She who dares

A globally influential thinker, Gabriela Ramos, explains why a group of leading economies is challenging globalisation and other conventional wisdom.

More than 30 of the world’s wealthiest countries with market economies share an ambition to promote economic growth, prosperity, and sustainable development. They are the members of the Organisation for Economic Co-operation and Development (OECD). The organisation includes among its aims, a commitment to “seek solutions to common problems” and its activities include “drawing on facts and real-life experience, we recommend policies designed to improve the quality of people’s lives”. One of its core values is to “dare to challenge conventional wisdom starting with our own.”

It’s fair to say that some of the 56 year-old OECD’s ambitions have been made more difficult due to the financial crisis in 2008. And it’s also fair to say the OECD failed to anticipate how the prevailing economic environment would bring about the events of 2008 and the economic fallout from that crash.

It is, in keeping with its core value of challenging conventional wisdom, now developing a new approach to the global economic challenges in post-crash economies including intractable low incomes, economic exclusion and inequality.

But the governments that make up the OECD were seen by many as being among the cheerleaders of globalisation and neoclassical economics that steered us all into crisis. And neoclassical thinking prevails among many of its current economists. So why might OECD be seen to have what is needed to draw on “facts and real-life experience,” and to come up with “policies designed to improve the quality of people’s lives”? And when it unfurls a banner of new economic thinking – can the pluralist economists take it seriously?

“So yes, we have been the cheerleader – guilty as charged. But we have also been trying to improve our analysis. Now we have made inclusiveness the ultimate goal of our policy thinking,” says OECD chief of staff and Sherpa to the G20, Gabriela Ramos.

“I guess the top challenge is to understand the economy better – aligning our tools to get better results for people. I think that the economic profession, and I would say classical economics, have failed. First of course was the financial crisis that turned into this economic and political crisis. Our models were not capable of explaining what happened, or avoiding it.”

The OECD’s shift in economic tack is manifest in its New Approaches to Economic Challenge (NEAC) initiative launched in 2012. Ramos says its purpose is to gain better understanding of the issues at play both, at the international level in the growing complexity and interconnectedness in the global economy, as well as the increased inequalities of income and opportunities within and among countries. “It is about building a better growth model that incorporates the social and environmental sustainability that our current framework considers as an afterthought,” Ramos says.
“This initiative has really brought a lot of insight in terms of how much we need to develop a new narrative for growth that includes distributional outcomes at the outset,” Ramos says. The insights emerging from NAEC will, she says, inform proposals for better policies that address inequality and poverty. “We launched this initiative having documented the increase not only in inequalities of incomes – which is the basis for this analysis – but also from getting more granular. This has meant looking at how much people who are already disadvantaged by low income are affected by poor education, how they lack access to good health care and infrastructure, and how they accumulate disadvantages. Even with a step increase in school attainment in many of our countries, this has not been translated into better opportunities for low-income groups”

“The beauty of the old models was in their very simple representations of the world. So simple that they got it wrong.”

Ramos accepts that the OECD does have inherent obstacles to any move away from neoclassical economic analysis. “There is a strong attachment to the simplistic way in which [neoclassical economists] explain the world, and the ultimate objective of efficient markets and average incomes is difficult to replace for more nuanced and complex narratives,” she says. She insists however that its progress along that path is real. The organisation – along with its member countries individually – is “looking for better ways to explain our economies and societies, including the distributional impact of the policies we take, and the environmental footprint.”

“There is a question as to how much we can push the new insights through if our governments continue to be organised in a way that relies on old assumptions that growth lifts all the boats and measuring success only through increasing GDP per capita,” says Ramos. “GDP per capita is a useful tool, but cannot have the high hand it has had in all the policy discussions”.

“The reality is that we have made very good progress. Even though we have many areas in the OECD where governments are represented by treasury representatives who are concerned with growing their own economies, and growth is still elusive eight years after the crisis, they are introducing elements of inclusiveness in their analysis and this is really great progress. They are also looking at the human outcomes of that growth,” says Ramos.

Ramos says the OECD does not see open trade as an end in itself, but views it as “a means to improve the outcomes for people.” She highlights the organisation’s Inclusive Growth Framework, as well as the Better Life Initiative that focus not only on distribution of wealth and income, but also at “the other areas that matter for people.” She adds: “The new narrative of growth has to include a multidimensional definition of the wellbeing of people.”

In a world where 1% of the population has captured a great deal of the wealth generated by GDP growth and where the repercussions of an economic crash are added to that mix, Ramos says fairness is an important consideration for the OECD’s economic models.

Meanwhile, a review of its neoclassical economics policy basis could undermine the organisation’s credibility with members and sponsors who are reassured by its established economics. A radical change could then be a threat.

Ramos disagrees. “No, no, on the contrary,” she says. “In my conversations with policymakers from many of our member countries, I find a lot of concern about the political outcomes we have been experiencing and the fact that we are not providing the answers that will help us to create more cohesive societies”. Ramos is convinced that things have deteriorated so much that politicians foresee disaster if changes aren’t made. In her view the UK has shown itself to be particularly eager to take on change and has been “really honest” in admitting that they got it wrong in relation to distributional and particularly regional outcomes.

