1. ECONOMICS AND POLICY ADVICE
A Farewell Seminar for Mr. Antti Suvanto
Christian KASTROP
Director of the Policy Studies Branch
Economics Department, OECD, Paris
Helsinki, Monday, 11th April 2016

2. Rebalancing is happening in China ?
2
Source: OECD Economic Outlook.
Macroforecasts-World

3. Financial exposures and vulnerabilities
have increased in EMEs
3
Source: OECD Economic Outlook.
Macroforecasts-World
Increase in debt levels
End- period stock, % of GDP

4. Advanced economies have therefore been
more resilient
4
Source: OECD Economic Outlook.
Macroforecasts-World
Revisions to OECD Economic Outlook projections between June and
November 2015

5. But there were growth shortfalls in the euro
area
5
Source: OECD.
Macroforecasts-World
The estimated impact on GDP growth in 2015 of changes in
forces acting since June 2014
Difference from baseline, percentage points

6. Growth recovery is still very subdued
6
Source: OECD Economic Outlook.
Macroforecasts-World
Global GDP growth

7. What keeps investment down in important
European countries?
7
Source: OECD Economic Outlook.
Macroforecasts-Europe
Total investment

8. Overall unemployment - except few countries -
only slowly comes down
8
Macroforecasts-Europe
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0
2
4
6
8
10
12
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Unemployment rate (%, left axis) Coefficient of variation¹ (right axis)
Unemployment dispersion in the European Union
1. Weighted standard deviation of unemployment rate observations for European Union (28) countries divided by
the average EU unemployment rate.
Source: Calculations based on Eurostat (2016), “Employment and unemployment (LFS)”, Eurostat Database.

9. Inflation is projected to remain below the target
9
Source: OECD Economic Outlook.
Macroforecasts-Europe
Harmonised index of consumer prices

10. Interest rates are low
10
Last observation: 1-Feb-16.
Monetarypolicy
Policy determined and money market interest rates

11. Central bank assets expanded
11
Source: Board of Governors of the Federal Reserve System, European Central Bank,
Bank of Japan, and Bank of England; and OECD calculations.
Monetarypolicy

12. Non-performing loans have been coming
down – but not in all countries
12
Source: OECD Economic Outlook.
Monetarypolicy
As a percentage of gross debt instruments

13. Inflation expectations still low
13
Source: Thomson Reuters; and Consensus Economics.
Last observation: 2-Feb-16.
Monetarypolicy
Proxies for long-term expected inflation
Euro area

14. Interest rates now negative for short term
maturity
14Source: Thomson Reuters.
Monetarypolicy
2-year government bond yields
German government bond yield curve

15. Besides some austerity successes fiscal
space is limited in many euro area countries
15
Source: OECD Economic Outlook.
Fiscalpolicy
Debt-to-GDP ratio
Maastricht definition

16. Fiscal now neutral or slightly positive -
Recent and planned consolidation
16
Source: OECD Economic Outlook.
-2
-1
0
1
2
3
4
5
6
7
PRT
GRC
ESP
IRL
USA
ITA
NLD
SVN
SVK
ISL
NZL
POL
CZE
DNK
EST
AUT
CAN
FRA
HUN
AUS
BEL
JPN
DEU
GBR
KOR
FIN
CHE
ISR
SWE
NOR
-4
-3
-2
-1
0
1
2
3
SVN
GBR
JPN
SWE
BEL
AUS
FRA
ISR
NZL
ESP
CAN
USA
ISL
FIN
GRC
POL
CZE
CHE
IRL
SVK
NLD
ITA
EST
HUN
PRT
KOR
DEU
AUT
NOR
DNK
2011 - 2014 2014 - 2016
Change in the underlying primary balance
Fiscalpolicy

17. Consolidation relied to a large extent on tax
increases up to 2014
17
Source: OECD Economic Outlook.
Change in key components of the primary balance
Fiscalpolicy

18. In the coming years, the focus is going to
be expenditure restraints
18
Source: OECD Economic Outlook.
Change in key components of the primary balance
Fiscalpolicy

