Washington, DC March 2009

1. Washington, DC March 2009 Going for Growth 2009 Klaus Schmidt-Hebbel Chief Economist and Head OECD Economics Department L

2. Outline • Going for Growth: analysis and policy recommendations for boosting long-term growth • Which long-term growth policies help to boost the recovery from the financial crisis? • New empirical results concerning long-run growth in this edition

3. The Going for Growth process Methodology 2 • Systematic policy and performance benchmarking using indicators • Identifies five priorities per country • Follow-up and review • To promote long-run economic growth

4. GDP per capita as a welfare measure Methodology • GDP per capita is not a perfect measure of well-being … • … but it is the least imperfect proxy of welfare that is available. • It is closely correlated with other objective performance measures but not with alternative measures of human development or subjective measures of happiness.

5. Decompose GDP per capita Methodology

6. GDP per capita gaps with the US (2007) Methodology 5

7. Convergence had improved before the crisis (vs. US) Meth0dology 6

8. Convergence pattern is robust to the choice of the numéraire Meth0dology 7

9. Benchmarking uses about 50 mostly OECD policy indicators Methodology 8 • Policy indicators affecting mainly productivity • Product market regulation database, 1998, 2003 and 2008 • Producer support estimates in agriculture • FDI restrictiveness index • Educational attainment and achievement • Health and infrastructure expenditure • Policy indicators mainly affecting labour markets • Tax wedges • Implicit tax rates on continued work • Minimum wages and labour costs • Unemployment benefit replacement rates • Employment protection legislation • Disability/sickness beneficiaries

10. Policy measures have been tied to outcomes in panel studies Methodology • Empirical work based on OECD studies • Sources of Growth in OECD Countries (OECD, 2003) • Estimates of short-run and long-run effects of policies on GDP/capita growth in Bassanini and Scarpetta (2001): • V is a vector of institutional variables • Dynamic panel estimates using pooled mean group (PMG) methods

11. Policy measures have been tied to outcomes in panel studies Methodology • Empirical work based on OECD studies • Reassessment of OECD Jobs Strategy (OECD, 2006) • Estimates of labour market policies effect on unemploy-ment and employment (Duval and Bassanini, 2006): • X is are a vector of labour market policies (EPL etc.), plus interactions. Unempl. eqn. looks at interactions. • System GMM estimators used for the dynamic panel. • Many other (primarily OECD) studies.

12. Benchmarking methodology Methodology Sample country: New Zealand 2009 • Three steps: • Identify performance weaknesses associated with subcomponents of GDP/capita • Identify policy weaknesses based on policy indicators and analysis establishing links between policy and performance • Select most important policy weaknesses as priorities for reform

13. Priority policy areas shift over time Five priorities for each member country and the European Union Methodology 12

14. Policy recommendations for the US, Japan and the EU (2009) Methodology 13

15. Outline • Going for Growth: analysis and policy recommendations for boosting long-term growth • Which long-term growth policies help to boost the recovery from the financial crisis? • New empirical results concerning long-run growth in this edition

16. Financial crisis, reflected in the OECD’s financial conditions index … Policies at a time of crisis 15

17. … affecting real activity Policies at a time of crisis Industrial production 16

18. Implication of the financial crisis for structural reforms Policies at a time of crisis The crisis reflects a failure of regulatory and supervisory policies to deal with risks inherent to the financial sector Yet it does not cast doubt on the importance of reforms to improve labour and product market performance recommended in Going for Growth Experience shows that structural reforms are often carried out at a time of economic crisis

19. Policy action at a time of crisis Policies at a time of crisis 18 • Focus on policies that stimulate demand in the short run and strengthen long term growth • OECD analysis shows that the key win-win policies are: • Enhance infrastructure investment • Cut taxes on lower income groups • Raise human capital through labour training • Reform product market regulation (#s 1-3 part of fiscal policy plans, reviewed next) • Special chapters of GfG on these four areas

20. Desirable Features of Fiscal Stimulus Plans Policies at a time of crisis 19 • Timely, temporary, targeted • Size determined by: • Economic conjuncture • Initial fiscal balance and debt levels • Size of automatic stabilizers • Targeting: short-term (stabilization); long-term (growth); job creation; green component • Accompanied with credible commitment to medium-term fiscal sustainability

21. Size of Fiscal Stimulus Plans Policies at a time of crisis 20

22. Size of Fiscal Stimulus Plans Policies at a time of crisis 21

23. Composition of Fiscal Stimulus Plans Policies at a time of crisis 22

24. Fiscal Multipliers Policies at a time of crisis Note: Literature review regarding medium/long-term is based on panel and cross-country analysis. Literature review regarding short-term effect is based on VAR studies and Macro models. * Ranges for the OECD depend on country differences in import intensity 23

