ECONOMICS AND POLICY ADVICE A Farewell Seminar for Mr. Antti Suvanto Christian KASTROP Director of the Policy Studies Branch Economics Department, OECD, Paris
Feb 20, 2017
ECONOMICS AND POLICY ADVICEA Farewell Seminar for Mr. Antti Suvanto
Christian KASTROPDirector of the Policy Studies BranchEconomics Department, OECD, Paris
Helsinki, Monday, 11th April 2016
Rebalancing is happening in China ?
2Source: OECD Economic Outlook.
Mac
ro fo
reca
sts
- W
orld
Financial exposures and vulnerabilities have increased in EMEs
3Source: OECD Economic Outlook.
Mac
ro fo
reca
sts
- W
orld
Increase in debt levels End- period stock, % of GDP
Advanced economies have therefore been more resilient
4Source: OECD Economic Outlook.
Mac
ro fo
reca
sts
- W
orld
Revisions to OECD Economic Outlook projections between June and November 2015
But there were growth shortfalls in the euro area
5Source: OECD.
Mac
ro fo
reca
sts
- W
orld
The estimated impact on GDP growth in 2015 of changes in forces acting since June 2014
Difference from baseline, percentage points
Growth recovery is still very subdued
6Source: OECD Economic Outlook.
Mac
ro fo
reca
sts
- W
orld
Global GDP growth
What keeps investment down in important European countries?
7
Source: OECD Economic Outlook.
Mac
ro fo
reca
sts
- E
urop
e
Total investment
Overall unemployment - except few countries - only slowly comes down
8
Mac
ro fo
reca
sts
- E
urop
e
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0
2
4
6
8
10
12
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Unemployment rate (%, left axis) Coefficient of variation¹ (right axis)
Unemployment dispersion in the European Union
1. Weighted standard deviation of unemployment rate observations for European Union (28) countries divided by the average EU unemployment rate.Source: Calculations based on Eurostat (2016), “Employment and unemployment (LFS)”, Eurostat Database.
Inflation is projected to remain below the target
9Source: OECD Economic Outlook.
Mac
ro fo
reca
sts
- E
urop
e
Harmonised index of consumer prices
Interest rates are low
10Last observation: 1-Feb-16.
Mon
etar
y po
licy
Policy determined and money market interest rates
Central bank assets expanded
11Source: Board of Governors of the Federal Reserve System, European Central Bank, Bank of Japan, and Bank of England; and OECD calculations.
Mon
etar
y po
licy
Non-performing loans have been coming down – but not in all countries
12Source: OECD Economic Outlook.
Mon
etar
y po
licy
As a percentage of gross debt instruments
Inflation expectations still low
13Source: Thomson Reuters; and Consensus Economics.Last observation: 2-Feb-16.
Mon
etar
y po
licy
Proxies for long-term expected inflation Euro area
Interest rates now negative for short term maturity
14Source: Thomson Reuters.
Mon
etar
y po
licy
2-year government bond yields
German government bond yield curve
Besides some austerity successes fiscal space is limited in many euro area countries
15
Source: OECD Economic Outlook.
Fisc
al p
olic
y
Debt-to-GDP ratioMaastricht definition
Fiscal now neutral or slightly positive -Recent and planned consolidation
16
Source: OECD Economic Outlook.
-2
-1
0
1
2
3
4
5
6
7
PRT
GRC ES
P IRL
USA ITA
NLD
SVN
SVK ISL
NZL
POL
CZE
DNK
EST
AUT
CAN
FRA
HUN
AUS
BEL
JPN
DEU
GBR
KOR FIN
CHE
ISR
SWE
NOR
-4
-3
-2
-1
0
1
2
3
SVN
GBR JP
N
SWE
BEL
AUS
FRA
ISR
NZL
ESP
CAN
USA ISL
FIN
GRC PO
L
CZE
CHE IRL
SVK
NLD ITA
EST
HUN
PRT
KOR
DEU
AUT
NOR
DNK
2011 - 2014 2014 - 2016
Change in the underlying primary balance
Fisc
al p
olic
y
Consolidation relied to a large extent on tax increases up to 2014
17Source: OECD Economic Outlook.
