Remarks by Angel Gurría, OECD Secretary-General
20th June 2013
Dear Mr. Shokin,
Ladies and Gentlemen,
It is a great pleasure to be with you today. I would like to first thank Mr. Shokin for the organisation of this breakfast and more generally, for his support to the OECD contribution to the B20. The OECD has always been a champion of the G20 dialogue with the private sector, both by participating in all B20 work strands and by hosting multistakeholder events at the OECD.
In the context of such an important reunion of business representatives, and in the running up to the Saint Petersburg G20 Leaders Summit, let me share with you some of the OECD views on the current economic situation, and what we can do together going forward.
1. Almost six years into the crisis, the global economy remains fragile
As we approach the sixth year of the crisis, we are still confronted with an outlook that remains weak, and a recovery that is hesitant and uneven across countries and regions.
The global economy does show some positive signs, like improving perspectives in the US and Japan and progress on structural and fiscal adjustments in euro area countries. However, as demonstrated in our latest OECD Economic Outlook launched at our Ministerial Council Meeting a couple of weeks ago, the economic outlook remains disappointing. With fiscal policy still geared towards consolidation, growth in OECD countries will slow down even further in 2013, to a meagre 1.2%.
The global recovery is being hindered by multiple speeds and different paths towards self-sustained growth. Current account imbalances are still large and could be rising in the near future, while new imbalances are starting to affect a large and heterogeneous group of “innocent bystanders”, both in advanced and emerging economies, through inflationary pressures and rising asset prices.
The failure of the global economy to recover more strongly has posed a heavy burden on people. Unemployment numbers are still alarmingly high. Today, we have close to 49 million people unemployed in the OECD area, with two particularly worrying facts in this drama: first, that the number of people out of job for more than 1 year has reached 17.3 million; secondly, that the most affected in this wave of unemployment have been our youngsters: the average unemployment rate in OECD countries for youth stands close to 17% compared to 8% of total unemployment rate.
2. Structural and systemic challenges need to be addressed for a strong recovery
In this context, it is essential to get the policy mix right to generate a sustainable recovery, based on productive investment and more jobs, while remaining vigilant about financial market exuberance. In other words, monetary, fiscal, financial and structural policies must work together. This is why we are supportive of the Russian G20 priorities that put the emphasis on growth.
Monetary policy remains a key instrument for supporting demand while fiscal consolidation must be pursued at the right “tempo”. In this respect, there is scope to target fiscal consolidation on measures, such as costly and wasteful tax expenditures and rising health care and pension costs, that have the smallest short run impact, the least effect on long-term growth and that strengthen fairness.
But let’s also recognize that fiscal and monetary ammunitions to re-energize growth have now been largely exhausted. In this context, G20 countries need to implement ambitious and wide-ranging structural economic reforms if they are to achieve an upside growth scenario.
This is the reason why the OECD recommends a full-fledged and comprehensive competitiveness programme across all G20 countries, both advanced and emerging economies. The OECD has simulated the effects of structural reforms on potential output across the OECD area through 2060: moving to best practice across a number of policy areas – product and labour market regulations, and education, just to name a few – would raise per capita incomes by some 20% in the median OECD country by 2060. [Economic Outlook 2013]. G20 members have actually made ambitious commitments in these domains. But now is the time to deliver on them and the business community should maintain the pressure!
In the same vein, and because trade liberalisation is so-to-speak the “mother of all structural reforms”, G20 members should first resist protectionist temptations but also engage in further trade opening initiative. This would provide the “free stimulus” which the global economy badly needs. The OECD, jointly with WTO, is taking a fresh look at the way international trade is being organized and is evolving, through the lens of Global Value Chains. This “value added” approach reveals more clearly than was possible before how policies that restrict access to foreign intermediate goods and services also have a negative impact on a country’s position in regional and global supply chains. Our analysis and new data on Trade in Value-Added are making an unambiguous case for progress on the trade liberalization and facilitation agendas at the WTO ministerial meeting in Bali end of this year.
Yet, it is illusive to believe that we will achieve this upside scenario without restoring trust in the banking sector and without making the financial sector at large work for and finance the real economy again.
In particular, we need to find ways to better limit contagion and address the too-big-to-fail problem through structural banking reforms, notably a change in their incentives structure through the separation and ring-fencing of their traditional (retail) and most risky (derivatives) activities. The risk of bank failure remains the key reason for separating banks. OECD studies suggest that banks that tend to be more heavily engaged in derivatives trading are seen as more likely to default than banks that abstain from such activities. Separating globally systemically important banks and a few of the traditional banks that are securities focused would have the added benefit of an adequate pricing of risk (by stopping cross-subsidization of risky activities by cheap resources coming from traditional ones, e.g. retail banking), thus encouraging a greater focus on lending.
There is progress on that front in several G20 countries, but much remains to be done. Also, banks, in the euro area, must be still be recapitalised. We believe a US TARP-style injection of capital to cover hidden losses and bring their leverage ratio to a clean 5% would help to restore credibility and transparency in the euro-area banking system after a history of flawed stress tests.
