Geneva, 17 November 2008
Director-General Somavia, ladies and gentlemen,
I am doubly delighted to address your meeting today.
First, I would like to thank you for the opportunity to reciprocate the Director-General’s recent visit to Paris to address the OECD Council, which is our Governing Board. These visits are a sign of the strong and fruitful relations that link our organisations, both on the political and at the technical level. We have very strong ties with labour and business through our trade union and business and industry advisory committees, TUAC and BIAC, which are important sources of wisdom and inspiration for our work. On a personal note, Juan Somavia and I are old friends, which adds to today’s occasion.
Second, our discussions today could not be more timely. The G-20 meeting last weekend led to what is effectively a major change in global governance, as leaders called on international organisations to support their work on policies to overcome the crisis and lead the global economy back to sustainable growth. This mandate translates effectively into an urgent call for better collaboration between international organisations, including the OECD and the ILO.
Governments around the world have taken rapid and resolute action but the impact is much bigger than anyone had imagined. We are now facing a situation where we have a breakdown in market confidence, a near paralysis of the financial markets, and large-scale government bail-outs of banks and other financial institutions which need to be shouldered by the tax-payers.
Companies are slashing production, closing factories and dismissing workers, millions of people are losing their homes. Jobs are being lost not only on Wall Street and in the City of London, but also in the construction sectors in Spain and Ireland, leading to large-scale lay-offs. And the virus of unemployment is spreading rapidly to other sectors, witness for instance the problems of the car makers in the United States, Germany and France.
The financial crisis threatens to turn into a full-scale economic and social crisis. Last week, we published our most OECD forecasts a protracted economic slowdown in US, Japan and Euro area. They make for very sombre reading. Despite the great uncertainties that surround such calculations today, we expect the average unemployment rate in OECD countries to rise from 5.6% in 2007 to 7.2% in 2010. This means that there could be around 10 million more unemployed in the OECD area by that date - the most rapid rise in OECD unemployment since the early 1990s. We need urgent action to ensure that the most vulnerable are protected in the short-term while we are putting the global economy back on the path to economically, socially and environmentally sustainable growth.
At the OECD, we are working on a comprehensive contribution to the G-20’s Action Plan. Our contribution has two strands. The first strand addresses the regulations and incentives in the financial sector, for market operators to act in a tighter oversight and risk management environment. The OECD’s committees will be working together to address the challenges and coherence of financial regulations, competition, investment flows, but also taxes, in particular tax transparency as requested by the G-20, and corporate governance, as corporate governance failures in the boards of directors of financial institutions are one of the factors that led to the crisis.
The second strand takes a longer-term perspective as it focuses on restoring the conditions for sustainable economic growth. One element to jumpstart the recovery is the fiscal stimulus that some countries have already announced and which the G-20 addressed over the weekend. Another element has to be innovation and investment in human capital.
Any sustainable growth trajectory will have to be low carbon-intensive. The OECD is addressing this challenge in its work on alternative policy packages to mitigate climate change in the most cost-effective ways. This work will feed into the upcoming meetings of the Conference of the Parties-14 in Poznan, and the Conference of the Parties-15 in Copenhagen at the end of next year.
On the road to recovery and “normality” we will also focus on exit strategies, i.e. ways to disengage from government participation in troubled sectors.
The crisis is hitting hardest those groups which were already having trouble finding and keeping jobs, such as youth and older workers. The low-skilled, and in particular low-skilled immigrants, are among the first to be laid off because they are concentrated in vulnerable sectors, such as construction or tourism, and often hold only temporary jobs. Diminishing remittances is yet another threat to the poorest countries.
The crisis is deteriorating the outlook for workers. But even before it emerged, we were already observing growing income disparities in OECD countries. Inspired by the concerns of TUAC and others, we conducted a major study of trends in income inequality and poverty. The report, called Growing Unequal?, shows that over the past two decades, inequality has gone up in over three-quarters of OECD countries. The largest part of this increase in inequality comes from changes in the labour markets.
