In Tax, Gender Blind is not Gender Neutral: why tax policy responses to COVID-19 must consider women

In Tax, Gender Blind is not
Gender   Neutral:   why  tax
policy responses to COVID-19
must consider women
by Michelle Harding, Grace Perez-Navarro, and Hannah Simon,
OECD Centre for Tax Policy and Administration (CTPA)

Women are at the core of the fight against the COVID-19
crisis: they make up the vast majority of healthcare workers
and shoulder much of the childcare and home schooling burden
during lockdowns. And while tax policy measures play a crucial
role in supporting individuals and businesses as we navigate
this crisis, the gender impact of taxation is often overlooked
– with serious consequences for gender equality.

Gender equality is a fundamental human right, as laid out in
the UN’s Sustainable Development Goal #5, and failing to
achieve it costs us up to 16% of world income every year. Yet,
in the context of government revenue collection, gender
balance is often neglected as a policy rationale. Could it be
that there simply is no need to assess the interaction of tax
and gender, or have gender imbalances in tax systems so far
been overlooked? And what does this mean for policy-makers in
the face of Covid-19?

Gender blind or gender neutral?

The   good   news   first:   tax   provisions   that   explicitly

disadvantage women relative to men are rare, although they
used to be more common. Historically, married men in the
Netherlands for example, were granted a higher income tax-free
allowance than married women (until 1984). Meanwhile, on the
Island of Jersey, married women will continue to need their
husbands’ permission to talk to tax authorities and to file
taxes under their own name until a new law comes into force in
2021.

While examples of explicit bias are rare, this does not mean
that our tax systems do not affect men and women differently.
Tax systems that are gender-blind on paper can, in practice,
exhibit a hidden, implicit bias and may even exacerbate gender
inequalities, particularly in times of crises. As long as men
and women face different socioeconomic realities, tax systems
will affect them in different ways. Therefore, it is necessary
to go beyond a cursory analysis of the tax law and to
understand how it interacts with the different socioeconomic
realities of men and women – such as persisting gender gaps in
income levels, labour-force participation, consumption,
entrepreneurship and wealth.

The hidden impacts of taxation are most visible in personal
income taxation. Although men and women are typically taxed
under the same rules, their different income levels and labour
force participation characteristics mean that the impact of
the tax system can be far from neutral.

In more than two-thirds of OECD countries, second-earners face
a disproportionately high tax burden when entering the
workforce. Compared to a single worker at the same level of
income, second earners face higher average tax rates, meaning
that, due to family-based taxation and reductions in dependent
spouse credits, their household income increases less for

every dollar earned. In the nine OECD countries with family-
based taxation, the net personal average tax rate of second
earners is 40%, meaning that they take home only 60% of their
gross wage – seven percentage points less than a single
individual at the same wage level.

This – alongside various other factors that influence the
decision of individuals to enter (or re-enter) the workforce,
such as educational level or the availability of childcare –
reduces the incentives for second earners to work. And given
that a large majority of second earners are female, it is
mostly women that face this disincentive.

Add consumption taxes to the picture and this disincentive is
exacerbated. Consumption taxes on services such as cleaning
and childcare make it more attractive to produce these
services at home rather than buying them on the market,
especially for low-income households. This further decreases
the (predominantly female) second-earner labour supply.

Consumption taxes can also directly affect the distribution of
income between men and women due to gendered differences in
consumption patterns, but these are harder to infer.

COVID-19 amplifies these dynamics by increasing women’s unpaid
work burdens and by destabilizing the labour market.
Widespread closure of schools and childcare facilities and
other confinement measures will increase the time that parents
have to spend on childcare and home schooling as well as on
routine housework such as shopping, cooking and cleaning –
much of which is likely to fall on women. Fulfilling these
demands will be difficult for many parents, especially for
dual-earner households, which increases the risk of second-
earner women to leave the workforce.

In addition, men and women typically exhibit differences in
employment patterns: in OECD countries, men are
overrepresented among the self-employed, while female
employees are, on average, almost three times more likely to
work part-time. These non-standard workers are among the most
vulnerable during the current crisis, facing higher risks of
job or income loss, and often fall outside of standard safety
nets. This makes fair taxation of different employment forms
as well as increased access to out-of-work benefits for non-
standard workers – which some countries have temporarily
introduced in response to the current crisis – a key dimension
of gender balance.

In developing countries, the challenge is magnified by large
degrees of informality and limited fiscal space. With the
majority of female workers in informal employment, lockdown
measures and the resulting economic hardship pose an acute
threat to women’s livelihoods, and a focus on officially
labeled taxes does not fully capture the complex linkages

between gender and taxation. User fees and informal taxes,
often used to finance basic goods such as education,
healthcare and water, can impose a significant financial
burden on households and can discourage low-income individuals
from accessing healthcare, which is particularly problematic
in the midst of a pandemic.

During the Ebola epidemic in West Africa, donor money shifted
to the most urgent humanitarian and public health needs and
away from financing local public goods and services, such as
schools, teachers and water wells. A similar shift in donor
money during the current crisis would increase the financial
burden on individuals and communities in funding these goods
and services, which is likely to reinforce unequal societal
practices: if schooling is too costly, girls are the first to
stay home, particularly during times of extreme economic
hardship.

“This is not the last pandemic we’re going to have”, said
Ngozi Okonjo-Iweala, who previously served as Nigeria’s
minister for both finance and foreign affairs and is one of
the governing board members of the OECD-UNDP TIWB programme.
“We had better make sure that those at the bottom of the
ladder are not pushed further back. That inequality is not
exacerbated”, she added in a recent interview with TIMES.

How can governments address gender differences in their tax
systems?

Government spending programmes and tax policy measures play a
central role in supporting individuals and businesses as we
navigate and exit this crisis. However, as the Finnish Prime
Minister Sanna Marin said at the World Economic Forum in Davos

earlier this year, gender equality “just doesn’t happen by
itself”.

