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March 1999, No. 216
Editorial
Economy
Japan’s economic reforms could lose their edge if they get caught up in the country’s institutional machinery. Determined action is therefore needed to prevent that from happening.
The troubles of the Japanese economy have been well documented by now. GDP fell by about 2.6% in real terms in 1998 and a weak performance is expected in 1999. Unemployment is expected to remain dispiritingly high by Japanese standards and, although the yen looks to have strengthened, the saga of suffering financial institutions seems to be never-ending. The impact of Japan’s problems on other Asian markets and the knock-on effect around the world have been striking, making the need to tackle deep-rooted structural problems clearer than ever. That at least has been recognised by the Japanese public and their political leaders and some progress in tabling reform has been made. In fact, the Japanese government has asked the OECD to conduct a broad-based review of regulatory reform in Japan; at the time of writing that review was under way, with the final report expected later in the spring. (...)
After a period of strong growth, the Slovak economy has reached a turning point. Macroeconomic imbalances have become unsustainable and a more stable development strategy is now required. Designing and implementing that strategy has been the main task facing the new government.
A co-ordinated approach to reform and macroeconomic stabilisation: that is the central recommendation of the latest OECD Economic Survey of the Slovak Republic (http://www.oecd.org/eco/surv/esu-slo.htm). The new government which emerged from the parliamentary elections of September 1998 appears to agree and has signalled its determination to act on that front. Notably, a key element of its adjustment package approved in January 1999 is a substantial fiscal tightening. The target for 1999 is a general government deficit of the order of 2% of GDP, down from above 5% in 1998. The government hopes to achieve this objective by reducing public infrastructure investment, putting a freeze on government wages and raising excise taxes. (...)
Greece is a candidate for entry into the euro area in 2001. To perform well once in EMU, it will have to step up its efforts of reforming its public-sector enterprises by introducing more competition and improving management.
Greece’s economy has made great strides forward since the beginning of the 1990s. Inflation has fallen sharply, as has the budget deficit. More recently, growth has begun to accelerate, exceeding 3% in real terms in 1997. It is on the strength of progress like this that Greece has set itself the objective of entering the euro area in 2001.
Nevertheless, significant challenges lie ahead. When it comes to structural reforms Greece lags behind most other OECD countries. The case of public enterprises is a perfect example.
Other OECD countries have demonstrated that restructuring of public monopolies and the introduction of competition make it possible to improve quality of goods and services and, in many cases, at lower prices as well. OECD calculations show that an ambitious reform of Greece’s public enterprises could generate a one-off increase in real GDP of as much as 10%, which would help boost employment. It would help relieve pressure on public finances and debt. This is very important for a country like Greece, where public enterprises each year claim a share of the national budget equal to 3.5% of GDP and where the general government debt exceeds 100% of GDP.(...)
When comparing different tax systems, most people tend to look at top rates of personal income taxes imposed by central government. However, concentrating on these ‘headline’ rates can be misleading. In the first of a two part series, Flip de Kam and Chiara Bronchi explain why.
In all OECD countries central government levies a tax on personal income. The rate structure of these income taxes shows wide variation. Our focus here is on top marginal rates, that is the highest percentage of tax imposed on every additional dollar, yen, deutsche mark or franc earned above standard taxable income levels. Most studies compare only the top rates of personal income tax imposed by central government. However, 22 out of the 29 OECD countries also levy other taxes on personal income. Consequently, any cross-country study of tax systems that does not take into account the combined rate of all taxes on personal income will not grasp how top income taxes in the OECD area really look. (...)
Spotlight: Biotechnology
So what is ‘biotechnology’? A quick look at the word suggests a technology that is based upon biology, the study of living things, and this is reflected in the definition which first appeared in the 1982 OECD publication Biotechnology: International Trends and Perspectives and which is still accepted today: ‘the application of scientific and engineering principles to the processing of materials by biological agents to provide goods and services’.
