Economic Policy Reforms 2021

Executive Summary

The COVID-19 pandemic is exposing long-standing structural weaknesses in our economies and widening gaps in living standards among countries, regions and people. Some of these structural challenges have exacerbated the short-term costs of the crisis and risk imparting long-term scars on growth, job prospects and undermining sustainability. Just as the vaccine rollout gradually instils hope, the post-pandemic recovery creates new opportunities to set in place the foundations for a vibrant recovery. With continued macroeconomic support, policymakers can shape the recovery to boost growth, enhance resilience and inclusiveness, and improve environmental sustainability.

Going for Growth 2021 provides country-specific strategic priorities for the recovery for OECD and selected non-member countries. There is no one-size-fits-all strategy, but the policy advice can be described around three – partly overlapping – pillars: building resilience and sustainability, facilitating reallocation and supporting people through transitions (Figure 1).

Building resilience and sustainability

The pandemic has highlighted a lack of resilience on a number of fronts including in supply chains of medical goods, uneven access to social safety nets and climate change.

Structural policies can improve the first line of defence against shocks by improving the coverage of health care and social safety nets and by investing in critical physical and digital infrastructure, including high-speed internet connection. Policies can also strengthen the private sector’s incentives to take into account longer-term sustainability, for example by directing investment and technological change to serve environmental objectives. This can be achieved by setting clear carbon price trajectories, and by phasing out fossil fuel subsidies and tax expenditures.

Facilitating reallocation and boosting productivity

The recession risks leaving considerable economic and social scars. Past experience shows that labour market entry during a downturn can leave lasting scars on the earnings and employment prospects of young workers. Scarring may also emerge from school closures and the switch to online learning, disrupting human capital accumulation and hence lifelong earnings, particularly for students from disadvantaged backgrounds.

Steering growth in a more resilient and inclusive direction requires enhancing market competition and reallocative capacity, which had hampered productivity growth before the pandemic. This necessitates removing policy barriers, where they exist, for firms to become more dynamic, innovative and greener, and adapting competition policy for the digital age. Failure to do so will reduce job opportunities and output growth, which in the longer run will hamper efforts to improve public finances.

Investment today will put in place capital structures, equipment and technologies that can last several decades. Hence, macroeconomic stimulus packages need to be carefully designed to avoid undermining carbon transition efforts by subsidising polluting activities or locking-in carbon-intensive technologies.

Supporting people through transitions

The pandemic is accelerating digitalisation, not least through increased recourse to teleworking and on-line shopping. On the one hand, this brings opportunities to revive productivity growth via technological adoption and within-industry reallocation. On the other hand, it is reshaping work relations and practices in a manner that aggravates digital divides as some do not have access and skills to fully benefit from such opportunities.

A high share of workers in many countries have been protected by job retention schemes. As the recovery takes hold, such broad support to firms and workers should shift towards more targeted measures focusing on early interventions – especially prior to job displacement – that are more likely to be effective in maintaining labour market attachment.

Figure 1. Structural policies for a stronger, more resilient and inclusive recovery

Part of the green transition will happen via downsizing or closing down polluting firms and less productive ones that cannot invest to make production environmentally sustainable. Policies need to provide appropriate support during these transitions by equipping people with skills and education; offering activation and retraining schemes, particularly targeted at the vulnerable; and facilitating access to social safety nets. Generating adequate incentives for taking up opportunities rather than creating dependence requires aligning taxes and benefits. Labour market relevant training and life-long learning make it easier and quicker to find quality jobs and enhance resilience to shocks.

Strategic vision for a vibrant recovery

Given uncertainty about the pace and strength of the recovery, the sequencing of reforms is vital. Expansionary fiscal policies -- such as public infrastructure investment, and health and social safety net reforms -- and measures to improve the rule of law should be frontloaded to support the recovery as well as enhance long-term growth prospects. This is also true for measures preventing social damage, such as reforms of education and activation programmes. Other measures – for instance, including strengthening of job-search conditions in unemployment benefit schemes, increasing carbon taxes and reducing the stringency of employment protection – should be contingent on the state of the economy or implemented only gradually.

The crisis has also underscored the importance of resilience and environmental sustainability (Figure 2). The prominence of priorities on social safety nets and health care has increased in both advanced and emerging-market economies, with particular emphasis on inclusiveness. In emerging-market economies, priorities addressing the rule of law, education and skills, and labour market regulations have gained importance, partly due to increased emphasis on tackling informality.

Figure 2. Distribution of 2021 priorities across countries

 

Note: Upward-pointing arrows denote priority areas having increased their relative share in the distribution of priorities, with respect to Going for Growth 2019. In this publication, the group of advanced economies comprises all OECD member countries excluding Chile, Colombia, Mexico and Turkey. These four countries, alongside Argentina, Brazil, China, Costa Rica, Indonesia, India, Russia and South Africa are labelled emerging-market economies.

While domestic policies are central to recovery strategies, the pandemic has highlighted the need for stronger international co-operation. Several areas identified in Going for Growth 2021 require decisive domestic as well as international policy action. These include health care and the manufacturing and distribution of vaccines and health care equipment; tackling climate change; taxation of multinationals in the digital economy; and reducing trade barriers.