To ensure that the tax system does not inadvertently reinforce
gender biases in society, governments need to include the
impact of taxes on gender as a key policy dimension in their
tax policy responses to COVID-19. Improving data on the impact
of COVID-19 on women as well as on previously unexplored
dimensions such as intra-household dynamics, asset ownership
and corporate participation will be crucial to understand
these impacts.

To address the complex interactions of tax and gender,
governments will need to consider options to redesign key
taxes to avoid exacerbating existing gender differences, or
use tax or other instruments to compensate for differences in
income levels as part of their long-term response to the
crisis. When it       comes   to    tax   and   gender,   let’s
#BuildBackBetter!

For more information, please see:

Milanez, A. and B. Bratta (2019), Taxation and the future of
work: How tax systems influence choice of employment form,
OECD Taxation Working Papers, No. 41, OECD Publishing, Paris.

OECD (2020a), Emergency tax policy responses to the Covid-19
pandemic, Updated 20 March, OECD, Paris.

OECD (2020b), Tax and Fiscal Policy in Response to the
Coronavirus Crisis: Strengthening Confidence and Resilience,

OECD, Paris.

OECD (2020c), Women at the core of the fight against COVID-19
crisis, OECD, Paris.

Saint-Amans, P. (2020), Tax in the time of COVID-19, 23 March
2020 on The Forum Network

Covid-19 as a wake-up call:
Three considerations going
forward
by Philippe Aghion, Collège de France, drafted by Shashwat
Koirala, OECD Economics Department

As a part of the Chief Economist Talks series, the OECD hosted
Philippe Aghion, Collège de France on May 11, 2020. This blog
presents the takeaways from his presentation. More information
regarding the OECD’s Chief Economist Talks, including previous
speakers, can be found here.

COVID-19 has prompted many difficult questions, chief among
which is how we should re-envision the world after the crisis.
This pandemic has revealed the shortcomings of our current
social, economic and political systems, and addressing these
will be central to rebuilding the post-coronavirus society.

Notably, there are three, albeit non-exhaustive, areas that
merit reflection: trade and value chains, social and health
insurance, and civil society and trust.

Trade and value chains

Although COVID-19 has incited criticisms against the
international trading and production systems, there is
evidence that trade has actually helped mitigate the crisis
and may even help countries exit and recover quicker. For
example, preliminary estimates suggest that, on average,
countries that are net exporters have lower daily cumulative
deaths. The cases of France and Germany are also revealing, as
the differences in medical capacity between the two countries
mirror their divergence in trade. Whereas Germany entered the
crisis with high medical capacity (e.g. 25 000 hospital beds
with respirators) and was able to test on a large scale (e.g.
500 000 tests per week), France had much smaller capacity
(e.g. 5 000 hospital beds with respirators) and was unable to
perform mass testing until recently. This was driven not by
any form of protectionism in Germany, but rather a consistent
growth in its trade of vital medical supplies, amounting to a
trade surplus today of over EUR 20 billion. Meanwhile, French
imports and exports of these goods have grown minimally since
2002 (see Figure 1).

However, there is some scope for domestic production in
strategic sectors to improve resilience to acute shocks.
Again, the differences in the value chains of French and
German firms for medical supplies are telling. Since 2000,
domestic production of pharmaceuticals in France has stagnated
while that in Germany has increased substantially.
Simultaneously, German asset holdings abroad (both in terms of
number of foreign affiliates and direct investment assets
abroad) in the pharmaceutical sector have remained flat over
time while those of French firms have grown markedly. Given
France’s lower medical capacity at the onset of the pandemic,
this raises the question of whether French firms outsourced
excessively, and whether policies are needed to maintain
domestic reserves in strategic sectors. This does not,
however, suggest that massive re-shoring of production is
needed, but rather that policies concerning the storage of
vital goods and investment in domestic industries could be
warranted. These include policies to boost investment in
automation/robotisation, which generate cost savings for firms
and provide incentives to re-shore some production (Kilic &
Marin, 2020).

Social and health insurance

COVID-19 has also elucidated the importance of social safety
nets to protect against unexpected shocks and their adverse
impacts on employment, health, and poverty. Social protection
mechanisms tend to vary by country. A clear dichotomy is
apparent between the United States and Germany, even prior to
the crisis, as the former is much less protective than the
latter. This is reflected in outcome indicators such as the
Gini index for inequality (0.39 in the U.S. vs. 0.289 in
Germany) and the poverty rate (0.178 in the U.S. vs. 0.104 in
Germany).[1]

These differences in social protection systems have been made
abundantly clear by the crisis. Forecasts show that the
unemployment rate in the United States is set to jump sharply
in 2020, compared to a much smaller increase in Germany
(Figure 2). Furthermore, empirical estimates extrapolating
from past relationships between unemployment and poverty risk
and healthcare coverage indicate a substantial increase in
2020 in the share of uninsured population in the United
States, owing to the bundling of health insurance with
employment, as well as in the percentage of population at risk
of poverty. In Germany, no such increase is evident. These
differences hold even when comparing the United States with
other European countries, such as France, Italy, Spain, and
the U.K.

What this data reveals is that the American system has less
social protection relative to Europe. This lack of protection
increases the vulnerability of its citizens, especially in
times of crises. There is, thus, a need to reform the American
social insurance system to incorporate more safeguards. Doing
so is not only key for social wellbeing, but also can foster

the innovation that is often considered the hallmark of
American capitalism, for example by boosting education and
quality of work.

Trust and civil society

COVID-19 has revealed the extent to which society rests on a
bedrock of trust and social norms, for which civil society is
indispensable. Practices used to limit the spread of the virus
include many voluntary actions that are dependant on mutual
trust and respect. Countries that were most successful in
limiting the spread of the virus, such as Germany and South
Korea, have civil society systems that played an important
role in instilling self-discipline and civic spirit needed for
the implementation of measures like large-scale social
distancing. While market incentives and government actions are
important elements of addressing the pandemic, they alone
cannot prevail without a fundament role for civil society and
the values of community, fairness, and reciprocity that it
promotes (Bowles & Carlin, 2020).

