de un crecimiento más fuerte, no hay tiempo para la autocomplacencia. Las reformas estructurales son vitales para mantener la expansión actual y mitigar los riesgos. Por lo tanto, en esta coyuntura de la economía mundial, es realmente crucial dar una oportunidad a las reformas. Después de que las políticas monetarias y fiscales hayan cumplido sus objetivos, es hora de que las reformas sostengan la expansión, mejoren el bienestar y hagan que el crecimiento funcione para todos.

Referencias

Perspectivas económicas OCDE, mayo 2018.




United we stand divided we fall: the need for greater inclusiveness in Israel

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

The Israeli economy is strong. The country is enjoying its 15th 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.

Israel 2018 survey tab 1 blog

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.

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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%.

Israel 2018 survey fig 2 blog

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