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Greater coordination is also required across city jurisdictions. Ideally, the provision of public goods should be governed at a high enough level to reduce the disincentives to providing “common goods”. Transport and land-use planning, in particular, can result in extremely poor outcomes for both efficiency and equity where co-ordination across jurisdiction is lacking. These issues suggest governing cities as functional economies rather than administrative units. Even relatively modest-sized urban agglomerations are often quite fragmented from a political-administrative perspective. Evidence suggests that leadership from higher levels of government is often required to bring about cross-jurisdictional cooperation among municipalities that is needed in complex metropolitan areas.
Finally, national governments may also need to become better at ‘city-proofing’ their national policies to ensure that they do not have unintended urban effects. National governments could inject more local flexibility in managing active labour market policies (OECD 2009b). Local employment agencies can have more discretion in how interventions are designed, budgets are managed, performance targets are set and activities are outsourced, within the limits set by accountability requirements. Research by the OECD LEED Programme has shown that when such flexibility is awarded, local employment agencies become more active partners in city strategies to address unemployment and social exclusion (OECD, 2009b and Froy et al., 2011). Similar incentives are needed in other policy areas, including education and training, housing and immigration. Furthermore, there is a need for more extensive monitoring and evaluation of national and city-level initiatives aimed at fostering Inclusive Growth (OECD, 2013k). There is no clearly-defined “best practice” in this field, and experimentation and innovation are badly needed.
Box 3.12 Making full use of local skills
In the United Kingdom, larger cities have been awarded ‘City deals’- agreements with government that give each city an enhanced role in decision making and greater responsibility in deciding how public money should be spent. This has allowed cities to think more innovatively about how they address social and economic exclusion, while also working towards economic growth. The first wave of City Deals were with the 8 largest cities outside of London (Bristol, Birmingham, Nottingham, Manchester, Sheffield, Liverpool, Leeds and Newcastle), and a second wave involves a further 20 cities. Increased flexibility in the implementation of skills policy has allowed Manchester, for example, to set up an Apprenticeships and Skills Hub that has created 2755 apprenticeships in SMEs.
In Canada, the multi-level Canada-Ontario-Toronto Memorandum of Understanding on Immigration and Settlement creates a partnership with the City of Toronto on immigrant-settlement matters. The MoU outlines trilevel co-operation on key issues related to integrating immigrants into the metropolitan economy and society, including access to housing and other settlement matters, as well as the all-important language-training issue. It establishes a clear framework for full participation by the City of Toronto in the oversight of settlement and language-training programming whose membership was previously restricted to the Province and the federal government.
Also involving Toronto, the Toronto Regional Immigrant Employment Council (TRIEC) was established. It brings together multiple stakeholders – employers, regulatory bodies, professional associations, educators, labour, community groups, government and immigrants. Led by the Toronto chamber of commerce, the TRIEC addresses the issue of how to recognise the skills and credentials of immigrants – who represent a significant and increasing proportion of the working-age population in the Metropolitan Region - in a way that allows them to obtain long-term employment in occupations for which they have been trained. The issue of credential recognition is a key stumbling block in semi- and high-skilled workers’ efforts to obtain initial Canadian work experience.
Without Canadian work experience, it becomes that much more difficult for an immigrant to enter the Toronto labour force in the field in which s/he has been trained.
TRIEC’s work focuses on increasing access to services and programmes that help skilled immigrants effectively enter the local labour market, working with key stakeholders, particularly employers, to build their capacity to work better with skilled immigrants; and working with all levels of government to increase local coordination of public policy and programming. This benefits all stakeholders: Employers benefit from improved recruitment channels, and access to new distribution; potential employees benefit through building their professional connections and experience through mentoring; educational institutions benefit from help with the development and distribution of learning tools and the curriculum, and finally government benefits through increased support from the private sector and independent interaction between those that supply and those that demand labour force skills. TRIEC relies heavily on the support of mentors within the business community, this can include immigrants who have successfully integrated with the labour force and former ‘mentees’ – graduates of TRIEC’s mentorship programme. These mentoring schemes fulfil the dual role of enhancing the networks of new immigrants, whilst at the same time providing them with role models to focus their aspirations.