The importance of civil society should be well-reflected in
how we address future problems and make policy decisions.
Existing research already shows that too much government
coercion engenders distrust. For example, on average,
countries with higher levels of regulation for firm entry,
rigidity of employment, and court formalism show higher levels
of distrust (Aghion, Algan, Cahuc, & Shleifer, 2009). This
suggests an important role for social dialogue in decision-
making. Moreover, decentralised decision-making and effective
coordination between local and central governments may also
help promote civil society and trust, especially as trust
tends to be higher at lower levels of government.

As countries begin to emerge from stringent containment
measures and chart a path to recovery, it is important to
address some of the underlying lessons that COVID-19 has
highlighted. First, turning inward towards protectionism is
not the answer; on the contrary, this may have worsened the
crisis and slowed the recovery. However, domestic reserves in
strategic sectors may be justified. Second, social safety nets
are indispensable in protecting and safeguarding against
downturns and hence, should be bolstered. Finally, while
governments and markets are important elements of society,
civil society should not be overlooked, as strong civil
society systems are needed to foster cohesion and trust, which
can help navigate shocks like this pandemic.

Bibliography

Aghion, P., Algan, Y., Cahuc, P., & Shleifer, A. (2009).
Regulation and distrust. NBER.

Bowles, S., & Carlin, W. (2020). The coming battle for the

COVID-19 narrative. VoxEU.

Kilic, K., & Marin, D. (2020). How COVID-19 is transforming
the world economy. VoxEU.

[1] Data for 2017.

Alberto Alesina – a global
talent who never forgot Italy
by Vincenzo Galasso, Andrea Goldstein and Giuseppe Nicoletti

A professor in the United States since 1987, first at Carnegie
Mellon for less than a year and then at Harvard, where he had
obtained his doctorate just two years earlier, Alberto Alesina
was first of all a world-renowned economist whose writings
have collected more than 120,000 quotes (google scholar). But
he also maintained close professional and intellectual ties
with Italy and with Italian economists.

The list of Alesina’s Italian co-authors is very long. Of his
142 articles published in academic journals since the first —
which he published before graduating in Economia pubblica in
1980 – more than half are the result of collaboration with

other Italian economists, including many doctoral students,
such as Silvia Ardagna, Eliana La Ferrara, Enrico Spolaore and
Francesco Trebbi. All of them are Bocconi alumni, as were
other co-authors – for example Carlo Favero, Paola Giuliano,
Vittorio Grilli, Andrea Ichino, Roberto Perotti and Paolo
Pinotti – not forgetting of course Francesco Giavazzi and
Guido Tabellini who have been teaching in Bocconi for years.
Alesina returned regularly to the alma mater, being since 1993
a fellow of IGIER (Innocenzo Gasparini Institute for Economic
Research), the centre established in 1990 to contain the
“brain drain” and bring to Italy economists from all over the
world. During the seminars held in Bocconi it was common to
listen to his comments, witty, funny and always constructive –
especially towards PhD students and young colleagues.

Overall, 42 Italian economists have published with Alesina in
40 years, most of them spent overseas. His latest book,
Austerity: When It Works and When It Doesn’t, winner of the
prestigious Hayek Book Prize from the Manhattan Institute just
a week ago, is also the result of collaboration with Favero
and Giavazzi. With the latter, Alesina has written 137
editorials in Corriere della Sera since 2011, spanning a
variety of themes, always with a strong penchant for
provocation, but always with a constructive spirit – “in the
interest of the citizens”, as his last contribution, which
appeared on May 10th, was titled.

As Silvia Ardagna and Eliana La Ferrara have recalled on il
Sole24Ore, his intellectual curiosity pushed him on many
different frontlines, from macro-economics to inequality,
social capital and culture. But his main field remained
political economics: the study of the economic and political
motivations that underlie the behaviour of decision-makers
(ministers, governments, parliaments, central banks) and their
public policy choices. A new strand of economic science that

he and other scholars had helped to create. When the Swedish
Academy decides that it is time to award the Nobel Prize in
Economics to political economics scholars, it will be very
strange not to see his name among the winners.

His interest in Italian affairs was reflected in many of his
scientific works dealing with general economic issues, but of
great relevance to Italy: from public debt to austerity
policies, from bureaucracy to the impact of family ties on the
functioning of the labour market and gender gaps. During the
meetings of the NBER (National Bureau of Economic Research)
Political Economy group in Boston, he liked to point out that
it was no coincidence that so many political economists were
Italian. Researchers love to study what doesn’t work, and in
Italy the relationship between politics and economics has not
been smoothly functioning.

Alesina transferred his ideas into the public debate through
his editorials (often with Francesco Giavazzi) and his books.
Editorials sometimes lashing, never trivial, that generally
requested a change of direction to Italian politics often
accused of too timid an approach when it comes to economic
reforms. To a country historically reluctant to fully accept
the rules of the market, he never stopped reminding, in both
scientific research and newspaper columns, the importance of
healthy competition among firms for promoting investment and
growth. He advocated the need for more competition as well for
a simplification in public administration and regulation,
especially in traditionally protected sectors of the Italian
economy, such as public services and liberal professions,
where the productivity gap vis-à-vis other countries bears on
Italian relative performance. Competition always invoked by
those who try to understand the root causes of the Italian
evil and often disregarded by Italian policy-makers, as in the
case of Law 99 of 2009 that requires the government to propose

every year to Parliament measures aimed at promoting it. A
provision first complied with six years after its approval and
then immediately forgotten, Alesina and Giavazzi wrote on July
10, 2017.

