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  • The Rise and Fall of Real Interest Rates

    Ahead of biennial meetings with the World Bank in Washington this week, the IMF 's research department has put out an interesting analysis of interest rates around the world. In the last thirty years, real interest rates have plummeted, from an average of 5.5% in the early 1980s to 0.33% post global economic crisis. From the report: The decline in real interest rates in the mid-2000s has often been attributed to two factors: • a glut of saving stemming from emerging markets economies, especially China; and • a shift in investors’ preferences toward fixed income assets—such as bonds—rather than equity, such as stocks. Both these factors put downward pressure on real interest rates globally while the expected return to invest in equities increased. The substantial increase in saving in emerging market economies, especially China, in the middle of the first decade of the 21st century was responsible for more than half of the decline in real rates (Chart 2). This was only partly offset by the reduction in saving in advanced economies. High-income growth in emerging market economies during this period seems to have been the most important factor driving the increase in savings. The IMF is now projecting a rise in real interest rates, but not to anywhere near the levels of the 1980s: Read the report here .
  • Russia's Market Volatility and Economic Diversity Problem

    The Winter Olympics are beginning their second week in Russia, and most people want to talk about the figure skating, the hockey, the medal count, maybe even the pageantry. But some economists have other thoughts on their minds. At Vox , World Bank economists Alvaro González , Leonardo Iacovone , and Hari Subhash are focusing on a major Russian weakness, and it isn't a lack of strong two-way forwards on the ice hockey team. No, they are concerned about Russia's "limited economic diversification." The nation's policy leaders have struggled to help limit market volatility, the authors note. Russia is susceptible to economic bad times that are really bad and last longer than for other large economies, and that makes it hard for new sectors to grow: Volatility in Russia is a nearly all-encompassing event. When things are booming, the boom is shared by nearly all manufacturing sectors. When things go bust, practically all sectors go bust. The relatively high level of concentration of output across firms and sectors exacerbates the problem. Further, when analysing slumps and surges across time and comparing these to other economies, we find that although surges in Russia have similar looking peaks and last about as long as those in comparator countries, the slumps are deeper (Figure 2) and longer (Figure 3). For slumps of less than 6 years (the horizontal axis), the probability (the vertical axis) of a slump persisting for another period is higher in Russia (the step-like line is above that of the other economies). The survival of new, relatively efficient firms (particularly during longer and deeper slumps) is a central weakness and likely key issue limiting economic diversification in Russia. Our analysis shows that during slumps, more productive firms tend to have lower odds of surviving relative to less productive ones than during surges. During long and deep slumps, older firms and firms facing less intense competition are more likely to survive. Unfortunately these firms are often not the champions of change and innovation that form the basis of diversification. In Russia the slumps do in fact wipe away some of the hard fought gains made by new, emerging entrants. So much for the new blood needed for the economy to diversify. Read Russian volatility: Obstacle to firm survival and diversification here .
  • OECD Report on Russian Economy: Structural Reforms Needed to Restart Strong Growth

    The Winter Olympics are set to begin in Sochi, Russia, and the news media has been focusing on the host nation's ongoing terrorism concerns. There are economic concerns as well, according to the latest analysis from the OECD. After a strong start to the 21st century--and Russia's economy weathered the storm of the global economic crisis relatively well--there are, according to the OECD , several structural problems that have slowed growth since late 2012. The economy has the capacity to change course--but not if it remains so dependent on commodity prices. Read the report here .
  • OECD's Gurría on Key Fixes For Struggling Global Economy

