By Ken Ash
Global food demand is rising so fast that farmers are beginning to have trouble keeping up. Projected world population growth, coupled with the new eating habits of a rising middle class, are likely to continue putting pressure on prices and boosting farm income levels for years to come. Despite this strong outlook, governments in advanced economies supported farmers to the tune of US$259 billion in 2012, through a combination of price support measures and budgetary spending. A new OECD report released last week shows that support ranges from lows of less than 5 percent of farm receipts in New Zealand, Australia and Chile to highs of 50 percent and more in Japan, Korea and Switzerland. Across the 34-member OECD area total support to agriculture is estimated at almost 1 percent of GDP.
As high as these numbers are, it is important to note that support in OECD countries has been gradually trending downward. In contrast, support to farmers in many emerging economies has been rising. In 2012, public farm support reached US$219 billion in a group of seven key agricultural countries: Brazil, China, Indonesia, Kazakhstan, the Russian Federation, South Africa and Ukraine. That said, the range of support levels -- from 5 percent or less in Ukraine, South Africa and Brazil to 15 to 20 percent of farm receipts in the Russian Federation, Kazakhstan, China and Indonesia -- is smaller than the range seen across OECD countries, and the highest levels of support still remain much lower.
The type of farm support generally on offer remains the problem. Across the 47 countries covered by a new OECD report, over half of the support provided in 2012 resulted from domestic prices being kept artificially higher than world prices. This is done through various regulations and restrictions on trade, as well as government subsidies based on farm output or input use.
These policies push relatively high prices still higher, and the costs are borne disproportionately by poorer consumers. All forms of support linked to production distort the decisions that farmers make, sometimes encouraging them to 'produce for governments' rather than for consumer demand. Support linked to production also goes primarily to those that produce the most -- larger farmers, often with already healthy incomes -- and not to the poorer farm families often put forward to justify these policies.
There are alternative policies that governments can and should pursue. It is not a matter of reducing farm support to zero and 'doing nothing.' But 'business as usual' is not an option either if the global food and agriculture system is to meet the planet's food, feed and fuel needs amidst competing demands for water, land and biodiversity resources and the uncertain impacts of climate change.
Countries should be thinking about increasing strategic public investments in the agriculture sector. While priorities will vary by country, its resource endowments, and its stage of development, there will be common elements: investing more in people, in education and skill development, and in emerging economies in improved health services for rural and farm families. Also essential will be increasing public and private spending on research and development, technology transfer, food safety and food quality assurance systems and rural and market infrastructure.
By following this forward-looking advice, governments can boost social returns and contribute to the long-term productivity, profitability, and sustainability of farming. It's high time to move away from those support policies, which have their roots in the past, toward better policies for a stronger agricultural future.
Ken Ash is Director of Trade and Agriculture at the OECD.
This blog was originally published on September 24, 2013.
It's a watershed moment for international tax policy. The debate over tax evasion by the wealthy and tax avoidance by multinational corporations has never before grabbed so many headlines or caused so much anger. To regain the confidence and trust of our citizens, there is a pressing need for action. To this end, the OECD's work on tax base erosion and profit shifting (BEPS) and automatic exchange of information -- with strong political support from the G20 -- will pave the way for rehabilitating the global tax system.
With understandable fury over tax avoidance by some, finger-pointing and oversimplification can easily happen, shedding more heat than light. Naturally, the business community feels like it's in the cross-hairs. They worry about the impact of new rules, unconstructive tax transparency debates and what the changes will mean for their shareholders, and for their tax obligations.
But the point of crafting new international tax rules is not to punish the business community. It is to even the playing field and ensure predictability and fairness. The OECD's role is to help countries foster economic growth by creating such a predictable environment in which businesses can operate. Today, we see that the rules have not kept up with the realities of doing business in our globalized world. The gaps between domestic tax systems, combined with economic incentives and legal accounting practices have all given rise to the phenomenon of double non-taxation, allowing some multinationals to pay little, or no corporate tax at all.