Europe and the Euro were also enticing topics for Alesina, who
in 2010, together with Giavazzi, had edited a NBER volume for
the ten years of the common currency. In quiet times, they
argued, the benefits (and costs) of the euro are important.
But during a crisis, the benefits appear magnified. Words that
still sound very current today.

Alberto Alesina’s biography is an example of how it is often
sterile to talk about brain drain and brain gain, when in fact
the circulation of talents can enrich nations and make sense
of globalization.

* This is the English translation of “Alesina, l’economista di
Harvard che non perse mai di vista l’Italia”, Il Sole 24 Ore,
26 May 2020.

The OECD COVID-19 Policy
Tracker: What are governments
doing   to  deal   with   the

COVID-19 pandemic?
by Tim Bulman and Shashwat Koirala

Governments have implemented an extraordinary range of new
policy measures to tackle the health and economic consequences
of the COVID-19 pandemic, including actions to stop the
virus’s spread, to bolster health systems, to support economic
activity and livelihoods, and to protect the vulnerable. To
identify effective policies to fight the pandemic,
policymakers and researchers need to share experiences and
learn from each other.

The OECD COVID-19 Policy Tracker is a centralised database of
government responses to the different dimensions of the
COVID-19 crisis, compiled and verified by OECD country
experts. Covering over 90 countries, across all continents and
income levels, the Tracker summarises each country’s
containment and health measures, fiscal responses, monetary
and macro-prudential mechanisms, and structural policies. It
also links to highly granular information on countries’
responses pertaining to tax policy, social, employment and
income policies, policies in support of small and medium-sized
enterprises, and health technology policy. The Tracker is
updated daily to capture the evolving nature of the crisis. To
facilitate empirical analysis of the impact of the pandemic,
users will soon be able to access a time-series of countries’
responses, and assess the policies in place on different
dates.

This blog post presents some of the Tracker’s insights into
how OECD and G20 countries are responding to the COVID-19

crisis.

Support for the health sector

Governments have taken substantial steps to strengthen the
capacity of the health sector. Many countries have boosted
health funding to cover the costs of increased staffing needs,
vital medical infrastructure (e.g. hospitals, ventilators,
beds, etc.) and safety equipment (e.g. personal protective
equipment). For example, Italy has devoted EUR 845 million to
recruit 20 000 health care workers and allocated additional
funding to produce and procure necessary equipment.

To give their health workforce more flexibility, governments
have also relaxed or eliminated certain rules, regulations and
administrative procedures. In Denmark and France, working time
rules and overtime caps for healthcare employees have been
relaxed while in the United States and Brazil, regulatory
barriers to telemedicine have been removed to facilitate
remote consultations. Meanwhile, Argentina and New Zealand
have eased import procedures by temporarily reducing import
duties and tariffs on medical supplies.

In addition to these instruments, countries have deferred non-
essential medical services, promoted research and development
of innovative medical equipment (e.g. affordable ventilators),
vaccines, treatments and testing-kits, and compenseted medical
workers through bonuses or salary increases. Though generally
not considered to be good practice, some governments have also
imposed restrictions, such as export bans, to preserve access
to vital medical supplies.

Containment measures

Containment measures aim to limit human interaction through
confinement or stay-at-home orders, school closures, and
restrictions on international and/or within-country travel.
These measures vary in intensity across countries (Figure 1).
One-fourth of OECD and G20 countries, covering about 558
million people[1], have instituted nation-wide lockdowns,
affecting many but not all groups or regions. Forty-one
percent have implemented more moderate confinement measures;
many areas or population groups in these countries are
restricted, but there are broad exceptions. These countries
account for about 2.6 billion people.[2] Meanwhile, only a few
countries (11%), with roughly 73 million people, have
refrained from or no longer have confinement measures.

Countries’ travel restrictions and school closures policies
also vary. In 21% of countries, totalling almost 1.9 billion
people[3], both international travel and movement within the
country are severely restricted. A larger share (53%) have
only imposed restrictions on all international arrivals, while
allowing internal movement to continue. These countries cover
a comparatively smaller number of people (approximately 1
billion). Likewise, whereas schools are completely closed in
25% of countries, some (16%) have kept physical sites open for
targeted groups, such as children of essential workers.
Nevertheless, these two groups of countries encompass a
similar number of people (about 1.7 billion and 1.8 billion
respectively[4]).

Certain countries have also started lifting their containment
measures (e.g. Austria, Spain, and Germany) and have indicated
timelines for further easing in the future. As the stringency
of containment measures changes across countries, the Tracker

is updated accordingly.

Fiscal and monetary policy responses

The containment measures, in conjunction with people’s
anxieties about the virus, have brought economic activity to a
standstill, inducing estimated output and consumption
decreases in many countries of 20-25% and 33% respectively
(OECD, 2020[1]), as well as severe income losses for firms and
households. To address this, governments have implemented
expansionary fiscal policies (Figure 2). The most common

schemes are deferral mechanisms for tax or social security
contribution payments (96%), credit subsidies (including
credit guarantees) for firms (93%), and expanded unemployment
income support programs for households (91%). Nearly half of
the countries have also introduced targetted support –
financial and otherwise – for vulnerable segments of their
population (e.g. elderly, low-income, migrant workers,
informal workers, etc.). For example, Spain has put in place a
special program to provide housing to victims of gender
violence.

Countries have also eased their monetary policies and macro-
prudential regulations to ensure that there is sufficient
liquidity in the economy. Common monetary instruments include
the reduction of policy rates and large-scale asset purchases
by central banks. For example, the United States Federal
Reserve has lowered its interest rates by 100 basis points to
0-0.25% and resumed large-scale asset purchases of treasury
securities, agency mortgage-backed securities, as well as

assets backed by student, car, credit card and small business
loans. Similarly, the Bank of England has reduced its policy
rate to 0.15% and increased its holding of UK government and
corporate bonds by GBP 200 billion.

