Tackling policy fragmentation: the key to getting onto a path of rapid and sustainable productivity growth
9/6/2016 – Further structural reforms are needed to help the business sector boost productivity growth and overcome the key challenges of sluggish investment in advanced economies and excess capacity in emerging economies, according to a new OECD report.
The OECD Business and Finance Outlook 2016 says there has been insufficient aggregate productivity growth since the crisis and the low interest rate environment has done little to help address this problem. Those companies that are spending more on R&D, orienting their financing to equity rather than debt, achieving free cash flow and engaging in more merger and acquisition activities are higher performers, while the others are left behind, unable to develop new products or quickly adapt to a changing landscape.
“If we want to get onto a path of stronger and more sustainable growth, we need better coordinated policies that put the pieces of our fragmented world back together in a more harmonious way,” said OECD Secretary-General Angel Gurría, launching the report in Paris. “Structural policy action will be critical to improve the incentives for corporate research and development, remove biases against equity financing of firms, and dismantle obstacles to the integration of renewables into electricity networks, to name just a few areas mentioned in the report.”
The report points out that fragmentation can be observed in a variety of business environments, including in financial markets where information technology and regulatory reforms have paved the way for fragmentation with respect to an increased number of stock trading venues and created so called “dark trading”. Differences in regulatory requirements and disclosure among today’s trading venues have raised concerns about stock market transparency and equal treatment of investors. Also corporations may be affected negatively if speed and complexity is rewarded over long-term investment.
Different legal regimes across countries and in the growing network of international investment treaties also fragment the business environment. National laws in different countries sanction foreign bribery with uneven and often insufficient severity, and many investment treaties have created rules that can fragment companies and disrupt established rules on corporate governance and corporate finance.
Finally, clean energy represents another important sector in which market fragmentation needs to be addressed, as overall investment in renewable projects remains constrained by trade barriers and other policies.
Policymakers should support R&D better, as it is one of the most important contributors to productivity growth. Fiscal incentives should be smarter and directed at specific barriers, impediments or synergies to facilitate the desired level of investment in R&D. Tax policies should stop favouring debt over equity finance. Governments should also promote openness to markets, including for corporate control – both between countries and within them, where domestic rules and lack of cooperation among competition authorities can often block entry.
The OECD Business and Finance Outlook 2016 also analyses the challenges that significant differences in life expectancy across socio-economic groups pose to social fairness and the solvency of pension and insurance companies. (Source- OECD)