Presentation at the 2016 Warwick Economics Summit

Warwick, 6 February 2016

GABY WARWICK

On 6 February 2016, I participated in the annual Warwick Economics Summit (WES) 2016 organised by a very dynamic student body at the University of Warwick. I was asked to talk about the need for a new growth model and it was very encouraging to see the students’ level of engagement and interest.  My presentation set out the work we have done at the OECD, through the New Approaches to Economic Challenges (NAEC) initiative – which I oversee – to ensure that our growth policies are sustainable (financially, environmentally and socially) and do not produce the kind of results that the dominant economic policies have generated.

NAEC recognises that the current ills besetting the international economy, and the very high impact of the crisis, were connected to flawed economic models, tools and assumptions. These models begin by considering GDP as an end in itself and not as a means, and by focusing on maximising outputs and market efficiency. By assuming that people’s lives can only be defined by material well-being we have ignored too many elements that really matter for human beings in their everyday lives. Therefore, NAEC calls for better economic models that capture this reality, and that bring redistribution policies and sustainability to the core of the economic debate.

Besides the impacts of the crisis (low growth, high unemployment, low investment, low trade), NAEC recognises that past policies also left the increased inequality of income and opportunities unchecked, generating a “winner takes all” dynamic at the top of the income distribution. We did not have a clear picture of what was going on because we did not possess the instruments to measure better and we relied too much on average income (income per capita) that hides all these differences. We also relied on measuring the yearly flows of income generation at the individual level, and therefore failed to capture the “stocks”, that is, the accumulation of wealth in some income groups. Distribution of wealth is seven times more unequal than distribution of income. It is no wonder that the world income is so massively unequally distributed. This is what Thomas Piketty found, using historical data, and why he called for immediate solutions such as a tax on wealth, which seems a valid proposition.

With their oversimplified features, these economic models failed to capture the complexity and interconnectedness in the global economy, and promoted both “silo” thinking and simplistic approaches. We could not adequately capture “minor elements” which are the most important ones for the global economy such as the “spill-over” effects of national policies and the speed at which events in one corner of the globe could affect all regions.

The most striking fact of our new analysis (built on household surveys and distributional impacts) is that the lower income groups accumulate disadvantages that do not even allow for the second or third generation to improve their perspectives in life. When you are born in a precarious family, the chances of obtaining a good education or good opportunities (for jobs, for the arts, for sports) are very limited. Intergenerational mobility is hampered and therefore not only the current generation, but also future ones are being caught in this vicious cycle. In a world defined by networks, not having access to good schools and jobs, prevents lower income groups from gaining access to these very networks where decisions are taken and where opportunities are generated.

Stocks not only refer to income and wealth, but also to the natural resources, that have been widely neglected as the platform in which our economies and societies succeed or fail. Following the climate agreement at the COP21 in December 2015 in Paris, there is no excuse not to incorporate this in our agenda.

Taking into consideration all these elements, the suboptimal outcomes require rethinking our growth model. This was my proposition to the students at Warwick University.  We need a model where the benefits are widely distributed; and one that is sustainable both socially and environmentally.  It also requires recognising that GDP, income and material well-being is only one aspect of what defines our needs as human beings, and only part of the story of our self-fulfilment.

When we are faced with material deprivation, it is true that income and jobs (no matter what jobs) are much more important than anything else. The problem is that, in addressing these emergency situations, people get trapped in precarious jobs, in a low skill equilibrium leaving little possibility for intergenerational mobility.  However, even in the worst conditions, income does not define everything. I am always puzzled by the fact that, in any happiness survey (or in our subjective well-being measures), countries like my own (Mexico) rank very high independently of real conditions. So there is something else at work (the sun, or the smiles of people perhaps?), while in countries like France, with higher levels of wealth and well-being, they rank lower in terms of happiness levels. This confirms that people do not only think about money. We think about trust, social connections, a feeling of belonging and a purpose in life, as well as good outcomes on health, education, security etc. We need materially rich communities, but this in itself is not enough. Harmony, tolerance, low conflict contexts are all settings that allow the human spirit to flourish. These elements are more difficult to capture and to measure in our models. In fact, the predominant economic models refused to incorporate these very elements since they cannot be measured. It is a saying in classical economics that “things you cannot measure, you cannot manage”. This thinking assumed that important elements such as trust and fairness were impossible to address. We are reversing the old saying ‘to treasure what we measure’, but saying ‘let’s measure what we treasure.’