The definition is broad, and like some of the others found in the pages of this Spotlight, could be interpreted to encompass growing, tending and caring of animals and plants used for food. It could also be interpreted to mean using microbes for processing foods such as yoghurt, cheese or beer; or using microbes to produce health products and drugs, such as antibiotics. The definition is also broad enough to encapsulate the use of microbes and plants for improving industrial processes and for cleaning up chemical spills. Today biotechnology is widely taken to mean genetic engineering, although some experts prefer to call this ‘modern’ biotechnology, seeing it as a sub-discipline.
Apart from defining biotechnology, the same 1982 International Trends and Perspectives report contained a number of recommendations. One of them states that for the public to have confidence in the products of modern biotechnology, governments must have proper mechanisms in place to regulate their safety.(...)
Biotechnology is a fairly broad term and it is difficult to talk of it as a specific sector or industry. Still, Ernst & Young make a pretty good stab at measuring it. In their biotechnology report (European Life Sciences, 1998) they sometimes call it the entrepreneurial life sciences sector and in their analysis include those companies which use modern biotechnological techniques to develop products or services for health care, animal health, agriculture, food processing, renewable resources and the environment. Companies which use conventional biological processes, such as brewers, are not included, nor are non-profit research institutions. According to Ernst & Young, there were 1,036 companies working in the ‘life sciences sector’ in Europe in 1997, employing more than 39,000 people directly, with revenues of $3.1 billion and $2.2 billion invested in R&D.(...)
There are many definitions of biotechnology and most of them have been argued about, agreed on, deconstructed, reconstructed and indeed manipulated over the years. Here are a few from the 1980s which, like the one the OECD offers at the start of this Spotlight, appear to have withstood the tamperings of time.
Since 1980 the OECD has been a leading player in addressing biotechnology-related issues. During that time, modern biotechnology has evolved from a scientific curiosity towards commercial applications, and has reached the in-trays of more and more policy advisers, in different ministries or government agencies—science, industry, agriculture, health, environment, education, development, trade, patent office and others. It became impossible for any one agency to pretend to a monopoly on it. At OECD biotechnology also reached the agenda of committees and subsidiary bodies, to such a point that in 1993 an Internal Co-ordination Group for Biotechnology (http://www.oecd.org/ehs/icgb/ABOUTUS.HTM) was established to facilitate co-operation between the various programmes. So how do these various parts of the whole work?(...)
Most whole food has never been the object of specific regulation, but that is changing with the emergence of genetically modified produce. So what should be the trigger for regulating such products? And what practical tools can we use to ensure the safety of novel foods?
Slowly but inevitably, the surge in understanding and precision tools that have illuminated the life sciences in recent years are transforming the two pivotal industries whose very essence is life: food and health. Downstream from the laboratory, agriculture and the health-care industries have seen their performances heightened and their competitiveness improved, often generating better value and quality for the consumer. The health and food sectors are both in ferment, as they try to absorb the flood of new knowledge and data that comes with the advances of biotechnology.
However, these advances have also underlined some key differences between the two. Health care is a highly regulated sector whose products address often life-threatening situations in a context where risks and benefits must be balanced; a context which imposes ethical imperatives on the medical practitioner, the drug industry and the regulatory authority to be fully up-to-date with the latest knowledge. To fail to keep up with developments would be culpable negligence..(...)
Modern biotechnology is changing fast and is beginning to have a major impact on agriculture and the environment. Increasing the efficiency of safety assessment and promoting transparency in the exchange of information are among the key aims of the OECD.
The 1990s have seen a rapid increase in the development of genetically modified products, many of which are destined for release into the environment. So far, most of the products being developed consist of major crops, such as maize, wheat and soya bean. Well over 40 types of crop plant species have been genetically modified to exhibit a variety of traits, including resistance to various insect pests and disease and tolerance to certain herbicides. Through modern biotechnology quality characteristics have improved, reducing spoilage.(...)
