Economic Policy Reforms 2023

Going for Growth

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Economic Policy Reforms

3 October 2023

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1. Overview

Abstract

The Chapter advises on country-specific structural policy priorities to strengthen growth fundamentals and pave the way for successful green and digital transitions. Four key policy areas are identified: enhancing the design of social support programs; lifting potential growth by removing obstacles to effective resource utilisation; securing faster progress towards decarbonization; making digital transformation a driver of productivity growth. Country specific information supporting this chapter is available in the country notes (Chapter 3).

Addressing the dual transition while strengthening fundamentals

The last few years have been dominated by massive shocks that have profoundly changed societies and economies. These shocks necessitated unprecedented governmental responses spanning multiple policy areas, helping to protect lives and livelihoods. Now the challenge is to move beyond the short-term policy responses to address the long-term threats to sustainable and inclusive growth.

The 2021 edition of Going for Growth highlighted the need for policy action to support a dual transition, through post-pandemic reallocation and convergence towards a low-carbon economy, while addressing pre-existing longer-term weaknesses. Those priorities remain. After the COVID-19 crisis, the post-pandemic recovery was gathering pace until the onset of Russia’s illegal war of aggression against Ukraine, which led to a sharp increase in energy prices. Governments acted swiftly to support vulnerable social groups, who would otherwise face the risk of energy poverty and losses in living standards. These events have had an impact on immediate policy priorities, dwarfing long-standing challenges.

Now, reinvigorating economies is vital, but so is improving the quality of growth. Before the pandemic, many economies were struggling with sluggish productivity growth amid declining business dynamism. Structural problems in many labour markets included stubbornly high long-term unemployment and high informality in emerging-market economies. And while labour supply has recovered to pre-pandemic levels in most countries, labour and skill mismatches continue to hinder effective resource utilisation and contribute to ongoing tightness in OECD labour markets. Moreover, environmental sustainability, alongside more general resilience concerns, was often absent from growth strategies.

Going for Growth 2023 provides country-specific advice to lay the groundwork for stronger, more inclusive and resilient growth. The key structural challenges to be addressed are identified within the Going for Growth framework (Annex 1.A) and presented in the Country Notes (Chapter 3). The main pressing policy challenges are the following:

Enhance the design and management of support programmes in periods of crisis: despite mounting pressure on public finances, the shocks related to the pandemic and the energy prices provide important lessons for the design of social protection. This is particularly important where untargeted, price-based measures have the undesirable potential of blurring the price signals needed to underpin the transition to a low-carbon economy.
Remove obstacles to effective resource utilisation to lift potential growth: steering growth in a more durable, resilient and inclusive direction requires structural policy action to increase labour mobility and support firms in becoming more dynamic, innovative and greener. This is particularly important given adverse demographics in most countries, which will require gains in labour productivity to offset slower labour force growth over the medium-to-longer term.
Secure faster progress towards decarbonisation to attain climate change targets: with appropriate policies and incentives in place, notably strong structural reforms combined with coherent climate policy, governments can secure convergence towards net-zero emissions trajectories. This requires action across a variety of policy areas, including the need to deal with transition costs for both businesses and workers.
Make the most of the digital transformation as a driver of productivity growth: digital technologies are transforming economies and offer a vast potential to enhance productivity of firms. Improving policies in a range of areas can support digital adoption and thereby substantially lift productivity.

Snapshot of cross-country reform priorities in 2023

Going for Growth priorities are selected based on a combination of quantitative analysis of performance and policy weaknesses, and country-specific expertise (Annex 1.A). Priority reforms are identified, even for top performers, based on weaknesses in specific areas and identified emerging challenges. The primary objective is to set a policy agenda most likely to secure long-term improvements in performances across the dimensions covered (Figure1.1).

In this edition, climate change mitigation constitutes a large share of priorities in both advanced and emerging-market economies, underscoring the urgent need of accelerating the green transition. Increasing green and digital infrastructure investment, strengthening standards to enable a reduction in emissions, and increasing the scope and level of carbon pricing are frequently identified recommendations. Priorities to accelerate the digital transformation, which has the potential to contribute to decoupling economic activity from natural resource use and their environmental impacts, as well as reviving productivity growth over the medium and long term, are also prevalent. Some policy hurdles, such as barriers to investment in digital infrastructures and digital skills development, still hamper the effective deployment and use of these technologies.

In addition to these longer-term challenges, there is a need to address labour market functioning as well as capital accumulation, both of which have been pushing down productivity across the board. Prolonged labour market tightness, especially for certain sectors (manufacturing and lower-pay sectors) and groups (women and young workers) in many advanced countries, indicates that there is a need to promote labour market participation to contribute to productivity growth and to enhance the overall innovative capacity of the economy. To boost supply, it is key for countries to lift investment rates from their currently low levels, both for tangible and intangible capital. Most common policy priorities in this area include sector-specific and economy-wide regulations, with an emphasis on streamlining licensing and permits, as well as skills acquisition, which could all foster competitive pressures and business dynamism. Other priorities include shifting the tax burden from direct sources (labour and capital income) to indirect sources (taxes on consumption, immovable property, and carbon emissions) while broadening the tax base, enhancing physical infrastructure, and improving the efficiency of public administration. For emerging-market economies, priorities to boost business dynamism and knowledge diffusion account for an even larger share of the total priorities, and primarily include streamlining permits, lowering barriers to trade and investment, expanding regulatory impact assessment, improving the quality and accessibility of infrastructure, and strengthening the rule of law.

In this edition, policy priorities also focus on supporting vulnerable groups and helping current and future workers acquire or improve their skills to contribute to longer-term growth that benefit all. The key part of the skill priorities concerns the need to reform education, with expanding support to disadvantaged students, improving teaching quality, vocational education and training (VET), and expanding long-life learning having the largest occurrences. Priorities on R&D and innovation, such as strengthening collaboration between universities and industries, are further important in enhancing the skills needed for the digital and climate transitions. In emerging-market economies, the recommendations on education are equally critical, with priorities in skills linked to higher VET as well as primary and secondary education.

Figure 1.1. Going for Growth 2023 priorities across main policy areas

Supporting vulnerable social groups during crises

Social vulnerabilities may be aggravated due to the pandemic and the sharp increase in energy prices following the onset of war in Ukraine, despite significantly increased public support (Figure 1.2). On average across the OECD, the public social spending-to-GDP ratio increased by almost 3 percentage points during 2019-20, to about 23%. While provisional data for 2022 show a decrease by 2 percentage points, mainly due to the strong GDP rebound in 2021 and 2022, this ratio remains nonetheless above pre-crisis level in most countries. With inflation having reached levels not seen over the past four decades in most OECD countries in 2022, real incomes were hit hardest among the lowest-income groups, and social protection policy is challenged to provide timely and targeted social support.