    OECD Angel Gurría presented his organization's latest Global Economic Outlook this week, and he gave a measured evaluation of the global economy. Unemployment is going to remain high, income inequality is posing serious risks to global growth and a healthy world economy, and the public has lost a lot of faith in policy makers. The key part of the speech, for us, is when Gurría outlines some prescriptions. Here are four: ●First, fixing the banks in Europe. This involves addressing the twin problems of non-performing loans and forbearance: recapitalising the banks (ideally without making deleveraging worse) and fully implementing the banking union. Policymakers also need to consider going beyond existing international regulatory initiatives and reforming the business model of banks. The separation of commercial banking and investment banking activities and adopting a leverage ratio of 5% would buttress the resilience of the banking sector. ●Second, we need to maintain open markets for trade and investment and reduce trade costs, including through trade facilitation reforms being discussed now at the WTO.There are increasing signs of trade protectionism that could jeopardise the still fragile economic recovery. ●Third, governments need to maximise the impact of the recovery on jobs. Greater and more targeted efforts are needed to upgrade the skills of the unemployed and those looking for jobs. Also, more effective labour activation policies are required to ensure that job-seekers are better incentivised in their search for employment. Lastly, progress needs to continue in some countries to add greater flexibility and dynamism in labour markets and to reduce excessively high labour costs. ●Finally, there is a need to overhaul regulations that restrict competition and to ensure a more effective policy support of innovation. In particular, policy makers need to adopt a broader concept of innovation, beyond the conventional view in which R&D is pre-eminent. Other assets such as organisational capital and design, and the ability to create value from data, are increasingly central to productivity growth in a knowledge-based economy. You can read or watch the full speech here . Here is a synopsis of the report:
  • OECD Report Looks at Impact of Global Financial Crisis on Life Satisfaction

    How's Life? That's what OECD analysts researched across all OECD nations for an annual report on well-being. And they found that the global economic crisis has had a "profound impact" on how people feel about their jobs, job prospects, governments, and overall satisfaction. Not surprisingly, people who lived in countries where GDP and employment dropped the most have had the greatest drop in life satisfaction. For example, life satisfaction dropped 20% in Greece. OECD Secretary General Angel Gurría calls the report a "wake-up call." The chapter that caught our eyes is titled Well-being and the global financial crisis . You can read it here . The full report is available here .
  • A Call to Consider More Women to Lead Central Banks

    Janet Yellen has emerged as the most likely replacement for Ben Bernanke as chair of the Federal Reserve Board of Governors. This prompted Caroline Freund , senior fellow at the Peterson Institute for International Economics , to do a little counting. In an op-ed for the Washington Post , Freund points out that, of the 34 members of the OECD, only Finland, Austria, and Poland have ever had a woman as top central banker. And those women no longer lead their respective central banks. Freund: There is a bright spot for women in the developing world. Of the 36 non-OECD countries with populations greater than 20 million, seven have had female central bank chairs. Here, the trend is positive, with five in office in 2013. Why is it that nearly all central bank leaders are men? One possibility is that relatively few women study economics and finance, which tend to be prerequisites. This leaves a very small pool of qualified candidates. But being a finance minister has similar requirements, and six OECD countries had female finance ministers in 2011. Four are in office today. A more troubling explanation is that women may still not be part of the tight-knit clubs from which central bank heads are chosen. Because central banks are independent, trust that the chairman’s goals are aligned with the administration’s interests is more critical than for other appointed positions. Bankers want someone they know and trust, the administration wants the same, and the independence of the institution means you’d better be pretty darn sure. In contrast to Cabinet positions, the Federal Reserve head cannot be fired if he or she strays from administration goals or fails to meet expectations. As an example, consider that a stellar publication record, a pedigree as former chairman of the Princeton economics department and service on the Fed board were initially not enough for Ben Bernanke to be asked to replace Alan Greenspan. President George W. Bush brought Bernanke in to head the Council of Economic Advisers and got to know him better before naming him Fed chairman. The lack of relative outsiders in this position suggests it is about not only what you know but also whom you know and how well. Women may perform less well in areas traditionally populated by old boys’ clubs. Read Where are the women in central banking? here .
  • OECD Projects Moderate Recovery in ADvanced Economies

    The OECD is offering up a relatively strong economic assessment for the global economy, and projects growth to continue in advanced economies. Emerging economies, however, are a different story. From the latest Interim Economic Assessment : In several major emerging economies, however, growth has slowed. While growth in China appears to have passed the trough, financial market turbulence - partly triggered by discussion of a tapering of quantitative easing in the United States - has highlighted difficulties facing a number of other emerging economies, especially those with large current account deficits. As emerging economies contributed strongly to economic dynamism in recent years, this slowdown makes for a continuation of sluggish global growth, notwithstanding the pick-up in advanced economies. While the improvement in growth momentum in OECD economies is welcome, a sustainable recovery is not yet firmly established and important risks remain. It is necessary to continue to support demand, including through unconventional monetary policies, in order to minimise the risk of the recovery being derailed. Meanwhile, both advanced and emerging economies face the challenge of slower trend growth. Therefore, reforms to boost growth, rebalance the global economy and reduce structural impediments to job creation remain vital. Read the full report here .
  • OECD Employment Outlook, 2013

