OECD on Growth and Political Reforms

OECD has just published its annual report 'Going for Growth' (hat tip, New Economist) in which the organization addresses the future challenges for OECD countries in terms of economic growth going forward. New Economist which is linked above has all the relevant points in terms of the summary of the report and also links to a recent Economics Focus column which addresses the inertia accruing to economic reforms in OECD countries. The article also notes the OECD report itself.

(quote New Economist)

'Economic reforms is, in most places and most of the time, a long hard slog. The anual OECD report Going for Growth 2007, published this week, explains why structural reform is still necessary. Now in its third year, the latest report "highlights the weaknesses that are holding back OECD economies from raising material living standards". Some common priorities emerge:

  • For much of continental Europe the main focus is on improving labour market performance to reduce unemployment and lift labour force participation.
  • For lower-income countries, as well as in Japan and Switzerland, raising productivity is the main challenge. Priorities focus more on liberalisation of product markets, especially in network industries and in services.
  • English-speaking countries generally display good labour market performance but need to raise skill levels, in particular through improvements in secondary education.
  • Many EU countries need to strengthen higher-education systems to improve graduation rates and, in some cases, the quality of teaching and research.' 

Now, I want to attach some comments to all this since I really think we are stuck in a ditch with the OECD discourse. Most importantly, I want to address the need for labour market reforms in order to free up supply side capacity and lift labour participation rates. It is not that I disagree with this but I merely need to ask whether in fact this will be enough for some countries. What of course underpins this call for reforms is the challenge presented by the continuous process of ageing. Reforms are important, I do not deny that for a moment but something tells me that this ongoing claim that converging to flexible labour markets and general liberalization reforms will do the trick rests on the inability to understand completely what we are talking about. In short, can Europe pull an American here? I don't think this is the way to go and essentially I think that the process of ageing and its magnitude as well as transmission mechanisms with the macroeconomic environment are not fully understood. We also need to consider that the need to reduce unemployment or more specifically the perceived benefits of this in terms of freeing up supply side capacity represents a closing window of opportunity as an ageing population in itself represents a structural tightening of the labour market (i.e. reduced unemployment!)

This, however, does not nullify the general theme in the OECD report on how reforms indeed are necessary and crucially how difficult these reforms can be to implement. Generally, I shold also note that the OECD's work on productivity convergnence looks interesting. Especially, the mentioning of Japan and Switzerland as countries who need to raise productivity is intriguing. For more on this stay tuned over at GEM where I am soon to post a note on the ongoing debate on global capex and labour supply.