Remarks by Angel Gurría,
16 March 2017
(as prepared for delivery)
Ladies and Gentlemen,
I am very pleased and thankful to the IIF for having invited me to speak on a topic that is at the heart of the OECD’s business, namely world trade and the global economy.
That said, the context for my talk could hardly be more forbidding. Although surveys indicate that people are generally positive about trade per se, the loss of public support in many OECD countries for some aspects of the existing international trade regime is real and having concrete consequences.
There's a lot at stake. We may be seeing a fundamental change not just in trade policy, but in the open, rules-based international order that we've come to take for granted. And we have no doubt that a retreat from openness would be very damaging for the world economy.
In our November 2016 Economic Outlook we considered a scenario that assumes an increase in import tariffs vis-à-vis all trading partners of 10% across the board in Europe, the United States, and China. In this scenario, our model indicates that world GDP could end up being 1.4% lower and global trade could shrink by as much as 6%. And there is good reason to think these costs would only be the beginning. A trade war scenario is also one in which international cooperation and openness in other areas is likely to be compromised. We could see harmful restrictions in flows of people, investment, aid and information as well as goods and services.
Since the crisis, average labour productivity growth has been slow, and the growth of average real wages even slower.
At the same time, post-crisis fiscal consolidation efforts have often implied rising tax burdens on labour.
It is hardly surprising, then, that median real household disposable income across 17 OECD countries fell by 0.8% from 2008 to 2013 . But at the lower end it was even worse: the decline over that 5-year period for the bottom income decile was 5%.
The same is not true, however, at the upper end of the income distribution. Incomes for the top 10% continued to rise. And wealth is even more unevenly distributed than income, which tends to ensure that inequalities are transmitted across generations.
It is only natural for many people to feel that they have been unfairly left behind by globalisation and technological change.
It may well be that greater trade openness has had at least something to do with some of the issues causing discontent, even if other factors were more important.
With the opening of trade, highly productive leading firms that dominate their domestic markets may increasingly be able to exploit their advantages on a global scale.
Frontier firms able to earn rents are also able to share those rents with their workers, and OECD work also shows that the widening productivity dispersion is accompanied by a corresponding increase in the degree of wage dispersion between frontier firms and the rest.
In addition, it is likely that the integration of China over the past couple of decades, with its huge pool of low-skilled labour, has put downward pressure on wages at the low end in advanced countries, and shifted national income towards capital. Most OECD economies have experienced a falling labour share in national income, and a fall in relative wages for the low-skilled.
We have seen significant job losses in some import-competing industries in OECD economies. And when these are concentrated in regions with few jobs and few prospects, we are seeing lasting negatives.
Finally, in many instances the adjustment that is supposed to happen is not happening. Labour force adjustment policies, where they exist, do not seem to be working as intended. Workers displaced from manufacturing in some advanced economies are either remaining unemployed, or moving into jobs with much lower pay and far less security.
So in this situation, where many people in OECD countries rightly feel that the global economy is not making their lives better, we urgently need to improve the way that globalisation works if we are to head off counterproductive policy reactions to the rising discontent.
There are no silver bullets or easy solutions. The road ahead from where we are is not an easy one.
As we see it, there is a need to do 3 things.
First, we must create domestic environments in which people can participate in opportunities from the global economy.
• We need to move towards the so-called “empowering state” that serves as a launch pad for its citizens by furnishing them with capacity-enhancing assets. This can mean investing in education, skills, innovation, and physical and digital infrastructure, along with labour market policies that balance boosting job quantity and quality, well-functioning financial systems, effective public institutions, and predictable rule of law.
• Governments can also act to reduce costs that policies can unintentionally impose on individuals and firms: Recent OECD analysis has estimated that services trade restrictions can impose the equivalent of a 20% tax on business users of services such as construction, air and maritime transport, storage, and accounting.
Second, we need to bring everyone along. Existing policies have failed to adequately spread the benefits of trade. They have been overwhelmed by the speed and depth of the structural changes brought about by a number of forces including globalisation, digitalisation and population ageing.
Adjustment policies focusing on the direct losers from trade are not enough. Making the whole system work better for more people calls for an integrated policy approach that puts improved well-being and stronger and more inclusive growth at the centre.
The exact recipe will vary by country, but key elements include:
• Ensuring access to good quality health and education for everyone, strengthening opportunities for the most disadvantaged;
• Providing effective activation frameworks while improving employability and expanding job opportunities;
• Better anticipating and responding to changing skill needs, and fostering a better use of skills in the workplace;
• Increasing the resilience of and revitalise regional economies.
Looking further ahead, we foresee the need for a new social contract to facilitate adjustment while providing an adequate safety net.
This will involve:
• Improving opportunities for upskilling and reskilling throughout working lives;
• Adapting labour market institutions and models of social protection to the changing world of work, with a rising share of non-standard workers; and
• Thinking beyond labour markets to facilitate mobility.
But inclusiveness is not just about income; it's also about participation and voice and fostering a more open conversation.
This will allow more people to assess the pros and cons and to be more confident that the right balance is being struck on the trade-offs inherent to such agreements.
Trade debates need to be extended beyond the narrow trade community to everyday forums, and connected to everyday experience.
Third, we need to make the international system work better for a fair global economy.
• The global impact of trade depends on the international “rules of the road” relating to various non-trade issues. Increased co-operation can help ensure that international trade and investment are governed by fair rules and that all businesses adhere to high standards of conduct.
• It is clear, however, that there are currently gaps in the international rules of the road. On example is unfair competition from state-owned enterprises which may benefit from preferential domestic treatment of various sorts. OECD guidelines on the corporate governance of State-owned enterprises exist but they are not universal in their coverage and have no enforcement mechanism.
• Finally, we should be open to the idea of combining the rules of the road in different areas. This may mean greater coherence and linkages between agreements on trade and other areas, such as the Paris climate agreement. Or bringing more issues into bilateral and multilateral trade agreements, despite the risks and difficulties of doing that.
Ladies and Gentlemen,
At a fundamental level, countries face a choice between isolation and openness. There are many reasons to defend a liberal international trade regime, which go well beyond the benefits of greater choice and cheaper goods and services.
Opening up your market to foreign competition also means opening up your society to new ideas and cultures. It is, more often than not, associated with emancipation, tolerance, prosperity, democracy, progress and freedom. A cause worth fighting for!
But we may not succeed in defending it unless we can ensure that its benefits are more widely and equitably shared. We therefore need to rethink our domestic policy frameworks as well as the rules and modus operandi of globalisation.
That is why the OECD will continue making the case for better policies for a fairer globalisation and better lives.
Thank you for your attention.