Introductory Remarks by Angel Gurría, OECD Secretary-General, delivered at the meeting of Ibero-American Finance Ministers
Porto, 2 March 2009
Minister Teixeira dos Santos, Mr. Iglesias, Ladies and Gentlemen:
It is a privilege to join you at this meeting of Ibero-American Finance Ministers to share our views on the severe crisis we are experiencing and to explore possible solutions together. I applaud the Portuguese government for this important initiative.
1. The most serious crisis of our lifetime
Let me start by confirming that the financial crisis has turned into a deep-seated paralysis of the world economy. We have just received the latest negative GDP figures for the United States, which has shrunk by 6.2%; and gloomy news reports are flooding discussion circuits all around the world.
International economic indicators all foreshadow an extremely difficult year. For example, trade in the OECD zone is set to shrink by 10%; and the latest figures for Japan suggest a 40% reduction in trade volumes. Foreign direct investment is also likely to dwindle further, following its 21% decline in 2008.
This scenario has now started to have a major impact on families, through unemployment and pensions. The International Labour Organization estimates that the crisis could increase the number of unemployed throughout the world by between 20 and 50 million people, depending on the severity of the recession. In the OECD zone alone, unemployment is poised to reach 10 million, and pension savings have been cut drastically.
Reviving the world economy is a political imperative that calls for courageous decisions and a huge dose of shared intelligence.
2. Latin America: Strong but not immune
Although the crisis was triggered by massive failures of regulation, supervision, risk measurement and governance schemes in the world's most advanced countries, the impact on the global economy is significant. Ibero-America will not be immune from its effects.
There are various channels of contagion for Latin America, in particular the slackening of international demand for its export products. Investment and remittance flows have also shrunk significantly, and the credit crunch is playing a major role as well.
Lower prices for raw materials are putting additional pressure on already tight budgets; and, to add to these risks, protectionist pressures are emerging in both trade and industry.
Nonetheless, the region is better prepared to deal with this crisis than before. For decades, Ibero-American countries made major efforts to implement structural reforms and increasingly robust macroeconomic policies. These bore fruit at the start of the new century, when the region entered a sustained upswing phase, posting growth rates of around 5% for several years running. The public finance situation and flexible exchange rates also provide greater room for manoeuvre.
The OECD thus sees most of the region's governments as having responded responsibly and quickly, although the convergence of a number of recessionary forces is making the challenge more complex.
3. Latin America's response: A chance to address structural challenges
Monetary policy is correctly being loosened in several countries, such as Brazil, Chile, Colombia and Peru; and, as these countries, along with Mexico, still have high real interest rates, further efforts to increase flexibility can be expected.
Complementary measures have been implemented to increase liquidity on financial markets in several countries. Brazil, for example, eased mandatory bank reserve requirements in September-December 2008.
Foreign-exchange market interventions have been relatively modest and have mostly been aimed at shoring up liquidity in periods of thin trade, and moderating excessive volatility in the exchange rate, rather than seeking to maintain a given parity.
Fiscal responses have varied from country to country: Brazil has announced capital injections into the National Development Bank (BNDES) to strengthen its lending capacity; and Chile has announced a large public expenditure program, including social protection for the most vulnerable groups, taking advantage of its comfortable fiscal position.
Clearly the need, scope and nature of the fiscal stimulus depends on the circumstances prevailing in each country; but without these fiscal measures, the slump in GDP for 2009 would be much greater.
The key question, therefore, is whether these measures are sufficiently ambitious; and here the answer is unclear. The fiscal responses implemented in various Latin American countries are a significantly smaller proportion of GDP than in other countries such as the United States or China.
But the size of a fiscal package is not the only criterion; it also needs to be "intelligent". And in this regard, stimulus measures to tackle the crisis offer a great opportunity to revive economies by relaunching stalled agendas in Latin America, especially in view of inequality and poverty levels.
In the publication “Going for Growth”, which we will be presenting tomorrow and which is being circulated here today, the OECD makes a number of recommendations on fiscal packages. These are especially timely for the Latin American region, because they stress that more efficient investment goes hand in hand with infrastructure and human capital. The publication also identifies direct transfers or tax cuts for the lowest-income groups as the most effective measures. It is essential for Latin America to invest in the poorest sectors of the population and avoid generalized subsidies.
