0. Going for Growth 2009 Klaus Schmidt-Hebbel Chief Economist and Head
Washington, DC March 2009
Going for Growth 2009
Klaus Schmidt-Hebbel
Chief Economist and Head
OECD Economics Department
Let me start by thanking very much President Barroso and the Group of Economic Policy Analysis for giving me the opportunity to participate in this meeting and illustrate some of the OECD views on the role that structural reforms have played and can play in the future to promote growth in the EU economies.
I have prepared a number of slides as background documentation for my talk, but I am aware that the time allotted to me is limited.
So please pardon me if I will focus on just a few figures that are key for supporting my main arguments. L

1. Outline
Going for Growth: analysis and policy recommendations for boosting long-term growth
Which long-term growth policies help to boost the recovery from the financial crisis?
New empirical results concerning long-run growth in this edition

2. The Going for Growth process
Methodology
Systematic policy and performance benchmarking using indicators
Identifies five priorities per country
Follow-up and review
To promote long-run economic growth 2

3. GDP per capita as a welfare measure
Methodology
GDP per capita is not a perfect measure of well-being …
… but it is the least imperfect proxy of welfare that is available.
It is closely correlated with other objective performance measures but not with alternative measures of human development or subjective measures of happiness.

4. Decompose GDP per capita
Methodology

5. GDP per capita gaps with the US (2007)
Methodology 5

6. Convergence had improved before the crisis (vs. US)
Meth0dology 6

7. Convergence pattern is robust to the choice of the numéraire
Meth0dology 7

8. Benchmarking uses about 50 mostly OECD policy indicators
Methodology
Policy indicators affecting mainly productivity
Product market regulation database, 1998, 2003 and 2008
Producer support estimates in agriculture
FDI restrictiveness index
Educational attainment and achievement
Health and infrastructure expenditure
Policy indicators mainly affecting labour markets
Tax wedges
Implicit tax rates on continued work
Minimum wages and labour costs
Unemployment benefit replacement rates
Employment protection legislation
Disability/sickness beneficiaries 8

9. Policy measures have been tied to outcomes in panel studies
Methodology
Empirical work based on OECD studies
Sources of Growth in OECD Countries (OECD, 2003)
Estimates of short-run and long-run effects of policies on GDP/capita growth in Bassanini and Scarpetta (2001):
V is a vector of institutional variables
Dynamic panel estimates using pooled mean group (PMG) methods

10. Policy measures have been tied to outcomes in panel studies
Methodology
Empirical work based on OECD studies
Reassessment of OECD Jobs Strategy (OECD, 2006)
Estimates of labour market policies effect on unemploy-ment and employment (Duval and Bassanini, 2006):
X is are a vector of labour market policies (EPL etc.), plus interactions. Unempl. eqn. looks at interactions.
System GMM estimators used for the dynamic panel.
Many other (primarily OECD) studies.

11. Benchmarking methodology
Three steps:
Identify performance weaknesses associated with subcomponents of GDP/capita
Identify policy weaknesses based on policy indicators and analysis establishing links between policy and performance
Select most important policy weaknesses as priorities for reform
Methodology
Sample country: New Zealand 2009

12. Priority policy areas shift over time
Five priorities for each member country and the European Union
Methodology 12

13. Policy recommendations for the US, Japan and the EU (2009)
Methodology 13

14. Outline
Going for Growth: analysis and policy recommendations for boosting long-term growth
Which long-term growth policies help to boost the recovery from the financial crisis?
New empirical results concerning long-run growth in this edition

15. Financial crisis, reflected in the OECD’s financial conditions index …
Policies at a time of crisis
We are in a financial crisis of immense proportions… 15

16. … affecting real activity
Policies at a time of crisis
Industrial production
We are in a financial crisis of immense proportions… 16

17. Implication of the financial crisis for structural reforms
Policies at a time of crisis
The crisis reflects a failure of regulatory and supervisory policies to deal with risks inherent to the financial sector
Yet it does not cast doubt on the importance of reforms to improve labour and product market performance recommended in Going for Growth
Experience shows that structural reforms are often carried out at a time of economic crisis

18. Policy action at a time of crisis
Policies at a time of crisis
Focus on policies that stimulate demand in the short run and strengthen long term growth
OECD analysis shows that the key win-win policies are:
Enhance infrastructure investment
Cut taxes on lower income groups
Raise human capital through labour training
Reform product market regulation
(#s 1-3 part of fiscal policy plans, reviewed next)
Special chapters of GfG on these four areas 18

19. Desirable Features of Fiscal Stimulus Plans
Policies at a time of crisis
Timely, temporary, targeted
Size determined by:
Economic conjuncture
Initial fiscal balance and debt levels
Size of automatic stabilizers
Targeting: short-term (stabilization); long-term (growth); job creation; green component
Accompanied with credible commitment to medium-term fiscal sustainability 19

20. Size of Fiscal Stimulus Plans
Policies at a time of crisis 20

21. Size of Fiscal Stimulus Plans
Policies at a time of crisis 21

22. Composition of Fiscal Stimulus Plans
Policies at a time of crisis 22

23. Policies at a time of crisis
Fiscal Multipliers
Policies at a time of crisis
Note: Literature review regarding medium/long-term is based on panel and cross-country analysis. Literature review
regarding short-term effect is based on VAR studies and Macro models.
* Ranges for the OECD depend on country differences in import intensity 23