Figure 1.2. Social spending has been above its pre-pandemic level

A pre-existing challenge in most OECD countries, which has made them ill-equipped to meet the needs of vulnerable social groups facing adverse economic shocks, is a lack of coverage of social protection systems. In many cases, social support does not reach those workers with the weakest attachment to the labour force, including the self-employed and those working in the informal sector or with non-standard contracts (OECD, 2019). For example, minimum income benefits cover less than 40% of median income, below the 60% threshold commonly used to measure poverty (Figure 1.3). 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, including platform workers, especially in emerging-market economies with a large informal sector such as Colombia and Mexico, notably to encourage to go formal.

In addition to limited coverage, social protection programmes are also often poorly targeted in many countries. Support programmes often fail to reach the intended beneficiaries, even when they are eligible for assistance, and end up benefiting social groups that may not be in immediate need of assistance. On average across countries, the same share of cash transfers reaches the poorest and the richest 20% of the working-age population (Figure 1.4, Panel A). Support to shield households and businesses from the impact of high energy prices has also been mainly untargeted (Figure 1.4, Panel B).

Figure 1.3. Social protection lacks coverage

Figure 1.4. Transfers targeting could be improved

Better targeting of social support is indeed a key policy priority in this edition of Going for Growth (Figure 1.5). Targeting could also be considered in the design of various relief measures, as suggested in new OECD evidence on the recent energy price relief measures (OECD, 2023a). However, each targeting method comes with distinct benefits and costs (Box 1.1).

Box 1.1. Social support programmes: benefits and challenges of targeting

Targeting implies refocusing the provision of social support to distinct groups. Methods can be applied in the design of social transfers and benefits, but also in the provision of training programs, ALMPs and other measures to promote labour market participation. When properly implemented, targeting measures can effectively help reduce poverty and build resilience among vulnerable households (Grosh, 2022).

There are various methods for discerning eligibility for social support, and there is no one-size-fits-all strategy in their application and selection. The choice should be guided by context and policy objectives, and each method comes with distinct benefits as well as specific costs. For instance, with means testing, eligibility is determined based on income or some financial asset. The benefit of this approach is that it can identify the most vulnerable directly. However, it can be administratively burdensome and cause some inaccuracies in countries with large informal sectors or low-quality administrative data. On the contrary, categorical targeting, which determines eligibility based on adherence to relatively easy-to-observe categories, such as age, employment status, family status etc., is simpler to administer and has the benefit of employing transparent and objective eligibility measures. Yet, categorical targeting may be less effective in reducing poverty, as eligibility is not determined based on income or financial resources.

Targeting is generally associated with higher administrative costs than universal programmes. Also, the risk of both exclusion and inclusion errors (where support is not given to eligible people or given to ineligible people) increases as one moves from universal support to more selected programs. Targeted social support can also create disincentives to take up work, particularly when eligibility for support is directly linked to salary income (i.e., for traditional means testing). However, disincentives to take up work may be less acute in schemes where eligibility is not only or not directly dependent on income, such as categorical targeting or proxy means-testing (where eligibility is determined based on adherence to an indicator often correlated with poverty).

Increasing the quality of public data, enhancing data-sharing practices, and investing in the entire delivery chain of social support programs, can effectively reduce the administrative costs associated with targeting practices, and limit exclusion and inclusion errors thus improving their overall effects on poverty and household resilience. In Norway for instance, detailed household data and electronic payment systems allow the system for an extended child benefit given to single parents to be completely automated. The abovementioned investments may also improve the agility of social support systems in the face of economic crises, where the dynamics of economic welfare can be considerable. In fact, the countries that were best able to adapt their support systems to the COVID-19 crisis were countries that already had the digital capacity to react with high-coverage social data registers, linkable information between them, and existing account-based or digital payments, and amenable legislation (Grosh, 2022).

Figure 1.5. Key recommendations in social protection and active labour market policies

The post-pandemic recovery has highlighted the need to ensure appropriate incentives for labour supply in the design of support programmes, to avoid amplifying labour supply constraints. This is a pre-existing challenge facing many countries, but the acute labour shortages that have emerged with the reopening of economies from the pandemic have brought these considerations to the fore. Financial disincentives to take up work often reflect the combined effect of taxes and benefits, particularly in higher-income countries where welfare states are comparatively more developed. On average across OECD countries, a jobseeker returning to work to earn the minimum wage after two months of unemployment is facing a 75% implicit marginal tax rate, due to higher taxes and lower benefits. This rate is above 100% in Japan and Korea (Figure 1.6).

Figure 1.6. Financial disincentives to return to work remain high for minimum wage earners

Reform options to enhance social protection also need to consider active labour market policies (ALMPs). While adequate income support should be provided during jobless spells, return to work should be encouraged by efficiently matching workers and jobs. This requires targeted policies, such as a more intensive and personalised approach to case management (e.g., regular face-to-face interviews and the development of individual action plans) as well as measures to find job opportunities that contribute to skills acquisition and work experience. The importance of ALMPs is well documented to achieve this, but reforms in this area are still needed, e.g., Japan, Luxembourg, and Portugal (Figure 1.5).

Removing obstacles to effective resource utilisation

The post-pandemic recovery in labour utilisation has been uneven

Labour markets remain generally tight in advanced economies. Labour market recovery has been strong, even if uneven across countries and sectors (OECD, 2022a). Indeed, employment rates have been relatively stable in Europe and Japan, owing to widespread reliance on job retention schemes, and bounced back swiftly in Canada and the United States, thanks to generous cash support. More broadly, tight labour markets have pushed unemployment rates to their lowest levels in the past two decades, coupled with unusually elevated vacancy rates (Figure 1.7). In Iceland, Switzerland, the United States, the United Kingdom as well as Colombia, Costa Rica, and Chile, labour force participation remains below its pre-pandemic level. Moreover, several countries have been reporting widespread labour shortages, particularly in manufacturing and construction as well as lower-pay sectors such as accommodation and food service activities (OECD, 2022a).

Figure 1.7. Labour markets remained historically tight

Notwithstanding strong labour markets, some vulnerable groups are lagging behind in the recovery, and the continuing disadvantage of young workers in some countries is of particular concern given their higher risk of scarring (OECD, 2021a). Moreover, in many countries employment rates for women remain far below those for men (see below). Some other demographic groups, including older adults, also have low labour force participation rates (OECD, 2021a). These outcomes undermine the productive capacity of economies, pointing to the urgent need for policies to enhance labour force participation across groups and countries.