What is particularly worrisome is that the trend of widening inequality occurred during a long period of strong economic growth in OECD countries. How will this trend evolve during recession? Our work shows that, in a typical OECD country, your chance of being poor is six times higher if no-one in the household is working than if someone is. This means that rising unemployment rates will put more people at risk of poverty will further widen the gap between rich and poor.
What can countries do to soften the blow and get people back to work? Most OECD countries have well-developed social safety nets and active labour market programmes in place. But these schemes were designed to protect workers during temporary spells of unemployment, to retrain workers and to help them find new jobs. Will they be able to withstand the tsunami we are facing? And what about those developing countries where workers cannot rely on social safety nets?
OECD social protection systems will come under stress as taxes and contributions dwindle. It will thus be important to target policy interventions in favour of the most vulnerable groups to prevent them from sliding further down the ladder. At the same time, we must improve the longer-term labour market prospects for all workers.
But this may not be enough. Given the likely steep increase in unemployment, pressure on governments is mounting to take additional ad-hoc measures. Many governments are already responding. In doing so, policy-makers should keep in mind two guiding principles: first, any such measures should pass the test of the now famous three “T”s: they should be timely, targeted and temporary.
Secondly, short-term action must be consistent with longer-term structural reforms. Governments may need to provide short-term relief by extending unemployment benefits and subsidising employment in certain sectors or for certain groups. But care has to be taken not to create an over-dependence on benefits which would persist even after economic recovery. Similarly, the gates of early retirement must not be re-opened to ease pressures on the labour market. Despite the crisis, we must not lose sight of the challenge of population ageing, or of the need to deliver good health, education and social services.
The policy guidelines of the Reassessed OECD Jobs Strategy of 2006 remain valid. In addition, we are looking into the do’s and don’ts in labour market and social policies in more detail, drawing lessons from past episodes of marked economic downturns in OECD countries. This analysis will be presented in our 2009 Employment Outlook, which will be the focus of the meeting of OECD Employment and Labour Ministers in the fall.
The social impact of the crisis will be even more dramatic in many of the developing countries and emerging economies. Often, these countries have only weak social safety nets, which provide insufficient protection in case of unemployment and cover only a small fraction of the labour force, while a large proportion of workers are employed informally. Jointly with the ILO, the OECD Development Centre is working on a report to shed more light on the key determinants and characteristics of informal employment. Knowing more about informal workers and how they may transition into formal employment is the first step to improving their situation.
The OECD and the ILO already collaborate well in a number of areas. One example that I would like to highlight is the joint OECD-ILO work on corporate social responsibility. With the OECD Guidelines for Multinational Enterprises and the ILO Tripartite Declaration of Principles concerning Multinational Enterprises we are joining forces to promote socially responsible corporate behaviour. The involvement of the employers’ associations, in particular BIAC, is crucial here. For the first time, an OECD and an ILO Committee are working on a joint statement detailing activities where future collaboration will be intensified. And the guidelines are becoming all the more relevant when redefining the right incentives of a well-functioning financial system. Earlier I mentioned our work on corporate governance in the context of the crisis; the contributions of labour and business will be indispensable in this area as well.
Cooperating with the ILO will also be increasingly important for the OECD as we are moving ahead in our process of enhanced engagement with Brazil, China, India, Indonesia and South Africa, all of them members of the G-20, and are expanding our activities in other non-member countries where the ILO has valuable experiences and information to share, like for example in the Asia-Pacific region where we are working together on the collection of social protection data and on monitoring trends in migration flows and policies.
The crisis has made our two organisations’ work on labour markets and social policies even more important. Success or failure in this area will affect not only the livelihood of millions of people around the world but it will also determine what the citizens of the world want the global financial and economic architecture to look like after the crisis. Globalisation can only work to the benefit of all if we get the social dimension right.
In closing, I would like to make a final remark regarding the perspective on global challenges. The current economic crisis demands a lot of our attention, but even in the middle of the storm we must not lose our sense of direction. Neglecting other important challenges such as climate change, migration, development aid and the MDGs, or the need to successfully conclude the Doha Development Agenda will result in other crises in the future. We must keep the momentum going and not let our guard down. I was very pleased to see that the paper you are discussing today raises many of these issues and I am looking forward to your comments, questions and a fruitful discussion.
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