19. In the past, some countries have adjusted
public investment
19
Source: OECD Economic Outlook.
Change in key components of the primary balance
Fiscalpolicy

20. Juncker’s problem: Divergent product market
regulation harms investment
20
Fiscalpolicy
Product market regulation heterogeneity
Deviation from OECD average bilateral heterogeneity, 2013, per cent
“Source: Fournier, J.-M. (2015), “The Negative Effect of Regulatory Divergence on Foreign Direct Investment”,
OECD Economics Department Working Paper No. 1268 (forthcoming), OECD Publishing, Paris.
A 20% reduction in regulatory heterogeneity across EU countries
could increase cross-border FDI in the EU by around 15%

21. Fiscal tools have a different impact on
growth and inequality
21
Growth Equity
Short-term Long-term Short-term Long-term
Spending cuts
Education -- -- - --
Health services provided in kind -- - - -
Other government consumption (excluding family
policy) -- + -
Pensions ++
Sickness and disability payments - + -- -
Unemployment benefits - + -
Family - - -- --
Subsidies - ++ + +
Public investment -- --
Revenue increases
Personal income taxes - -- + +
Social security contributions - -- - -
Corporate income taxes - -- + +
Environmental taxes - + -
Consumption taxes (other than environmental) - - -
Recurrent taxes on immovable property -
Other property taxes - ++ +
Sales of goods and services - + - -
Source: Cournède, Goujard and Pina (2014).
Fiscalpolicy

22. 22
Optimal consolidation packages
(growth/equality) in OECD countries
Fiscalpolicy
Ranking from most to least desirable instruments of consolidation
Education
Childcare and family
Social security contributions
Health services in kind
Public investment
Consumption taxes
Sickness payments
Sales of goods and services
Other gov. consumption
Rec. taxes on imm. property
Environmental taxes
Corporate income taxes
Personal income taxes
Unemployment insurance
Other property taxes
Pensions
Subsidies
0 2 4 6 8 10 12 14 16 18
Instrument rank
Equal weights
Simulated interdecile range
Source: Cournède, Goujard and Pina (2014).

23. Limits to sustainability:
– Debt sustainability depends on market assessment of
the probability to default, which is state contingent
and, therefore, debt sustainability limit can vanish
quickly, if market confidence evaporates.
23

24. 24
Country by country prudent debt target
0
25
50
75
100
125
150
Prudent debt levels
0
1
2
3
4
5
6
7
Average annual fiscal effort

25. • The role of the prudent debt target: effective in anchoring
expectations about future fiscal policy. The prudent debt target
serves as the reference point to define numerical fiscal rules.
• Fiscal rules:
– Role: Ensure fiscal discipline and long term growth (well-being)
– Objectives: (1) anchor fiscal policy expectations by targeting a
prudent debt level and (2) allow for macroeconomic
stabilisation.
– Benchmarking existing rules: Budget balance + spending rule
seem the best.
25
… and effective fiscal frameworks
Budget balance Structural balance Expenditure rule Revenue rule
Fiscal stabilisation - + + -
Fiscal discipline ++ + + -+
Side-effects and risks - -- - -

26. 26
EU fiscal rules support debt-sustainability
with a set of several rules
Fiscalrules
Source: Barnes, Botev, Rawdanowicz and Strasky (forthcoming).
0
20
40
60
80
100
120
140
160
starting debt levels (2016) 2026
Debt levels in 2026 if EU fiscal rules are followed exactly
( % of GDP)  Debt rule
(both nominal and
cyclically-adjusted;
backward- and
forward-looking)
 Nominal budget
balance rule
 Structural
budget balance
rule
 Expenditure rule

27. The Productivity Problem: Aggregate productivity
growth goes down even before the crisis
Labour productivity growth since 1990
GDP per hour worked (China and India refer to GDP per worker)

28. Diffusion from frontier is key !
Average of labour productivity across each 2-digit sector (log, 2001=0)
Source: Andrews, D. C. Criscuolo and P. Gal (2015), “Frontier firms, technology diffusion and public policy: micro
evidence from OECD countries”, OECD Productivity Working Papers No. 2.