There are large cross-country differences in labour utilisation and its drivers

In many European countries, such as Austria, Denmark, Finland, Germany, Iceland, Norway, the United Kingdom, and to a lesser extent in France and Luxembourg, the gap in labour utilisation compared to the best OECD performers is largely the result of low average hours worked per worker (Figure 1.8). Low hours worked often reflect policy impediments or disincentives to full-time work, especially for lone parents and second earners. By contrast, in Belgium, Italy, Latvia, Romania, Spain, Slovakia, and also in Türkiye, Chile, Colombia, Costa Rica and South Africa, the labour utilisation gap can be explained by a comparatively low employment rate, while average hours worked per worker is relatively high.

Figure 1.8. The drivers of labour utilisation vary across groups of countries

Fostering inclusive and flexible labour markets is a critical step needed to boost competition, mitigate supply shortages, and strengthen gains from digitalisation. Weak aggregate employment rates are often driven by low employment of specific groups, such as younger workers, older workers, women, minorities and the low skilled. Labour market dualism, the segmentation between workers with regular contracts with strong employment protection and those with contracts with little protection and little scope for on-the-job training, plays an important role in driving low employment. Other driving factors include incentives for early retirement or inadequate skills, which are also prevalent across OECD countries.

Reforms to remove barriers to women’s labour market participation

Investments in gender equality can boost labour force participation, employment and output (OECD, 2018a). While there have been considerable improvements in women’s labour market participation, their employment rate remains well below that of men, and gender pay gaps remain high across many OECD countries (Figure 1.9).

Figure 1.9. Gender inequalities in labour market outcomes persist

Gender gaps in labour market participation can often be traced back to barriers or incentives related to the provision of childcare and parental leave, as well as the design of tax-benefit systems. Increasing access to, and lowering the cost of, non-parental childcare is one of the policy priorities identified in this edition of Going for Growth (Figure 1.10). Indeed, disproportionately high childcare cost is one of the main factors contributing to inequalities in childcare use across income groups (OECD, 2020a). Providing access to affordable childcare can not only boost maternal employment, but also benefit children’s educational outcomes, especially for those from low-income backgrounds.

Improving parental leave is another key policy recommendation. The provision of adequate maternity leave has been shown to produce several societal benefits, such as lower infant mortality rates and health benefits for the mother (Khan, 2020). Moreover, it tends to boost the female labour supply, by helping women reconcile work and family life, while strengthening their attachment to the labour market. On the other hand, in order to avoid prolonged periods of leave-inducing labour market detachment, the length of parental leave could be reduced in the Czech Republic, Korea, the Netherlands, Slovakia and the United Kingdom. Parental leave could also be reformed to provide additional support for mothers wishing to reintegrate the labour force. While many OECD countries offer parental leave to fathers, uptake remains low.

In some cases, countries would do well to reform tax-benefit systems to remove disincentives for women to participate in the labour market. This includes making the tax system neutral between main and second earners, as recommended for Italy and Spain. In addition, the tax system could be used to address certain fixed costs, such as childcare. This could be done through targeted support, child credits, or tax deductibility of childcare expenses.

Figure 1.10. Key recommendations to remove barriers to women’s labour market participation

Boosting investment in various types of capital to revive productivity growth

Productivity growth had slowed even before the pandemic

While lifting growth has been a long-standing challenge in most countries, the current prolonged slowdown and weakened underlying growth prospects in the face of weak productivity growth highlight the critical role for supply-boosting structural reforms. The past decade witnessed a dramatic decline in potential output growth, which primarily reflects slower trend growth in labour productivity. Indeed, while labour productivity growth has been continuously trending downwards since the end of the 1990s for most OECD economies, coinciding with accelerating trade and capital integration, since the global financial crisis there has been a broad-based slowdown in productivity growth across both advanced and emerging-market economies (Andrews et al., 2016; Figure 1.11). The support for globalisation also eroded over the same period, entailing the risk of a more fragmented economic order that could weigh heavily on future productivity performance. Chapter 2 specifically reviews selected characteristics of trade integration, their implications, and then outlines general strategies to better understand and mitigate global values chains risks.

Figure 1.11. Weak labour productivity underpinned the decline in potential output

Productivity varies across countries

Cross-country differences in labour productivity are explained by a combination of gaps in the capital stock and total factor productivity (TFP) (Figure 1.12). While TFP gaps are more pronounced in emerging-market economies, in other countries, such as Austria, Czech Republic, Korea and Japan, TFP is relatively weak while capital per worker is comparatively high.

Figure 1.12. Differences in labour productivity across countries are mostly driven by TFP gaps

Lifting investment

Weak productivity growth since the mid-2000s, and most notably since the global financial crisis, can be traced back to slow capital accumulation, despite a gradual decline in the cost of capital. This includes tangible capital, such as equipment, machinery, and buildings, as well as intangible capital, which encompasses a range of assets from digital (software, data), intellectual property (R&D and patents) and organizational capital (Andrews and Criscuolo, 2013). Lower investment in these areas implies that firms do not devote sufficient resources to upgrading their technologies, their modes of production and their business practices more generally, resulting in lower productivity growth.

Making the most of these investments requires complementary investment in skills, both managerial and technical. Indeed, about one-third of the labour productivity gap between firms at the productivity “frontier” and a typical, medium performer of the same industry can be explained by gaps in skills (Criscuolo et al., 2021a). Moreover, managerial skills play a particularly important role, also through complementarities with worker skills. Gender and cultural diversity among managers – and to a lesser extent, among workers – is positively related to firm productivity as well. Moreover, the pandemic-induced shift towards more remote work underscores the need for upskilling the labour force, including in particular in the digital and managerial areas, to adapt to a new hybrid work environment (Criscuolo et al, 2021). In other words, public policies have a crucial role to play to enhance the productivity benefits of workers and managers by raising the quality and quantity of human capital (supply), by promoting skill upgrade (training), and by facilitating productive matches of workers to jobs.

To boost firms investment in physical, intangible, and human capital, firms need to have not only the capabilities but also the right incentives. Competition is one key area where public policies can play a crucial role to ensure that firms want to keep improving. This is true not only for the most innovative businesses at the top end of productivity performances, but also for those who rely on adoption of the latest technologies or best practices from these leading firms. However, a large body of evidence suggests a weakening of competition in several major OECD economies. In particular, industry concentration and mark-ups have been rising (De Loecker et al., 2020), the entry and exit of firms have been falling (Akcigit et al., 2021; Calvino et al., 2020), and the gap between the best firms (the productivity “frontier”) and the other firms has been growing (Andrews et al., 2016).

