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Developing countries and emerging market economies face specific educational challenges Developing countries and emerging market economies need to ensure that a high proportion of the population enter education in the first place and do not leave it before they are literate and numerate. Great strides have been made in this respect. In China, for example, school enrolment up to lower-secondary level has risen from 20% to 99% in the post-war period, illiteracy among working-age adults has dropped from 80% to under 4%, and the average number of years already spent in education of those aged 15 years and over is now 9.5 years40. Primary school enrolment rates are now similar in most emerging market economies to those in OECD countries, although they remain lower at the secondary and tertiary levels (OECD and ILO, 2011). In some Latin American countries, disadvantaged households are encouraged to enrol and keep young children in education by means of conditional cash transfers.

Policies should facilitate the school-to-work transition, reducing young people’s likelihood of being neither in employment nor in education nor training (NEET), especially girls. In developing countries the likelihood to be NEET for girls increases with age and is associated with early marriage and child bearing. Successful school-to-work transition requires integrated, multi-sectoral approaches to education, employment, migration and family programmes policies. High-quality education, better links between the educational and employment sectors, and transparency in labour market information may facilitate the transition to labour market. Discriminatory social institutions, such as laws, social norms and practices that restrict the economic and social roles of girls and women, also play a role in limiting opportunities for women. Promoting gender-sensitive vocational training programmes that are tailored to local contexts, placement and counselling services, as well as discouraging preconceived views about suitable jobs for women will facilitate girls’ school-to-work transition.

Competition and product market regulations

Pro-competition reforms in product market regulations promote economic growth, which benefits all households, including the poorest. The pro-growth benefits of enhanced competition in product markets are relatively well known. Regulatory impediments to the entry of firms in product markets deprive societies of the benefits of new products and technologies that lead to productivity gains (Blanchard and Giavazzi, 2003; Nicoletti and Scarpetta, 2005). The improvements in the adoption and diffusion of new technologies that are brought about by competition are at the core of the growth effects of regulatory reforms in product markets. Indeed, the analysis carried out by the OECD and summarised in Going for Growth, as well as in the Regulatory and Competition Reviews carried out for Member and Partner countries, quantifies the potential benefits of policy action.

The distributive effects of pro-competition reforms in product markets are somewhat less well understood. Efforts are being made to close this analytical gap, as discussed in Chapter 2, and complement it with evidence-based analysis of the effects of pro-competition reform on different segments of the income distribution and social groups. An important channel, through which distributional effects take place, is the association of stronger competition with greater firm turnover, as poorly performing firms exit the market and more productive ones prosper, which fosters job creation and entrepreneurship. Also, by facilitating entry into product markets, pro-competition reforms result in lower prices, as well as increased availability and/or better quality, of goods and services, which benefit poor households, enhancing their purchasing power.

Vulnerable social groups may end up paying more for goods and services where there is a lack of competition. Indeed, poor and less educated consumers were found to pay more for long distance telephone calls in the United States than wealthier and better educated consumers, even after controlling for differences in usage, a finding that is associated with a lack of competition among service providers (Hausman and Sidak, 2004). Similarly, liberalisation of retail financial markets has resulted in smaller savers having access to bank accounts, where previously they relied on informal credit institutions.41 An OECD study in Mexico shows that the relative negative effect of monopoly power is greatest among poor households (Urzúa, 2013).42 Countries such as Mexico and India are opening up some of their network industries to foreign direct investment so as to boost productivity and lower prices. To avoid the risk that multinational enterprises engage in anti-competitive behaviour, which undermine the efficient operation of both domestic and international markets and therefore the positive impact MNEs can make to sustainable development and enduring social progress, the OECD Guidelines for Multinational Enterprises set out government-backed recommendations on responsible business conduct, including protection of consumer interests and competition (Box 3.6).

Box 3.6. The OECD Multinational Enterprise (MNEs) Guidelines include recommendations directly relating to inclusiveness The Guidelines are a set of recommendations on responsible business conduct addressed by governments to MNEs operating in or from adhering countries. They are supported by the representatives of business, worker organisations and non-governmental organisations through the OECD Business and Industry Advisory Committee (BIAC), the OECD Trade Union Advisory Committee (TUAC), and OECD Watch.