    "Persistently high unemployment is threatening to leave a permanent scar in our societies," says OECD Sectetary General Angel Gurria . In a speech supporting the release of the OECD's 2013 Employment Outlook , Gurria called on policymakers to tackle the jobs problem (there aren't enough) across developed economies--and to pay particular attention to youth unemployment and long-term unemployment. We've posted helpful slides from the report below, but first here is a key excerpt from Gurria's speech: Our report reviews approaches adopted by seven different countries to combine adequate income support for the unemployed with effective re‑employment services. These countries also introduced a range of mutual obligations to help and encourage the jobless to find employment. Let me share with you some of the lessons learnt. First, institutional arrangements matter. Employment outcomes and services for clients can be improved by merging public employment services and benefit agencies to create a “one-stop shop”. Greater coordination between different levels of government can also make a real difference. Second, the effectiveness of employment services can be improved through more robust performance management. For example, Australia and Switzerland rate the performance of local employment offices after adjusting for differences in client profiles and local labour market conditions. Third, sufficient resources for cost-effective labour market activation policies should be available. Resources per unemployed jobseeker have declined by almost 18% since the start of the crisis through 2011. This raises concerns about the ability to prevent structural unemployment from gaining root. Putting effective activation strategies into place is not only important to deal with the crisis-induced rise in unemployment but also for coping with on-going structural change. In good or bad times every year, between 2 to 7% of all OECD workers are forced to leave their jobs for involuntary reasons. Providing effective job search assistance and necessary skills upgrading is vital to prevent discouragement and early withdrawal from the labour market, especially for older workers who lose their jobs. In emerging-markets and many developing countries, the major challenge in promoting an effective labour market activation strategy is to broaden the coverage and the scope of social protection. It is important to protect the most vulnerable social groups and allow them to invest in the human capital of their children and participate in productive activities. OECD Employment Outlook 2013 - press conference on 16 July 2013 from OECD - Organisation for Economic Co-operation and Development Read the report here .
  • OECD 2013 'Education at a Glance' Report

    In case any doubt lingers in you about the correlation between education and employment, the latest OECD annual report, Education at a Glance , affirms previous data on how much better people with higher ed degrees are faring during this jobless recovery. From the report: Unemployment rates are nearly three times higher among people without an upper secondary education (13% on average across OECD countries) than among those who have a tertiary education (5%). Between 2008 and 2011, the unemployment rate for the poorly-educated rose by around 4 percentage points, while it increased by only 1.5 percentage points for the highly educated. “Leaving school with good qualifications is more essential than ever,” said OECD Secretary-General Angel Gurría. “Countries must focus efforts on helping young people, especially the less well-educated who are most at risk of being trapped in a low skills, low wage future. Priorities include reducing school dropout rates and investing in skills-oriented education that integrates the worlds of learning and work. Though the focus should remain on quality of spending, Governments must ensure that investment in education does not fall as a result of the crisis.” This year’s report finds new evidence of the value of vocational qualifications as a pathway to employment: countries with a higher than average (32%) share of vocational graduates, such as Austria, Germany, Luxembourg and Switzerland, saw unemployment rise much less or even fall among 25-34 year-olds than their peers with general upper secondary qualifications. The crisis has also widened the earnings gap: the average difference in earnings from employment between the low educated and the highly educated has risen from 75 percentage points across OECD countries in 2008 to 90 percentage points in 2011. On average, the relative earnings of tertiary-educated adults are over 1.5 times that of adults with upper secondary education. People with upper secondary education earn 25% more than their peers who left school early. But a strange thing happened during the Great Recession and the following recovery. As education became more valuable to developed economies, the overall investment in education dropped. Read the full report here . And watch Angel Gurria discuss the report:
  • Germany's Weakening Infrastructure May Be a Sign of Larger Economic Vulnerability