The issue of GMOs in food and their possible effects on the environment have featured highly in the European media since the start of the year. The OECD Observer invited Julie Hill to explain the reasons behind this upsurge in concern.
Q: Is there a problem with GMOs?
A: It’s very difficult to say, though that’s part of the problem. We really are dealing with something novel here—the ability to move genes from species to species, sometimes in ways that would never be possible with ‘traditional’ plant breeding techniques. That means that as consumers of food, and in the environment, we are being faced with combinations of genes that we have not encountered before. We can of course test these new products in various ways—analyse their toxicity or allergenicity to humans, monitor their growth and behaviour in controlled conditions before releasing them to the wider environment—but we do not have any hard and fast ways of predicting the long-term consequences of altering nature to the degree that genetic manipulation allows. Green Alliance accepts that the likelihood of a problem from any one product is small, but is concerned that an accumulation of subtle effects might affect the environment and health in a way that will be difficult to deal with. (...)
Consumers want their governments to pay closer attention to food safety and quality. That may mean more regulation, which if ill-defined or excessive can damage trade and well-being. Weighing up the costs and benefits of particular regulations, rather than just assessing risk, could help improve safety, while avoiding protectionism.
Consumers are generally much less tolerant about health risks from food than about risks from tobacco or cars. Smokers probably accept the risks they run from cigarettes, but eating food, particularly fresh food, is not supposed to be a risky venture, particularly in today’s modern, hygiene conscious world. But consumer confidence in the food industry has been badly shaken by scares caused by mad cow disease and outbreaks of food-borne poisoning, such as from E Coli 0157 and listeria. There have been steep drops in demand for certain products as a result of these scares, and serious economic hardship has been the lot of some in the sectors concerned.(...)
When it comes to assessing regulation and safety with regard to particular goods, cost-benefit analysis does not receive the emphasis it should, particularly when compared with the importance of pure risk analysis. The Uruguay Round agreements give economic assessment only a limited role in the settlement of sanitary and technical disputes. In fact, there is no requirement in the SPS agreement that the economic benefits of any regulatory measures must outweigh the costs. Yet it is becoming clear that some regulatory measures can have net economic drawbacks. To use the terminology of cost-benefit analysis, they have a negative effect on society’s welfare—or well-being—even if the measures reduce risk.(...)
To many, biotechnology is all about genetically modified foods and cloning. Yet, it is also proving its value to the industrial production process, offering clear environmental and economic advantages over conventional methods.
In an industrial context, ‘clean’ is a relative term. Any change that reduces consumption of raw materials and energy or reduces waste, including recycling, is ‘cleaner’ or more environmentally friendly. There are ways of evaluating technologies and their alternatives in terms of their relative cleanliness throughout the production process and the life of the product. More generally, with industrial biotechnology the focus has shifted from remediation to prevention of environmental degradation. (...)
The intellectual capital invested in biotechnology raises important questions about protection. Some of them hold risks.
The market for biotechnology is expected to be worth $38 billion by the year 2005. That makes it a lucrative market. But it is much more than that. For whatever the controversies surrounding it—and one only needs to read the newspapers to know there are a few—biotechnology’s influence over our lives is growing, whether it be in the way of the life-saving drugs it brings to the market or in food production with its claim of reduced reliance on chemical pesticides and higher, more reliable, yields. Public calls, particularly in Europe, for better information about the true effects of GMO food on health and the environment, have served to push the stakes for the concerned industries higher still. (...)
It is not surprising that in such a novel technology field, several ‘pioneer’ inventions have been presented in the recent years. Patent offices have tended to provide these novel inventions broad protection. These patents cover protection of future, as yet unknown, uses, even though the patent was issued on the basis of the first therapeutic breakthrough. Let’s take a hypothetical example. If a scientist secures a broad patent for a drug that lowers blood pressure and then someone else discovers that the same drug cures ear infections, the new inventor will not be able to patent the new use of the drug. (...)