Regulations in product, labour and capital markets should thus aim to keep promoting competition and adapt to the evolving nature of markets, for instance, due to more intensive digitalization. Competition-friendly product market regulation can sharpen the incentives for incumbent firms to adopt the latest technologies. Moreover, by enabling low barriers to entry, pro-competitive regulations can foster entrepreneurship and related experimentation with new business models and technologies, potentially contributing to closing productivity gaps (Figure 1.13). Insolvency regimes that do not excessively penalise debtors can also have similar beneficial effects, by facilitating the exit of less productive firms to free up resources to productive incumbents or entrants, spurring productivity overall, in particular in intangible-intensive sectors (Figure 1.14). Labour market regulations should also avoid putting a burden on workers who wish to move across space, by limiting unnecessary differences in the licensing requirements of certain occupations, so that workers have also appropriate incentives for finding more productive matches to jobs (Bambalaite et al., 2020).

Figure 1.13. Faster product market reform can mitigate productivity divergence

Figure 1.14. Sound insolvency regimes can benefit productivity in intangible-intensive sectors

Reforms to economy-wide and sector-specific regulations

Reducing both economy-wide and sector-specific regulatory burdens continues to be key in reviving productivity in many countries. Frequently associated recommendations include streamlining regulation while facilitating firm entry through simplified and transparent permit and licensing procedures, reducing the scope of state-owned enterprises while improving their governance, and strengthening competition frameworks (Figure 1.15). Limiting sector-specific regulatory burdens, especially in non-manufacturing, i.e., retail trade and professional services as well as network industries, should also take priority, to spur productivity and promote allocative efficiency (Bambalaite et al., 2020).

Figure 1.15. Key recommendations in product market regulation, competition and trade and FDI

As mentioned, a regulatory environment that encourages the entry of new firms and enables them to grow, and in turn reassures unsuccessful firms to downscale or close down, can also enhance business dynamism and productivity. Indeed, policies that promote more efficient firm entry and exit feature regularly in Going for Growth. In practical terms, this calls for bankruptcy legislation that does not excessively penalise business failure, which remains a priority in Hungary, Norway, Portugal and Romania (Figure 1.15).

Reforms to improve physical and legal infrastructure

Public infrastructure investment contributes both directly and indirectly to the economy-wide capital stock, including through its role as a catalyst for private investment. Indeed, enhancing the capacity and regulation of infrastructure is a priority in several advanced countries (Figure 1.16), with emphasis on addressing infrastructure shortages in transport, energy, or both in a cost-effective way, as is the case in Canada and France. Infrastructure provision - quantity and quality - is also poor in many emerging-market economies and raising public investment should be accompanied by reforms of the regulatory environment to attract private investment and optimise its use. Removing infrastructure bottlenecks, such as those in transport, can contribute to higher employment in countries like Estonia, Indonesia, and Peru, by facilitating the matching of workers and jobs. In general, quality infrastructure is crucial to the mobility of goods and people and for improving business dynamism.

Figure 1.16. Key recommendations on physical and legal infrastructure

In addition to well-developed tangible infrastructure, a sound legal framework is also critical to removing growth bottlenecks. Going for Growth provides policy options to strengthen the rule of law and judicial efficiency, with recommendations generally spanning the provision of security of persons and property, the enforcement of contracts and checks on corruption, as well as improvements in resource management and performance evaluation in public administrations. Recommendations in this area are identified especially in transition-market economies such as Bulgaria, Croatia, Latvia, Lithuania and Estonia.

Reforms to make the tax system more efficient

A more growth- and equity-friendly tax system can be achieved by shifting the tax burden towards immovable property, broadening tax base, and reducing the fragmentation of the tax system. A shift to environmental taxation can also help improve the sustainability of economic growth and well-being, provided measures are taken to ensure that lower-income households are not disproportionately impacted (see below). While countries still exhibit wide scope for improvement in this respect, and tax reform is among frequent priorities, recommendations vary depending on country-specific performance and policy weaknesses (Figure 1.17). Reductions in labour or corporate taxes are generally recommended alongside increases in various indirect taxes depending on country-specific sources of distortions. For example, in Argentina, Colombia, Lithuania and Slovenia, there is room to shift further the tax structure toward indirect taxation.

Figure 1.17. Key recommendations on the structure and efficiency of the tax system

Reforms to accelerate skills development and innovation capacity

Upskilling/reskilling policies are crucial as knowledge is a key driver of growth. Improving education and skills has repeatedly been identified as a priority for a vast majority of advanced and emerging-market economies, with specific recommendations varying depending on the sources of policy weaknesses (Figure 1.18). Despite widespread and sustained reform action in this area, challenges remain. Education and skills are also essential drivers of innovation. A strong network of knowledge transmission through R&D collaboration among firms, as well as between higher education institutes and firms, is conducive to innovation-led growth.

The success of the match between education and innovation relies on a broader range of -mostly intangible- assets such as employee skills, organisational know-how, databases, design, brands and various forms of intellectual property. Policies spurring investment in such assets should be complemented by appropriate framework conditions, as mentioned above, including product and labour market policies that encourage the reallocation of capital and jobs across firms, as well as effective insolvency legislation that does not penalise entrepreneurial experimentation. Thus, addressing the challenge of innovation cuts across most of the policy areas covered by Going for Growth.

Figure 1.18. Key recommendations in education and skills

Priorities to improve the effectiveness of education systems

High-quality primary and secondary education should be prioritised in public funding because those are a prerequisite for raising skill levels and facilitating access to tertiary education. Increasing the quality of lower-level schooling across broad segments of the population is important for securing improved productivity but also for fostering inclusiveness, notably by achieving rising participation in higher education.

In primary and secondary education, reform recommendations focus on raising teachers’ qualifications, addressing educational inequalities, and enhancing the targeting and effectiveness of resources devoted to disadvantaged students and schools (Figure 1.18). In the area of tertiary education, recommendations are more prevalent for higher-income countries, with a common challenge to improve university responsiveness to labour market needs (Figure 1.18). Similarly, recommendations in the area of vocational education and training (VET) also aim at responding to the challenge of aligning skill provision with labour market needs. Expanding or enhancing the effectiveness of VET will provide a better bridge between education and the labour market and is identified as a recommendation in several emerging-market and advanced economies.