    Germany continues to be hailed as the model developed economy--the one that has braved the storm while others have paid the price for careless economic policies. But talk to any of your German friends this summer and you are likely to hear them complain--if not about the overall strength of the economy, then about potholes and slipping train reliability. Der Spiegel does a bit of an ego-check in this week's issue. Apparently, the German Institute of Economic Research has come out with a report that "paints the picture of an ailing economy that has been seriously out of balance for years." The diagnosis is alarming. Although Germany has weathered the financial and economic crisis better than all other large industrialized nations and created over a million new jobs, this comes largely thanks to years of wage restraint by the country's trade unions. To make matters worse, the productivity of these jobs -- a decisive aspect of long-term growth and prosperity -- has contributed just as little to the current upswing as consumer demand, which has been an important growth driver in other countries. The Berlin institute points to a chronic lack of investments as the main cause for this low productivity. Both the state and the private sector spend too little money on infrastructure, education, plants and machinery. "Despite all the successes of the past few years, Germany has not created an investment basis to ensure robust growth," the researchers conclude. In other words, Germany is living off its reserves. Bridges are crumbling, factories and universities are deteriorating, and not enough is being spent to maintain phone networks. This has resulted in a massive impoverishment of the country, according to DIW calculations. Nearly 15 years ago, the state's net assets still corresponded to 20 percent of gross domestic product (GDP). When adjusted for inflation, this amounts to nearly €500 billion ($650 billion). By 2011, this had dwindled to 0.5 percent of GDP, or a mere €13 billion, primarily due to systematic neglect. All of Germany's political parties have pledged to spend more money on highways, transportation and education during the upcoming legislative period -- but they have often made such promises in the past. In the end, however, the already meager budgets for investment were slashed and the money was distributed to preferential groups of voters. It could be a similar story this time around. As for the infrastructure investment problem, take a look at where Germany stacks up: Read Ailing Infrastructure: Scrimping Threatens Germany's Future here .
  • OECD's International Migration Outlook Shows Pickup in Immigration, But Siginficant Unemployment for Immigrants

    In the U.S., immigration stories have been the domain more of the political press than business and econ journalists. But mobility issues are one measure of economic changes. For example, worker migration within Europe all bu shut down during the recession--declining nearly 40% between 2008 and 2009, according to the OECD. It has since recovered in a big way, even if the workers migrating within Europe are having trouble finding jobs. The OECD 's International Migration Outlook shows a slow rise of migration into OECD nations--a rate of 2% the last two years. Here is a look at inflows across OECD member nations: Read the full report here . And learn about the key takeaways in the report from this short video:
  • OECD's Better Life Index and What Makes for a Happy Nation

    The OECD 's Better Life Index is out, and it is, well, a bit better itself this year. The OECD has made the data more interactive. Comparing the relative quality of life among nations is easy to do and more than a little interesting, in part because you can work with the various categories. For example, if you want to give extra weight to income, housing, and jobs, then the rankings look like this. But if you, instead, place greater emphasis on life satisfaction, health, and education, you get this. At MarketWatch , Jim Jelter and his colleagues were most interested in the happiness of different countries. He breaks down the top five in this video. Explore the Better Life Index yourself, or with classmates, here .
  • OECD Commends Member Nations for Structural Reforms as Response to Recession