29. Diffusion comes easier to some
economies than others
Estimated frontier spillover (% pa) associated with a 2% point increase in
MFP growth at the global productivity frontier
Source: Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From the Global Productivity Frontier:
Industry Level Evidence”, OECD Economics Department Working Papers, No. 1238.
0.0
0.1
0.2
0.3
0.4
0.5
Trade with the Frontier Participation in GVCs Efficiency of skill
allocation
Managerial quality Business R&D
Minimum
(Italy)
Minimum
(Italy)
Minimum
(Austria)
Maximum
(Finland)
Maximum
(Belgium)
Maximum
(Sweden)
Maximum
(Canada)
Minimum
(Australia)
Minimum
(Canada)
Maximum
(Belgium)
Globalisation Reallocation Knowledge-Based Capital
Finland

30. Policies shape the diffusion of new
innovations from the global frontier
Estimated frontier spillover (% pa) associated with a 2% point increase in MFP
growth at the global productivity frontier
Source: Saia, A., D. Andrews and S. Albrizio (2015), “Public Policy and Spillovers From the Global Productivity Frontier:
Industry Level Evidence”, OECD Economics Department Working Papers, No. 1238.
0.0
0.1
0.2
0.3
0.4
0.5
Barriers to Entrepreneurship Cost of Bankruptcy Legislation
for Entrepreneurs
Basic Research University-Industry Collaboration
Minimum
(Sweden) Minimum
(Norway)
Maximum
(Greece)
Maximum
(Italy)
Maximum
(France)
Maximum
(Belgium)
Minimum
(Belgium) Minimum
(Italy)
Entry and Exit Innovation policies
Finland

31. Skill mismatch and public policy
Source: Adalet McGowan, M and D. Andrews (2015), “Skill mismatch and public policy in OECD countries”
OECD Economics Department Working Paper, No. 1210.
Maximum
Maximum
Maximum
Maximum
Maximum
Maximum Maximum
Maximum
Maximum
Maximum
Minimum
Minimum
Minimum
Minimum
Minimum
Minimum
Minimum
Minimum
Minimum
Minimum
Minimum
Minimum
Maximum
Maximum
(POL)
(DEU)
(FRA)
(ITA)
(BEL)
(SWE) (AUT)
(SVK)
(NLD )
(AUT)
(ITA)
(ITA)
(NLD )
(USA)
(CAN)
(NOR)
(DNK)
(FIN)
(CAN)
(KOR)
(USA)
(KOR)
(DNK)
(FIN)
0.14
0.18
0.22
0.26
0.30
0.34
Productmarket
regulation
Employment
protection
legislation…
Employmentprotection
legislation
(temporaryworkers)
Costofclosing
abusiness
Transactioncosts
Rentcontrol
Tenant-landlord
regulations
Costofobtaining
abuildingpermit
Responsiveness
ofhousingsupply
Coveragerateof
collectivebargaining
agreements
Participationin
lifelonglearning
Managerialquality
Framework policies Housing policies Other policies
FinlandProbability of mismatch

32. Skill mismatch as a constraint on
labour productivity
Source: Adalet McGowan, M and D. Andrews (2015), “Labour market mismatch and labour productivity:
evidence from PIAAC data ” OECD Economics Department Working Paper, No. 1209.
Skill mismatch, particularly over-skilling, is harmful for productivity because it
constrains the ability of innovative firms to attract skilled workers and grow

33. • Global Economy: China and EME/ Trade and
Capital flows/ Data ?
• Monetary: Macro via bubbles ?, Financial markets
and Real Economy/ Channels / Long Term
Expectations
• Fiscal: Hysteresis, Multipliers and Non-Linearities
• Structural: Macro/Micro Data, Pass through QSR/
Global Integration-Technology/ GNP accounts
• Dynamic change of preferences, Behaviour and
(individual and group) “rationality”
If economists know what they don’t know,
do they tell ?

34. THANK YOU