New Approaches to Economic Challenges: Institutions and Governance


Policy makers are facing a number of near-term challenges in the wake of the crisis, including high and rising unemployment, stagnating growth, and weak fiscal positions. Long-term trends, such as population ageing and migration, pose additional challenges.

The crisis also sparked a debate on the role of governance failures in the crisis, many of which still need to be addressed. At the same time, there has been increasing demand from citizens for the state to better support inclusive growth and to offer greater transparency and access to information. In addition, new technologies including the internet and various social media have significantly changed the time frame and constraints under which governments operate, particularly in the context of a crisis.


These interconnected challenges require a rethinking of the role of the state. Against this background, this category of work will discuss approaches that could help to improve institutions and governance in order for national and sub-national governments to more effectively adopt and implement policies in an increasingly interconnected world. It will also examine how the OECD can better develop its work and assist governments in implementing reforms.

There are three streams in this category of work.

  • Trust in Government: The first stream will explore the impact of the crisis on trust and effectiveness in government and identify specific policy measures to rebuild them.
  • Vulnerability of Social Institutions: The second stream will focus on the vulnerability of social institutions to the consequences of the crisis as well as major global trends, with a particular focus on the implications of population ageing.
  • New Challenges for Governance: A third stream will take a close look at new challenges for governance, including the importance of effective regulation to support inclusive growth and opportunities for regulation to be adapted to a globalised world.

All these aspects aim to provide concrete options to reflect the notion of the ‘smart state’, which was introduced by Philippe Aghion at the first NAEC Group meeting in October 2012.


Trust in government

C1   Revisiting the social contract: rebuilding trust for sustained economic recovery


Vulnerability of social institutions

C2   Assessing the vulnerabilities of social institutions, and policy responses to enhance resilience
C3   Can health become an even bigger part of the economy without undermining fiscal sustainability?
C4   Assessing immigrant characteristics and links to labour market performance


New challenges for governance

Revisiting the social contract: rebuilding trust for sustained economic recovery


C5   Promoting inclusive growth through better regulation
C6   Implications of globalisation for competition
C7   Securing tax revenues in a globalised economy



View the other pillars of the New Approaches to Economic Challenges:



Description of projects


Revisiting the social contract: rebuilding trust for sustained economic recovery


Against a background of increasing unemployment and widening inequalities, demands from citizens and business are high, but confidence that government can deliver is low in many countries. Without trust in government, public support for ambitious, innovative policies is difficult to mobilise, particularly where short-term sacrifices are involved and where long-term gains might be less tangible. This represents a serious challenge for OECD governments as they search for the more effective policies that the NAEC initiative aims to identify. One of the conclusions of the Chair at the first NAEC Group meeting was that NAEC should “examine how to gain back trust in governments”.

This project includes two innovative components, both of which build on areas of OECD expertise, that look at how public confidence can be assessed and what measures governments can take to strengthen it.

1. Building the evidence base on trust in government: When we start to address the link between trust and policy outcomes, we are moving into new territory for the OECD. Do we have the right measures? Are the methods for measuring trust in institutions, the ones that we would choose? Or do we need to strengthen the metrics so that they meet OECD standards in terms of policy relevance, quality and so on. The project will assess the robustness of existing methodologies to measure trust in government and key institutions, and develop new metrics that are more policy focused, drawing on OECD governance indicators developed for Government at a Glance and guided by G@G Steering Group experts in relevant fields such as budget transparency, open government, integrity, regulatory compliance, rule of law and public sector efficiency. New approaches to measuring trust will be tested through case studies.

2. Managing complex challenges – reliable, competent and legitimate responses in a context of uncertainty and risk: Public confidence depends to a large extent on how governments deal with the big issues. Securing stakeholders’ buy-in and mobilising their active support is essential for political decisions to succeed and have a measurable impact, but that support depends on the government demonstrating its capacity and competence under pressure. The project will look at the specific case of complex policy challenges to see how governments can adapt institutions, and processes to cope better with major cross-department challenges or crises. This pillar would look at the public governance of complex policy challenges across three dimensions of complexity: (a) multi-sectoral issues that cut across the structure of government; (b) planning for long-term change and (c) risk management in the public sector. The work will draw on evidence from OECD public governance reviews and on expertise from the centres of government network, public governance committee and high level risk forum. The output will be developed by means of seminars and case studies and will focus on the capacity and organisational requirements needed to manage change and maintain public support.



