A Strategy for Economic Growth
By Angel Gurría, secretary general, Organisation for Economic Co-operation and Development
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There are growing signs that the world economy is stabilising. Financial conditions have improved, money markets have started to normalise and there is increased risk appetite. The most recent indicators point to an improvement in output and trade. There is also conspicuous decline in the size of global imbalances. Yet this was expected, given the unprecedented macroeconomic stimulus packages and the degree of global coordination put in place to counter the decline in world activity and repair the financial system. Current reductions of global imbalances are mostly the result of the downturn. They do not necessarily signal a permanent shift in underlying conditions. This underscores the fact that our work together is far from complete. More must be done to move from today’s policy-driven recovery to self-sustained growth – as confirmed by the analysis of the Organisation for Economic Co-operation and Development (OECD) of the consequences of the crisis on potential growth. The OECD sees a medium-term reduction in the level of members’ potential output of about 3 per cent, reflecting higher structural unemployment, lower risk propensity, higher cost of capital and less investment, including in innovation. This reduction is on top of pressure from more secular trends, such as population aging, and other pre-existing policy challenges, such as efforts to mitigate climate change.
The crisis offers an opportunity for greater leadership and cooperation. The unprecedented response of the G20 leaders must be maintained to build a new global governance framework. The OECD stands ready to help
Several long-term policy priorities stand out in this context. First, and most urgent, we are facing a major job crisis with extremely serious social consequences. As labour markets respond to trends in economic activity with a lag, employment numbers will continue to deteriorate sharply in the near term. The latest OECD projections show a rise in total unemployment of more than 25 million by 2010, compared with pre-crisis levels. Global unemployment could well exceed 50 million, based on the projections by the International Labour Organization (ILO). These are huge numbers.
Second, efforts to improve the framework within which business, markets and governments should operate continue to deserve attention. We must ensure conditions wherein the whole business sector, including the actors of financial intermediation, acts prudently, transparently and honestly. Responsible business conduct is a prerequisite to maintain confidence in markets and, ultimately, foster production and job creation. It is the ‘conveyor belt’ of economic growth.
Third, a major policy challenge is the restoration of sustainable fiscal positions that have deteriorated dramatically with the crisis. In virtually all OECD countries, large deficits are expected in 2010. These frequently include a significant structural component. At the same time, assessing the timing of fiscal consolidation is a challenge in itself, as premature consolidation would endanger the recovery and delayed consolidation would undermine credibility.
Fourth, we need to set the basis for a global architecture that would underpin a more balanced world economy. As the process for increasing private and public savings in key countries with external deficits gains momentum, the world will experience even greater falls in potential output unless the saving-prone emerging economies undertake policies to shift toward more domestic demand-led growth.
Fifth, all the above policy areas provide additional rationales for accelerating structural reforms that would improve longer-term growth prospects and also enhance resilience to adverse shocks in the future.
These are the key priorities likely to be at the centre of the G20 discussions. The OECD is already working on many of them as follows:
New sources of growth. Further to assessing the impact of the crisis on potential output, since the launching of its Strategic Response to the Financial and Economic Crisis in 2008, the OECD has provided policy analyses and recommendations on appropriate strategies to restore growth through structural reform, enhanced innovation and public investment as delivered through the stimulus packages. The medium- and long-term challenges to fiscal sustainability generated by such packages are also important. We are looking at them thoroughly in our work.
The social and human dimension of the crisis. This includes work on active labour market policies, including effective implementation of the OECD Reassessed Job Strategy, skills development, income support, effective social safety nets, pensions, education and enhanced training projects. Some of this work will serve as input to the OECD Employment, Labour and Social Affairs Ministerial on 28-29 September 2009.
Finance, competition and governance. Within its areas of responsibility, the OECD is helping to prepare appropriate strategies for unwinding the extraordinary measures taken in response to the crisis. Competition and levelling the playing field are also important, including the central dimensions of moral hazard and implicit subsidies to institutions. The OECD also provides an institutional framework for continuous dialogue among relevant stakeholders on corporate governance, financial literacy and the fight against corruption in international business. Furthermore, with preserving market openness a key issue, the OECD plays a leading role in monitoring and peer reviewing measures that could restrain investment.
Tax transparency. Tax issues are very high on the G20 agenda. Its approach has been based on the principles of transparency and effective exchange of information on tax matters developed by the OECD. Responding to a request from G20 leaders to identify non-cooperative jurisdictions, the OECD issued a progress report following the London Summit. The OECD is working to strengthen the Global Forum on Transparency and Exchange of Information, including the expansion of its membership.
Development issues. The OECD is conducting work on aid effectiveness, policy coherence and financing to help developing economies become more resilient and less vulnerable to economic downturns, and to achieve the Millennium Development Goals. It is also helping to promote a comprehensive approach for development and development finance, to engage with all stakeholders in the development process.
Trade finance. The main providers of officially supported export credits have agreed to meet regularly at the OECD to exchange information on the measures taken in support of the London G20 trade finance initiative, and to ensure the continuation of medium- and long-term export financing.
Green growth strategy. Ministers of 30 OECD countries plus Chile, Estonia, Israel and Slovenia requested that the OECD develop a green growth strategy to help countries achieve economic recovery and environmentally and socially sustainable economic growth, including by promoting the use of market-based instruments, regulations and other policies to change behaviour and foster appropriate private sector responses.
Global governance. The OECD has been discussing a Global Charter for Sustainable Economic Activity with the German government and with other international organisations (the ILO, the International Monetary Fund, the World Bank and the World Trade Organization). Based on existing instruments, the charter aims to enhance the effectiveness of these instruments and fill regulatory gaps. The OECD is working actively on the issues of transparency, propriety and integrity in business conduct, also at the centre of the international agenda.
The response to the crisis has been impressive. As the recession bottoms out we must make sure that green shoots are consolidated and that we achieve self-sustained growth. We must work toward a greener, stronger, fairer global economy based on shared principles, while allowing for – and reaping the benefits of – diversity. The global economy cannot go back to business as usual. This means using all policy instruments at our disposal and developing a strategic framework to maximise synergies and complementarities among policies. The crisis is also an opportunity to shift gears in leadership and cooperation. The unprecedented response that the G20 leaders have implemented must be maintained beyond the emergency to build a new global governance framework. The OECD stands ready to provide its support to achieve this goal.
I look forward to contributing to a successful summit in Pittsburgh.
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