24. Long-Term Policies: Outline
Going for Growth: analysis and policy recommendations for boosting long-term growth
Which long-term growth policies help to boost the recovery from the financial crisis?
New empirical results concerning long-run growth in this edition

25. 1. Infrastructure investment, growth and public policy
Special chapter
1. Infrastructure
1. Infrastructure investment, growth and public policy

26. Infrastructure investment has been falling: crisis offers opportunity to reverse it

27. Empirical work on the impact of infrastructure
Hard to measure infrastructure systematically in the national accounts, use physical measures
Estimates of long-run and short-run effects
MRW framework adapted to infrastructure:
Infrastructure taken as separate input
Shows some countries and periods had negative effects (relative to other types of investment)

28. Infrastructure investment has to be done carefully
Since the impact of infrastructure
Varies over time and by industry
Overprovision of infrastructure is a real risk
A good regulatory environment is critical
Requires careful cost-benefit analysis of projects
Hard to implement quickly, but can move forward with maintenance expenditure and good, off-the-shelf investment projects
Public investment has the highest short-term (0.7 to 0.9) and long-term (up to 1.0) multiplier effects on GDP levels

29. Having a good regulatory framework is critical to ensure efficiency
1. Infrastructure
One key component: Independence of the regulator in the OECD
Reference period: 2007/08

30. 2. Taxation and economic growth
Special chapter
2. Taxes and growth
2. Taxation and economic growth

31. Share of tax revenues (2005)
Tax composition
2. Taxes and growth
Share of tax revenues (2005)

32. The effects of tax composition on growth
2. Taxes and growth
Empirical work looks at tax effect on growth
Aggregate level:
Industry level:
Firm level:
Effects on investment through user cost also examined

33. Which taxes should be cut?
2. Taxes and growth
It depends on the current tax structure in each country
Taxes matter for long-term growth:
Corporate taxes are the most harmful, followed by …
… labour income taxes, and then …
… taxes on goods and services with …
… taxes on immovable property the least harmful
In the short-run, the best strategy at present is to cut taxes on labour income for low-income workers, as this will boost aggregate demand and raise labour utilisation in the long term

34. Tax burden at 67% of average worker earnings
There is much room to reduce labour income taxes for lower income workers
2. Taxes and growth
Tax burden at 67% of average worker earnings

35. 3. Population structure, employment and productivity
Special chapter
3. Education
3. Population structure, employment and productivity

36. Education and population structure vary considerably across the OECD

37. Education and population structure explain part of the income gap
Income gap relative to the United States (%)

38. Strengthen education and training
Education and training is very important for high productivity levels in the long run
Increased activation through mandatory training programmes for the unemployed can facilitate transition to new employment in the short term
A temporary increase in public spending in this area can help boost aggregate demand

39. Elasticities estimated over 1997-2004
Moderate long-term trade-off between labour utilisation and productivity
3. Education
Employment and productivity changes when matching US employment rates in each group (2004)
Elasticities estimated over

40. 4. Reform of product market regulation
Special chapter
4. Product market regulation
4. Reform of product market regulation

41. Reforms of product market regulation (PMR) have been substantial
Restrictiveness of product market regulation (0-6)

42. Updated indicator of PMR based on detailed policy settings (2008)
4. Product market regulation
Product market regulation
State control
(0.33)
Barriers to entrepreneurship
(0.33)
Barriers to trade and investment (0.33)
Public ownership
(0.50)
Involvement in business operations
(0.50)
Regulatory and administrative opacity
(0.33)
Administrative burdens on
start-ups
(0.33)
Barriers to competition
(0.33)
Explicit barriers to trade and investment
(0.50)
Other barriers
(0.50)
Scope of public enterprise
(0.33)
Gov’t involvement in network sectors
Direct control
over business enterprises
Price controls
(0.50)
Use of command and control regulation
Licenses and permits system
(0.50)
Communication and simplification
of rules and procedures
Admin. burdens for corporations
(0.33)
Admin. burdens for sole proprietor firms
Sector-specific administrative burdens
Legal barriers
(0.25)
Antitrust exemptions
Barriers in network sectors (0.25)
Barriers in services (0.25)
Barriers
to FDI
(0.33)
Tariffs
Discriminatory procedures
Regulatory barriers
(1.0)

43. Reform product market regulation, strengthen competition
Stronger competition in product markets increases productivity in the long term by ensuring better use of resources and spurring entrepreneurship
New firms and new products may also help to raise demand in the short term
Many OECD studies show strong link with pace of convergence

44. Firm entry barriers can be reduced
4. Product market regulation
Barriers to entrepreneurship, 2008
(increasing stringency, 0-6)

45. Need for reform in range of areas, depending on area
4. Product market regulation
Distance from best practice, 2008
(increasing stringency, 0-6)

46. Going for Growth 2009 Klaus Schmidt-Hebbel Chief Economist and Head
OECD Economics Department
Let me start by thanking very much President Barroso and the Group of Economic Policy Analysis for giving me the opportunity to participate in this meeting and illustrate some of the OECD views on the role that structural reforms have played and can play in the future to promote growth in the EU economies.
I have prepared a number of slides as background documentation for my talk, but I am aware that the time allotted to me is limited.
So please pardon me if I will focus on just a few figures that are key for supporting my main arguments.