Economic reform: A mixed scorecard

© André Faber

How can governments promote higher living standards? A pertinent question for many countries in light of today’s rather unsettled economic picture. A basic step is to ensure good policies that support both productivity and labour market participation. Is this being done?

In 2005 the OECD launched a new annual report, Going for Growth, to evaluate progress in policy reform with the aim of improving economic performance and well-being. According to the latest edition, issued in March, governments have made good progress over the past year in taking some form of action on nearly two-thirds of the reform priorities identified in the 2007 report, with particularly good progress in the area of education.But progress by member countries in other areas has fallen short,particularly on labour policy reforms, where actions were taken by only 40% of the members when this was identified as a priority. The new OECD report finds that the intensity of reform efforts in the area of labor policies is only half as much as that for education across OECD countries.The mixed performance took place against the backdrop of buoyant economic activity, the report notes, which may have had the dual effect of providing a favourable context for reform, on the one hand, while perhaps reducing the sense of urgency to reform, on the other.Going for Growth 2008 reviews the progress made by member governments in the past year in implementing country-specific policy recommendations to boost growth published in the 2007 report. Five special chapters in this year’s report analyse key structural performance and policy areas: differences in hours worked across countries, efficiency in primary and secondary education, investment in higher education, how geography influences economic performance, and trade in services.Among the sorts of measures that a number of countries have taken to raise productivity are easing competition-restraining regulations in the energy sector, pushing through reforms that improve public sector efficiency, allowing more foreign investment, and improving the tax structure. But progress has been less impressive in thornier policy areas such as regulation of labour markets, where there has been, for example, little attempt to reform job protection laws in countries where they are regarded as too rigid.Going for Growth points to annual working hours in the US that are some 15% longer than those in Europe as partly due to the larger number of work days per year in the US and partly due to a higher number of average weekly hours worked. The latter phenomenon, in turn, reflects differences in the number of hours worked by women in the two regions, with Europe’s higher marginal tax rates largely explaining why employed European women generally work fewer hours. Data compiled for the report show that a 10 percentage point reduction in personal income tax rates or social security contribution rates at the margin would increase weekly hours worked by women in Europe by 3.5%.In addition to policy, geographic factors also affect living standards and growth, and the report indicates that countries located furthest away from centres of economic activity trade less. European countries have the most central location, while the remoteness of Australia and New Zealand is cited as a reason for their relatively lower incomes per head. The effects are potentially large: Australia and New Zealand’s remoteness may reduce their GDP per capita by 10% compared with the average OECD country, while the central location of Netherlands and Belgium could boost theirs by 6%.Competition is also important for trade in services. The report estimates that if OECD countries were to align each of their competition-restraining rules with the least restrictive stance in the OECD area, trade in services would almost double, lifting GDP per head by about 2% on average and by over 3% in countries with the most stringent regulations. click here for larger graphBetter performing education systems are key to enhancing productivity and living standards and this is the area where the most significant action on reform has been taken over the past year across the countries. Yet, the report says that efficiency in primary and secondary schools in OECD countries could be greatly enhanced if they were to adopt national and international best practice. For instance, raising the standards of a typical national school up to that of OECD “best performance” would increase efficiency by 20-40%. This would require increased emphasis on performance-based management, greater autonomy and reduced streaming at school.Although investment in tertiary education can generate high returns, some young people may have difficulties in financing their studies. And, while the ratio of tertiary graduates to the adult population has been increasing almost everywhere in the OECD - particularly for females — there is considerable variance here, too, ranging from around 10% in Italy and Portugal to above 35% in North America. One challenge countries have is how to increase this ratio while avoiding a compromise in quality. Going for Growth suggests funding options, (including student loans with repayments that depend on earnings after graduation) to encourage students to invest in higher education, raising tuition fees to increase resources, and providing more scope for autonomy and innovation by the educational institutions themselves.
ReferencesOECD (2008), Going for Growth: Economic Policy Reforms–Structural policy, Indicators, Priorities and Analysis, OECD, Paris.
©OECD Observer No 266, March 2007

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