    Every year the OECD lays out five key areas for structural reform necessary for each member country (and the BRIICS nations) to spur growth. In this year's Going for Growth report, many countries get high marks for making key reforms that the OECD expects to provide more stable long term growth. The authors chalk up the changes as a response to "market pressures in the context of the euro area crisis and by discussions and co-ordinated efforts in multilateral settings such as the G20." Market pressures appear to have played an important role in the intensification of reforms, as indicated by the significant correlation between reform responsiveness and changes in government bond yields over the 2011-12 period: ● Euro area countries under financial assistance programmes or direct market pressures (e.g. Greece, Ireland, Italy, Portugal and Spain), are among the OECD countries whose responsiveness was highest (Figure 1.2, Panel A), and also where it increased most compared with the previous period (Figure 1.2, Panel B). Accession to the Euro area in 2011 – in concomitance with a steep recession – may have acted as reform catalyst for Estonia, who also ranks among the most responsive countries. ● Furthermore, as reflected in the comparison between simple and adjusted responsiveness rates, the crisis led most countries under financial markets pressure to enact reforms in traditionally politically-sensitive areas, e.g. labour market regulation and social welfare systems. ● In contrast, less progress has been achieved in other euro area countries, in particular those with a current account surplus (e.g. Germany, Luxembourg and the Netherlands). Yet, reforms are also needed in these countries, in particular in areas that may help intra-euro area rebalancing, such as boosting competition in non-tradable sectors. ● Despite exposure to financial market scrutiny, Iceland and Slovenia have made no or very little reform progress in the areas identified in 2011. While market pressures have played a catalyst role, allowing for long-overdue reforms to be undertaken, some concerns may arise over the effects of reforms in a context of strong budgetary retrenchment and weak activity. Yet, it can be argued that some of the measures taken have already helped by boosting confidence and bringing some market relief. This may have been particularly the case of policy changes, such as pension reforms, that directly contributed to restore medium-term public debt sustainability, though reforms aimed at restoring competitiveness over time will also help to underpin confidence. Still, it is clear that the broader benefits from reforms may take more time than usual to materialize in the current environment, in part due to possible delaying effects from remaining dysfunctions in financial markets. It is important to avoid such delays eroding popular support and to ensure that legislated changes be effectively implemented in order to reap the long-term gains and preserve the positive initial confidence effects. Read the full report here .
  • Testing Okun's Law--Are Jobs and Growth Still Linked?

    In 1962, Arthur Okun wrote that "changes in the level of economic activity are associated with shifts in the composition of employment and output by industry." But the nature of the economic recovery in the U.S. (as slow as it may seem) has made reconsidering Okun's Law popular (if not necessary). In a post for VoxEU , Laurence Ball , Daniel Leigh , and Prakash Loungani examine whether jobs and output can now be decoupled: Figure 1 shows peak-to-trough declines in output for a group of OECD countries during the Great Recession against the change in unemployment over the same period. The correlation is essentially zero. In the language of economics textbooks, Figure 1 suggests a breakdown of Okun’s Law, the short-run negative relationship between output and unemployment reported by Arthur Okun in 1962. Figure 1. The Great Recession: Peak-to-trough output and unemployment changes (simple scatter plot) We believe the casual impression that "Okun’s broken" is misleading (Ball, Leigh and Loungani 2013). Two adjustments are needed to restore Okun’s Law (as shown in Figure 2): The first adjustment is to account for differences in the duration of the recessions; For the set of recessions shown in these charts, the period from peak to trough ranges from two quarters to seven quarters. As we show in our paper, Okun’s Law implies a relationship between the changes in unemployment and output only if we control for this factor. The second adjustment accounts for the fact that, historically, the coefficient in Okun’s Law varies across countries. Figure 2. The Great Recession: Peak-to-trough output and unemployment changes (with adjustments for duration of recessions and country-specific Okun coefficients) Read the full post here .
  • OECD Lays out the Case for Countries to 'Act Now' on the Gender Gap

    Take a look at this chart. What stands out to you? This chart shows the impact of having children on women's income levels across OECD countries. The extremes here are striking. What is going on in Italy and in Japan, for example? But overall the trend is, while not surprising, quite clear. In a new report called Closing the Gender Gap, OECD researchers point out the economic benefits to nations that improve the economic conditions of women at all stages of their lives. From the report: Greater educational attainment has accounted for about half of the economic growth in OECD countries in the past 50 years – and that owes a lot to bringing more girls to higher levels of education and achieving greater gender equality in the number of years spent in education. Greater educational equality does not guarantee equality in the workplace, however. If high childcare costs mean that it is not economically worthwhile for women to work full-time; if workplace culture penalises women for interrupting their careers to have children; and if women continue to bear the burden of unpaid household chores, childcare and looking after ageing parents, it will be difficult for them to realise their full potential in paid work. In developing countries, if discriminatory social norms favour early marriage and limit women’s access to credit, girls’ significant gains in educational attainment may not lead to increased formal employment and entrepreneurship. The issues are complex and tackling them successfully means changing the way our societies and economies function. Men and women have to be able to find a work-life balance that suits them, regardless of family status or household income. Sharing childcare responsibilities can be difficult in a culture where men are considered professionally uncommitted if they take advantage of parental leave and mothers are sidetracked from career paths. And if good quality, affordable childcare is unavailable, it may simply be impossible for many parents, especially those on low incomes, to work full-time and take care of their families. Access the full report here .