Economic policy reforms to 2021: striving for growth: shaping a dynamic recovery

This review by the Organisation for Economic Co-operation and Development (OECD) suggests strategies for recovering from the COVID-19 pandemic in OECD member countries and a select number of non-member countries.

Boosting economic growth and ensuring its sustainability and inclusiveness are key to the world's recovery from the COVID-19 pandemic. Achieving this goal requires adjusting structural policies to address the existing weaknesses that have emerged as a result of the pandemic:

- COVID-19 has identified existing structural weaknesses in health, social protection, and public administration performance;

- with the pandemic accelerating digitalization, the lack of digital skills, access, and digital infrastructure among certain segments of the population has become more apparent, which has increased the dynamics of inequality.

- many countries have struggled with low productivity growth, lack of opportunities to create quality jobs, and the transition costs of restructuring before the pandemic. COVID-19 has introduced problems related to low productivity growth, increased risk of unemployment and bankruptcy, negative consequences for young people, and deterioration of the physical and mental health of vulnerable segments of the population.

The OECD review demonstrates a new policy focus on sustainability, which is achieved through stronger growth, inclusiveness, and the ability to rapidly reallocate resources, reducing barriers to change. Addressing the above challenges increases the effectiveness of policy incentives during the recovery period and accelerates growth in the medium term.

The OECD's Vision for Growth 2021 provides strategic recovery priorities for OECD countries and selected non-member countries. At the same time, it is noted that there is no universal strategy, but the reforms that governments undertake should be linked to three overlapping pillars:

1.             Increase self-healing ability and resilience.

2.             Assist in the reallocation process.

3.             Support of the population during the transformation.

Improving self-healing and resilience

The pandemic outbreak has demonstrated a lack of resilience in a number of areas, including global health supply chains, uneven Internet access, and climate change.

Structural policies can improve the first line of defense against shocks by improving health and social protection coverage, while investing in critical digital infrastructure, including high-speed Internet. These policies can also strengthen private sector incentives, taking into account long-term sustainability, for example, by channeling investment and technological innovation into the environmental sector. This can be achieved by setting a clear price for carbon and by phasing out the use of fossil fuels.

Facilitating the reallocation process

A recession caused by a pandemic can have a significant negative impact on economic and social development. Past experience has shown that entering the labor market during an economic downturn can negatively affect the earnings and employment prospects of young professionals. The negative impact can also affect the education system, in particular the closure of schools and the transition to online learning.

Managing growth in a more sustainable and inclusive way requires increased market competition and the reallocation of capacity that hindered productivity growth before the pandemic.

In this regard, it will be necessary to remove political barriers, where they exist, so that businesses become more dynamic, innovative and eco-friendly, adapting to the conditions of competition in the digital age.

Macroeconomic stimulus packages should be carefully designed to avoid undermining efforts to reduce carbon emissions by subsidizing polluting activities or by anchoring carbon-intensive technologies.

Support of the population during the transformation

The pandemic has accelerated the process of digitalization by increasing the use of technology in remote work and online purchases. On the one hand, this creates opportunities for renewed productivity growth through the adoption of technologies and their redistribution within the industry. On the other hand, working relationships and working practices are changing in ways that exacerbate the digital divide, as some lack the access and skills to take full advantage of such opportunities.

In many countries, a significant proportion of workers are protected by job retention schemes. As this broad support for firms and workers recovers, more targeted interventions should be made, with an emphasis on early intervention-especially before leaving the job-that are more likely to be effective in maintaining attachment to the labor market.

Part of the transition to a "green transformation" will be through the reduction or closure of firms that pollute the environment, and less productive ones that cannot invest to ensure environmentally sustainable production. Policies should provide appropriate support during these transition periods by equipping people with skills and education; stepping up the process of retraining people through transformation schemes, with a particular focus on the vulnerable; and creating conditions for access to social safety nets.

Creating adequate incentives to take advantage of opportunities requires the alignment of taxes and benefits. Job-market-appropriate lifelong learning makes it easier and faster to find quality work and increases resilience to shocks.

Structural reform packages: consistency, synergy, coordination, and government contingencies.

Given the uncertainty about the shape of the recovery, the consistency of the reforms is vital.

Stimulating recovery

Some structural policies encourage fiscal expansion because they either require increased spending or increase the effectiveness of fiscal incentives. Their early deployment can boost the recovery process and improve the long-term outlook:

- Investment in public infrastructure can stimulate demand. Already prepared projects that have a high (social) return should be implemented first. For example, the expansion of digital infrastructure, which will improve equality of opportunity or investment in transport or energy infrastructure in underdeveloped regions.

- Reforms aimed at improving people's prospects, including education, the rule of law, and infrastructure management, can increase people's confidence and resilience to future shocks. Such a policy increases the efficiency of budget expenditures.

- Policies to address the economic integration of poor households (for example, health and social protection reforms) can improve the efficiency of budget spending, as these households are more likely to spend. Rapid action to improve health resilience — by increasing capacity and accessibility-can support the recovery process by accelerating the introduction of the vaccine.

