Keynote address by Angel Gurría,
Dublin, 15 September 2015
(As prepared for delivery)
Minister Flanagan, Professor Barrett, a chairde,
I am honoured to deliver this evening’s Iveagh House lecture, following in the footsteps of Ban Ki Moon and Mark Carney.
It is in the nature of policy makers often to focus on the most pressing challenge, the latest crisis, the next election. That is human nature, and perfectly understandable. Governor Carney has aptly described the phenomenon as a “tragedy of horizons” – the failure of governments and businesses to internalise long-term considerations into their decision-making.
We have just gone through the worst economic crisis of our lives. Many OECD economies are still suffering its legacies: poor growth, high unemployment, growing inequality and an erosion of confidence. The traditional ‘engines’ of growth – trade, investment and credit – are at half speed.
Ireland’s economy is bouncing back strongly. Slowly, the social scars of the crisis are beginning to heal. With the worst effects of the crisis receding in the rearview mirror, the time has come to shift gear and focus more on the biggest policy challenges of the next 50 years.
It goes without saying that the world in the 2060s will be a very different place. Our long-range simulations suggest that if we follow ‘business as usual’ our societies will be older, our climate will be warmer and, as a result of both, economic growth will be slower, ramping up pressure on public finances.
But business as usual is not good enough! Just like visionaries in times past foresaw the social and economic merits of free education for all, for example, the challenge for the current crop of policymakers is to introduce the reforms today that will reap dividends for generations to come.
Next year will mark not only the 100th anniversary of Ireland’s 1916 Easter Rising, but also the 50th anniversary of a landmark OECD report on Irish education: Investment in Education. I had the pleasure of presenting Taoiseach Enda Kenny with one of the two remaining original copies from our archives earlier this afternoon.
Investment in Education helped lay the foundations for the introduction of free secondary education in Ireland two years later by Donagh O’Malley, then Education Minister, and for much of the social and economic development that flowed from it.
As we take a peak over the medium-term horizon this evening, I’d like to address some of the longer-term challenges requiring urgent policy attention. Let me mention three; what I call the ‘3 Ps’: People, Planet and Productivity.
Everything we do as policymakers, and policy advisors, must be focused on people. This is encapsulated in the OECD’s own motto: better policies for better lives. Our people are our most precious resource, and investing in our human capital – in education and skills – will be as important over the next half century as it has been for the past fifty years, in Ireland and across the globe.
One of the most striking global ‘megatrends’ is rising inequality. As shown in our latest publication, In It Together: Why Less Inequality Benefits All, the average income of the richest 10% (in OECD countries) now represents nearly 10 times the average income of the poorest 10%, up from 7 to 8 times a generation ago. By 2060, the average OECD level of inequality could reach the level of the most unequal OECD countries today – meaning an increase in the so-called GINI coefficient for the OECD as whole from its current level of 0.32 to over 0.5, the level in Chile in 2013.
This inequality has become a serious obstacle for growth. The rise in inequality observed between 1985 and 2005 in 19 OECD countries knocked 4.7 percentage points off cumulative growth between 1990 and 2010. And what matters for growth is not just the poorest falling behind. It is inequality affecting lower-middle and working class families that has the biggest economic impact. So, we need to focus much more on the bottom 40%; it is when they lose ground that social mobility is blocked and economic growth is brought down. The bottom 40% - a huge segment of the population.
Another well-established global megatrend is societal ageing. It’s not as advanced yet in Ireland as in Japan or Germany, and many emerging markets are even further behind, but the direction of travel is clear. One answer is migration, but as living standards converge upwards, and as global demand for skilled labour rises, the incentives to migrate from developing to OECD countries will eventually diminish. OECD analysis suggests that by 2060 the drying up of immigration could have lowered the labour force by 20% in the euro area and by 15% in the US if the effect of cross-country convergence in incomes is taken into account. Another part of the answer must surely be for people living longer to work longer.