Reforms to upskill and reskill

Enhancing growth and equality of opportunity through education and other skill provision programmes across the whole population, including low-skilled workers, is a policy priority identified in many OECD countries. People with low and medium levels of educational attainment face distinct challenges as they are overrepresented in informal sectors and face higher risk of job-losses, longer unemployment spells, and often weaker social security coverage (OECD, 2019). Increased digitalisation, combined with the stepping-up of climate change mitigation policies, can add to these challenges, as low-skilled and low-paid workers are overrepresented in polluting jobs and more likely to experience wage-reductions and job-losses along with the green transition (D’Arcangelo, 2022a). Recent evidence estimates that the policy package required to achieve net-zero emissions by 2050 would lead to about 2% of the global workforce changing the sector in which they work over the next 30 years, with workers moving from polluting, higher-emissions sectors to those that are cleaner and generate lower emissions (IMF, 2022).

Public policies need to provide adequate support to ease labour market adjustments and help efficient reallocation of workers, particularly for vulnerable groups. This can be done by equipping people with the appropriate skills, offering support to return to the labour force, and strengthening social safety nets. Efforts to keep or reconnect vulnerable groups to the labour market are one of the most effective ways to preserve living standards (OECD, 2022a). Reskilling should focus on the most vulnerable groups, who are more exposed to labour market adjustments but are less likely to participate in training (OECD, 2019). Key policy priorities in this area include removing time and financial constraints to training participation, tackling unequal access to training based on employment status, and making training rights portable between jobs.

Priorities to improve innovation capacity

There is further room for policy action in promoting innovation capacity. Efficient public support for R&D is generally warranted, as investing in innovation involves considerable uncertainty while associated outcomes often have some public good qualities - being widely shared within the economy and even abroad. In both advanced and emerging-market economies, recommendations on innovation also include strengthening collaboration between research institutes or universities and industry. A mix of incremental R&D tax incentives and selective direct grants is considered the best approach, with recommendations focusing on achieving a better balance between the two types of support, as recommended for Norway and Slovakia, and pursuing close evaluation of grant programmes (Figure 1.19).

Figure 1.19. Key recommendations in innovation policies

Securing faster progress towards decarbonisation

Ambitious targets have been set in the wake of the 2015 Paris Agreement, with many countries committing to net-zero emission targets by 2050 to limit global temperature rise to “well below 2°C and as close as possible to 1.5°C relative to pre-industrial levels”. Countries have also set intermediate targets for 2030, but action is needed to make sure these targets are met (Figure 1.20). At the global level, the policies in place are likely to be insufficient to put greenhouse gas emissions on a downward path before 2030 (IEA, 2022), making the goal of net-zero emissions by mid-century difficult to attain.

Figure 1.20. Meeting 2030 emission reduction targets remains challenging

Attaining decarbonisation by mid-century requires structural changes in the economy and will entail substantial reallocation of workers and capital from emission-intensive activities towards greener activities. Against this backdrop, Going for Growth recommendations can be grouped into three areas: i) increasing the scope and level of carbon pricing; ii) increasing green investment; and iii) strengthening regulations, institutions and standards to enable emission reductions. Most countries have recommendations in all three groups of this policy mix (Figure 1.21).

Several countries have introduced widescale reforms to support the transition. Recent initiatives include the United States’ Inflation Reduction Act, foreseen to boost the growth of wind and solar capacity annually by 2.5 times, compared to 2022 growth, filling some of their gap in renewables penetration. In Europe, the Recovery and Resilience Facility aims to support achieving the EU’s climate neutrality target by 2050, while promoting investments in digitalisation, productivity growth and job creation. In China, new targets for expanding clean energy capacity are expected to make the country’s oil and coal consumption peak before 2030. Japan announced a Green Transformation (GX) plan at the end of 2022, which restarts some of the country’s nuclear power plants as part of the policy package to reach carbon neutrality by 2050. At the same time, the use of carbon pricing has continued to rise, and new policies passed in 2022 in major energy markets are, compared to today, expected to increase annual investments in clean energy by 50% over the horizon of 2030 (IEA, 2022).

To the extent that climate change mitigation policies are appropriately designed and implemented, they will have impacts on productivity across firms and sectors. The ensuing restructuring of the economy will have heterogenous effects. For example, more productive firms when facing stricter environmental policies may be better placed to benefit from new opportunities as demand shifts towards greener goods. These firms may also benefit from being able to exploit technological spillovers and lower borrowing costs to restrain growth costs (Dechezleprêtre et al., 2019). By contrast, stringent environmental policy can raise costs and force less productive firms to downsize or exit the market. These dynamics create space for more productive firms to expand (Dechezleprêtre et al, 2020), thereby boosting aggregate productivity.

Figure 1.21. Key recommendations on energy transition

The challenge restructuring poses will be exacerbated if the likely evolution of policy lacks clarity. With policy uncertainty firms will curtail investment, especially in capital-intensive sectors (Berestycki et al., 2022). In this light, minimising the costs of transition will require not only facilitating the reallocation of resources towards more productive and greener activities but also managing expectations about the future path of policy.

A second key challenge for the transition is managing the associated distributional impacts. Major transition costs will emerge or rise in specific sectors that are most vulnerable to the climate transition, such as mining and fossil fuel and energy-intensive industries, either due to higher input costs or changing demand patterns. This will also have repercussions for firms that are heavily reliant on these industries. Workers lacking the skills needed in the growing green activities will be at the greatest risk of job losses.

Public acceptability of climate change mitigation policies can be improved, primarily by cushioning vulnerable social groups from the adverse effects of transition (Figure 1.5). Individuals are also more likely to accept policy reform in this area when they have received sufficient background information to make better-informed choices. Close attention needs to be paid to phasing in policies to allow time for households and firms to adjust, especially when significant investment is needed. Recent cross-country evidence also suggests that the public is more likely to support climate change mitigation policies when a degree of revenue recycling is included in the reform package (Dechezleprêtre et al., 2022). In line with this, other recommendations in this area are using revenues from novel taxes to reduce existing taxes or make transfer payments and earmark revenue for environmentally related measures, notably for countering the adverse distributional effects of some policies (see section above).

Accelerating the adoption of digital technologies can strengthen the climate transition. Indeed, digital technologies can support more efficient flows of energy and increase interconnectivity between markets. They can also provide the necessary data to match supply and demand at a more disaggregated level and close to real time. The forecasting of energy production and demand can be improved by digital technologies, such as sensors and smart meters and geo-localisation devices. This allows smart grids to adjust consumption to weather conditions affecting the production of intermittent renewable energy, and reduces the cost of integrating intermittent renewable energy in existing system, enabling its effective management and distribution, facilitating cross-border exchange, and preventing interruptions. Digitalisation also empowers people and businesses to shift consumption to green energy sources, adjust consumption to price signals, and even trade energy. While the energy and digital transitions are different in nature and each subject to specific policy challenges (see below), the policies needed to address them have the capacity to reinforce each other.