There is another issue that highlights the intensity of global interconnectedness and complexity: that of tax evasion and tax base erosion. This is an issue systemic in nature which, as such, constitutes a perfectly relevant issue for the G20. Tax base erosion through aggressive tax planning as well as tax evasion and avoidance constitute a serious risk to tax revenues, but also to tax sovereignty and tax fairness for all G20 countries. This is the reason why the OECD stepped up its work on exchange of information following a call from the G20 in London, in April 2009. The Global Forum on Tax Transparency is moving ahead quickly with its peer reviews and is well into its examination of the effectiveness of exchange of tax information upon request – ratings for as many as 50 jurisdictions will be published later this year.
But the OECD is also supporting the move towards automatic exchange as the new frontier of international exchange of tax information. Recent high profile cases of tax evasion have increased consensus at the political level, both in G8 and G20, to move to automatic exchange of banking information. The OECD is providing the legal platform: the Multilateral Convention on Mutual Assistance which the G20 has been very effective at promoting. The next step is to have formerly non-cooperative jurisdictions join this instrument, and make sure they actually use it for automatic exchange of tax information. We are also providing support to the G8 and the G20 to make automatic exchange operational by developing the practical procedures, processes and instruments.
Finally, tax rules have not kept pace with the way business operates and allow multinationals to report profits for tax purposes in locations different from where the business operation takes place. The OECD has embarked, with the support of G20 members, on a comprehensive and very ambitious work programme called BEPS (Base Erosion and Profit Shifting) aimed at revisiting rules of international taxation such as double-taxation or transfer pricing.
3. Looking ahead: Adopting inclusive, innovative and sustainable sources of growth
Looking ahead, this crisis has opened a window of opportunity for governments to revisit models and patterns of growth, to make them more inclusive, innovative and more sustainable. At the OECD, we have embarked on a wide-ranging, sort of “soul-searching”, initiative – the New Approach to Economic Challenges - aimed at examining more systematically the unintended consequences of our policy recommendations, to improve our understanding of policy trade-offs and synergies related to growth, inequality, and the environment. The private sector should be a key partner for governments to build on this momentum.
This is not just a question of new drivers of growth, such as innovation and technology. It is also about finding new approaches to putting people at the centre of our policy efforts. It is about pursuing inclusive growth. The numbers I have already cited to you on global unemployment, in particular among the youth, are a tragedy! We must work together – the public and the private sector- to pursue growth that combines economic dynamism with social equity in all countries. This will help to strengthen a fragile social compact and rebuild the path to sustainable, inclusive growth, and most importantly, to rebuild prosperity, equality and trust!
That is why the promotion of Jobs, Equality and Trust has been at the centre of the OECD’s efforts in recent years and the main focus of our recent ministerial meeting. I am talking about developing country specific action plans that will bring governments and the private sector together to address youth unemployment. I am talking about commitments from governments to rebalance the rules of the game and promote equality, including gender equality. I am talking about laying the new foundations of trust, in governments and legislatives, in corporations and banks, in regulators and rating agencies, in public and private leaders.
That said new sources of growth, such as innovation and green growth, remain a vital ingredient in pursuit of global growth:
Innovation first: Knowledge-based capital (KBC) has become one of the most important new sources of growth. Unlike physical capital, KBC – including computerised information; innovative property; and economic competencies - can foster growth because the initial cost incurred in developing certain types of knowledge is not re-incurred when that knowledge is used again. This can lead to increasing returns to scale in production. Investments in many forms of KBC also create knowledge that spills over into other parts of the economy, again spurring growth. KBC is also transforming the determinants of competitive success for firms. We are looking at policies - in the fields of taxation, innovation, entrepreneurship, competition, corporate reporting and intellectual property – that are supportive of the accumulation of KBC.
Second example, green growth: Let me insist on the following point: We need to stop our collision course with nature. The OECD Environmental Outlook to 2050 projects that, without immediate action, by 2050 we will see a 50% increase in greenhouse gas emissions, with a disastrous impact on the well-being of people worldwide, and a further 10% decline in terrestrial biodiversity. At the same time, there is a huge potential of green technologies and innovation to be the new and sustainable drivers of growth. So we need to design ambitious, comprehensive and systemic green growth strategies – the OECD unveiled its own strategy 3 years ago - to unleash this potential, thereby putting growth on a cleaner and more sustainable footing. Concretely, this means introducing bold policy options to help governments make pollution more costly; remove environmentally harmful subsidies; value and price the natural systems and ecosystem services; and encourage green innovation. More can be done by the global community to achieve these ambitious goals.
Like any deep structural shift, building a knowledge-based strategy and finding a foothold in global value chains and green growth will require effort. But the prize will be the opening up of huge opportunities that not only boost productivity, but also address many social and environmental challenges of our time, from ageing to climate change to development.