The challenge of boosting innovation and trade, while achieving inclusiveness
By Catherine Mann, OECD Chief Economist
The recent pick-up in global growth is good news, but a durable return to healthy growth supported by productivity and trade will require stronger political commitment to implement policy packages to make growth more inclusive. The support for governments’ pro-growth structural reforms has been undermined by the prolonged period of stagnating living standards that has affected a large share of the population in many countries and hit some regions particularly hard. Growing political headwinds, particularly around globalisation, are clearly one factor contributing to the steady slowdown in the pace of reforms observed since the immediate post-crisis years. Yet, the reforms are needed, both to escape the low-growth trap and to prepare for rapid technological changes.
The increase in the number of actions taken over the past two years to create jobs–as reported in the OECD annual Going for Growth report released in March–is an indication of the greater attention that governments are already paying to promoting inclusiveness, in particular with measures to facilitate the labour market integration of youth and low-skilled workers as well as women. Such measures are important for the well-being of citizens and winning back their trust. However, achieving inclusive growth on a sustained basis requires addressing the productivity slowdown. The experience from the past two decades has shown that rapid technological advances and greater trade openness do not automatically translate into broad-based productivity and income gains, and they create losers as well as winners.
Ensuring that progress in technology and knowledge turns into higher and more widespread gains requires that workers, business managers and governments are better equipped to acquire the skills, and adopt the organisational structures and regulatory settings, to keep up with the pace of innovation and benefit from more open economies. While the recipe for reforms varies from country to country, the key ingredients include measures to promote business dynamism and the diffusion of innovation, to help workers cope with the rapid turnover of firms and jobs, and to better prepare youth for the labour market of the future. Promoting business dynamism and the diffusion of technology and knowledge is important.
To catch up with industry leaders and make the most of new technologies and workers’ skills, lagging firms must be given incentives to make the necessary investment in research and development (R&D), new digital equipment and organisational know-how. Governments can help by improving the level and efficiency of public support for private R&D as well as by facilitating the collaboration between research centres (or universities) and industry.
Creating an environment that encourages firms to innovate also implies promoting the market entry of new firms and the redeployment of resources from poorly performing businesses to high-productivity ones. This is how successful ideas and products can be tested and developed. For this to happen, poorly performing firms should either improve or be allowed to exit the market. Since the crisis, the share of non-viable, so called ‘‘zombie’’ firms, has risen from 4% to nearly 6% of total businesses across OECD countries. As they are trapping valuable resources, such firms are lowering productivity by close to 1% in countries where they are most prevalent.
Facilitating the entry of new firms is also critical. In most countries, the scope for reducing regulatory barriers to firm entry and competition remains substantial, especially in services. In many countries and regions, regulatory fragmentation continues to hinder cross-border competition in services. Despite the more rapid pace of change, progress in reforming product market regulation has slowed significantly in recent years, contributing to an increasing gap between high- and low-productivity firms. In fact, the trend decline in business dynamism and the growing survival of low-productivity firms suggest that barriers to firm entry and exit may have risen.
Beyond product market regulation, other policy factors influence firm turnover and competition. For instance, a sound legal and judicial infrastructure, and robust financial markets that serve the real economy, play an important role. Continued efforts to strengthen the rule of law and fight against corruption, improve the governance of state-owned enterprises, increase the efficiency of bankruptcy procedures and the financial sector, or speed-up the resolution of non-performing loans in the banking system: these should all feature highly on reform agendas.
To ensure that everyone can benefit from renewed business dynamism and open markets, additional measures are needed to help workers cope with jobs turnover. This is one reason why reform packages are so important for growth to be more inclusive. For example, OECD analysis has shown that spending more public money to help laid-off workers find a new job through work-search assistance and training–so-called active labour market policies (ALMP)–is far more effective in countries where regulatory barriers to firm entry are low (see chart). This is because job opportunities are more abundant where new firms can enter the market more easily.
Future advances in digital technologies and the growing importance of knowledge-based capital underscore the need for reforms in education to ensure that young people are prepared for the dynamic labour market of the future and have the right cognitive and non-cognitive skills to cope with technological change. At the same time, more attention should be devoted to the significant share of workers who are either over- or under-skilled for their job. Addressing skills mismatch through better vocational education and training systems, as well as adult or lifelong learning programmes, is a priority for most countries.
Closer relationships between business and educational offerings will better anticipate skills most likely to be in demand, help ensure that job market needs are reflected in educational and professional developments, and enable workers to navigate through the more rapid turnover of firms, jobs, and tasks of the future. Reducing barriers to labour mobility, including through reforms of housing market policies and the decoupling of pension and other rights from specific jobs (pension mobility), will also help improve skills matching.
Packaging reforms to exploit complementarities is key to achieving stronger, more inclusive growth.
While encouraging innovation and business dynamism, including through greater market openness, is crucial for achieving healthy and sustained growth, it does not necessarily or automatically go hand-in-hand with inclusiveness. Beyond investing in skills development and helping workers cope with turnover of jobs and tasks, the effectiveness of redistribution through tax and transfer policies needs to be strengthened to ensure that the bene fits from technological progress and globalisation are broadly shared.