The dramatic changes in the energy supply required during the transition will call for policy action to make the electricity supply secure. For example, due to the intermittency of renewables, electricity systems will continue to rely on natural gas and gas-fired power plants in times of high demand (IEA, 2022). While phasing out gradually natural gas, at the same time existing natural gas infrastructure can support the deployment of low-carbon gases, e.g., biomethane, hydrogen, and synthetic methane, with generally low adaptation costs. However, this will require the development of new regulations for low-carbon gas markets.

Emission pricing is a powerful climate change mitigation instrument

Accelerating the pace of decarbonisation will require ambitious packages of new policy measures, of which emission pricing is a key element. Putting a price on emissions discourages the production and consumption of goods with strong carbon content. It also provides a clear signal to investors about the interest in investing in low-carbon technologies (OECD, 2021b). Recent experiences have shown that a strong carbon price can effectively contribute to reducing carbon emissions. For example, after the United Kingdom added a Carbon Price Floor to EU ETS prices in the electricity sector in 2013, emissions decreased by 53% by 2018, and the share of coal in generation fell from 37% to 2%, a record low (Hirst and Keep, 2018). Making the carbon price uniform across energy sources and sectors is particularly important: it makes the instrument technologically neutral and does not require supervision to determine or anticipate which technology or process is the most effective, leaving firms to innovate and determine the best approach in their own environment and constraints (D’arcangelo et al., 2022b).

Strong and stable price signals are necessary but still lacking in most countries (Figure 1.22). Furthermore, a credible path of price increases will be needed to underpin progress towards carbon neutrality. Currently, in the 44 OECD and G20 countries, responsible for 80% of global emissions, 80% of emissions are priced below EUR 60/tCO2. Increases of carbon prices are among the top reform priorities in Australia, Brazil, Canada, the Czech Republic, Ireland, Iceland, Latvia and South Africa.

Emission pricing will not necessarily imply choking economic growth. Recent evidence from European countries shows that carbon pricing increases over the last three decades have had limited negative effects on aggregate GDP growth (Metcalf and Stock, 2020). Nevertheless, there have been heterogeneous effects across sectors (Dechezleprêtre et al., 2022). Moreover, revenue recycling allows governments to reduce distortionary taxation, supporting investment, job creation and bolstering public acceptability, insofar as government revenues are estimated to be large in the initial phase following the pricing (D’arcangelo et al., 2022a). Carbon pricing is nonetheless likely to reduce activity in sectors and firms that are heavier emitter. These results underline that carbon pricing generates winners and losers, requiring support that can be financed through the additional revenues generated, and reallocation policies to counter adverse distributional effects.

Figure 1.22. Carbon emissions remain under-priced

Pricing should be accompanied by other measures

Regulations can complement carbon pricing where fossil fuel demand is irresponsive to price signals. In addition, they are powerful tools to improve efficiency in the use of energy and to encourage innovation that can lead to the development and adoption of greener technologies that can reduce the costs of abatement during the transition. For example, more than one-third of the vehicles and heavy industrial facilities that will be in use in 2050 are expected to come on stream in the next two decades (Figure 1.23). Making sure that these assets are in line with the latest energy-efficiency standards will help reduce energy intensity and emissions.

Another area requiring steadfast policy action is housing, which accounts for almost 30% of global energy-related emissions both through direct energy use and from power generation. Furthermore, urban form can influence emissions from transport activity. Implementing appropriate building energy codes will contribute to energy efficiency improvements and reductions in emissions (IEA, 2021). Balancing housing affordability and environmental concerns is nonetheless possible. Rethinking land use regulations, for example, may allow greater densification, higher housing supply and lower emissions (OECD, 2021c).

Making energy efficiency foundational in new investment will reduce energy demand, other things being equal, and the risk of potential future fossil-fuel disruptions. Such an approach may also reduce the burden for households and businesses in choosing appropriate technology. Improving the efficiency of currently existing assets is essential, particularly in the housing sector, a challenge identified notably for Eastern-European countries. One avenue to achieve this is earmarking tax revenues generated by emission pricing to subsidise innovation programs dedicated to improving efficiency.

Figure 1.23. A large share of the global stock to be built in the next decade will still be used in 2050

Investments in clean energy will need to accelerate to meet emission reduction targets, and a large share of countries have key policy recommendations identified in this area (Figure 1.21). Supporting public and private investment in these technologies will bolster the transition and complement carbon pricing and regulatory tools. The current times of high fossil fuel prices provide additional incentives to do so, but at the same time energy security concerns could also renew investments in fossil fuel supply. In the long run, increasing investments in fossil fuel will prolong the dependence on this energy source, slow the path of emissions reduction and delay the decline in demand. It will also increase the amount of stranded assets in the future. A deceleration of the energy transition can be avoided while still incorporating security objectives by coordinating clean energy investment with the reduction in fossil fuel investment. In fact, the scaling down in fossil fuel investment should not run ahead of the scaling up in clean energy investment, and the two flows should not be viewed as isolated policy objectives (IEA, 2022). If that were the case, in addition to heightening social discontent, this could lead to higher and more volatile prices. As such, coordinating the two will be essential in any forthcoming investment strategy, to deliver on both the mitigation and security fronts.

The International Energy Agency (IEA) estimates that investment in clean energy technologies needs to more than double from around USD 2 trillion recently to USD 5 trillion by 2030 (IEA, 2021). A large share of this investment is needed in electrification and the update and modernisation of electricity networks. Investment needs subsequently decline gradually as costs of renewable energy technologies are expected to continue falling. While energy investment has been rising recently (around 8% in 2022), this in part reflects rising capital investment costs (IEA, 2022), which suggest risks to the needed investment.

Against this background, accelerating investments in clean energy will deliver crucial and long-lasting solutions for climate outcomes. Government actions can contribute to this acceleration, by supporting private sector investment, through regulations and direct public investment. However, public debts after consecutive crises, higher interest rates and underlying spending pressures could constrain public investment. The participation of institutional investors (e.g., pension funds, insurance companies) in areas such as green infrastructure financing could be increased. Recent OECD research has shown that the total assets under management by these investors in OECD and G20 countries are at least USD 64.8 trillion (OECD, 2020b). When discounting for risk diversification and regulatory requirements, up to USD 11.4 trillion could be devoted to infrastructure-related assets. As of today, only USD 1 trillion is actually allocated to infrastructure-related assets, out of which around one-third are green infrastructure assets.

