Keynote address by Angel Gurría
Toronto, Canada, 31 October 2017
(As prepared for delivery)
Ladies and Gentlemen,
I am delighted to be with you at the Toronto Global Forum, which has chosen a very topical theme, redefining globalisation. This is in the same spirit as the title of this year’s OECD Ministerial Council Meeting, which was Making Globalisation Work for All. And we will come back to a similar question at the first IEF Paris conference, which the OECD will host in December. Naturally, we are all asking why globalisation is being called into question and what to do about it.
There is no single factor that can explain the rise of protectionism in the US, Brexit, Catalan separatism and the strength of populist parties in the Netherlands, France, Italy, Germany, Austria and other countries.
Nonetheless, there have been two widespread tendencies in advanced economies in recent years, which do suggest a common thread. First, the stagnation of incomes for most households and, second, the extraordinary gains accruing to those at the top of the income distribution.
Most OECD economies have experienced a slowdown in household income growth since the global crisis. In some of them real median incomes have failed to grow for 20 years or more. And this is reflected in people’s perceptions. In every advanced economy where a recent Ipsos poll was conducted, a majority of respondents thought that today’s youth would be worse off than their parents. This is a sharp deterioration compared with 15 or 20 years ago.
But if median incomes in many advanced economies have failed to grow, incomes at the top end have increased sharply. The average income of the top 10% in OECD countries has increased to almost 10 times that of the bottom 10%, up from seven times in the mid-1980s.
And wealth is even more concentrated than income: at the last count, the top 1% in OECD countries for which comparable data were available owned 18% of total household wealth. The bottom 40% owned only 3% of total household wealth.
This combination of stagnant real incomes for the many and rising prosperity for the richest has left many in our societies feeling left behind, cheated and pessimistic. The result has been an erosion of trust in our institutions as well as in globalisation. In our view, these two developments have done more than anything else to open the door to protectionism, xenophobia and exclusive nationalism.
Before I discuss whether it’s right to blame globalisation for these trends, it is worth reminding ourselves of its benefits, which is also a reminder of why unwinding globalisation would be a costly blunder.
Simply put, the period of rapid globalisation since the Second World War has yielded the greatest increase in global prosperity in history, despite a near-tripling of the world population. Globalisation has fostered the diffusion of science, medicine, art, culture and sports, bringing the world closer in countless ways. It has also helped to spread peace and democracy. The most recent wave of globalisation, since about 1990, has facilitated the rapid productivity gains seen in China, India and a number of other emerging economies and has thereby helped lift hundreds of millions of people out of poverty. Interestingly enough, we do not see a political backlash against globalisation in China, India or Mexico.
Nonetheless, despite the clear benefits of globalisation, we have to acknowledge the widespread feeling in many advanced economies that those benefits have been concentrated in too few hands.
Such a feeling, however, does not mean that globalisation is wholly or even mainly responsible for stagnant median incomes and the widening inequality at the top end of the income distribution. For one thing, the productivity growth slowdown occurred post-crisis, when global trade growth has been sluggish and international capital flows have remained below their pre-crisis peaks. Also, most studies of wage stagnation and growing income inequality in OECD economies point to technology as the main factor.
But technological change and globalisation are too intertwined to make a neat distinction between them. Technology is a vector for globalisation, making it easier to trade, invest and migrate across borders. And the growing cross-border flows of products, people and information help drive technological change in each country. Globalisation and technological change are best seen as a single combined process.
Also, while it is true that globalisation has faltered in the post-crisis period – when the productivity growth slowdown occurred – it can be argued that growing international capital mobility was one factor that produced the crisis, which in turn was responsible for the sluggish productivity growth since.
Moreover, there is other evidence suggesting that globalisation, combined with technological change, has contributed to the stagnation of median incomes and the rising gaps at the top end of the income distribution in advanced economies.
First, the increasing international mobility of capital and of wealthy individuals has increased the revenue losses for countries that maintain high tax rates on top incomes or wealth. This may have encouraged the tendency for OECD tax systems to shift the tax burden onto labour.
The greater international mobility of capital has also facilitated tax evasion and avoidance, as the Panama Papers scandal reminded us.
In addition, there is evidence that globalisation and digitalisation have fed the dominance of leading firms across a range of sectors. This has allowed them to earn exceptional profits -- benefitting shareholders who typically are already well off – and leading to wider wage differentials across firms.
Some of the global firms, particularly those providing digital platforms, have also enjoyed low effective tax rates, pointing both to challenges in how to tax new activities as well as loopholes in the interaction with national tax systems.
We have also learned more about the spatial impact of globalisation. It is important that many of those with stagnant or falling incomes have been concentrated in particular regions or communities, and that the effects of dislocation caused by these factors have been longer-lasting than previously realised.
Finally, the combination of technological change and globalisation has put at risk many jobs involving routine tasks, contributing to the polarisation of labour markets.
So, while globalisation has overall been a positive force, something worth defending, we may not succeed in defending it unless it can be reshaped to spread its benefits more evenly in our societies. As this Forum’s title suggests, we must redefine globalisation. Or, as we put it at our Ministerial meeting, we need to make globalisation work for all.
How do we do this? In our view, the only way is to adopt an inclusive growth framework. Rather than thinking about what increases output and only afterwards considering how to distribute that output in a fair way, we should seek policies that deliver fairer outcomes as part of the growth process. OECD work points to a Productivity-Inclusiveness Nexus which suggests that, often, policies can improve both efficiency and equity. We do not have to face a trade-off.
The inclusive growth approach implies rethinking social protection. Providing people with adequate income support in the case of negative shocks is vital, but not enough. Social protection systems must become social enabling systems. Among other things, this means focussing on gender inclusion, the integration of migrants, as well as early childhood education. Universal access to quality healthcare and adult education are also essential. And skills are a key element of the inclusive growth approach. We have to empower people with the skills to function in a globalised and digitalised economy. They must be able to participate in global production networks and adapt to a rapidly changing environment.
Strengthening international standards can also help deliver inclusive growth. We need greater collaboration on competition, taxation, state-owned enterprises, responsible business conduct and fighting corruption, among other areas. A failure to ensure a level playing-field is bound to fuel resentment and lead to harmful attempts to curb openness. In some cases new standards may be needed. In others it is a question of broadening the coverage of existing standards and enforcing compliance. The OECD is doing both. It has developed important new standards, like the OECD/G20 BEPS agreement on tax. And it is widening adherence to others, such as the Anti-Bribery Convention and the OECD Guidelines on Multinational Enterprises; OECD instruments are increasingly adhered to by countries well beyond the 35 OECD members.
It is also participating in new initiatives like the Global Deal, launched last year with the Swedish Government and the ILO to encourage social dialogue to support more inclusive growth.
Ladies and gentlemen,
Globalisation means the integration of national economies through increased cross-border flows of goods, services, money, people and information. That is unquestionably a good thing. It is how we learn from each other, how we benefit from specialisation, how we thrive on our diversity. But it is currently letting us down. Or rather, we are letting it down. We need to redefine globalisation, to reshape it, to make it work for all. With better policies, we can do it. As the OECD motto says, better policies for better lives.
OECD Economic Outlook 2017