Economic Policy Reforms 2023

Executive Summary

Recent years have been dominated by shocks that have profoundly changed societies and economies, from the outbreak of the COVID-19 pandemic to Russia’s war of aggression in Ukraine. Unprecedented policy responses have helped protect lives and livelihoods during this turmoil, but long-term and long-standing challenges remain to be addressed. Weak productivity growth and declining business dynamism remain prevalent in many OECD countries. Structural problems in labour markets still prevail and skill mismatches continue to hinder effective resource utilisation. Moreover, while its urgency is widely recognised, environmental sustainability has often remained absent from most growth strategies.

Going for Growth 2023 identifies country-specific policy recommendations for OECD and selected non-member countries to lay the groundwork for a stronger, more inclusive and sustainable growth (Figure 1). While there is no one-size-fits-all strategy, but the main pressing policy challenges identified in this edition can be grouped in four pillars: i) enhancing the design and management of support programmes; ii) removing obstacles to effective resource utilisation; iii) securing faster progress towards decarbonisation; and iv) making the most of the digital transformation as a driver of productivity growth.

Figure 1. Distribution of 2023 priorities across countries

Enhancing the design and management of support programmes

The pandemic and then increases in energy and food prices have aggravated pre-existing social vulnerabilities, notwithstanding significant increases in public spending. Amidst soaring energy and food inflation, social protection systems struggled to deliver timely and targeted social support. Limited coverage has been a key factor hindering the delivery of support to the most vulnerable. In this context, a key recommendation in this edition of Going for Growth is to expand the coverage of social security and unemployment benefits to include self-employed and non-regular workers, especially in emerging-market economies with a large informal sector. Additionally, social protection programmes are often poorly targeted. Applying different targeting mechanisms, while also maintaining strong work incentives, could make support systems more effective in reducing poverty and building resilience, while also improving the overall cost effectiveness of social spending.

Removing obstacles to effective resource utilisation

The past decade witnessed a dramatic decline in potential output growth, which primarily reflects slower trend labour productivity growth. In turn, weak productivity growth can be traced back to low investment levels and slow capital accumulation. Competition is a key area where public policies can strengthen firms’ incentives to upgrade their technologies, organisational structures, and business practices. The regulatory environment should encourage the entry of new firms and let them grow and enable unsuccessful firms to downscale or close. Insolvency regimes that do not over-penalise business failure facilitate this process. Reducing both economy-wide and sector-specific regulatory burdens, streamlining regulations, simplifying permit and licensing procedures and reducing the scope of state-owned enterprises while improving their governance, are other recommendations that could help in reviving productivity growth.

In other areas, public infrastructure investment can also act as a catalyst for private investments. The capacity and regulation of infrastructure in areas such as energy and transport could be enhanced in several countries. A sound legal framework is also critical to removing bottlenecks to growth, and a handful of OECD and non-member countries are recommended to take steps to strengthen the rule of law and judicial efficiency. Increasing public support for R&D is also warranted on a general basis, as investing in innovation involves considerable uncertainty while associated outcomes often have some public good qualities. Tax systems could also be made more growth- and equity-friendly, by shifting the tax burden towards immovable property, broadening the tax base, and reducing the fragmentation of the tax system. A shift to environmental taxation would also contribute to improving the sustainability of economic growth and wellbeing, provided measures are taken to ensure that lower-income households are not disproportionately affected.

Moreover, as knowledge remains a key driver for growth and innovation, furthering investments in education, upskilling and reskilling programs are also frequently identified recommendations. There is also a continuing need to promote labour market participation and improve work incentives, especially among vulnerable and under-represented groups. Reforms to foster inclusive and flexible labour markets, while limiting labour market dualism and incentives for early retirement, would be all essential steps in this regard. Moreover, and while progress has been achieved over the last decade, more could be done to increase female labour market participation, notably through the provision of childcare and parental leave, and improved tax incentives.

Beyond domestic borders, protectionist policies should be avoided. Globalisation has brought many benefits in terms of higher productivity, lower prices, greater variety of goods and accelerated income convergence of many emerging-market economies. However, globalisation is currently facing political headwinds, as national security and strategic considerations have gained traction, risking a more fragmented economic and political order. Chapter 2 of this edition provides new OECD material which reviews selected characteristics of trade integration via global value chains, identifies gaps in our understanding of the risks related to such chains, and outlines possible strategies to address global value chain risks. These include diversifying supply chains, friend or near shoring and inventory management, with the latter two likely to entail higher costs.

Securing faster progress towards decarbonisation

Attaining decarbonisation by mid-century will require structural changes in the economy, notably by entailing substantial reallocation of workers and capital from emission-intensive activities towards greener activities. Carbon pricing, strong and predictable regulations, as well as investments in renewable energy are all essential components of this restructuring. Curtailing greenhouse gas emissions will not necessarily imply choking productivity and economic growth, but transition costs are likely to emerge in sectors that are most vulnerable to the climate transition. The public acceptability of mitigation policies can be improved by cushioning vulnerable social groups from these adverse effects of transition.

Emission pricing is a key element of any ambitious policy package to accelerate the pace of decarbonisation. Putting a price on emissions discourages the production and consumption of high carbon goods and spurs innovation and investments in low carbon technology. Across the OECD, there is still considerable room to improve emission pricing mechanisms Carbon price levels need to be raised and made uniform across energy sources and sectors. A clear and predictable regulatory environment can enhance the effect of carbon pricing and directly reduce emissions, particularly where fossil fuel demand is irresponsive to price signals. Accelerating both public and private investments in clean energy is also imperative to meet emission reduction targets. Importantly, for energy security purposes, the scaling down in fossil fuel investments should not run ahead of the scaling up in clean energy and network investments, and the two flows should not be viewed as isolated policy objectives.

Making digitalisation a driver of productivity growth

There is ample room to boost productivity through the adoption and diffusion of digital technologies. Policies that accelerate the digital transformation can also help strengthen the climate transition, as digital technologies can support more efficient flows of energy and more broadly help decouple economic activity from natural resource use. There are currently large gaps in access to, and use of, digital technologies across OECD countries. Public policies should aim at ensuring speedier diffusion while governments need to provide leadership in using and providing data and technology. Policies focusing on facilitating investments in, and access to, broadband connections, as well as policies ensuring a competitive business environment and lower entry barriers for new firms, are likely to spur incentives for digital technology adoption. This is especially the case for young firms, which often possess a comparative advantage in commercialising new technologies and thus create pressure on incumbent firms to adopt them as well. Policies that facilitate the movement and redeployment of workers and capital within and across firms, could also promote digital diffusion.

Human capital is fundamental in ensuring the effective adoption and use of digital technologies. The skills needed consist of specialised competencies from ICT professionals and generic skills for other workers, for a broad-based use of digital technologies. Attention should thus be given to enhancing the digital skills in the curricula proposed to students and expanding vocational education and apprenticeships. Lifelong learning has a central role to play in allowing all workers and job seekers to keep up with the digital transformation and not be left behind. Achieving so requires stepping-up investments in training, by providing individuals with opportunities to gain or improve their digital skills, ensuring that skills are matched with jobs within firms, and developing and maintaining high quality management.