Assessing the vulnerabilities of social institutions, and policy responses to enhance resilience


The recent crisis has revealed the unsustainability of some of the promises made under various social systems. Social institutions have been burdened by the crisis, which makes them particularly vulnerable to future shocks. In this context, it is important to assess the vulnerabilities attached to the main types of social security institutions, covering pensions, health care systems and unemployment insurance, as well as identifying adequate policy responses. In particular, there should be a focus on finding the right balance between achieving financial sustainability while continuing to further the social goals that these institutions serve.

The project aims at identifying both general institutional settings and specific institutions that tend to be more (or less) vulnerable to structural shocks. It will propose changes in the design of existing social institutions in different countries in order to make them more resilient to global trends and economic crises. A framework for analysing the vulnerability of different types of social institutions to shocks will be developed. OECD countries will then be grouped based on institutional settings in social institutions in order to identify those that are most at risk. Existing in-house models for institutions, e.g. for pensions or unemployment support, will be used and investigated through exposure to potential shocks. The effects of policy settings in related areas will also be taken into account. To the extent possible, the analysis will be applied to non-OECD G20 countries too.



Can health become an even bigger part of the economy without undermining fiscal sustainability?


Access to high-quality health services for all is a key objective to promote wellbeing. While health spending has continued to climb over past decades, the recent economic and financial crisis has prompted many governments to ask whether new approaches to defining the boundaries between public and private health spending ought to be envisioned. Rather than simply reacting to shocks by cutting or consolidating health spending, governments are asking how they can improve prioritisation models in order to deliver high-quality health services in a fiscally sustainable manner.

In the fifteen years prior to the Great Recession, health spending per capita in OECD countries grew, on average, three times faster than income per capita. Employment growth in the sector has continued through the recession, even in some of the countries most hit by the public expenditure crisis. Health and social services are a major source of employment, including low-skilled employment. However, if the expansion of health care is to be a source of jobs and growth, it needs to be financed in a way that is sustainable. At the moment, 70-80% of total health spending is financed by the public sector, and there has been little change over time. If these proportions are maintained as total health spending increases, public budgets will be put under great pressure.

The aim of this project is to develop policy scenarios to assist countries in deciding how to best manage the boundaries between the public and private provision of health services in a way that helps manage the impact on equity in access and guards quality of care. This is a critical policy challenge as OECD countries seek to decide which health services to prioritise, while emerging economies seek guidance on which health services to focus upon as they attempt to achieve universal health coverage. The project plans to rely on empirical analysis of the sources of growth in health spending as well as on different approaches based on econometric analysis. It will also advise countries on possible scenarios for public/private boundaries of health spending to respond to different population preferences for fairness and public spending.



Assessing immigrant characteristics and links to labour market performance


Promoting the economic and social integration of immigrants in host countries is an important component of an inclusive growth strategy. Already in 2010, on average in the OECD, permanent migrants accounted for more than one in four new entries into the working-age population, although a significant fraction was still accounted for by free mobility within Europe. Although labour migration is expected to increase over the next decade, family and humanitarian migration will continue to be a significant part of total migration flows and policy efforts to better mobilise domestic resources in the context of ageing populations need to take this into account more explicitly.

The project will look at the policy requirements needed for migration to play an even stronger role in responding to skill mismatches in complement to other types of policy responses (i.e. activation, mobility, education and training) and for ensuring the best possible use of migrants’ skills to support inclusive economic growth. Possible spillover effects across countries will be also considered.

Building on past OECD work on the labour market integration of immigrants and their children and taking advantage of newly available PIAAC data, it will provide much needed information on the relative importance of different immigrant characteristics for labour market outcomes, with implications for both integration policy and the selection of labour migrants in supply-driven regimes. It will also seek to focus more precisely on the skills of migrants, their use in the labour market and the barriers that migrants are facing in accessing the labour market.



Promoting inclusive growth through better regulation


The financial and economic crisis highlighted serious regulatory failures, be they related to poor articulation of regulation across borders, limited enforcement of rules or regulatory capture. The crisis reawakened debate on the role of the state as a regulator in the economy, and on how and where it should intervene to achieve which objectives. In the aftermath of the crisis, the issue of how better regulation/regulatory frameworks can spur growth and strengthen social inclusiveness while guarding against regulatory failure has emerged as a high priority. Identifying opportunities for promoting growth through the application of regulatory policy and reform remains, however, a challenging task. There is a need to explore more systematically the potential of better rule making at domestic level, but also beyond countries’ borders, to unblock critical constraints to growth in specific country contexts and globally.