Source: OECD (2009a) Designing local skills strategies, OECD (2012), OECD Territorial Reviews: Skåne, Sweden, OECD Publishing, Paris. OECD Territorial Review of Chicago, OECD (forthcoming), Job Creation and Local Economic Development 2014, OECD Publishing, Paris, and OECD (2006) From immigration to integration: local solutions to a global challenge, OECD Publishing, Paris.
3.7. Adapting development policies faced with poverty and inequality Structural change and Inclusive Growth Fast growth of GDP in several non-OECD countries has lifted millions out of poverty, but challenges remain if continued growth is to be more inclusive. The last decade has seen patterns of growth changing across the world, as the centre of economic gravity shifted from Western countries towards the East and the South (OECD 2010c). This “shifting growth” process, driven by China’s rise and integration with the global economy, has directly and indirectly fuelled economic growth in many other countries. Often, these changing patterns of growth have been accompanied by both major increases in productivity and substantial falls in poverty. One of the biggest challenges for policy makers around the world continues to be the identification of strategies that promote economic growth accompanied by continued reduction in poverty and the creation of well-paying jobs for all those who wish to work.
Strong, jobs-rich growth is a necessary step towards Inclusive Growth. This is because employment is still the best means for individuals to boost incomes, and improve material and nonmaterial living standards. Economic development usually entails shifts of labour from a low-productivity agricultural sector and/or low-productivity activities to higher-productivity, more skill-intensive activities in manufacturing and services. In the case of China, most of the very high productivity growth of the last decades has resulted from productivity gains within manufacturing, although labour migration from low to high-productivity sectors has also been significant. By contrast, in India, the two forces were of about equal importance. At the other extreme, within-sector productivity developments in Turkey had a negative impact on overall productivity growth, possibly because higher-skilled workers moved to other sectors where their skills could be put to better use (Figure 3.9).
Labour productivity gains through industrialisation can be further enhanced by reaping the demographic dividend. Rising per capita incomes in developing countries have typically been accompanied by falling birth rates. When families have fewer children, the number of non-productive dependents falls while the share of those of working age in the population increases. The combined effect from a larger labour force that is employed in more productive activities yields a double dividend.
However, if productivity rises faster than demand for the products, perhaps reflecting rigidities in labour and/or product markets, unemployment or underemployment will be the result. Taken together, the benefits of labour shifts and demographic change, as well as the challenges from underemployment, are all linked to the importance of economic (productivity) growth and job creation.
Shift-share decomposition of labour productivity growth, annual average over 2000-2009 Note: Figure based on 32 sectors including agriculture, mining, 14 manufacturing and 16 service industries in 39 economies.
Productivity is measured by value added in 2002 constant US dollars per person employed. The within-sector effect measures the impact of productivity growth within each sector on total economy productivity growth, assuming that sector labour shares are unchanged. The shift effect measures the impact on total economy productivity resulting from the movement of labour between sectors, assuming that the level of productivity in each sector is unchanged. The cross-term effect measures the change in both labour share and productivity in each sector and accounts for the impact of labour re-allocation between sectors with varying productivity growth rates.
Source: OECD calculations using the World Input-Output Database.Timmer, M.P (ed.) (2012), “The World Input-Output Database (WIOD): Contents, Sources and Methods”, WIOD Working Paper, No. 10.
Countries can facilitate structural transformation through policies that boost productivity in low-productivity sectors, and facilitate movement of labour to high-productivity sectors. In the early stages of development a large share of the population is still engaged in low-productivity agricultural activities. Agriculture is still of enormous importance in most developing countries, the poor are concentrated in rural areas, and most of the extremely poor rely on subsistence farming for their livelihoods. Many developing countries still have significant potential to increase agricultural productivity, for example through mechanisation and investments in more advanced seeds and fertilisers, which can help to free up labour that can then move into other, more productive activities. Smallholder farmers, in particular, face numerous constraints to productivity growth, as discussed above, due to limited access to credit and insurance, as well as land tenure insecurity. Integration of smallholder farmers into vertical value chains can support agricultural productivity. Examples of successful commercialisation of agricultural products are cocoa production in Ghana, or vertically integrated fruit production in Kenya (OECD 2013b). Typically, the freed-up labour moves first into low-skill labour-intensive manufacturing in urban areas, which calls for the provision of basic infrastructure and other public services, as well as affordable housing, to make the industrialisation-urbanisation process more inclusive.