In terms of macro-prudential regulations, many central banks
and financial regulators have reduced reserve and/or capital
requirements for banks. The European Central Bank has allowed
banks that it supervises to temporarily operate at lower
capital levels. Many Eurozone countries have supplemented the
ECB’s responses through additional actions at the national
level. The French High Council for Financial Stability, for
example, has released all banks’ from its countercyclical
capital buffer.

Given the extraordinary burden of the COVID-19 pandemic on
socio-economic systems, many countries are also reaching to
tools beyond fiscal and monetary measures, towards sharing the
burden across the private sector. This includes payment
holidays affecting private transactions between firms and/or
households, such as rent freezes or reductions, mortgage
deferrals, and exemptions from utility payments.

Tracking policies to launch the recovery

As governments relax restrictions, the goal of policy
responses will shift from bridging the crisis to the recovery.
To launch sustained and inclusive recoveries, governments will
need to transition from broad economic support mechanisms to
targeted initiatives that buttress demand while helping people
to find new jobs, viable firms to restructure, and new
businesses to emerge and grow. The Tracker will continue to
report structural policies implemented by countries in

response to the COVID-19 crisis, such as strengthening safety
nets, upgrading skills, raising the effectiveness of public
administration, leveraging the benefits of digitalisation, and
supporting investment for green growth.

Forthcoming OECD Ecoscope blog posts will present further
policy insights from the Tracker that can help countries
tackle the COVID 19 crisis and prepare the recovery.

References

OECD (2020), Evaluating the initial impact of COVID-19
containment       measures     on    economic      activity,
https://read.oecd-ilibrary.org/view/?ref=126_126496-evgsi2gmqj
&title=Evaluating_the_initial_impact_of_COVID-19_containment_m
easures_on_economic_activity.         [1]

OECD (2020), Tackling coronavirus (COVID 19): Contributing to
a global effort, http://www.oecd.org/coronavirus/en/.    [2]

[1] All population figures are based on country populations
for 2019. The sample includes China (about 1.40 billion
people) and India (about 1.33 billion people), which helps
explain the large number of people covered by the level of
containment measures to which these countries correspond.
Total population for all OECD and G20 countries is about 4.86
billion.

[2] These countries include India.

[3] These countries include India.

[4] Former includes India and the latter includes China.

Green swans: climate change
risks, central banking and
financial stability
by Luiz Awazu Pereira da Silva, Bank of International
Settlements, drafted by Shashwat Koirala, OECD Economics
Department

The Chief Economist Talks are part of the OECD’s high-level
distinguished speaker series in which global economic leaders,
top thinkers and decision makers are invited to discuss their
perspectives on the world economy with the OECD Chief
Economist. The talks aim to foster learning and inspiration
and provoke meaningful discussions. Previous speakers have
included: Claudio Borio (BIS), Peter Praet (ECB), Maurice
Obstfeld (IMF), Penny Goldberg (World Bank), Debora Revoltella
(EIB), Hal Varian (Google), Sergei Guriev (EBRD), Stefanie
Stantcheva (Harvard), Emmanuel Moulin (Ministry of Economy and
Finance, France), Philipp Steinberg (Ministry of Economic
Affairs and Energy, Germany), and Jean Pisani-Ferry and George
Papakonstantinou (EUI). Participation in these events are by

invitation only and are aimed at OECD staff and the OECD
Ambassadors and delegations. They are not open to the press.

On April 23, 2020, the OECD hosted Luiz Awazu Pereira da
Silva, Deputy General Manager, Bank of International
Settlements, to discuss his work on the challenges posed by
climate change to financial stability, drawing on his co-
authored book, “The green swan: Central banking and financial
stability in the age of climate change”. This blog presents
key takeaways from his talk.

The unprecedented challenge posed by climate change is well
documented. The rising concentration of greenhouse gases in
the atmosphere has profound environmental impacts (e.g. rising
sea levels, extreme temperature events, etc.) that threaten
the delicate balance of the planet’s natural systems. The
human and societal consequences of the climate emergency are
also massive, as environmental damages can exacerbate
inequalities, food and water insecurity, and conflicts.
Accounting for climate-related risks is, thus, indispensable
for building resilient socio-economic-ecological systems.

There is an emerging recognition among central banks and
financial regulators that climate-related risks are also a
source of price and financial instability, and that there is a
need to safeguard the financial system against these risks.
This is complicated by a paradoxical tension between physical
climate risks and transition risks. For example, on one hand,
inaction towards the climate crisis means that climate-related
accidents become more frequent and severe, threatening socio-
economic systems and financial stability (i.e. physical
risks). On the other hand, a rapid and aggressive
decarbonisation effort can lead to sudden asset repricing
(i.e. transition risks). This tension epitomises the fact that

climate-related risks are transmitted through complex and
inter-connected channels and have cascade effects. Treating
these risks requires a departure from status quo thinking, as
outlined by the following four key ideas.

First, while similar in some respects to “black swans”– highly
unexpected events with severe far-reaching consequences (e.g.
2008 U.S. housing market crash) that can be best explained ex
post – climate-related risks are distinct. They are not tail-
risk events; scientific evidence suggests that climate-related
shocks are virtually certain to occur, though the exact timing
of these events is uncertain. Since the climate crisis poses
an existential threat to humanity, climate-related risks are
also more catastrophic than traditional systemic financial
risks. Finally, as alluded to earlier, climate-related risks
are much more complex. They are propagated non-linearly with
destructive feedback loops and can cascade across sectors,
countries and systems (see Figure 1 for a representation of
chain reactions stemming from climate-related risks). Taking
inspiration from the “black swan” moniker, climate-related
events are termed “green swans”.