Change in key components of the primary balance
Fisc
al p
olic
y
In the coming years, the focus is going to be expenditure restraints
18Source: OECD Economic Outlook.
Change in key components of the primary balance
Fisc
al p
olic
y
In the past, some countries have adjusted public investment
19Source: OECD Economic Outlook.
Change in key components of the primary balance
Fisc
al p
olic
y
Juncker’s problem: Divergent product market regulation harms investment
20
Fisc
al p
olic
y
Product market regulation heterogeneity Deviation from OECD average bilateral heterogeneity, 2013, per cent
“Source: Fournier, J.-M. (2015), “The Negative Effect of Regulatory Divergence on Foreign Direct Investment”,OECD Economics Department Working Paper No. 1268 (forthcoming), OECD Publishing, Paris.
A 20% reduction in regulatory heterogeneity across EU countries could increase cross-border FDI in the EU by around 15%
Fiscal tools have a different impact on growth and inequality
21
Growth EquityShort-term Long-term
Short-term
Long-term
Spending cutsEducation -- -- - --Health services provided in kind -- - - -Other government consumption (excluding family policy) -- + -Pensions ++Sickness and disability payments - + -- -Unemployment benefits - + -Family - - -- --Subsidies - ++ + +Public investment -- --
Revenue increasesPersonal income taxes - -- + +Social security contributions - -- - -Corporate income taxes - -- + +Environmental taxes - + -Consumption taxes (other than environmental) - - -Recurrent taxes on immovable property -Other property taxes - ++ +Sales of goods and services - + - -
Source: Cournède, Goujard and Pina (2014).
Fisc
al p
olic
y
22
Optimal consolidation packages (growth/equality) in OECD countriesFi
scal
pol
icy
Ranking from most to least desirable instruments of consolidation
EducationChildcare and family
Social security contributionsHealth services in kind
Public investmentConsumption taxes Sickness payments
Sales of goods and servicesOther gov. consumption
Rec. taxes on imm. propertyEnvironmental taxes
Corporate income taxesPersonal income taxes
Unemployment insuranceOther property taxes
PensionsSubsidies
0 2 4 6 8 10 12 14 16 18Instrument rank
Equal weights
Simulated interdec i le range
Source: Cournède, Goujard and Pina (2014).
23
Limits to sustainability: – Debt sustainability depends on market
assessment of the probability to default, which is state contingent and, therefore, debt sustainability limit can vanish quickly, if market confidence evaporates.
24
Country by country prudent debt target
0
25
50
75
100
125
150
Prudent debt levels
0
1
2
3
4
5
6
7
Average annual fiscal effort
25
• The role of the prudent debt target: effective in anchoring expectations about future fiscal policy. The prudent debt target serves as the reference point to define numerical fiscal rules.
• Fiscal rules:– Role: Ensure fiscal discipline and long term growth
(well-being)– Objectives: (1) anchor fiscal policy expectations by
targeting a prudent debt level and (2) allow for macroeconomic stabilisation.
– Benchmarking existing rules: Budget balance + spending rule seem the best.
… and effective fiscal frameworks
Budget balance Structural balance Expenditure rule Revenue rule Fiscal stabilisation - + + - Fiscal discipline ++ + + -+ Side-effects and risks - -- - -
26
EU fiscal rules support debt-sustainabilitywith a set of several rules
Fisc
al r
ules
Source: Barnes, Botev, Rawdanowicz and Strasky (forthcoming).
EST
LUX
SWE
CZE DNKPO
LSV
KFI
NDEU NLD
HUNSV
NAU
TES
PFR
ABEL IR
LPR
TIT
A0
20
40
60
80
100
120
140
160starting debt levels (2016) 2026
Debt levels in 2026 if EU fiscal rules are followed exactly( % of GDP) Debt rule
(both nominal and cyclically-adjusted; backward- and forward-looking)
Nominal budget balance rule
Structural budget balance rule
Expenditure rule
The Productivity Problem: Aggregate productivity growth goes down even before the crisis
Labour productivity growth since 1990GDP per hour worked (China and India refer to GDP per worker)
Diffusion from frontier is key !Average of labour productivity across each 2-digit sector (log, 2001=0)
Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy: micro evidence from OECD countries”, OECD Productivity Working Papers No. 2.