Preventing significant and long-lasting social impact

Social impact prevention policies should be implemented with priority:

- Education reforms take time to demonstrate macroeconomic success, but they are at the heart of health, poverty reduction, and sustainability. Education reforms should compensate for the learning losses associated with the pandemic, in particular by ensuring that distance learning becomes an effective support tool for all students in the event of future learning disruptions.Preventive health care can be of great benefit later, but will increase resilience, as evidenced by a pandemic that has hit people with pre-existing illnesses or poor health harder.

- Strengthening activation policies and skills will support job seekers and accelerate their re - entry into the labor market.

Sequential or case-dependent implementation

Other reforms should be carried out gradually or with reference to the state of the economy, as they may hinder the recovery process:

- The introduction or strengthening of job search conditions in unemployment benefit programs is important for job search incentives, but should depend on the state (i.e., vary depending on labor market conditions), since employment opportunities may remain limited initially during the recovery period. Tougher eligibility criteria can drive welfare recipients out of the labor force, which can increase poverty, undermine confidence, and create uncertainty. Moreover, strict unemployment benefit programs should be complemented by effective activation policies by public employment services that assist in the transition from job to job.

- Reforms aimed at creating a more favorable environment for the growth of tax structures require a gradual phased implementation and a cautious approach to recovery. Such reforms typically include income tax cuts and the transfer of income to consumption, property taxes and environmental taxes, and the expansion of the tax base.

- Concern for financial sustainability implies that these reforms should be implemented as a package so that they are budget neutral, but this still carries the risk of adverse consequences for implementation and implementation. If such reforms are nevertheless required, the personal income tax and the tax for low-income workers should be reduced, while the government should commit that tax increases will only follow after a sustained recovery.

- A timely push to increase the use of carbon taxes in the later stages of the recovery phase — with clear price trajectories-can serve as a guide for investors without immediately burdening businesses with new taxes (Van Dender and Teusch, 2020) and reducing policy uncertainty, which encourages investment and innovation in low-carbon technologies (Dechezleprêtre, Kruse and Berestycki, 2021). In order to effectively manage expectations (for example, regarding financial sustainability and environmental tax signals), tax increases need to be planned and clearly communicated in advance, as well as take into account distribution effects.

- The restructuring of firms in which the state bought out stakes during the crisis is complicated by the difficulty of valuing firms in such circumstances and the job losses associated with the restructuring (Arnold, 2018; Brown et al, 2019). Restructuring should be accompanied by early intervention aimed at retraining (Adalet McGowan, Andrews and Millot, 2017). If firms remain state-owned (SOE), better and more transparent governance is needed. This can be achieved by blocking the role of the state as the owner, which can increase the effectiveness of crisis-induced emergency measures and the entire portfolio of state-owned enterprises (Abate et al., 2020). This will help ensure that the presence of state-owned enterprises in the markets does not disadvantage private sector competitors and does not undermine competitiveness in processing.

- Increasing the flexibility of labor markets helps to increase productivity by increasing the reallocation of resources, but in times of economic downturn. This can be particularly harmful in the early stages of recovery and in countries where retraining policies do not help people to take advantage of new opportunities. In this light, one option is to relax the policy for new employees, with careful monitoring of developments.

- Once the recovery is sustained, the post-crisis environment will provide an opportunity for countries to reassess their fiscal and spending policies, together with their overall fiscal base. Such a reassessment will need to take into account both the issues highlighted by the crisis and those related to current structural trends (e.g., population ageing, digitalization, rising inequality, the need to address climate change) in order to determine the combination and set of fiscal policies needed to ensure inclusive and sustainable economic growth in the long term.

Priorities for international cooperation: areas of reform with cross-border impact

The COVID-19 pandemic highlighted the need for international cooperation to ensure the preparedness and resilience of health systems for similar events around the world and on global health priorities. While countries need to improve their domestic health systems, international cooperation can help contain the spread of future pandemics and coordinate responses, including through the deployment of vaccination, which will increase overall economic resilience. Deficiencies in the international supply of essential medical supplies, including medicines, personal protective equipment and other medical devices, were identified. Currently, existing production and distribution capacities limit the effective global response to the pandemic.

No country produces all the products needed to fight the pandemic, including vaccines, and there is a high degree of interdependence in the trade of these products. The main and compounding weaknesses of global supply chains were the lack of consistent, comparable and timely data that could be linked and shared across sectors, regions and countries. The crisis has confirmed that health systems are lagging behind in terms of a coherent approach to data management and global standards, and data sharing.

Thus, a single response based on the data was not possible.

Another clear shortcoming was the global shortage of health workers. As countries seek to strengthen their own health workforce, many will see international recruitment as the fastest way to increase capacity, but such recruitment must comply with the WHO Global Code of Practice on International Health Recruitment (WHO, 2010).

It is important to note that closer cooperation on issues related to production and distribution capacity, distribution of materials, and planning of vaccination campaigns can help ensure fair and affordable access for all. It is also important to ensure that intellectual property protection and insufficient transfer of know-how and technology do not become an obstacle.