Second, a methodological shift in macroeconomic-climate
modelling is required to better understand green swan events,
and how they emerge, accumulate and cascade. Backward-looking
and deterministic approaches (e.g. vector autoregressive
models) that extrapolate historical trends do not suffice in
capturing the complexity and radical uncertainty of climate-
risks. Even current scenario-based forward-looking risks
assessment mechanisms are unable to completely incorporate the
broad range of chain-reactions associated with climate change.
This, in tandem with the fact that these approaches lack
granularity and there is uncertainty regarding approaches to
climate-change mitigation, means that the current paradigm of
models cannot fully elucidate the potential macroeconomic,
sectoral and firm-level repercussions of climate change. Thus,
an exploration of alternative approaches is needed, such as
non-equilibrium models (instead of more sophisticated dynamic
stochastic general equilibrium models), sensitivity analysis
with more complex scenarios, and studies specific to
countries, sectors and firms.

Third, given the intrinsic complexity of climate change,
international co-ordination and co-operation is vital. While
central banks play a critical role in mitigating climate-
related risks, they do not possess a silver bullet to do so by
themselves. Central banks and financial regulators have a role
to play in identifying and managing climate-risks (e.g.
integrating risks into prudential regulation), internalising
externalities (e.g. incorporating environmental, social and
governance considerations into their own portfolios), and
enabling structural low-carbon transitions (e.g. reforming the
international monetary and financial system). Nevertheless,
many tools, such as green fiscal policy and carbon pricing,
fall outside their purview, and uncoordinated actions from
central banks would be insufficient and could potentially have
unintended consequences. A systems-wide green transition
necessitates buy-in and action from all stakeholders (i.e.
governments, private sector, and civil society), and central
banks need to contribute to coordinate on climate change by
being more proactive on this front while continuing to fulfil
their financial stability mandate.

Fourth, it is important to acknowledge that green swans have a
tremendous negative redistributive impact, within and between
countries. Not only do the physical risks stemming from
climate change predominately affect lower-income countries,
but also the costs of adaptation to climate-change (e.g. shift
away from carbon-intensive industries) are higher for poorer
households. This means that addressing climate change requires
scaled-up mechanisms for redistribution and a redesign of
societal safety nets and efforts to finance the green
transition of low-income countries. Otherwise, a society-wide
acceptance of actions on climate change will prove elusive.

The ecological and environmental stability of the planet is a
prerequisite for price and financial stability. So, for

central banks to fulfil their central mandate, they have an
important role in contributing to a systems-wide climate-
change effort. In a nutshell, this involves identifying and
communicating the risks ahead, calling for bold actions from
all stakeholders to ensure the resilience of the earth’s
socio-ecological systems, and helping manage the risks within
the bounds of their mandate.

Bibliography

Bolton, P., Despres, M., Pereira da Silva, L. A., Samana, F.,
& Svartzman, R. (2020). The green swan: Central banking and
financial stability in the age of climate change. Bank for
International Settlements.

The COVID-19 crisis creates
an opportunity to step up
digitalisation         among
subnational governments
By Luiz de Mello, OECD, and Teresa Ter-Minassian, OECD Fiscal
Network

Recent decades have seen rapid growth of advanced digital
technologies, including high-speed computing, big data,
artificial intelligence, the internet-of-things and

blockchain. This “digital revolution” creates significant
opportunities for all levels of government to improve the
delivery of public goods and services, and to raise more and
better revenue.

This is particularly important in the context of the COVID-19
crisis. Fighting a pandemic while minimising the associated
economic costs calls for appropriate digital infrastructure
for the design and enforcement of containment measures, as
well as to ensure access by the population and enterprises to
critical government services. After all, subnational
governments (SNGs) account for about 40% of government
spending on average in OECD countries; they also play an
important role in the delivery of key services that are at the
heart of the policy actions being taken to slow the spread of
the pandemic, including on health care and social protection.

Much of the literature has focused so far on the scope for
advanced digitalisation at the central/federal level of
government. In a recent OECD paper, de Mello and Ter-Minassian
(2020) focus on the opportunities and challenges that
digitalisation creates for SNGs.

Advanced digital technologies can help improve the quality and
efficiency of subnational programmes. Geographic information
systems (GIS) are being used to identify potential
environmental and health risks, which is important when it
comes to controlling the spread of a pandemic and avoiding its
recurrence. Of particular interest is the use of sensors, to
control road and railway traffic, maintain regional or local
infrastructure, and monitor water and sanitation usage, just
to cite a few. Digital portals facilitate SNGs’ communication
with their populations and the delivery of certain public
services, and well-designed information systems can strengthen

all aspects of subnational public financial management, and
facilitate subnational transparency and accountability.

At the same time, regional and local governments are having to
operate digitally in periods of confinement and to broaden the
range of services provided on-line to the population,
including in some cases in the area of e-health. The case of
testing, tracing and tracking through digital devices to
contain the spread of COVID-19 is a case in point, where the
local governments are in many cases actively involved in these
efforts, and privacy/confidentiality concerns are prompting
important debates among policymakers.

Digitalisation can also help to improve both shared and own
subnational revenues. This is particularly important to
prepare governments to restore the sustainability of the
public finances, once the post-COVID-19 recovery has been
firmly established. Especially promising are possibilities to
introduce, or strengthen, the enforcement of consumption
taxes, regional personal income taxes (PITs), or regional
surcharges on national PITs; make more efficient and equitable
the administration of local property taxes; and better utilise
user fees for local services.

Digitalisation, however, also poses significant challenges for
SNGs, whose capacities to deal with such challenges vary
widely both across and within countries (see Figure). The most
important constraint in many SNGs is likely to be the scarcity
of requisite skills, not only in government leadership and
bureaucracy, but also across the population at large. Lack of
skills breeds, in turn, distrust and resistance to
digitalisation.

Other significant constraints can be posed by inadequate
physical infrastructure and financial resources to improve it.
Less recognized, but also important, can be legal or
regulatory constraints. Tackling cyber security risks, and
adequately addressing citizen’s privacy concerns constitute
further significant challenges.