Society
Cars are getting safer, but are our roads? Probably not enough.
Christmas and New Year came and went with the usual merry vigour: shopping trips, parties and visits to friends and family. But the holiday season also brought another traumatic wave of death and serious injury on the roads. It is a world-wide problem and while there may have been a reduction in the number of fatalities in some countries—Australia and Mexico for example—others such as Spain saw a substantial rise. But even where there have been falls it cannot be said that injury and fatality on our roads have reached satisfactory or acceptably low levels. They have not. The World Bank estimates that road accidents could become the third cause of mortality by the year 2020 unless there is some radical new thinking about the problem and a fundamental change in attitude. So are current road safety strategies failing us or have tragedies on our roads become banal? (...)
In OECD countries, women’s employment is not necessarily synonymous with high wages and career opportunities.The labour market remains difficult for women and in all fields of activity, it will be a long time before women have equal access to the same occupations as men.
In modern societies, one might easily get the impression that the problem of gender inequality in the labour market is a thing of the past. But this is far from true, as an examination of employment indicators in OECD countries shows. The fact is that women do not have the same opportunities as men on the labour market, either in terms of wages or career prospects. Female employment still remains highly concentrated in a narrow range of occupations. The situation has not evolved much since the 1970s and there is no firm reason to believe that it will change in the coming years, unless the effort to upgrade these occupations, in particular by taking into account the specific characteristics of women’s jobs, is made a central policy concern. (...)
Development
What does the future hold for European development co-operation in Africa? That was the keynote question Michel Rocard addressed at an informal seminar held in February by the OECD’s Development Centre. The Observer invited the former French prime minister to sum up his views.
ODA has declined markedly. In fact in 1997 it represented only 0.22% of DAC Member’s GNP, the lowest level since the ODA concept was introduced in the 1960s. In contrast, private flows have risen sharply in recent years, as the first chart shows, reflecting the influx of foreign direct investment into recipient countries. However, the figures do not yet reflect the full impact of the Asian and Latin American crisis on private flows (specifically Foreign Direct Investment). (...)
OECD.org
Every year some $80 billion is paid out worldwide in the form of bribes or some other pay-off. To put this amount into perspective, it is more than New Zealand’s GDP and half the size of Norway’s. And $80 billion probably represents the tip of the iceberg. Whatever the size, for the OECD the principle remains a simple one: bribery of foreign government officials to obtain, or retain, business is a serious threat to democracy. It misdirects resources, undermines development and distorts competition. It is a distortion that the OECD is committed to removing. (...)
The countries of the southern Mediterranean suffer from a crucial lack of capital, and there is a danger of investment flows going to the centre—particularly European countries—from the periphery, which in the event is MENA, which regroups the Middle East and North African countries of the Mediterranean basin). This risk, sometimes referred to as hub-and-spoke, is that much greater in that all the countries are linked to Europe by bilateral agreements and that trade relations between them are relatively infrequent. How to prevent this periphery-centre divide from deepening was a recurrent theme of the conference organised by the OECD Development Centre, the World Bank and the Economic Research Forum, ‘The Dynamics of New Regionalism in MENA: Integration, Euro-Med Partnership Agreements and After’, held in Cairo (Egypt) in February 1999. (...)
If you are running a small or medium sized company, then the world may well be your oyster. The electronic world, that is. That was one of the optimistic messages arising from a seminar on electronic commerce, hosted by the OECD in Paris in February.1 The argument was made that e-commerce, whose value was expected to reach $1 trillion in the next three to five years, is ideally suited to small and medium sized firms. For a start, it was inexpensive to set up a website, certainly when compared to opening up shops in city main streets. And the global reach of the internet was far greater than was possible for most small businesses in traditional physical markets too. In fact, not only is the Internet suited to those smaller firms that already exist, but it was the catalyst for the creation of new ones. (...)