This has created a chain of interlinked problems which have a detrimental effect on all stakeholders. First, it harms the man on the street: when tax rules allow businesses to shift their income away from where it was produced, it erodes that country's tax base and shifts the burden onto individual taxpayers. Second, it harms governments: when multinationals are not perceived as paying their 'fair share', it undermines the integrity of the entire tax system in the eyes of the public. Additionally, in some countries the resulting lack of tax revenue leads to reduced public investment that could promote growth. Third, it harms other businesses. Domestic firms face the economic burden of higher taxes, while the multinational next door can reduce its taxes by shifting its profits to a low tax jurisdiction. These distortions make it harder for small and family-owned businesses to compete fairly.
That's why the OECD and G20 economies like Brazil, China and India are working together to address BEPS, providing consistency for both business and tax sovereignties. G20 leaders meeting in St. Petersburg endorsed the OECD's Action Plan to address the gaps in the international tax system through BEPS.
G20 leaders also stepped up the fight against offshore tax evasion by establishing automatic exchange of information as the new global standard of tax cooperation. The implementation of this new standard will make it easier for tax authorities to detect undeclared income hidden in foreign accounts or through foreign entities and investments. Foreign bank accounts and other foreign assets will no longer be secret because countries will share this information with each other on a regular basis. The OECD is working with G20 countries to provide the technical standards to make automatic exchange a reality and this includes ensuring the confidentiality of information exchanged.
Taxation remains at the core of countries' sovereignty. But without international, consensus-driven action we risk countries taking unilateral action to protect their tax bases which could easily lead to tax chaos for the global business community. That is why the OECD -- a unique forum for international cooperation and dialogue -- is working with countries around the world to bring the international tax rules into the 21st century.
The time is ripe for the business community and governments to work together to achieve a fairer, more effective and more efficient international tax system that provides a 'win' for everyone.
Pascal Saint-Amans is Director of the Center for Tax Policy and Administration at the OECD.
This blog was originally published on September 17, 2013.
Finding new sources of growth right now is tough. And in a time of rising inequality, to do so equitably and fairly is even tougher. Innovation -- which fosters competitiveness, productivity, and job creation -- can help but with budgets stretched to the limit how can governments boost innovation in their economies?
Tax incentives for business R&D is a good place to start. As of 2011, 27 of the OECD's 34 members provided tax incentives to support business R&D -- more than double the number in 1995. By 2011, over a third of all public support for business R&D in OECD countries came through tax incentives -- a share that jumps to more than half when the U.S. -- with its large direct procurement of defence R&D -- is excluded. Other economies -- including Brazil, China, India, Singapore and South Africa -- have also instituted new tax provisions to stimulate investment in R&D.
As they have proliferated, R&D tax incentives have become more generous. Over the period 2006-2011, about half of the 23 countries for which complete data are available increased their generosity, with R&D tax support rising by almost 25 percent in some countries. This probably underestimates the shift towards greater generosity because the economic crisis caused a decline in both profits (and hence taxes) and R&D. This growing popularity of R&D tax incentives as a policy instrument is due to a variety of reasons including being exempt from EU and WTO "state aid" rules, and the fact that tax expenditures tend to be "off budget, " meaning they escape the scrutiny that applies to direct expenditures.
A new OECD report shows that in a relatively short period of time, R&D tax incentives have become among the most widely used policy instruments to promote innovation. Some have asked "is this too much of a good thing?" and in this era of tight public budgets "are governments (and citizens) getting value for money?" The answer depends on the exact design of the R&D tax incentive.
Most firms engaging in R&D are multinationals that can use cross-border tax planning strategies that result in tax relief that may exceed what was originally intended. This in turn may cause an unlevel playing field vis-à-vis purely domestic firms that do not benefit from these same tax planning strategies. This may also disadvantage young firms that have been the disproportionate source of net job growth and tend to be the origin of radical new innovations that spur growth.
