Tackle Key Policy Weaknesses to Boost Productivity, OECD Says
Policymakers need to deploy broad-based reform plans that incorporate monetary, fiscal, and structural policies to re-launch productivity growth, create jobs and build a more inclusive global economy, according to the OECD’s annual Going for Growth 2016 report.
The report finds that the U.S. economic recovery has kept momentum, although investment remains subdued in contrast to a comparatively good employment performance. It also finds that productivity growth — in particular gains in multifactor productivity — has been modest in recent years, despite the comparatively high investment in knowledge-based capital and a business environment generally favorable to entrepreneurship.
Addressing structural policy weaknesses, particularly in the areas of educational outcomes and taxation, would ensure that stronger productivity growth can be sustained in the long run. Increasing the supply and quality of early childhood education and care is of particular importance, as it influences the participation and performance of students at higher education levels, the report says.
While Canada has weathered the economic and financial crisis and its aftermath better than most other advanced economies, productivity growth has also been persistently weak. The report recommends addressing structural policy weaknesses in the areas of competition, innovation, education and taxation, where a shift in tax revenues towards indirect sources would help to raise economic efficiency.
“The worrying slowdown in the global economy calls out for an urgent and comprehensive policy response, drawing on all the monetary, fiscal and structural policy levers at governments’ disposal,” OECD Secretary-General Angel Gurría said.
“Given the breadth and evolving nature of the growth and inclusiveness challenges facing advanced and emerging economies, the slowdown in the pace of structural reforms is a serious concern. Greater ambition on structural reforms can help bring about better conditions for investment and innovation, leading to higher productivity, better quality jobs and a more inclusive approach to the pursuit of growth that benefits all segments of society.”
Going for Growth 2016 makes the case for prioritizing growth-enhancing measures that can best support demand in the short term, combining structural policies targeted toward regulatory reform with investment in public infrastructure. “Today’s exceptionally low interest rates improve governments’ fiscal space, affording a unique opportunity to make investments in infrastructure that will boost demand, stoke growth and actually improve public finances,” Mr Gurría said. “Choosing the right projects, combined with structural reforms, will generate higher multipliers on economic activity. This can re-launch growth while lowering the debt-to-GDP ratio, opening additional space for policies aimed at creating a more inclusive society."
Mr. Gurría said the report’s reform recommendations, tailored for each country, could boost growth in OECD and G20 countries alike. The recipe for reform varies by country, but the ingredients include improving product market competition, labor market flexibility, financial market resilience and tackling barriers to cross-border trade and investment.
The Going for Growth analysis forms the basis of the OECD’s wider contribution to the G20 Framework for Strong, Sustainable and Balanced Growth. The OECD works with G20 countries to quantify their efforts to fulfil a pledge made during the 2014 Leaders’ Summit in Brisbane to boost their combined GDP by 2% over the coming five years, and to achieve their national growth strategy objectives.
Previous Going for Growth recommendations for the United States include:
- Strengthening active labour market policies by continuing to broaden and enhance activation measures, such as training, by reinforcing the support for adult training through better links to local employers, and by expanding successful pilot programmes conducted under the Disability Employment Initiative.
- Improving the efficiency of the health care sector by continuing to conduct pilot programmes of Medicare provider payment systems, by assessing the comparative effectiveness of prescription drugs and research by the Patient Centred Outcome Research Institute, and by ensuring that cost-saving measures identified by research and in the pilot programmes are rolled out and their impact monitored.
- Improving the efficiency of the tax system bycutting the statutory marginal corporate income tax rate and broadening its base so as to reduce the incentive to shift business activity to non-corporate forms, by eliminating regressive exemptions such as mortgage interest deductions for owner-occupied housing, by simplifying eligibility procedures for numerous (and often changing) tax provisions and by increasing reliance on consumption and environmental taxation.
- Improving equality of opportunity and outcomes in education byexpanding effective targeted pre-school initiatives such as Head Start, Early Head Start and evidence-based home visiting programmes, by ensuring states meet quality standards to receive federal support, including requiring pre-school teachers to have the required skills and competencies and by supporting the adoption and introduction of common core standards in primary and secondary education.
- Reducing producer support to agriculture bycontinuing to lower production-related subsidies (including the subsidised crop insurance programmes) and the remaining agricultural-produce import barriers.
Previous Going for Growth recommendations for Canada include:
- Reducing barriers to entry and enhancing competition in network and services sectors by moving towards more integrated and competitive electricity markets, privatising Canada Post and eliminating its legally protected monopoly, easing entry regulations in professional services and licensing requirements in retail trade, and eliminating retail price controls.
- Reducing barriers to foreign direct investment by lifting FDI restrictions in key sectors, such as telecommunications, airlines and broadcasting, by reducing the administrative burden of environmental regulation and discrimination against foreign suppliers in professional services, air and road transport.
- Reforming the tax system by increasing environmental and value-added taxes and reducing regressive and distortive income-tax expenditures to further lower statutory corporate and/or personal income tax rates.
- Enhancing access and efficiency in tertiary education by complementing income-contingent loans with needs-based grants to improve access for students from disadvantaged backgrounds, promoting education quality and efficiency by encouraging institutions to specialise in areas where they have a comparative advantage.
- Improving R&D support policies, by lowering the refundable small-firm Scientific Research and Experimental Development (SR&ED) rate towards the large firm rate and using the savings in part to raise grants while allocating them competitively.
Further information on Going for Growth 2016 is available at: http://www.oecd.org/economy/growth/goingforgrowth.htm. Detailed country notes are available on most G20 countries.
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