25. Long-Term Policies: Outline • Going for Growth: analysis and policy recommendations for boosting long-term growth • Which long-term growth policies help to boost the recovery from the financial crisis? • New empirical results concerning long-run growth in this edition

26. Special chapter 1. Infrastructure 1. Infrastructure investment, growth and public policy

27. Infrastructure investment has been falling: crisis offers opportunity to reverse it 1. Infrastructure

28. Empirical work on the impact of infrastructure 1. Infrastructure • Hard to measure infrastructure systematically in the national accounts, use physical measures • Estimates of long-run and short-run effects • MRW framework adapted to infrastructure: • Infrastructure taken as separate input • Shows some countries and periods had negative effects (relative to other types of investment)

29. Infrastructure investment has to be done carefully 1. Infrastructure • Since the impact of infrastructure • Varies over time and by industry • Overprovision of infrastructure is a real risk • A good regulatory environment is critical • Requires careful cost-benefit analysis of projects • Hard to implement quickly, but can move forward with maintenance expenditure and good, off-the-shelf investment projects • Public investment has the highest short-term (0.7 to 0.9) and long-term (up to 1.0) multiplier effects on GDP levels

30. Having a good regulatory framework is critical to ensure efficiency 1. Infrastructure One key component: Independence of the regulator in the OECD Reference period: 2007/08

31. Special chapter 2. Taxes and growth 2. Taxation and economic growth

32. Tax composition 2. Taxes and growth Share of tax revenues (2005)

33. The effects of tax composition on growth 2. Taxes and growth • Empirical work looks at tax effect on growth • Aggregate level: • Industry level: • Firm level: • Effects on investment through user cost also examined

34. Which taxes should be cut? 2. Taxes and growth • It depends on the current tax structure in each country • Taxes matter for long-term growth: • Corporate taxes are the most harmful, followed by … • … labour income taxes, and then … • … taxes on goods and services with … • … taxes on immovable property the least harmful • In the short-run, the best strategy at present is to cut taxes on labour income for low-income workers, as this will boost aggregate demand and raise labour utilisation in the long term

35. There is much room to reduce labour income taxes for lower income workers 2. Taxes and growth Tax burden at 67% of average worker earnings

36. Special chapter 3. Education 3. Population structure, employment and productivity

37. Education and population structure vary considerably across the OECD 3. Education

38. Education and population structure explain part of the income gap 3. Education Income gap relative to the United States (%)

39. Strengthen education and training 3. Education Education and training is very important for high productivity levels in the long run Increased activation through mandatory training programmes for the unemployed can facilitate transition to new employment in the short term A temporary increase in public spending in this area can help boost aggregate demand

40. Moderate long-term trade-off between labour utilisation and productivity 3. Education Employment and productivity changes when matching US employment rates in each group (2004) Elasticities estimated over 1997-2004

41. Special chapter 4. Product market regulation 4. Reform of product market regulation

42. Reforms of product market regulation (PMR) have been substantial 4. Product market regulation Restrictiveness of product market regulation (0-6)

43. Updated indicator of PMR based on detailed policy settings (2008) 4. Product market regulation Product market regulation Barriers to entrepreneurship (0.33) Barriers to trade and investment (0.33) State control (0.33) Public ownership (0.50) Explicit barriers to trade and investment (0.50) Other barriers (0.50) Regulatory and administrative opacity (0.33) Administrative burdens on start-ups (0.33) Barriers to competition (0.33) Involvement in business operations (0.50) Legal barriers (0.25) Antitrust exemptions (0.25) Barriers in network sectors (0.25) Barriers in services (0.25) Scope of public enterprise (0.33) Gov’t involvement in network sectors (0.33) Direct control over business enterprises (0.33) Price controls (0.50) Use of command and control regulation (0.50) Barriers to FDI (0.33) Tariffs (0.33) Discriminatory procedures (0.33) Licenses and permits system (0.50) Communication and simplification of rules and procedures (0.50) Admin. burdens for corporations (0.33) Admin. burdens for sole proprietor firms (0.33) Sector-specific administrative burdens (0.33) Regulatory barriers (1.0)

44. Reform product market regulation, strengthen competition 4. Product market regulation • Stronger competition in product markets increases productivity in the long term by ensuring better use of resources and spurring entrepreneurship • New firms and new products may also help to raise demand in the short term • Many OECD studies show strong link with pace of convergence

45. Firm entry barriers can be reduced 4. Product market regulation Barriers to entrepreneurship, 2008 (increasing stringency, 0-6)

46. Need for reform in range of areas, depending on area 4. Product market regulation Distance from best practice, 2008 (increasing stringency, 0-6)

47. Going for Growth 2009 Klaus Schmidt-Hebbel Chief Economist and Head OECD Economics Department