Diffusion comes easier to some economies than others
Estimated frontier spillover (% pa) associated with a 2% point increase in MFP growth at the global productivity frontier
Source: Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From the Global Productivity Frontier: Industry Level Evidence”, OECD Economics Department Working Papers, No. 1238.
0.0
0.1
0.2
0.3
0.4
0.5
Trade with the Frontier Participation in GVCs Efficiency of skillallocation
Managerial quality Business R&D
Minimum (Italy)
Minimum(Italy)
Minimum (Austria)
Maximum(Finland)
Maximum(Belgium)
Maximum(Sweden)
Maximum(Canada)
Minimum(Australia)
Minimum (Canada)
Maximum(Belgium)
Globalisation Reallocation Knowledge-Based Capital
Finland
Policies shape the diffusion of new innovations from the global frontier
Estimated frontier spillover (% pa) associated with a 2% point increase in MFP growth at the global productivity frontier
Source: Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From the Global Productivity Frontier: Industry Level Evidence”, OECD Economics Department Working Papers, No. 1238.
0.0
0.1
0.2
0.3
0.4
0.5
Barriers to Entrepreneurship Cost of Bankruptcy Legislationfor Entrepreneurs
Basic Research University-Industry Collaboration
Minimum (Sweden) Minimum
(Norway)
Maximum(Greece)
Maximum(Italy)
Maximum(France)
Maximum(Belgium)
Minimum(Belgium) Minimum
(Italy)
Entry and Exit Innovation policiesFinland
Skill mismatch and public policy
Source: Adalet McGowan, M and D. Andrews (2015), “Skill mismatch and public policy in OECD countries” OECD Economics Department Working Paper, No. 1210.
Maximum
Maximum
Maximum
Maximum
Maximum
Maximum Maximum
Maximum
MaximumMaximum
Minimum
Minimum
Minimum
MinimumMinimum
MinimumMinimum
Minimum
Minimum
Minimum
Minimum
MinimumMaximum
Maximum
(POL)
(DEU)(FRA)
(ITA)
(BEL)
(SWE) (AUT)
(SVK)
(NLD )(AUT)
(ITA)
(ITA)
(NLD )
(USA)(CAN)
(NOR)(DNK)
(FIN)
(CAN)
(KOR)
(USA)
(KOR)(DNK)
(FIN)
0.14
0.18
0.22
0.26
0.30
0.34
Pro
duct
mar
ket
regu
latio
n
Em
ploy
men
t p
rote
ctio
n le
gisl
atio
n…
Em
ploy
men
t pro
tect
ion
legi
slat
ion
(tem
pora
ry w
orke
rs)
Cos
t of c
losi
ng a
bus
ines
s
Tran
sact
ion
cost
s
Ren
t con
trol
Tena
nt-la
ndlo
rd re
gula
tions
Cos
t of o
btai
ning
a b
uild
ing
perm
it
Res
pons
iven
ess
of h
ousi
ng s
uppl
y
Cov
erag
e ra
te o
f c
olle
ctiv
e ba
rgai
ning
agr
eem
ents
Par
ticip
atio
n in
life
long
lear
ning
Man
ager
ial q
ualit
y
Framework policies Housing policies Other policies
FinlandProbability of mismatch
Skill mismatch as a constraint on labour productivity
Source: Adalet McGowan, M and D. Andrews (2015), “Labour market mismatch and labour productivity: evidence from PIAAC data ” OECD Economics Department Working Paper, No. 1209.
Skill mismatch, particularly over-skilling, is harmful for productivity because it constrains the ability of innovative firms to attract skilled workers and grow
• Global Economy: China and EME/ Trade and Capital flows/ Data ?
• Monetary: Macro via bubbles ?, Financial markets and Real Economy/ Channels / Long Term Expectations
• Fiscal: Hysteresis, Multipliers and Non-Linearities • Structural: Macro/Micro Data, Pass through QSR/
Global Integration-Technology/ GNP accounts• Dynamic change of preferences, Behaviour and
(individual and group) “rationality”
If economists know what they don’t know, do they tell ?
THANK YOU