The issue of governance was highlighted at the NAEC Group meeting as an important area for the initiative to explore. Public governance has been a neglected issue in the debate over how countries can recover from the crisis and develop more sustainable and inclusive policies. This project offers an opportunity to review the contribution of regulatory policy — a key dimension of public governance reform — and an area in which OECD has an established track record of thematic and country-level analysis, but also an area in which NAEC could provide impetus for new thinking. The project aims at producing recommendations and good practice based on surveys from OECD countries, analytical work carried with expert inputs, case studies of specific regulatory cooperation experiences, as well as roundtable discussions.



Implications of globalisation for competition


Growing interconnectedness across borders has direct implications for competition policy. The world economy is more integrated than ever before, thanks to technology and a substantial reduction in transactions costs. Companies sell into global markets, and produce their goods using supply chains that cross national boundaries many times.  Competition law has also spread worldwide, with over 120 competition authorities worldwide, which represents a remarkable convergence of economic policy recognising the benefits of well functioning markets. Although the work of these authorities is usually well-aligned through increasing international co-operation and framework convergence, they enforce competition laws on a national, or at most, a regional level. As the world economies further integrates, and in particular as the competition agencies in emerging economies flex their muscles, it is important to ensure that global markets and national competition law enforcement promote global economic growth. The study will increase policy makers’ awareness of the implications of national approaches to competition law enforcement and the value of increasing consistency and coherence across jurisdictions in the way it is enforced. The project will relate trends in competition law enforcement to measures of globalisation to illustrate the possible costs of the existing fragmented approach, and the benefits of jurisdictions working together highlighting the ways in which existing soft convergence and voluntary co-operation tools have promoted sound policy and minimised conflicts.  Finally, the study would set out the range of policy responses to the problem. Competition policy should not be used at worst as a mechanism for covert protection and at best result in costly inefficiencies in the efforts of global companies to make appropriate investment decisions – greenfield or M&A.

 Another aspect of globalisation and competition arises in the context of state-owned enterprises (SOEs). While some countries have tried to employ SOEs as agents for inclusive growth, the relative growth in the number of SOEs has also led to concerns about competitive neutrality, as SOEs sometimes receive public subsidies and privileged positions in the marketplace and/or may be excluded from requirements applied to the private sector. Cross-border activities of SOE’s must be on a level playing field basis, regardless of what they do in their own countries with respect to industrial policy. The proposal calls for examining the question of state activism through two lenses: state-owned enterprises (SOEs) and experimental policy and government learning. As such, we will identify policy options that allow governments that wish to use SOEs for inclusive growth to continue doing so, but at the same time safeguard an open and non-discriminatory investment climate. For this purpose, we will rely on a mixture of empirical and dialogue-based fact finding, explore existing sources of data (including corporate and legislative information) and gather new information through questionnaires.



Securing tax revenues in a globalised economy


The generally accepted principles of taxation were mostly formulated in the context of closed economies, with policies for handling international flows grafted on subsequently. Domestic and international rules for the taxation of cross-border income flows have evolved since their origins in the 1920s, but the real world has changed even more fundamentally as a result of globalisation (particularly international capital mobility and the growth of trade in services as well as goods) and the rapid growth of the emerging economies. The interaction of the tax regimes of different countries matters as never before in its effects on economic activity, employment and equality (within and between countries). Of particular note in the context of a globalised economy is the mix of source-based taxation (notably the corporate income tax), residence-based taxation (particularly the personal income tax) and destination-based taxation (e.g. value added tax).

It is therefore important to have a new approach to tax policy that would secure tax revenues in a globalised economy and ensure that tax regimes have an overall coherence, while contributing to the response to other challenges such as inclusive economic growth, increased employment, improved financial regulation and a more stable macroeconomic environment and minimising harmful spillovers across countries. The project will bring together tax revenue and rate information with statistics on the drivers of trends in the structure of revenues (e.g. national accounts measures of profit shares in total GDP, data on income distribution, and statistics on international trade and the digital economy) to produce an analysis of prospective revenue trends. This will be complemented by literature reviews on core topics, notably international profit shifting and the effective incidence of source-based corporate income tax and residence-based taxes on personal capital income, as well as by empirical analysis of the distributional effects on greater reliance on destination-based taxes (as outlined in project B7).

With its emphasis on the implications of global economic trends for domestic tax policies, this project will complement the OECD’s work on base erosion and profit shifting (BEPS).  The work on BEPS is focused on the international rules for taxing corporate income, and on developing comprehensive, internationally-coordinated strategies for countries concerned with base erosion and profit shifting (while at the same time ensuring a certain and predictable environment for businesses).

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