Evidence from 15 OECD countries over 2001-11 suggests that young businesses, many of which are among the most innovative, play a crucial role in employment creation regardless of their size. Over this period, young firms (less than or equal to five years of age) accounted for almost 20 percent of total (non-financial) business sector employment but generated about 50 percent of all new jobs created. And, during the economic crisis the majority of jobs destroyed generally reflected the downsizing of large mature businesses, while most job creation was due to young enterprises.
Some will argue that R&D tax incentives are preferable to direct support policies so as to avoid picking winners. But this isn't an either/or situation. A mix of incentives could be the smartest path forward. Recent OECD analysis shows that well-designed direct support measures - contracts, grants and awards for mission-oriented R&D - may be more effective in stimulating R&D than previously thought, particularly for young firms that lack upfront funds. Direct support that is non-automatic and based on competitive, objective and transparent criteria can stimulate innovation.
It's the policy package that matters. Tax incentives should be designed to better meet the needs of domestic companies and young, innovative companies that do not benefit from cross-border tax planning opportunities. There should be a balance between indirect support for business R&D (tax incentives) and direct support measures to foster innovation. And governments should ensure that R&D tax incentive policies provide value for money.
Do this and growth might be a bit less elusive than we think.
Andrew Wyckoff is Director for Science, Technology and Industry at the OECD.
This blog was originally published on October 11, 2013.
By David Khoudour
Migrants are all too often viewed as a problem in destination countries when they can and should be seen as a potential solution to inequality in and between nations. But their ability to fuel development in poorer countries, while also bolstering developed-world economies, will hinge on governments employing the right policies and cooperating internationally.
The truth is we live in an unequal but flat world. Thanks to advances in communication technologies, most of the planet's inhabitants, including the poorest, know how other people live thousands of kilometres away. They also know they can improve their lives without having to wait decades for their countries to reach the living standards of the richest ones. Crossing borders, though it can be a long and risky enterprise, is often the most efficient socio-economic ladder for individuals and the best alternative to the long process of income convergence between nations.
Yet, the vast majority of the earth's inhabitants do not migrate. International migrants actually make up just 3% of the world population. Even though 9 out of 10 of the estimated 232 million migrants worldwide leave their home countries to seek better job opportunities and higher wages - a trend that reflects the huge income differential between countries - things are more complicated than they seem.
Contrary to conventional wisdom, most migrants are not the poorest people from the poorest countries. Most come from middle-income countries like China, India and Mexico. And within these countries, they are not the poorest either. Moving to another country requires a certain amount of capital - financial, human and social - which the poorest do not possess. For that reason, very unequal countries do not always see high levels of emigration: the poor do not have the financial means to move abroad and the rich would lose their economic and social power by doing so.
If the world's poorest people are not migrating, can migration still reduce inequalities within and between countries?
The first beneficiaries of migration as a driver of inequality reduction are migrants themselves. Even though they can face demanding labour and social conditions in host countries, moving abroad usually comes with a significant wage increase. In countries with generous welfare states, immigrants also benefit from social protection and better education prospects for their children. In origin countries, families can use the money sent back by the migrants to improve their living conditions. They can spend more, can access better education and health services and may even invest in small businesses.
Nonetheless, migration is not the panacea to all development problems and can even worsen inequality. Immigrants are often victims of human trafficking, labour exploitation and racial discrimination. Local populations, especially the lowest skilled, can also see migrants as a threat in terms of job competition and social cohesion. For origin countries, migration can turn into a development trap. In situations where emigrants relieve pressure on the labour market through their departure and help families back home invest in education and social protection through remittances, states can lack the incentive to make necessary reforms.
The net positive impact of migration on development and inequality reduction depends on the policies implemented in origin and destination countries. Immigration has become a sensitive and divisive issue in many countries - yet those same countries face labour shortages and demographic imbalances caused by population ageing. Immigration may be part of the solution.