As in other regions, these stimuli can also be used to promote a "green recovery" which takes account of environmental impacts and promotes low-carbon growth.
4. The OECD's contribution: A multidimensional response
These recommendations are contained in the OECD Strategic Response to the Economic and Financial Crisis, which we launched last December. The purpose of this initiative is firstly to help countries and international organizations design a more reliable and transparent international financial system, and secondly to support economic revival efforts by making effective policy recommendations in various sectors. On the financial front, we look at incentives and the interaction between various fiscal, financial competition and corporate governance policies. More generally, we consider labour, social, pensions and innovation policy, with a view to relaunching economic growth.
We also review potential exit strategies, as a medium-term message to avoid taking distorting measures when tackling the crisis. When announcing expenditure growth, it is also important to send a long-term signal guaranteeing that these measures will be reversed to establish a healthier balance between states and markets.
The OECD response is based on a number of international instruments that we have developed over the last 50 years and which could be very useful in constructing a dynamic global economy. These include Corporate Governance Principles, Guidelines for Multinational Enterprises, the Model Tax Convention, the Competition Toolkit, the Antibribery Convention, or the Declaration on International Investment.
These guidelines could also be useful when tackling the crisis. In the context of support measures, countries must be dissuaded from adopting protectionist policies aimed at stopping investments from leaving their countries. At the OECD we are addressing this new form of protection in our Freedom of Investment project.
In conjunction with the G20 and G8 we are also contributing the OECD global standard on tax havens and non-cooperating financial centres to ensure that this type of anomaly is rejected when designing a new global financial system. This is an additional element that we bring to this ministerial meeting.
Many Ibero-American countries have been involved in these tasks. In addition to OECD members (Portugal, Spain and Mexico), we are also working on a strengthened cooperation scheme with Chile (an accession candidate country) and Brazil. Peru has joined the Investment Committee, and Colombia and Argentina are members of the OECD Development Centre. In fact, several of the region's countries are represented on OECD committees and working groups, particularly in the areas of competition, investment and antibribery. I renew our invitation to them to continue contributing to these important endeavours.
But, in addition to better international regulation, this crisis also requires each country's solutions to be mutually coordinated.
To achieve that, we need stronger international organizations with greater decision-making capacity; but they also need to be more inclusive and better coordinated. New world governance schemes are also emerging, such as the G20 and G8+G5, at the political leadership level, in which the voice of Ibero-America needs to be heard loud and clear and be well coordinated.
The OECD is making a major effort to expand its membership and global reach; and we are working increasingly closely with the other international organizations.
In Berlin just a few weeks ago, I met with Chancellor Angela Merkel and the directors of the IMF, the World Bank, the WTO and the ILO, in the framework of a process that we have been implementing to coordinate our actions to help create a sounder, more reliable and more transparent international regulatory framework.
A few days ago I also attended the meetings of G-7 Finance Ministers which issued a mandate to develop a new regulatory instrument for the global economy; and this past weekend we met in Taormina with the G8 and G5 Sherpas as part of the Heiligendam Dialogue Process. This Ibero-American meeting is an excellent opportunity to strengthen the contribution we can make to global discussions.
Ladies and gentlemen:
While this crisis has exposed and created many uncertainties, it has also made something very clear: The days when countries could solve their problems on their own are gone forever. The solution must come from inclusive and broad-based cooperation; and new consensuses need to include the views of developing countries.
Latin America has a major role to play in building a new international financial and economic system, since it has accumulated substantial experience in managing financial crises and recovery programs.
The OECD wants to be part of this effort. Our relationship with the region is ever stronger. As noted in our pamphlet "OECD: Active in Latin America", several Latin American countries are now participating in 37 OECD instruments and agencies.
To my mind, it is impossible to envision a strong OECD without a strong Latin America and vice versa. We need to work together to lay foundations for a stronger, cleaner and fairer world economy.
Thank you very much.