But, even if the retirement age is increased, population ageing will result in a declining or at best a stable labour force in most economies. Against this backdrop, future gains in GDP per capita will become more dependent on the accumulation of skills and, especially, gains in productivity driven by ‘soft’ innovation -- such as organisational know-how, databases, design and various forms of intellectual property. This is what we call knowledge-based capital – or KBC – at the OECD.
During the crisis years, productivity growth in most OECD countries slowed down. Here in Ireland, it has slowed from over 4% in the late 1990s to less than 1% now. This morning, I presented the 2015 OECD Economic Survey of Ireland alongside Minister Michael Noonan. The urgency of boosting productivity and innovation is one of the key messages.
The global outlook for future productivity growth is mixed and hotly debated. For some, all the “ripe fruit” has already been picked and the IT revolution has run its course. For others, this revolution continues apace and is fuelling a new wave of productivity growth.
Recent OECD work provides new insights. Our new report on shows that the leading firms globally have continued to register robust productivity growth in the 21st century. In Ireland, leading global firms in the IT and pharma sectors, for example, continue to do well while domestic SMEs lag behind. In fact, the gap between these firms at the technology frontier, and the others, has been rapidly growing over the last decade, especially in the services sector.
Our analysis suggests that future productivity growth will depend on reviving the ‘diffusion machine’, enabling technology and knowledge to flow from the global leaders to the rest of the economy. In practice, this implies action in several areas.
First, we need to continue investing in R&D and innovation. We are today bearing the fruits of public investment in research that led to the Internet, health technologies and GPS. Governments, including here in Ireland, play a key role in financing and conducting such research, so that it can serve as a basis for future innovation.
Second, we need to facilitate the growth of new firms, technologies and business models. OECD research finds new firms to be the main source of job growth and a key source of innovation.
And third, we need to strengthen the diffusion of knowledge across the economy, so that all can benefit. This means promoting competition in goods and services markets, closer collaboration between firms and universities, and investment in public infrastructure and human capital.
The third and final ‘P’ is for ‘planet’. We are on a collision course with nature. Climate change is the perfect example of the ‘tragedy of horizons’. Even while they are well-known, catastrophic losses in the next 50 or 100 years do not seem to carry much weight when making policy and investment decisions today. Yet there is a real risk that before the end of this century, we will face severe, pervasive and irreversible climate impacts. And then we will regret our myopia!
Even in purely economic terms, climate change will have a big impact. OECD analysis suggests that global GDP will take a serious hit, especially in some vulnerable regions. More fundamentally, climate change is now breaking the delicate equilibrium of nature, threatening our health, our prosperity and our social stability. The rate of biodiversity loss has accelerated by at least 100 times due to human activity. Time is running out to avoid a future catastrophe!
The COP21 meeting in Paris this December is an opportunity not to be missed by the global community to reach an ambitious and credible deal that will keep within reach the agreed target of containing the rise in average global temperatures to 2 degrees.
The New Climate Economy Commission, of which I am a member, and our latest OECD report on the subject, Aligning Policies for a Low Carbon Economy, have convincingly argued that sustainable growth and the transition to a low carbon economy are not incompatible. And in any case, there are plenty of short term low or no-cost actions consistent with achieving a 2 degree pathway, such as energy efficiency, subsidy reform and investment in green innovation. The key, however, is to get all policy areas pulling in the same direction: not just on the environment, but on energy, tax, transport, innovation, investment, and infrastructure.
Ladies and gentlemen, the ‘3 Ps’ I have mentioned – people, productivity and planet – illustrate well the urgent need to focus on long term challenges – paradoxical as that may sound. We need to move beyond the crisis and find new approaches to social, economic and environmental challenges. We need to develop the new systems, the new regulations, incentives and policy frameworks of a more human, more inclusive and sustainable economic model. I invite you all to continue this important conversation, to reach out and partner with the OECD to build a brighter future, for Ireland and the planet.
Go raibh míle maith agaibh! (Thank you very much!)