There is ample room to mobilise capital from institutional investors (D’Arcangelo et al., 2022b). Emerging digital technologies could also contribute to this mobilisation, among other objectives. However, this would require promoting direct infrastructure debt, a growing type of asset within which green bonds, while rising in use, remain relatively under-developed in most countries (Figure 1.24). Beyond barriers specific to the financial sector, such as low credit ratings for potential green bond issuers and green projects, or the lack of suitable securitisation and aggregation mechanisms, especially in emerging-market economies, structural challenges remain to be lifted to accelerate their development. For instance, in many countries a pipeline of infrastructure projects corresponding to a long-term governmental commitment to low-carbon development remains to be developed.

Figure 1.24. Green bonds issuance remains modest in many countries

Regulations should integrate energy security in their design

Large mitigation benefits can be reaped through a clear and predictable regulatory environment that can directly reduce emissions but also enhance the effect of pricing measures and the provision of low-carbon options. Identified as a key recommendation in several countries, regulations such as requirements for energy renovation, emissions tracking and green certification should be strengthened to facilitate mitigation while minimising costs. However, stronger regulations require careful design. Complying with new, more stringent standards and rules can entail substantial costs, asset decommissioning and repurposing, risking disruptions during the transition. Regulations can also have hidden adverse distributional impacts where compliance costs are borne disproportionately by vulnerable households and firms. In this context regulators should complement cost-benefit analysis with an assessment of energy security for new planned regulations, with the aim of minimising supply disruptions.

In some countries, reducing or removing regulatory barriers is also needed to facilitate the expansion of renewable energy. For example, in Estonia several regulatory restrictions hamper wind power development (OECD, 2022b). In France, administrative constraints for solar power appear to have hampered the development of this energy (OECD, 2021d).

Making the most of the digital transformation

Digital technologies have strengthened the resilience of economies and societies during the pandemic, underpinned by a surge in teleworking and remote education, alongside increased use of digital public and e-commerce services. Such transformations have the potential to contribute to the green transition and more broadly revive productivity growth over the medium-to-long term, by creating new entrepreneurial opportunities and spurring innovation. At the same time, some factors still hamper the effective deployment and use of digital technologies across all strata of society. To take further advantage of the digital transformation, large gaps in access to, and use of, digital technologies should be closed (Figure 1.25). Policies should ensure access by businesses and households to a broadband connection, equip workers with the needed skills to thrive in a digital economy and create the appropriate policy environment to support digital innovation. Furthermore, as the pandemic has renewed and anchored the role of digital government, both in its conventional delivery of digital services as well as an effort in managing crises, this edition identifies recommendations to boost digital government services in almost half of the countries covered (Figure 1.26).

Figure 1.25. Digital adoption differs across countries and tools¹

Figure 1.26. Key recommendations on the digital transformation

Lifting regulatory barriers to increase technology access

Reliable connectivity is essential for the digital transformation and facilitates interactions among people, firms, and organisations. Fixed broadband penetration, the starting block for connectivity, is still lagging in some countries, and gaps are even more pronounced by speed tiers (Figure 1.27, Panels A and B). The deployment of high-speed fixed networks is not only important to increase fixed broadband penetration, but also for the newer generation of mobile networks. Expanding quality broadband to rural and remote areas remains also a key challenge, as differences in coverage between urban and rural areas are large (Figure 1.27, Panel C).

Improving the existing legal, regulatory and governance frameworks that incentivise investment in highspeed broadband networks is key for the digital transformation. For instance, the rolling-out of 5G technology, which can act as a ‘leapfrog’ technology and is often heralded as necessary to accelerate and deepen the digital transformation (OECD, 2021e), will necessitate significant investment in infrastructure, through more fibre deployment and new last mile connectivity solutions to make sure people have potential access to faster, better-quality network. Entry barriers remain high in several countries (Figure 1.28) and lowering them would ease both fixed and mobile networks deployment, as well as increase the access and use of services at competitive prices.

Figure 1.27. Disparities in connectivity remain large across countries

Figure 1.28. Regulatory barriers on communications could be eased further

Achieving the productivity potential of digital adoption

Digital technologies offer new tools to design, producing and market goods and services, and to interact with other firms, workers, consumers and governments. Technologies, such as cloud computing, software to automate supplier and customer relations, online platforms and artificial intelligence, offer a vast potential to boost productivity and living standards. However, this potential is likely to differ across firms, posing challenges for policy. Indeed, OECD analysis shows that the productivity performance of the top performing firms has exceeded that of most other firms, holding back overall productivity growth (Andrews et al., 2016). Adoption of digital technologies has been a key driver of this divergence in performance, which is more pronounced in digital-intensive industries (Sorbe et al., 2019). There is therefore ample room to boost aggregate productivity through the adoption and diffusion of digital technologies (Figure 1.29).

In addition to promoting the availability of the necessary pre-requisite infrastructures, policies can focus on appropriate incentives, including by ensuring a competitive business environment, and on building capabilities, such as by encouraging the accumulation of digital and managerial skills. The “incentives and capabilities” policies also exhibit strong complementarities for advancing adoption (Andrews et al., 2018), requiring thus an articulated and complementary policy strategy, with market incentives reinforcing the positive effects of enhancements in firm capabilities on adoption of digital technologies.

Lowering burdens on the entry of new firms, identified as recommendations in several countries, is likely to spur incentives for adoption, as young firms possess a comparative advantage in commercializing new technologies, thus placing indirect pressure on incumbent firms to adopt them. Technological catch-up is particularly difficult in some sectors, such as services, where pro-competitive product market reforms have been least extensive, and lowering impediments to competition could promote adoption (Andrews et al., 2016).

Figure 1.29. Further adoption of digital tools could result in large productivity gains across firms

Moreover, policies that facilitate the movement and redeployment of labour and capital, within and across firms, could promote digital diffusion. For example, finding the right balance between overly restrictive labour codes, where hiring and firing costs are high, and those which may reduce incentives for firms to invest in firm-related human capital, is essential for adapting to technological change. Similarly, too stringent and burdensome insolvency regimes that could slow the reallocation of capital, or housing policies that impede residential mobility and the movement of labour, could influence the speed of digital adoption. Recommendations in those areas have been identified in several countries. Addressing them could also contribute to the adaptation of economies for other objectives such as climate mitigation, given that this challenge carries some similarities with digital adoption in terms of the disruptions entailed, requiring also to increase reallocation capacities.

