Think - AT LONDON BUSINESS SCHOOL

New measures of economic success

OECD's top economist Laurence Boone suggests governments must look beyond GDP to stem rising global inequalities

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Laurence Boone, Chief Economist at the Organisation for Economic Co-operation and Development (OECD), did not grow up wanting to spend her days poring over numbers and percentages. “I always intended to become a doctor,” she says. “But then when I first tried medicine, I realised I didn’t like the sight of blood.

These days, of course, it’s possible to argue that it’s the numbers and percentages that are the really frightening things, and that we currently need economic healers as much as medical ones.

In a world where protectionism, the rise of populist nationalist governments, rising inequality and rapid climate change are all playing an increasingly significant role in our lives, high-flying economists such as Boone, who took her PhD in Economics at London Business School in 1995, suddenly find themselves in the eye of the storm, with the unenviable job not only of diagnosing and making sense of the causes of the chaos, but also of putting forward possible cures. “It is an extremely challenging and interesting time to be an economist,” agrees Boone, with a degree of understatement. “The transformation to a digital economy, the energy transition, the way we trade, the way we work – everything is changing.” 


"We need economic healers as much as medical ones"

The deep economic changes occupying Boone’s attentions are all fundamental, controversial, and have implications for the global economy. “Trade growth has totally collapsed,” she says. “It is way below the level in 2017 and it’s kind of scary.” In this context, Brexit and the US President’s erratic twitter campaigns contribute to uncertainty.

Her solution – multilateral round-table talks, rather than the bilateral agreements favoured by President Trump and the current Conservative Government in the UK – is unlikely to find favour in London or Washington. Boone acknowledges: “We have to admit that while trade openness and digitalisation overall are beneficial, they have also hurt some people, an issue we have to address.”

Recent research by LBS supports that assertion. It showed that between 1980 and 2014 – the heyday of globalisation – US average pre-tax incomes adjusted for inflation for the bottom 50% of households rose by a microscopic $200, from $16,000 to $16,200. The incomes of the top 1% trebled from $428,000 to $1.3 million – an increase of $872,000. This divergence in fortunes has, in turn, been one of the prime factors behind growing populist movements on both sides of the Atlantic.

So what can be done to halt this dynamic and prevent high inequality from sparking the rise of populist, protectionist governments in more of the developed economies?

 

“This radical pivot towards wellbeing as the benchmark for healthy economic development has to happen”

Boone suggests the campaign needs to be waged across several fronts: “Governments need to ensure that all of their citizens have equal access to a high-quality education. People need good transport infrastructure to be able to reach the jobs on offer, digital infrastructure such as high-speed broadband, and access to good healthcare and housing. Training and retraining throughout one’s life is also essential as a digitalised and low-carbon economy will require very different jobs.”

“Denmark, for example, has done very well to put in place schemes to retrain its workforce and help in the transition to a digital economy. An OECD report in January 2019 found that wellbeing in Denmark was among the highest in OECD member countries. It put their success down to a ‘strong and inclusive labour market, including policies for reskilling job seekers’.”

  

Multilateral taxation approach

More tricky will be dealing with what Boone calls the taxation “race to the bottom”, in which giant digital corporations use tax havens and tax-arbitrage tactics to avoid paying their dues in the countries where they generate most profits. This in turn squeezes government coffers and reduces funds available for the retraining of workforces and for alleviating the negative impacts of globalisation faced by some regions.

Here again, a multilateral approach is preferable: “Redistribution [of resources] has fallen over the past 25 years and tax competition between countries constrains the ability of governments to help people,” Boone says. “We need a framework for inclusive taxation so all countries have the resources to face up to the challenges of the global digital economy.”

She adds: “We look at all aspects of digitalisation – healthcare, social implications, trade and so on – and about 14% of all jobs are going to disappear as a result. A third of jobs will be significantly affected. That is massive.”

The inexorable rise of artificial intelligence and advanced computing has profound implications for employment and social policy as well as the economy – a challenge that governments and business need to do more to meet by forceful concerted effort – not least because, without long-term strategic action, inequality will only get worse, Boone warns.

The implementation of technologies that radically increase automation and which will remove a whole swathe of lower-paid jobs could mean that GDP and productivity – the traditional measures of economic success – continue to rise, but at the expense of a large proportion of the global workforce. 

As result, the OECD is advising governments to look at other ways of measuring economic success that take wellbeing into account.

Boone says the OECD has been looking at this for a while: “The traditional way of looking at this would be to focus on productivity growth, but there is an increasing disconnect between GDP growth and how people feel and how they appreciate wellbeing. We have developed a number of indicators looking at health, housing, security, the environment and so on. It is up to governments to decide how to adopt these.”


Beyond GDP

It is to spur them on that Boone and the OECD are pushing their agenda for inclusive growth – a template not just for ensuring that globalisation benefits everyone, but also for restoring people’s faith in governments and the democratic process. 

Boone says: “The majority of our member governments do understand that GDP growth is not enough. But obviously it is politically difficult to look at other measures, and making a meaningful difference is difficult within the typical four-year mandate of a government. That’s why we help governments identify things they can do which may be beneficial during and beyond their shorter-term mandate.” 

She cites New Zealand, which recently introduced the world’s first ‘wellbeing budget’ as the pioneer for this fundamentally different approach.

This radical pivot towards wellbeing as the benchmark for healthy economic development has to happen if populism is to be rejected, Boone believes.

“If we don’t look at things differently, we will lose,” she says. “People have voted for change. The only solutions now are radical ones.”


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