The OECD’s Positive Peer Pressure

By Martin S. Edwards

SOUTH ORANGE, NEW JERSEY – If an international organization made recommendations for improving a country’s economy, and the country adopted fewer than half of them, the organization might seem like a failure. But an international organization should be judged according to the quality of the information and advice that it provides, not by whether governments listen. Indeed, measuring its success solely on the basis of compliance ignores the purpose: to encourage – and facilitate – reform by informing officials about its costs and benefits.

Every 18 months, the Organization for Economic Cooperation and Development releases an economic survey of each of its 34 member countries, including a list of previous recommendations and their implementation status. In its 2010 survey of the United States, the OECD made 29 recommendations, from rebuilding the national electricity grid to expanding health-care coverage to implementing a cap-and-trade scheme. But, according to its latest US survey, only 14 recommendations have been adopted.

This pattern is not unique to the US. According to a recent report that evaluated OECD surveillance in 24 randomly selected member countries, 52% of the OECD’s economic recommendations are adopted – a level of adoption that is consistent over time and across different types of issues.

Unlike the International Monetary Fund, which can deny member countries access to loans if its conditions are not met, the OECD is not designed to enforce its advice. While some of the OECD’s recommended reforms, such as in trade policy, directly affect other countries, most are largely domestic in focus, addressing such issues as education and health care. Without external pressure, policymakers lack incentive to undertake difficult reforms, making a high degree of reform implementation unlikely.

But peer review, a mechanism of multilateral surveillance employed by the OECD, can help to offset this tendency. OECD policy prescriptions are supported by macroeconomic analysis of a country in the context of the global economy. The US Economic Survey was discussed, defended, and debated among representatives of the OECD and its member countries, and other countries’ experiences informed the OECD’s policy recommendations for the US.

By measuring countries in relation to each other, rather than according to an “optimal” economic standard, the peer-review mechanism helps to improve understanding of a problem’s scope, thereby enabling a more productive debate about how to solve it. For example, the recent US survey found that America has the fourth-highest level of income inequality among OECD countries, after Chile, Mexico, and Turkey.

Establishing such international benchmarks can help to elevate discussion from whether a problem exists to which policies could redress it. Given that politicians often prefer to avoid such comparisons in order to control public debate, OECD surveillance and benchmarking is valuable in building support for reforms.

For example, while the OECD report lauds the US for extending unemployment benefits, it notes that other countries rely far more on active labor-market policies. Because a significant share of US unemployment is structural (resulting from a mismatch between labor-market demand and workers’ skills), the OECD recommends that the government devote more resources to providing job-search assistance and training for unemployed workers.

Likewise, the report recommends ways to ensure that US high-school students gain the skills that they need by discussing the strengths of the German and Swiss secondary-education systems, which include strong vocational-training components. Investing in training and education to raise the workforce’s skill level would help not only to reduce unemployment, but also to ameliorate inequality in the long-term.

Economic reforms create winners and losers, so it requires hard choices. Understanding the challenges that such reforms pose is crucial to understanding the value of OECD surveillance. In short, it helps politicians to do their jobs better.

Indeed, through peer review, the OECD helps policymakers to understand the magnitude of the problems that they face, and to outline possible solutions. Armed with this information, officials can assess the costs and benefits of potential reforms. Far from being a threat to national sovereignty, effectively implemented international economic surveillance can strengthen governments and improve their citizens’ lives.©

 Martin S. Edwards is an associate professor at the John C. Whitehead School of Diplomacy at Seton Hall University.

Copyright: Project Syndicate, 2012. 
http://www.project-syndicate.org

 

 

 

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