The phenomenon of migration today requires an international co-operation framework that views migrants not only through a security lens, but as key players in countries' economic and social development. Political leaders must begin acknowledging the needs of their economies instead of using immigrants as scapegoats for the problems in their countries. Such a framework would promote migrants' rights (including the right not to migrate), better regulate recruitment agencies, increase the number of bilateral agreements that facilitate labour mobility and implement more programmes to leverage the development impact of migration.
Some countries are already working in this direction. If we are to change current perceptions on migration and make it an efficient motor of inequality reduction, these countries need to be followed by many more.
David Khoudour is head of the migration and skills unit at the OECD Development Centre.
Even in the world of high-flying soccer salaries, the deal announced late this summer between Real Madrid and Welsh player Gareth Bale was eye-popping -- £85 million (about $120 million). The 24-year-old will now earn at least 10 times more in a week than the average British worker earns in a year.
Mr Bale is rich -- not Bill Gates-rich -- but rich. He's also typical of many of today's high-earners in that he's making his own money. In previous centuries, high incomes typically came from inherited wealth. That's why so many of Jane Austen's characters never seem to work -- they don't need to: Their wealth is invested instead in government bonds that reliably pay an income of between 4 and 5 percent a year. In Pride and Prejudice, a would-be suitor reminds Elisabeth Bennet that unless she marries, her wealth will produce an income of only £40 a year: "... one thousand pounds in the 4 per cents, which will not be yours till after your mother's decease, is all that you may ever be entitled to."
If she were alive today, Lizzy Bennet might be running her own business and earning her own money. In that, she would be a typical member of today's set of top earners -- the 1 percent -- which as Chrystia Freeland has written, "consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition ...".
Over the past few decades, these winners have done quite nicely for themselves, most notably in English-speaking countries: In 1980, the top 1 percent of income recipients in the U.S. earned 8 percent of all pre-tax income; by 2008, their share had risen to 18 percent and it rose in many other OECD countries too. Several factors have worked in their favour: lower taxes; technological advances that reward skilled workers; the emergence of a global market for talent; and rising executive salaries.
But here's a question: Are all these jet-setting meritocrats really worth it?
Historically, various justifications have been offered for income inequality - in other words, people earning more than others. As Branko Milanovic notes in The Haves and the Have-Nots, J.M. Keynes retrospectively justified 19th century inequalities by arguing that the rich had not wasted their money on fripperies but, instead, "like bees, they saved and accumulated", so providing capital for investment, which ultimately benefited everyone.
Arguments today aren't all that dissimilar. T.J. Rodgers, founder of Cypress Semiconductors, recently defended his own wealth by pointing to the money he had reinvested in his own firm and in new businesses, such as a restaurant in his home town that created 65 jobs. "How much more do I need?" he asked. "How many more jobs do you want?"
In essence this is an appeal to the idea of "economic efficiency" - inequality may not always be popular, the argument goes, but it ensures a society's economic resources are put to their best use. The most influential thinker in this area was probably the economist Arthur Okun, who in the 1970s argued that there was a "big trade-off" between equality and efficiency: Reduce the wage gap by raising taxes or minimum wages and you kill people's incentives to work hard and risk losing some of that tax money in the "leaky bucket" of government.
That argument still appeals to many, but it has its detractors. Based on an analysis of growth patterns in a number of countries, IMF economists Andrew Berg and Jonathan Ostry concluded that "when growth is looked at over the long-term the trade-off between efficiency and equality may not exist." While some inequality is necessary to ensure markets run efficiently, the economists argue, too much can destroy growth.
Among the downsides of rising inequality, they say, are that it may pave the way for financial crises, as many argue it did in the run up to the 1929 Wall Street Crash; it may also fuel political instability, as in Brazil earlier this year; and it "may reflect poor people's lack of access to financial services, which gives them fewer opportunities to invest in education and entrepreneurial activity."
Indeed, that last point is increasingly invoked. As Joseph Stiglitz has written, "growing inequality is the flip side of ... shrinking opportunity," a view echoed earlier this year by Alan Krueger, then-chairman of the U.S. President's Council of Economic Advisers: "In a winner-take-all society, children born to disadvantaged circumstances have much longer odds of climbing the economic ladder of success."