There are several recommendations in the MNEs guidelines which are directly related to inclusiveness,

including the following:

Enterprises should:

“Encourage local capacity building through close co-operation with the local community” (chapter on General Policies);

“Encourage human capital formation, in particular by creating employment opportunities and facilitating training opportunities for employees” (chapter on General Policies);

“Engage with relevant stakeholders in order to provide meaningful opportunities for their views to be taken into account in relation to planning and decision making for projects or other activities that may significantly impact local communities” (chapter on General Policies);

“When multinational enterprises operate in developing countries, where comparable employers may not exist, provide the best possible wages, benefits and conditions of work, within the framework of government policies” (chapter on Employment and Industrial Relations);

“Be guided throughout their operations by the principle of equality of opportunity and treatment in employment and not discriminate against their workers with respect to employment or occupation on such grounds as race, colour, sex, religion, political opinion, national extraction or social origin, or other status, unless selectivity concerning worker characteristics furthers established governmental policies which specifically promote greater equality of employment opportunity or relates to the inherent requirements of a job” (chapter on Employment and Industrial Relations);

“Take into consideration, in applying the above principles, i) the needs of vulnerable and disadvantaged consumers and ii) the specific challenges that e-commerce may pose for consumers” (chapter on Consumer Interests).

Source: OECD (2011b) OECD Guidelines for Multinational Enterprises, OECD Publishing, Paris.

Competition in product markets boosts growth but does not automatically lead to greater inclusiveness (OECD 2013d). Stronger competition between firms will lead to lower prices and higher productivity, with fewer jobs in some sectors and more in others. Relaxing anti-competitive regulations also tends to reduce the bargaining power of workers43, and the loss of a job could be catastrophic for many workers in developing countries and emerging economies. But stronger competition in the production of those goods and services which the poor have a higher propensity to consume, such as basic foodstuffs, health care, housing and transport, could result in an overall improvement in income distribution at the same time as enhancing the economy’s growth potential (Box 3.7).44 The redistributive impact of lowering barriers to entry is likely to be positive in professional services, as the reduction in prices benefit consumers at the expense of a small number of often high-earning incumbents. In sectors where low-skilled labour prevails, such as the retail sector, increased competition may widen the wage distribution, but only insofar as these workers initially benefited from rents. All in all, the impact of regulatory reforms on income dispersion (as opposed to average income levels) has to be examined on a case by case basis, distinguishing carefully between short-term effects from longer-term outcomes (OECD 2013f).

Box 3.7. Competition and poor consumers in poorer countries

There is good evidence that lacklustre competition affects poor consumers in developing and emerging economies. For instance, Peruvian poultry farms and their trade association have conspired to block entry and eliminate competitors. Likewise, 11 Peruvian wheat flour producers and their trade association formed a cartel to end a price war. Zambian poultry firms have demanded that their biggest customer stay out of the production market – and the customer complied. Cartels and boycotting agreements have been discovered and prosecuted in the baking, milling, sugar and milk industries in developing countries. Anti-competitive practices are endemic in public transportation markets such as bus and taxi services, on which many poor consumers depend. The cement industry, on which so much public infrastructure – including public housing – relies, is riddled with cartels and abuse of dominant positions. These problems are not specific to a small group of countries but rather are widespread throughout the developing world.

There are several examples of how greater competition in developing countries and emerging market economies has helped poorer consumers. The advent of mobile telephony, and competition between operators, allows small producers to check on market prices for their output quickly and cheaply, and adjust their schedules accordingly, and mobile telephone-based money transfers for small amounts has allowed poorer people who have no access to normal commercial bank facilities to carry out monetary transactions rapidly and at minimum cost.