Once the potential of shifting labour out of low-productivity agriculture is exhausted, moving workers from low to high-productivity activities becomes more important. One route is to move up the productivity scale in manufacturing, often by adopting and adapting more sophisticated technologies developed in advanced countries, as discussed above. Relative to the United States, the benchmark country for productivity in manufacturing, emerging market economies still have some way to go (Figure 3.10). As well as involving the creation of new industrial sectors and upgrading of products in existing value chains based on comparative advantage, moving up the productivity ladder also requires strengthening the service sector, which has significant potential to absorb both low and high-skilled labour.
Note: Average manufacturing TFP 2002-09, weighted by value added in 14 sectors classified according to the International Standard Industrial Classification Revision 3 (ISIC Rev. 3).
Source: OECD’s estimations using the United Nations Industrial Development Organization (UNIDO) Industrial Statistics and the World Input-Output Database. Timmer, M.P (ed.) (2012), “The World Input-Output Database (WIOD): Contents, Sources and Methods”, WIOD Working Paper, No. 10.
Policies need to focus on both raising productivity and ensuring that the labour force is equipped to deal with it. Small young firms display stronger productivity growth than old large firms (OECD, 2014a), but new firms, small firms and those in the services-sector often have limited access to finance. New service-sector firms in particular often have limited access to finance. Governments can set up credit guarantee schemes to encourage credit creation and can generally foster entrepreneurship to mitigate the disadvantages of such firms. Governments should also provide targeted education (including vocational and on-the-job training) to prepare for a transition towards higher productivity industrial activities and ICT-based service activities. It is important to provide the right kinds of skills, for example, in many African countries, the university system traditionally focused on providing education for public sector jobs (OECD 2012a). Adapting educational curricula to market needs is necessary, and governments can support on-the-job training to bridge education mismatches. Developing countries should focus vocational training on sectors and competencies where training would have the strongest employment impact, and establish a clear and widely understood system of skills certification to promote transparency and boost the employability of graduates.
Can development aid support Inclusive Growth?
Aid can support Inclusive Growth by helping to get the enabling conditions right and through targeted interventions, in particular to those living at the fringes of society and in the poorest countries.
While the overall empirical correlation between aid and Inclusive Growth is difficult to assess, on balance the cross-country evidence suggests that aid has a positive, albeit small, effect. Inclusive Growth has become a priority in developing country strategies and donors are responding with tailored support in areas such as agriculture, private sector development, health and education. Aid will remain essential, especially in low-income countries, in supporting domestic policies and structural transformation to achieve Inclusive Growth.
The focus of development aid has changed over the decades as lessons are learned and problems facing poorer countries evolve. Since the beginning of the century, the Millennium Development Goals programme helped orient aid towards poverty reduction, health and education, a “pro-poor growth” approach.56 The experience of the BRICS countries, which had concentrated their development efforts on growth per se and lifted many of their citizens out of poverty, encouraged the G20 to call for an agenda fostering “strong, sustainable, inclusive growth” (G20, 2009). The G20 define Inclusive Growth as growth which creates jobs, coupled with social policies and legal protections, involving civil society, NGOs and the private sector. Consequently, and especially since the global crisis, OECD aid donors have started to commit relatively more aid towards economic development, although social aid remains paramount, as has been the case since the beginning of this century (Figure 3.11). In addition, Inclusive Growth objectives will help frame the Post-2015 Development Agenda (Box 3.13).
The international community, under the leadership of the UN, is currently discussing a new global development agenda. This will focus on a specific set of goals for “poverty eradication and sustainable development” building on the progress already achieved through the Millennium Development Goals (UNGA, 2013).