These challenges in SNG digitalisation highlight the need for
a well-structured overall strategy beginning with a
stocktaking of the initial state of, and main obstacles to,
digitalisation. Within these constraints, SNGs need to define
priorities (e.g. which public services should be digitalised
first); identify needs for legal and organisational supporting
changes; define responsibilities for different tasks; set up
realistic timetables for implementation; appropriate the
necessary budgetary resources, and procure any needed skills
and materials; and closely monitor the implementation of the
strategy.

Early involvement of main stakeholders and clear communication
to the public at large of expected results, are essential for
securing citizens’ support for the digitalisation effort.

Moreover, co-operation among and within different levels of
government can play a significant role in supporting effective
and efficient digitalisation of SNGs. The case for support by
national government is made more compelling by the fact that
different SNGs are differently equipped to meet the challenges
of digitalisation. Smaller and poorer urban, and especially
remote, rural communities are more likely to suffer from skill
shortages, limited connectivity and scarcity of budgetary
resources.

Policy innovation is another important area for inter-
governmental co-operation in the digital sphere, with
considerable potential for SNGs to launch pilot programmes
that can be tested and subsequently taken up by other same-
level jurisdictions and/or up-scaled to other levels of
administration through gradual experimentation. The pandemic
is actually triggering a lot of promising innovation by SNGs
that can do much to improve their preparedness to deal with
future crises.

National governments can support subnational digitalisation
efforts. This can be achieved in particular through
appropriate reforms to intergovernmental fiscal relation
systems, including the assignment of own tax bases to SNGs;
greater clarity in the assignment of expenditure
responsibilities, and the implementation of equalization
transfers; by giving adequate weight to regional digital
inclusion in public investment choices; by defining
appropriate nation-wide standards to facilitate seamless
interfaces among the national and subnational digital systems;

and through technical assistance and training of subnational
officials.

There is also significant scope for horizontal co-operation
among SNGs. Peer support can include demonstration effects,
technical assistance and joint training of officials, as well
as effective interfaces among subnational digital systems in
areas of common interest. Dedicated forums for inter-regional
and inter-municipal dialogue on digitalisation issues,
possibly under the umbrella of broader horizontal co-operation
forums, can be instrumental in facilitating both the exchange
of experiences and consensus building on common digitalisation
issues.

The COVID-19 crisis provides an opportunity to step up the
digital transformation of SNGs given the need to act
steadfastly during the ongoing containment phase but also in
preparation for the post-crisis recovery. The lessons that are
emerging from the current experience, if put to good use, can
do much to make SNGs better equipped to cope with future
crises.

Reference

de Mello, L. and T. Ter-Minassian (2020), “Digitalisation
Challenges and Opportunities for Subnational Governments”,
OECD Working Papers on Fiscal Federalism, No. 31, OECD, Paris.

North    Korea    and                                  the
coronavirus pandemic
by Vincent Koen and Jinwoan Beom, Country Studies Branch, OECD
Economics Department

The COVID-19 epidemic started in Wuhan, China, but soon spread
across borders and became a pandemic on a scale not witnessed
since the 1918 flu pandemic. One of the countries most
directly exposed to the outbreak was North Korea, whose
economy is not as closed as the “Hermit State” moniker might
suggest, but highly dependent on China, as documented in the
OECD’s first study on North Korea.

The North Korean authorities acted swiftly: Air China flights
between Beijing and Pyongyang were suspended on 20 January and
so were national carrier Air Koryo flights soon thereafter and
Chinese tourism more generally – a major forex lifeline. On 21
January, North Korea was reportedly already working with the
World Health Organisation to try and prevent the spread of the
virus in the country. Quarantine measures followed, including
school and university closures.

The North Korean economy has been a statistical black hole for
decades but is undergoing substantial transformations. Rapid
post-war industrialisation had put the country ahead of South
Korea by the time Prof Joan Robinson visited in the mid-1960s,
prompting her to wax lyrical: “Eleven years ago in Pyongyang
there was not one stone standing upon another (…) Now a modern
city of a million inhabitants stands on two sides of the wide
river (…) A city without slums (…) Even more remarkable are

the neat villages, scattered over the countryside (…) A nation
without poverty (…) everyone is adequately provided with food,
clothing, shelter, medical care, and educational
opportunities” “All the economic miracles of the postwar world
are put in the shade by these achievements (…) Every industry
and every service is building up capacity so as to be able to
rush aid to the South as soon as communications are opened
up.”

The “miracle” was not sustained, however, and South Korea’s
economy far outpaced North Korea’s during the next three
decades, during which trend growth declined and turned
negative as Soviet support ended and the terms of trade with
China became less friendly.

Today, GDP in North Korea is reportedly lower than in 1990,
notwithstanding a larger population, and gross national income
per capita is down to only a tiny fraction of South Korea’s. A
large share of the workforce remains in agriculture but
domestic food production is insufficient to avoid widespread
chronic undernourishment. Infrastructure shortcomings are
glaring, not least with respect to electricity supply and
transportation.

At the same time, the scale and breadth of market activities
has visibly expanded since the turn of the millennium, as part
of a transition to a hybrid system mixing State, Party and
army control with decentralised initiative, against the
backdrop of a military       build-up   met   by   tightening
international sanctions.

The OECD’s new working paper documents a number of the changes
that have taken place North of the 38th parallel. It draws on
a wide array of published sources, which rest on limited and
often indirect hard evidence and numerous bits of more
anecdotal evidence. The study describes the evolution of
economic planning, currency reform, “yuanisation”, the
proliferation of markets, the emergence of a new mercantile
class dubbed the “masters of money” (donju), the development
of special economic zones and their failure to attract much

foreign investment, the dispatch of North Korean workers
abroad and the promotion of tourism as means to secure forex,
and how digitalisation is changing lives. It also discusses
the impact of the economic sanctions, which can be seen for
example when looking at mirror statistics of official crude
oil imports. The study lists some of the myriad ways the
sanctions are circumvented, including via a bewildering
variety of smuggling channels.