Let us take, for example, the question of learning. School systems, government and private institutions work hard to understand how to improve the education performance of their students. In the past, including with our PISA evaluation, we have put too much emphasis on academic-intellectual factors and performance, often favouring cognitive skills over other forms of intelligence that human-beings are blessed with.

Many systems have neglected emotional and social skills, regarding them as belonging more to the family sphere. We now know that they cannot be separated. The day before I spoke, one of the discussants at the Warwick Economics Summit very interestingly explained that, most of the time, emotions may help in making good and fast decisions. Emotions are not disentangled from rationality. They come together and they may also lead to wrong behaviour. But a lack of emotion or overemphasis in intellectual skills does not deliver better outcomes. Learning is an easier and more enjoyable process when it is accompanied by emotions. Passion for a subject led to more reading and learning, and brought about a sense of fulfilment and joy. We all had teachers who were able to instil a passion for learning and transformed difficult subjects into something accessible and fun. How can we bottle these experiences and roll them out again and again?

On the other extreme, the rise of fundamentalism and confrontation that we are seeing in Europe nowadays is certainly related to a large group of youngsters experiencing a sense of marginalisation, of not belonging, of unfairness.

At the OECD we are trying to develop the metrics that capture these elements better. We are working on a multidimensional living standard that incorporates household income, health and employment. We are also developing a framework for quality jobs that includes levels of remuneration, risk of unemployment and working conditions.  In the PISA programme, which assesses students’ performance, we are incorporating social and emotional skills.  We are also incorporating complexity theories into our economic thinking and bringing the findings of behavioural studies to design better policies. We hope that all these tools will help us get away from flawed notions of self-equilibrium forces in  market economies, or representative agents.

But we are also calling economist to make use of other less “quantitative” sciences, like history, sociology, psychology to better inform their decisions or the advice which they provide to policymakers.

Let’s bring these elements back to the table. But also bring back common sense. Bring back the realisation that our models do not have all the answers, and nor should they. Bring back the conviction that we may be wrong in our assumptions and that our decisions always have high levels of uncertainty and, maybe even, mistakes. Only when we are not so sure about ourselves may we make room to be more open, to learn from others, and to do better over time. The current context demands this. Our children will be grateful, and the world may be a more liveable place.

http://www.warwickeconomicssummit.com/news/announced-gabriela-ramos-1

 

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The Role of the Insurance Sector in a Climate Change Agreement

Joint Geneva Association and OECD Conference on Climate Change and the Insurance Sector, Opening address by Gabriela Ramos OECD Chief of Staff, G20 Sherpa and Special Counsellor to the Secretary-General

This special session of the OECD Insurance and Private Pensions Committee was organised at a critical juncture—as negotiators at COP 21 worked towards achieving an agreement to get us on a 2 degree pathway. The financial sector is coming to the forefront of managing the uncertainty of, transition to, and adaptation to climate change.

The insurance and reinsurance sector plays a critical role in managing the financial impacts of disasters by absorbing some of the losses and providing relatively quick access to funding for recovery. Countries with mature insurance markets recover much faster and more efficiently when struck by a disaster. Insurance can also play a critical role in incentivising the reduction of risks. However, these important market functions are significantly underutilised. Between 2005 and 2014, insurance covered only 51 per cent of all losses from meteorological and hydrological disasters in high-income countries, and less than 10 per cent of losses in developing countries. Closing this “financial protection” gap will only become more challenging in the context of a changing climate. In this context, policymakers and regulators have a critical role to play in ensuring that insurance sector policy supports the capacity of insurance and capital markets to absorb increasing disaster losses and addresses the market failure that occurs where insurance premiums are beyond the ability of large parts of the population to pay.

Insurance companies also have a key role to play through their investment decisions. Insurance companies alone represent over USD 28 trillion in assets under management. The transition to a low carbon economy will require trillions in investment into infrastructure—much of which will need to come from private sources. A number of insurance companies have made significant commitments to support this transition to a low carbon economy, through investments in green bonds, renewable energy projects, and energy efficiency. These investments can be viewed as a “climate hedge” given the potential of assets dependent on fossil fuel extraction and consumption becoming stranded assets, and will likely increase going forward. Government policies can play a central role in influencing how this private capital is mobilised and shifted, for example by improving the scope and consistency of disclosure on climate change risks and providing further guidance on how institutional investors can best take into consideration the impact of climate change on their investments, as part of their broader fiduciary duties.

The Insurance and Private Pensions Committee brings together officials from OECD members and key partners, enabling discussions on the implications of climate change in such important and relevant areas. I hope that this will be the beginning of active discussions on climate change in this Committee.

December 3, 2015