But if we accept the idea -- and not everyone does -- that too much inequality benefits the rich and hurts the poor we're left with another question: How much inequality is "too much" inequality? Economists may have their own views but, ultimately, that's a question only politicians and societies can answer.
Reducing income inequality while boosting economic growth: Can it be done -- from the OECD's Going for Growth 2012
Less Income Inequality and More Growth -- Are they Compatible? Part 4. Top
Incomes, by Peter Hoeller (OECD, 2012)
Divided We Stand: Why Inequality Keeps Rising (OECD, 2011)
OECD work on income inequality.
"I just had a cup of tea with soymilk," tweets Dave Ellis. "It was one of the worst decisions I've ever made in my life."
Dave's tweet, and many, many more, can be found on Middle Class Problems, which makes fun of the daily challenges facing folks in the middle of our societies. In truth, their supposed pretensions and status anxieties have long made the middle classes objects of fun and even scorn. Even John Lennon, raised in fairly comfortable surroundings, turned his back on them and proclaimed himself a Working Class Hero.
Lennon was able to play with his identity, perhaps, because from a social perspective the term that might have described him best -- "middle class" -- is so vague. By definition, middle class is relative -- somewhere between not well-off and very well-off, or rich, but where?
The economic definition is unclear, too (see Box 1): For example, some experts use a relative approach and define a household as middle class if it's earning, say, between 75 percent and 125 percent of median income. (Median income is the point in the income range, after taxes are paid and state transfers received, that separates the top 50 percent of earners from the bottom 50 percent.) Other approaches are more global: Goldman Sachs has defined middle class households as having an income of between $6,000 and $30,000 a year. By contrast, experts working in development tend to use a much lower figure -- between $10 and $100 a day. Another way to see it is that, after covering the essentials, middle-class households have some money to spare -- in other words, they've risen above subsistence living and can start thinking about the future.
In any case, defining "middle class" in purely economic terms misses a lot. That's because to be middle class is as much a question of values as of income or wealth. "Middle class values," says development expert Homi Kharas, "emphasize education, hard work and thrift." The goal of all this, adds columnist David Brooks, is improvement - of the individual, family and society: "They teach their children to lead different lives from their own, and as Karl Marx was among the first to observe, unleash a relentless spirit of improvement and openness that alters every ancient institution."
It's these values that make the middle classes so important -- a reality underlined by recent protest in Brazil and elsewhere. As the OECD's Horacio Levy wrote, the rallies showed that a "part of the population now feels empowered to demand access to quality services".
Those calls are only likely to grow: According to Homi Kharas, there were 1.8 billion middle class people in the world (based on the $10 to $100-a-day definition) at the start of this decade. Europe and North America accounted for more than half the total, and the next biggest share was in the Asia-Pacific region, with 28 percent of the total. By 2030, Kharas estimates that the middle class will total 4.8 billion, and around two-thirds will live in the Asia-Pacific. These, he argues, they will increasingly take over from U.S. consumers as the main drivers of the world economy.
Naturally, any projections like this come with health warnings. It remains to be seen, for example, how the current slowdown in emerging economies will affect the emerging middle classes. Their position is often fragile -- $10 a day doesn't buy a lot of stability -- and they are vulnerable to setbacks both in the economy and in their own households in the form of unemployment or illness. But, economic shocks aside, their long-term prospects probably look good.
By contrast, many fear the same can't be said for developed economies. As Alan Krueger, then-chairman of President Obama's Council of Economic Advisers, said in June, "economic forces have been chipping away at the middle class for decades". As we've noted before on this blog, income inequality has tended to rise in OECD countries, fuelled by factors that include technological change, globalization and the emergence of winner-take-all economies. In many OECD countries, middle-class incomes have grown less quickly -- or even stagnated -- compared to those of high earners. Middle-class jobs, too, are under pressure, increasingly vulnerable to technological advances, even in areas like law and tax accounting that might once have seemed immune.