Source: OECD (2013) Competition and Poverty Reduction,

Removing subsidies which distort economic activity promotes competition and can improve resource allocation and equity. There are two general arguments against subsidies. First, the beneficiaries pay less for the good or service than the value to society of the resources used to produce them and, second, they have to be paid for by higher taxes, which can also distort competition. They are also open to abuse when well-financed lobbies put pressure on governments to introduce, retain, or increase subsidies in their sectors, benefitting producers and owners and harming consumers. The end result is that real incomes will be lower than in the absence of subsidies, and the distortion to competition can affect producers and their employees in other countries. In principle, they are acceptable only when they counteract or compensate for a distortion to competition elsewhere.

Removing some sectoral subsidies can however also have a negative social impact when they target or benefit low-income individuals. Despite their drawbacks, virtually all countries have subsidies of some kind, for example those provided to agriculture to aid self-sufficiency, while subsidised education up to a certain level is nearly universal. Subsidies are often targeted at poorer households, by focussing on staple foodstuffs, basic health facilities, and some forms of housing and public transport. Such subsidies are naturally politically popular, genuinely help poorer households and are politically very difficult to remove. If they are removed, flanking policies may be required to aid poorer households. However, in developing countries, the poorest of the poor are often subsistence farmers, who live outside the market economy and do not benefit from such subsidies.

There is a strong case for phasing out or down subsidies that are environmentally harmful.

Subsidised fuels and electricity benefit mainly wealthier households that travel in powerful automobiles and heat and cool their large houses. Reforming environmentally harmful subsidies and putting in place prices to fully reflect the resource, investment and operating costs associated with natural resource use, as well as the social costs of pollution or environmental damage, are key policies to support green growth.

There are however trade-offs to phasing out environmentally harmful subsidies. Introducing or increasing environmentally related taxes or charges (e.g. energy taxes, water charges) help to cover the full costs and promote more efficient use of the resource, but can have a regressive impact. To address this, governments often introduce exemptions or subsidised rates for certain uses (e.g. fuels for domestic heating or fishing boats, electricity for irrigation pumping). Universal applications of such exemptions or subsidies often lead to inefficient outcomes that benefit the better off (Box 3.8), and should thus be removed to maintain the price signals of the taxes and charges. Negative social impacts from the reduction or suppression of energy subsidies are better addressed by better targeting compensation measures only for low-income households, or through separate social security systems. Further, a full assessment of the income distributional effects should also include the indirect effects – such as price increases on taxed products, employment effects of using environmental tax revenues, as well as associated environmental benefits.

Box 3.8. Mexico’s moves on energy reforms to address environmental and social concerns Mexico is making efforts to reform its subsidies to fuel and electricity, while more effectively supporting the poor. In 2008, energy subsidies (1.8% of GDP) in Mexico cost more than twice the amount spent on anti-poverty programmes. Although these subsidies were reduced to 1% of GDP in 2011, they are still highly regressive, with the poorest 20% of the population capturing less than 8% of transport fuel subsidies and only 11% of residential electricity subsidies. Using some of the revenues from reducing energy subsidies to better target support directly to low-income households would benefit the poor, and at a much lower cost to the government budget. Similarly, 90% of agricultural price support in Mexico and 80% of electricity subsidies for irrigation-water pumping benefit the richest 10% of farmers. Overall, Mexico spends more on subsidies to electricity for pumping irrigation water than it does to improve irrigation infrastructure.

The 2013 budget aims to reduce fuel subsidies, and since 2011 irrigation water pumping subsidies in some aquifers have been replaced with direct cash transfers The carbon tax law has just been passed in the Senate in November 2013, although the carbon tax rate is lower than initially planned and natural gas is taxed at zero rate.

Nonetheless, this achievement sends a strong international signal about Mexico’s commitment to green growth and opens the doors for gradually increasing the carbon tax rate in the future. Efforts have been also made to phase-out energy subsidies. Using some of the revenues from phasing-out energy subsidies to better target support directly to low-income households would benefit the poor and at a much lower cost to the government budget. Conducting a voluntary peer review of its fossil fuel subsidies in the G20 process would further aid Mexico with energy reforms, while addressing social concerns through an exchange of international experiences.

Source: OECD (2013p), OECD Environmental Performance Reviews: Mexico 2013, OECD Publishing.

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