In many of the aforementioned areas, the country’s very high
dependence on China is striking. This has been particularly
evident since the outbreak of the COVID-19 pandemic, which cut
off some of North Korea’s major sources of supply and the main
market for its products – a situation that is hard to sustain
for an economy with limited reserves. Indeed, while North
Korea closed its border with China in January 2020, some
traffic has reportedly resumed, with exemptions provided by
the Chinese authorities to North Korean traders in late March
and container trucks seen to again cross the Sino-North Korean
Friendship Bridge in early April.

Read the full paper: Vincent Koen and Jinwoan Beom, “North
Korea: the last transition economy?”, OECD Economics
Department Working Papers, No. 1607, April 2020.

Information      on     COVID-19      in     North     Korea:
https://www.nknews.org/pro/coronavirus-in-north-korea-tracker/

Europe   must   act  now  to
prepare the aftermath of the
pandemic crisis
by Laurence Boone, OECD Chief Economist and Alvaro S. Pereira,
Director, Economics Department Country Studies Branch, OECD

We are currently facing extraordinary challenges posed by the
Covid-19 pandemic, due to which necessary health measures are
shutting down part of our economies and precipitating a
recession of unprecedented nature and magnitude.

In the immediate response to the crisis, governments increased
health spending, but also introduced large fiscal support
(e.g. short-time working weeks, extended unemployment schemes,
tax and social security deferments, new credit lines, among
others, see OECD Policy tracker) in an attempt to mitigate the
social and economic impact of the pandemic. In addition, in
Europe, the ECB launched a large program of asset purchases
and a set of other unprecedented measures, and the European
Commission temporarily shut down budget rules and
exceptionally lifted state aid rules.

Still, given the magnitude of the crisis that we are facing,
these measures and packages, albeit important and
unprecedented, will not be enough for most European countries
to address a post-pandemic world where debt levels will be
much higher and the job losses tremendous. According to OECD
estimates, the widespread shutdowns needed to contain the
spread of the coronavirus and save lives will cause an
estimated initial direct output decline of around 25% in many
economies (Figure 1).This is equivalent to a contraction of
about 2 percentage points of annual GDP per month of
confinement. Thus, the 2020 output fall will far exceed that
of 2009.

When   the   confinement   is   gradually   withdrawn,   European
policymakers will have to do more to speed up the recovery and
avoid massive unemployment and firm bankruptcies. The
challenge will be significant: many euro area countries will
have debt ratios above – and sometimes much above – 100% of
GDP, and economic fundamentals will have been hurt. History
shows that countries that invest in the recovery, rather than
tighten too much too fast, not only accelerate the recovery,
but are also able to bring debt down faster. Too rapid fiscal
tightening in some countries in 2010/2011 weakened the euro
area and left it with long-term scars, including an incomplete
restructuring of the banking and corporate sectors, higher
structural unemployment, low investment and low inflation, and
a failure to revive structural reforms agendas.

There is an important positive element in the current crisis:

by committing to “do everything necessary within its mandate”,
the ECB has responded forcefully and much faster than in the
previous crisis, contributing to and buying precious time for
policymakers to work out a sustainable response to this
symmetric shock.

Europe is building up a multi-pronged response to the crisis
and the ensuing recovery, but some debate remains regarding
the financial instruments that must be used for this purpose.
The EIB is proposing substantial support to firms, and the
Commission is proposing to support the unemployed, which seems
to have met consensus. But the bulk of Europe’s fiscal
response to address the “war effort”-like recovery remains
largely individual or national. Unlike in the recent financial
crisis, this exogenous shock is shared across countries. The
debate is made more complex by some perceptions that the
uneven situation across countries is due to different levels
of responsibility at the national level, especially regarding
fiscal policy. It may be fair to say that much of the debt
legacy prior to the crisis is indeed individual countries’
responsibility. But this is not the case for the health and
economic efforts resulting from the Covid-19 pandemic. Both
the widespread pandemic and the close integration of EU
countries argue for a financial response that should be large
and shared . Such a response should be clearly differentiated
from the stock of debt prior to the Covid-19 crisis.

It is imperative to bridge the gap between the existing
options in the debate for a forceful response. Two options
could provide the EU with the necessary fire power to address
this crisis: a new financial instrument featuring joint
issuance, and the European Stability Mechanism (ESM). We start
with the latter.

The ESM was created by euro area members to mobilise funding
and provide financial assistance to countries threatened by or
experiencing severe financing problems. Its use involves a
rigorous analysis of public debt sustainability and strict
policy conditionality, because these difficulties were
perceived as resulting from past policies having led to poor
economic performance. Obviously, these criteria do not apply
in the current crisis. In particular, the strong
conditionality attached to financial assistance seems totally
inadequate when the crisis arises from a pandemic or a natural
disaster. Some are suggesting light conditionality. However,
this approach may not be acceptable to those countries that
believe that strict conditionality is an explicit requirement
for accessing its resources. In addition, the 410 billion
euros in unused lending capacity (3.4% of 2019 euro area GDP)
seems modest when compared to the needs of the euro area as a
whole. In addition, the ESM currently relies on short-term
credit facilities having an initial maturity of one year, and
renewable twice, each time for six months. Therefore, ESM
credit lines provide only limited relief against medium-term
rollover risks, which makes it more of a bridge facility to
overcome temporary fiscal distress pending a medium to long-
term solution.

For all these reasons, as it currently stands, the ESM is ill
suited to provide widespread fiscal support to euro area
countries to counteract the economic fallout of the pandemic.
If the ESM is to play a significant role in the challenges
posed by the current crisis, its firepower will have to be
substantially upgraded, the conditionality requirements will
have to be significantly watered down and replaced by an
allocation usage condition (namely, fund all pandemic-related
spending).

An   alternative   is   the   creation   of   European   financial