Secretary-General

The need for structural reforms

 

Introductory Remarks by Angel Gurría, OECD Secretary-General, delivered at the Network of Ideas Business Lunch 2012

 

2 September 2012

Bled, Slovenia
(As prepared for delivery)

Ladies and Gentlemen:

The young are the seed of our future, the main source of change and progress, and we must do all we can to increase their opportunities; especially in this critical moment in which many of you are finding it very hard to turn your dreams into reality.

I thank the Network of Ideas for giving me this opportunity to address young Slovenian professionals.

The topic that you have asked me to address today, the need for Structural Reforms, is of enormous relevance. For the OECD, the implementation of structural reforms is not only the only way out of the crisis, but the only way to build a stronger, cleaner and fairer global economy. Let me explain why.

Still on the brink of a slump.

The global economy is experiencing the fifth year of the crisis. In spite of some stabilization and improvement, the economic recovery is faltering.

GDP growth across the OECD may slow to 1.6% in 2012, before recovering to 2.2% in 2013. The unemployment rate is likely to remain around 8% for the OECD area through the end of 2013, leaving 48 million people out of work. To bring the employment ratio back to pre-crisis levels, we need to create 15 million additional jobs.

In many countries the situation is particularly dramatic for young people like you. The youth unemployment rate for the OECD area was just over 16% in May 2012, while it was at more than 50% in Greece and Spain. In the G20 countries, some 37 million young men and women are currently out of work. This is a tragedy.

Countries are making huge efforts to reverse these trends, trying to implement new policies to reactivate growth and employment. But the world economy is still haunted by a series of imbalances and destabilising factors. Here in Europe, the current financial and sovereign debt crisis is a clear example.

European recovery efforts are undermined by a growing confidence crisis in financial markets and national banking sectors, coupled with another confidence crisis among investors and consumers. If we add a credit squeeze, persisting fiscal consolidation and extremely high sovereign yields, then we have the perfect recipe for a prolonged European slowdown or even a contraction. This grim economic outlook in turn feeds into the confidence crisis and round and round we go.

It is time to break this vicious cycle. It is high time for action. Time for bold decisions and structural changes! Our economies, our societies, our environment are getting closer and closer to their limits. Our governments have the duty to find new sources of growth, jobs and trust. Our view is that the only way they can do it is by implementing big policy changes on three parallel tracks: our advice is to Go Structural, Go Social and Go Green!

Go Structural, Go Social and Go Green!

We recommend governments to Go Structural because all our countries still have significant space for upgrading their economies with reforms which can deliver growth and employment. Governments urgently need to plan and implement reforms to improve education attainment and performance, to encourage innovation and entrepreneurship, to enhance competition in product markets and services, to make labour markets more adaptable.

We recommend governments to Go Social because the impact of this crisis on families has been devastating and because we see significant room to improve social policy. Going social is about policies in taxes, education, health, social security, migration, gender which can create jobs, bring women and other underrepresented groups to the labour market and tackle inequality. But “going social” is also about the fact that innovation, education and skills go hand in hand. At the OECD, we launched a Skills Strategy to help governments empower people to innovate by improving the quality of education, by facilitating the portability and transferability of skills, and by facilitating access to the skills markets.

We recommend governments to Go Green because we cannot continue to promote an economic growth which does not respect the environment and the sustainable use of natural resources. The transit to low carbon economies can in itself be an important source of innovation, entrepreneurship, growth and jobs, while reducing resource bottlenecks and natural imbalances.

After extensive analysis and prognosis, at the OECD we are convinced that bold decisions and innovative policies on these three tracks can not only stimulate growth in the medium and long term; we now have evidence that the benefits can also accrue in the short term, provided the proposed reforms are well structured, communicated, explained, sequenced and combined.

Now, how do we see Slovenia in this context?

Let me conclude with a few words to share our perspective of Slovenia and its main economic and social challenges.

Over the past two decades, Slovenia has had impressive success in economic and social development. Bold decisions, sound economic policy and hard work yielded success and resulted in relative stability, which helped this country achieve important progress while reducing its levels of inequality. In fact, today Slovenia is the best OECD performer in mitigating household income inequality, as it is shown by our report Divided We Stand: Why Inequality Keeps Rising.