Policy recommendations for international health cooperation:

- Enhance international cooperation in ensuring the security and maintenance of the supply chains of essential medical products (including medicines and medical devices), as well as the capacity and use of medical supplies and infrastructure. Security of supply can be improved, for example, by: avoiding export restrictions, creating new reporting and monitoring mechanisms that improve information on supply chain structures and capabilities, consistently reporting product shortages by country, and exploring policies to remove barriers to supplier diversification; formulating flexibility and supplier requirements to reduce supply chain risks; defining emergency procurement procedures during public health crises; expanding, deepening existing joint procurement mechanisms, and / or creating new schemes.

- Improve the use of detailed and timely data from abroad (for example, from electronic health records) for pandemic alert systems, identification of risk groups, and patient management. To achieve this goal, there is a need to strengthen international coordination of agreed approaches to data management and global standards to ensure the protection of data privacy and security, without hindering monitoring and research, as detailed in the OECD Council's Recommendation on Health Data Management.

- Use so-called pull mechanisms, such as genuine and large international upfront market commitments (AMC), in addition to push mechanisms to finance R & D. One advantage of these mechanisms, which reward successful R & D completion and reduce uncertainty about the return on investment, is that they can define prerequisites for procurement, licensing of intellectual property rights (IPR) and accessibility.

- Define pre-purchase schemes for vaccines and medical equipment based on international cooperation, defining criteria for the distribution of production volumes between countries that are not based on capacity to pay.

- Support international efforts to ensure that intellectual property rights (IP) do not become an obstacle to the transfer of know-how and the building of production capacity for medicines and medical devices. This can be achieved by committing to using existing mechanisms to provide IP at low cost or free of charge, as well as to pool IP and encourage the exchange of know-how.

- Strengthen international coordination to ensure that clinical trials are well planned, meet strict methodological standards, and have sufficient capacity to produce definitive results.

Policy recommendations for climate change mitigation:

- By COP26 in 2021, adopt and update both non-current liabilities (NDC) and long-term national low-carbon strategies in line with the international goals of COP 21. Strategies should cover all sectors that are sources of emissions and make extensive use of available policy tools, in particular carbon pricing.

- Develop robust action plans on how national decarbonisation strategies will be implemented, taking into account international spillovers (e.g. carbon leakage) and identifying areas for potential cooperation. Use transparent cost-benefit assessment mechanisms when timing different policy instruments, as well as when identifying possible interactions, bottlenecks, and implications for business performance, and household well-being. Identify opportunities for high-yield government support to facilitate and encourage investment in low-carbon technologies (including infrastructure) and innovation.

- Where possible, coordinate decarbonisation strategies and their implementation with other countries in order to achieve global goals at minimal cost and minimize leakage and competitiveness problems. Introduce and gradually raise carbon prices as the recovery process begins. In particular, prioritize phasing out fossil fuel subsidies and incentives for carbon-intensive investment and consumption in order to reallocate resources to low-carbon investment and innovation, including R & D.

Recommendations for international trade policy:

- Strengthen the commitment to rule-based trade, including by enforcing and enforcing existing trade rules, increasing policy transparency, and working towards effective resolution of trade disputes.

- Address gaps in the existing rulebook, for example with regard to government support that distorts markets and damages the environment, and agree on new rules to address emerging issues such as state capitalism and digital transformation of economies.

- Promote trade in goods and services through full implementation of the WTO Agreement on Trade Facilitation, domestic trade-promoting reforms, and the resumption of safe international travel.

- Make progress in international economic cooperation using the full range of tools, including legally binding rules, voluntary guidelines and codes, as well as transparency and dialogue.

Policy recommendations on digital taxation:

- Continue multilateral discussions to reach an international agreement.

Conclusion-Strategic vision for dynamic recovery

Given the uncertainty about the pace and strength of the recovery, the consistency of the reforms is vital. Expansionary fiscal policies, such as investment in public infrastructure and health and social protection reforms, and measures to strengthen the rule of law should be prioritized to support the recovery process, as well as improve long-term growth prospects. This is also true for measures to prevent social impact, such as education reforms and revitalization programs. Other measures — for example, including strengthening job search conditions in programs, unemployment benefits, increasing carbon taxes and reducing employment protection - should depend on the state of the economy or be implemented only gradually. The crisis also highlighted the importance of self-healing capacity and environmental sustainability.

The importance of priorities related to social safety nets and health has increased in both advanced and emerging economies, with a particular focus on inclusivity. In emerging economies, priorities related to the rule of law, education and skills, and labour market regulation have gained importance, in part because of the increasing focus on combating the informal sector. While domestic policies play a central role in recovery strategies, the pandemic has highlighted the need for closer international cooperation.

Several areas identified in the "Drive for Growth 2021" document require strong domestic and international policy action. These include healthcare, the production and distribution of vaccines and medical equipment; combating climate change; taxing multinational corporations in the digital economy; and reducing trade barriers.