Regarding capabilities, accelerating the acquisition of digital skills across all segments of the population is key for widespread digital adoption. The well-recognized strength of Estonia in digital technologies, and its reputation as a front-runner in digital government, can be partly traced back to the massive accumulation of computer science and information technology skills implemented shortly after the restoration of independence (OECD, 2022b). To make effective the adoption and use of digital tools within firms (and organizations), human capital plays a critical role, and increasing digital skills is a key recommendation identified in several countries (Figure 1.26). The skills needed essentially consist of specialized competencies from ICT professionals, and generic digital skills for other workers, for a broad-based use of digital technologies. Evidence shows that skill shortages in all these two areas can be a brake to reaping the benefits of digitalization, especially undermining productivity gains in less productive firms (Figure 1.30).

Figure 1.30. Skill shortages reduce gains from digitalisation in less productive firms¹

Seizing the benefits of digital change depends first on the availability of ICT specialists, whose expertise is crucial to identify and deploy efficiently new technologies. Indeed, these skills enable innovation in a digital economy to flourish, but also support the infrastructure on which firms, governments and users rely. Given the rapid pace of digital transformation, it is thus important to implement forward-looking programmes to match current ICT training programs with expected skills needs in various sectors. Involving the private sector, to align and predict its needs, is key for the relevance of such programs. However, digital diffusion will stall if adoption is not broad-based, which will depend crucially on the generic digital skills on non-specialist. Across countries, many adults still lack ICT skills, in particular the older generations (Figure 1.31).

Figure 1.31. Generic digital skills could be improved

Lifelong learning has a central role to play in allowing workers and job seekers to keep up with the digital transformation. Emphasis should be placed on providing support to firms and their different stakeholders, e.g., owners, managers and workers, to ensure they can adapt continuously their skills to the fast evolution of technology and job market needs. 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 (Sorbe et al., 2019).

Attention should also be given to enhancing the digital curriculum proposed to students in the educational system. In particular, expanding vocational education and apprenticeships is a recommendation identified in several countries. Access should also be facilitated and encouraged, to ensure that individuals gain digital skills matching the evolution of labour market needs. Evidence points to the fact that, compared with post-graduate studies, vocational education facilitates school-to-work transition, and tends to lead to a faster accumulation of digital skills (Grundke, R. et al., 2018). Currently, several countries are still struggling to attract students in combined school and work-based programmes (Figure 1.32).

Figure 1.32. The importance of work-based learning is varying across countries

Leading the way with digital government

Governments must continue to provide the leadership in using data and technology to maximise the potential of the digital transformation. Digital technologies can have a substantial impact on government’s capacity to effectively design and implement policies, and to be transparent and accountable in delivering outcomes and outputs. The COVID-19 pandemic has demonstrated the capacities and scope for improvement in the use of digital technology to continue delivering public services in most countries.

Policies can promote wider uptake of digital government services. Performance in this area varies considerably across countries, but it has increased significantly, even during the decade prior to the pandemic (Figure 1.33). Cross-country variations mainly reflect differences in various factors such as fixed broadband penetration, internet usage rates, the availability of digital government services and the propensity of users to perform administrative procedures online (OECD, 2021e). The simplification and elimination of unnecessary procedures, the greater interoperability of State institutions in requesting information, as well as the complete digitalisation of their internal processes, are steps that could offer opportunities to increase the quality of, and access to, digital public services. As for the whole economy, promoting digital skills in the public sector is also crucial, and their developments should be encouraged across all categories of civil servants. Similarly to private companies, the public sector needs to improve generic digital skills, and attract digital specialists and also proactive managers (OECD, 2021e).

Figure 1.33. The uptake of digital government services remains low in some countries

Beyond efficiency gains for the public sector and increased values for individuals, shifting towards a more digitalised government can also trigger benefits for the economy at large, by fostering the development of digital skills among the population, as well as encouraging firms to adopt digital technologies to enable interaction with public authorities. In return, productivity gains could materialize relatively quickly for firms (Figure 1.34).

Figure 1.34. Illustrative productivity gains for firms from an increase in digital government use

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Annex 1.A. The OECD Going for Growth framework for prioritisation of structural reforms

Going for Growth uses quantitative and qualitative insights to identify structural reform recommendations to boost medium-term economic growth in an inclusive and sustainable way. Limited to 31 OECD members in its 2005 edition, Going for Growth’s coverage has grown over time to include 49 economies by 2023, including many non-OECD economies.

Building on a production-function decomposition of GDP per capita, Going for Growth has for long focussed on reforms to improve labour productivity and labour utilisation. In its 2017 edition, however, its framework was extended to include an inclusiveness dimension. Reducing inequalities of income and opportunities, as well as poverty, is indeed necessary to safeguard social cohesion and the well-being of citizens, which are key to sustain growth in the longer run. On the other hand, growth and well-being are increasingly threatened by environmental pressures like – among others – air pollution and climate change. This acknowledgement led, in the 2019 edition, to the explicit inclusion of environmental sustainability as an additional dimension in the framework to identify economy-specific policy recommendations. Moreover, for this edition, the digital transformation is recognized as a cross-cutting dimension that has the potential of not only boosting growth, but that can also support inclusiveness and sustainability objectives (Figure 1.A.1).

The identification of reform recommendations for each individual economy builds on a mixed approach combining a quantitative and a qualitative assessment. The starting point of the process, however, consists in the detailed examination of dashboards of indicators including, for each of the Going for Growth dimensions (i.e., growth, inclusiveness and environmental sustainability), the best available outcome and policy indicators matched into pairs based on the surveillance of economic evidence. Put differently, along each dimension, every single indicator of economic outcomes is matched with the indicators of policies empirically proven to address them. The pairings, hence, occur based on the links between outcome and policy indicators established in the academic literature and applied research by the OECD and other institutions. The current Going for Growth framework includes more than 450 of these links.

For each of these outcome-policy pairs, economies are then benchmarked against the OECD average by standardising both outcome and policy indicators to have the mean across economies equal to zero and standard deviation of one. In this context, an outcome-policy pair becomes a recommendations candidate in a given economy if falling into the lower-left quadrant of Figure 1.A.2, i.e., when both the outcome and the associated policy score below the OECD average.

In the following step, OECD expert judgement is used to select the top recommendations faced by each economy and regrouped in four areas in the country notes (product and labour markets functioning; digital transition; inclusiveness, social protection, and ageing; and climate transition). This step also considers potential recommendations which have not been included in the matching process due to improper measurement or limited comparability. Reliance on expert judgement allows overcoming limitations of data quality and coverage and ensures the framework’s comprehensiveness. A final step is peer-review, dialogue and consultation process with the governments before the final publication.

Periodic comprehensive reviews of policy and outcome indicators ensure the selection framework remains up-to-date with the frontier of academic and applied research, as new data and evidence become available on key policy issues.

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