However, since the outbreak of the global crisis, Slovenia’s economy has been slowing down, and now it has entered a recession. Our latest Economic Outlook projects a GDP contraction of –2.0% in 2012, and a slight contraction of about –0.4% in 2013. In this context, Slovenia’s unemployment rate has reached 8.6% in the first quarter of 2012.

The problem is that the government does not have much firepower to reverse these trends, as public finances are still weak; despite a relatively low public-debt-to-GDP ratio (at 47% in 2011), which is about half the average of the OECD.

To avoid a worsening of the crisis and having to request for international financial support, Slovenia needs to implement decisive reforms as soon as possible. Urgent action is required to strengthen competitiveness and to achieve sustainable economic growth. I want to bring to your attention six key recommendations:

  • First, consumers and businesses need a healthy banking sector. Despite repeated recapitalisations, the state-controlled banks in Slovenia still appear too thinly capitalised to both absorb losses and continue to finance the economy. Urgent action is required to improve banks’ equity positions. An orderly deleveraging of banks and the corporate sector is key to restoring sound growth.

  • Second, to strengthen public finances, fiscal consolidation should curb the structural deficit by rationalising public administration, education, health care and spending on cash transfers. Also, the adoption of a so-called golden fiscal rule can help restore long-term fiscal sustainability. Of course, a golden fiscal rule is not necessarily something gold - it is simply a tool for more fiscal discipline. Germany, Italy and Spain all adopted a golden fiscal rule. Sweden and the UK for example went even beyond this and introduced a Fiscal Council to act as an autonomous watchdog over the fiscal decisions of the government. Yes, adopting a fiscal rule is a strong message of confidence to the world, an important signal that a country is serious, decisive and concrete about capping its debt. Slovenia should deliver this message now.

  • Third, there is significant scope for increasing productivity and upgrading the economy. Boosting innovation capability will be essential. Slovenia needs to restructure its economy towards more knowledge-based activities. This calls for the reform of universities and public research organisations, as well as the streamlining of public policy and funding, to increase the economic and social benefits from R&D.

  • Fourth, Slovenia’s labour market is rigid and hampers economic adjustment. Labour market dualism should be addressed by reducing what is the OECD’s second highest degree of protection of regular employment.

  • Fifth, Slovenia has one of the least sustainable pension systems in the OECD, stemming from a combination of significant pension generosity and rapid population ageing. Pension expenditure is projected to increase by around 7 percentage points of GDP by 2060. To reverse this trend, the effective retirement age should be increased and net replacement rates reduced.

  • Sixth, our recent Environmental Performance Review of Slovenia observes that Slovenia could do more in the areas of green tax reform and removal of environmentally harmful subsidies, such as the support for coal-fired energy plants. We recommend a shift in the tax burden from capital and labour towards the environmentally harmful emissions. This would simultaneously help to address the budget deficit, strengthen incentives for environmental protection, and enhance the overall efficiency of the economy.

  • Finally, Slovenia must ensure that the framework for the governance of state-owned enterprises, which is currently being discussed, is robust enough to deal with the range of structural challenges facing the state owned sector, including competitiveness, deleveraging and privatisation. The overall objective must be to ensure consistency, predictability and transparency in the governance of state-owned enterprises. This will help improve market and consumer confidence.

Of course, a well functioning public administration is critical to ensure the success and implementation of all these reforms, as we stress in our recent study on “Slovenia: Towards a Strategic and Efficient State”. And certainly, the big challenge will be to build consensus on all these issues. This is always difficult, but absolutely necessary.

Ladies and Gentlemen,

Tough times demand tough measures. To drive economic growth and consolidate our public finances, we should embark on the path of decisive reforms. But we must do this while at the same time making our economies more inclusive and more environmentally friendly. It is time to Go Structural, Go Social and Go Green!

There is no going back to business as usual because the world has changed and there is nothing nowadays that is business as usual. We are facing a new normal and this demands new decisions, innovative policies, effective institutions and inclusive multilateral cooperation.

As the Slovenian proverb goes:  “Ou starae  sodae,  staro  veno     ou  novae  sodae,   novo  veno”.  (Old wine goes with old barrels – but new wine goes with new barrels). I very much hope that the new ideas, the new solutions and the new policies will come from people like you. The OECD stands ready you!

Thank you very much.

 

 

 

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