OECD Secretary-General

Shanghai G20: Remarks at high-level seminar on structural reform

 

Opening session of G20 High-Level Seminar on Structural Reform

Remarks by Angel Gurría,

Secretary-General, OECD

Shanghai, 26 February 2016

(As prepared for delivery)

 

 

Dear Minister LOU Jiwei,

Dear Managing Director Lagarde, Chère Christine,

Ladies and Gentlemen,

 

The global economy is, again, going through very challenging times as highlighted by our just-released updated OECD economic outlook. Productivity growth remains low, global trade abnormally weak and investment and credit flows disappointing. Emerging economies, the engines of growth in the last decade, have decelerated markedly and some are in recession.

 

Let me concentrate on the challenge of slow productivity gains, which is central to the difficulties we are currently experiencing.

 

Productivity growth -- a central ingredient in the pursuit of well-being -- has been decelerating in a vast majority of countries, in the advanced economies since around 2000, and more recently in the emerging-market economies.

 

In order to buck this worrying trend, we need to address three parallel developments:

 

One is the widening dispersion of productivity growth between leading firms, those operating at the global productivity frontier, and other firms – the OECD estimates this gap at around 3% per annum in the manufacturing sector in the 2000s. It seems to be the result of a breakdown in the knowledge and technology diffusion “machine”.  

 

Another “unsettling” development is the decline in the pace of business creation, which raises concerns about the opportunities for new ideas to be brought to market and develop.  In most countries, the share of young firms in total businesses has been falling, in some cases markedly. In the United States, for example, the share fell from around 22% in the early 2000s to about 16% in 2011.    

 

And the third trend that deserves attention is the reduction in the growth rate of investment in knowledge-based capital, such as R&D, skills and organisational know-how. These are critical deficits in the pursuit of productivity. 

 

Reviving productivity calls for coherent policy packages to promote trade, innovation and competition  

 

First the productivity gap across firms needs to be narrowed. Since leading firms are mostly multinationals which are concentrating innovation efforts -- 250 firms account for more than half of all business R&D -- the intensity of cross-border connections via trade and investment and the mobility of skilled labour is crucial for the diffusion of knowledge and technologies from these globalised “frontier” firms to national firms. Hence the importance of giving international trade and cross-border investment a fresh boost – a very pertinent priority area of China’s G20 Presidency.

 

Next, harnessing the full potential of new technologies, starting with the digital economy, for productivity enhancement, also necessitates higher investments by lagging firms in various forms of knowledge-based capital. The slower pace of investment in these types of assets suggests that traditional incentives (such as R&D tax credits) put in place in most countries to boost private spending on innovation may be losing effectiveness. They should be reassessed and redesigned – this is why we welcome China’s G20 Presidency’s emphasis on the challenges raised by innovation and the digital economy.

 

But the seed of innovation needs a fertile ground to flourish. For reforms to pay off, firms need the right incentives – healthy competition - to strive for the development of new and better-quality products at lower costs. In this regard, the decline in business start-ups in advanced economies could be a sign that barriers to entry have been creeping up.

 

This calls for reforms of competition policy, bankruptcy legislation and product market regulations to facilitate firm entry and exit and enable the smooth reallocation of scarce resources to firms with a high-productivity / high-growth potential. Pro-competition reforms are particularly needed in services that are critical for competitiveness in global value chains, as underlined by our work on trade in value added, and where the scope for both job creation and productivity gains remains large.  

 

Reviving productivity growth will require concerted action in trade, investment, innovation and competition. This is about growing the pie.

 

But against a background of ever rising inequalities, G20 governments also have a central role to play in promoting a more inclusive approach to productivity growth, therebyallowing everyone to get its proverbial fair share of the pie and for well-being to improve.

 

“Centre stage policies” such as investment in education and training - for workers to keep up with technological change - taxation and urban planning are key and need to be part of a growth strategy. But to reach inclusive productivity, we need to implement policies that allow traditional groups at disadvantage, with low skills or low access to finance or connectivity, to improve their contributions to the most dynamic sectors of the economy and, thus, their chances to succeed in life. These inclusive policies should be deployed together with those that promote innovation and growth.

 

An inclusive productivity agenda

 

This is a rich reform agenda for governments, but also one where the G20 can bring a fundamental collective contribution. Deeper global integration and the growing reliance on intangible forms of capital underline the importance of collective policy approaches in the areas of competition law enforcement, regulatory harmonisation, basic research and the taxation of mobile capital. The G20/OECD Base Erosion and Profit Shifting (BEPS) project constitutes a very successful illustration in this regard.

 

Given the breadth and evolving nature of the growth and inclusiveness challenges facing advanced and emerging economies alike, this is no time for stepping back from reform efforts.  Yet, one message from our flagship 2016 Going for Growth report -- which I will have the honour to launch later this morning, with Minister LOU Jiwei -- is that the pace of reforms appears to have steadily declined since 2011-12. This is deeply worrisome for the achievement of the additional 2% growth scenario by 2018.

 

So, more than ever, we need the G20 to go structural (education, skills, competition, innovation, regulation, labor and product market flexibility, employment and investment-friendly tax regimes, R&D, sound financial systems, etc.) in order to promote productive economies for inclusive societies – which will be the mantra of our June OECD Forum and Ministerial meeting! Thank you.