“The reality is the backlash against globalisation and open trade in our societies, as well as the rejection of anything that has to do with the model of growth we have followed, means it’s time to be serious about looking for better policies,” Ramos says.

She says the rejection of globalisation is “gaining traction” and there is a growing interest among businesses in inclusive growth that was not there five years ago.
“You ask: what kinds of companies can go beyond maximising the benefits for their shareholders and get better outcomes for society? I’m saying that this is something I’m seeing more and more from companies.”

We have seen gestures towards a more inclusive approach in the UK but a swift retreat followed. Prime Minister, Theresa May proposed mandated union representation on company boards. But May backtracked from that very quickly when business rebelled. Why won’t that be the global pattern?

Ramos insists that, given the increased polarisation in many of our societies, and the results of recent democratic processes where people opted for less open societies, many business are looking beyond their “maximizing shareholder benefits mantra”. She points to the Nordic region where better social outcomes have emerged. And even though inequality has also increased, it remains below that of the rest of OECD countries. She puts that down to better “social dialogue” and recounts her attendance at a meeting in Sweden between union and business representatives where she “could not believe it but it was really so civilised.”

Ramos says the interesting point was the better understanding that emerges when businesses and employees abandon the “confrontational zero-sum game.” She thinks we could all learn from this. “We always say that if you have big government, you really stifle innovation – you prevent businesses from thriving. Well, the Nordics have proved that it is not true – they have a very dynamic business environment as well as robust social protection systems.

“So how do we make sure that government interventions improve a situation so that businesses are seeing investment and extending their hand to make others benefit?

“Indeed, due to the focus on efficiency and not on distributional outcomes, 40 percent of our populations have been left behind. Instead of framing a solution with the traditional lenses, we need to think ‘out of the box’ and look at favoring those solutions that improve the living standard of those left behind. And business have much to contribute. This should be seen as an investment, not as an expenditure. Investing in the skills, infrastructure, and access to finance to laggard firms, regions and people is what we call the ‘Nexus’ between productivity and inclusiveness. There are great losses when almost half of our populations cannot exploit their full potential. We need to empower people, and business can contribute greatly. But our governments should also analyse the distributional impact of the policies that are proposed, and prioritize those that will help the bottom 40.

“For example, working with our educational assessments of 15 year-olds, we can look at those countries that seem successful at reducing inequality and producing high-quality outcomes in education. It’s amazing because in all the countries that are top participants – very different countries like Canada, Finland, and Korea – they prioritise the bottom 40% through something as easy as sending the best teachers to the most difficult schools.”

The nexus of productivity and inclusiveness is, Ramos says, “the next frontier of discussion.”

She elaborates: “I call it the “inclusive productivity” goal, but traditional economists say this is an oxymoron. We developed this concept of the nexus to bring the two aspects together, and favour those policies that have positive impact on both. Without this, at the same time that low-income groups accumulate disadvantages, the top earners are best placed to take advantage of all the opportunities. In an already unequal world, the digital economy presents an additional challenge as it can produce “winner takes all” outcomes. Frontier firms indeed accumulate advantages as their competitive stance allows them to develop the most advanced technologies, to sort out the best talent, and to continue investing in it. No wonder they experience productivity growth of 3-5% when it is stagnant in the rest of the economy.” she says.

“It’s time to address it. I don’t really think we have a choice,” says Ramos.

A world of less inequality and a more equitable distribution of income and wealth as envisaged by the OECD cannot be guided by the economics that has brought none of these and topped it with financial crisis and failed foresight. Can it?

“But there are people who stick to the past. I’m always surprised that we continue to teach general equilibrium modelling in universities,” she says. Why does she think this persists?

“Because the model is so simple it is so difficult to leave. But reality is much more complicated. We need to consider the environment for example; we need to factor in distributional impacts; and to properly understand growth. Our challenge here is to build models that are more representative of how the world actually works without a level of complexity that leads to paralysis. We need to get away from averages, we need to get away from assumptions that are based on “rational behaviour”, and we need to balance efficiency objectives with distributional impacts. Not easy. Then you come to these politicians that need to have very fast and simple messages and you tell them that you are going to tell them about complexity economics, that the level of uncertainty is high, and that we do not have simple answers. It’s like ‘give me a break’…”

“The beauty of the old models was in their very simple representations of the world. So simple that they got it wrong.

“But we don’t need the perfect model. We’re trying to glean insights not only from quantitative economics as we usually do, but also from history, sociology, psychology and so on. All these other disciplines that were neglected during the heights of the neo-liberal model, and to do the types of things you need to do to inform your models. Then of course there is a judgement call. It is not a quantitative model that is going to give you the answer.

“And that is scary.”

Gabriella Ramos

Gabriela is the OECD Chief of Staff and Sherpa to the G20. Besides supporting the Strategic Agenda of the Secretary General, she is responsible for the contributions of the Organisation …

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