The result, argue some, is a "squeezed middle" -- a middle class that grabs a shrinking share of national income and is losing confidence that its children will do better than it's doing. In the world of middle-class problems, that's a very big one indeed.
OECD work on income inequality
The hurting middle class -- Arianna Huffington in the OECD Observer
A hollowing middle class - Peggy Hollinger in the OECD Observer
By Luiz de Mello
Many countries across Latin American and the Caribbean have in recent years achieved strong growth in living standards while improving social development and the distribution of income. This is no small feat in a continent that remains one of the most unequal in the world, and is all the more impressive when compared with the recent experience of OECD countries, where income disparities have actually increased over the last 30 years, and growth has been slow since the global crisis.
To help policymakers learn from and build on recent Latin American experiences, the Organization for Economic Cooperation and Development (OECD) and the Economic Commission for Latin America and the Caribbean (ECLAC) invited experts from across the region to a Consultation on Inclusive Growth on November 14th and 15th in Santiago, Chile. We discussed the progress that has been made toward ensuring that the benefits of economic growth are better shared among all Latin Americans.
The discussion has to begin with economic growth, which remains the first step if Latin America is to bridge the large gap in living standards relative to the wealthier OECD countries. Income per capita in the region is today only about one-third of the average in the OECD area, even in the more prosperous countries like Argentina, Brazil, Chile and Mexico. The drivers of growth must also be reconsidered -- Latin American growth has long been based on investment and job creation, given the region's favorable demographics, rather than gains in productivity, which drive performance in advanced economies. Future prosperity in the region will depend largely on the steps countries take to improve their productivity. Our recommendations are well-known, and include chiefly greater investments in human capital and better policies to leverage this investment.
Latin America's lopsided distribution of income will add a degree of difficulty to the bid to make growth strong and inclusive. After all, Inclusive Growth is not about pro-growth or distribution-friendly policies; it is about making progress on both fronts. And Inclusive Growth is not about income alone; it is about better outcomes in all aspects of life that matter for people's well-being.
The Latin American countries that have made the most progress toward achieving Inclusive Growth have done so through a mix of external push and home-grown solutions. The global economic environment has helped. Increased world demand for commodities - courtesy of China and other fast-growing emerging-market economies - has driven up the terms of trade, boosting consumption and shifting income to those employed in lower-paid, lower-productivity, often informal jobs. Those at the lower end of the income distribution have benefited greatly.
Many countries have invested heavily in human capital. Easier access to services has created opportunities for those who had not been able to study and acquire marketable competencies. Not only has the supply of skills increased but also demand for those skills. The premia that employers paid for additional years of education used to be among the highest in the world but are now coming down, narrowing the dispersion in labour income.
The best performing countries have also implemented structural reforms. They have opened up their economies to trade and improved the business environment. In doing so, they have unleashed opportunities for investment and entrepreneurship, which is good for productivity and growth, also benefiting those who had hitherto been excluded from economic life.
Public policies have changed. Increasing emphasis has been placed on reaching out to underserved populations and linking social protection strategies to participation in education and health care programs. Multidimensionality -- a key feature of Inclusive Growth -- has come to the fore in the design of social programs. This is the case of Brazil's Bolsa Família program, which directs cash transfers to the country's poorest families, as long as their children attend school and receive preventive health care. Mexico's Oportunidades and other programs throughout the continent share the same philosophy. Short-term income-support objectives are thus combined with the long-term bid to improve human capital and health. It's a solution made in Latin America that the rest of the world is taking notice of.
To ensure these successes continue, countries must put in place necessary reforms to safeguard the progress achieved to date and continue addressing the region's longer-term challenges, notably slow productivity growth, poverty and high inequality. We must all continue working to better understand the policies that deliver both strong growth and greater inclusiveness, and the trade-offs that may need to be addressed in meeting both objectives.
Luiz de Mello is deputy chief of staff to the Secretary-General of the OECD.