Philippines

APEC Cebu Finance Ministers Meeting: Remarks on global economic and financial outlook, inclusive productivity and integration in APEC economies

 

Remarks by Angel Gurría,

Secretary-General, OECD

Cebu, Philippines

11 September 2015

(As prepared for delivery)

 

 

Minister Purisima, Ministers, Ladies and Gentlemen:

 

Thank you for your warm welcome.

 

The OECD values its fruitful partnership with APEC, and looks forward to further opportunities for dialogue and collaboration. As we continue our common fight against the global challenges of continued economic uncertainty, deepening inequality, entrenched poverty, climate change, and rising geopolitical instability, cultivating this partnership is more important than ever.

 

Let me begin with a few observations about the global economic outlook.

 

Global economic and financial outlook

 

The slow and bumpy road to recovery continues. Business investment remains subdued in all major economies, impeding global trade and productivity. The recent sell-off in China and heightened volatility in global equity markets has cast, once again, a shadow on the global recovery.

 

Certainly, the Asia-Pacific region is and will remain the engine of the world economy going forward – it accounts for 57% of global GDP, 46% of world trade and more than a third of the global population – and there is much to celebrate about APEC’s achievements in recent years. However, APEC economies are not immune from risk. In particular, falling commodity prices have adversely affected member economies that export energy and raw materials, including Australia, Canada, Indonesia and Malaysia. Also, many emerging economies that were relatively unscathed by the financial crisis, in APEC and beyond, have started to show signs of stress and are facing a sharp growth slowdown. While we expect global growth to strengthen in 2016, the future remains uncertain.

 

According to the OECD, structural reforms to boost productivity and address inequality, coupled with continued efforts to deepen regional economic integration and connectivity, are the keys to advancing the health of the Asia‑Pacific region and the wider global economic landscape. Demand-side policies to support growth, particularly those that encourage investment, are important complements to these reforms and efforts.

 

Constraints to growth in APEC economies: low productivity and persistent inequality

 

The Asia-Pacific region has grown strongly over the past decade. However, growth in many APEC economies is too sluggish to support convergence towards high-income status. OECD estimates in our latest Economic Outlook for Southeast Asia, China and India suggest that, under the best scenario, the estimated year to become a high income country would be 2020 for Malaysia, 2025 for China, 2042 for Indonesia, 2051 for the Philippines, and 2058 for Vietnam.

 

Higher growth necessitates improvements in productivity, which remains below the OECD average in many emerging and developing APEC economies. For example, in 2015 labour productivity in China is 4 to 5 times lower than in the United States. Recent data show that some developing APEC economies are experiencing lower productivity growth compared to the 2000s (e.g. China, Malaysia, and Thailand), while in others productivity growth has been negative (e.g. Mexico, Chile, Vietnam and Peru). Low productivity makes it difficult for economies to move up the value chain, away from a factor accumulation-driven and low labour cost-driven development model, to an innovation-driven growth path. It also impedes more inclusive and sustainable development.

 

Inequality is a further barrier to growth. In most countries, the gap between rich and poor is at its highest level in 30 years. Our recent publication, In It Together: Why Less Inequality Benefits All, estimates rising inequality reduced the collective growth of advanced economies, including several members of APEC, by 4.7 percentage points between 1990 and 2010. Inequality reduces the capacity of the poorest segments of society – the poorest 40% of the population, to be precise – to invest in their skills and education and shape a better future for themselves. Inequality also affects these segments through reduced opportunities, including access to formal and quality jobs, training and healthcare. 

 

So what can be done to address these challenges?

 

Advancing the economic progress of developing and emerging economies in the Asia-Pacific region requires a new approach to development, with a strong emphasis on structural reforms to boost productivity and ensure the benefits of growth are evenly distributed – in other words, promoting “inclusive productivity”.

 

Such structural reforms may include:
 

  • reforming product and financial markets and fostering competitive service sectors;
     
  • diversifying continuously into higher value-added market segments in agriculture, industry and services;
     
  • innovating by using global knowledge and developing domestic capabilities;
     
  • developing skills and human capital;
     
  • investing in greener growth; and
     
  • supporting capacity building for government officials.

 

The OECD has developed an Inclusive Growth framework to ensure policy parameters are calibrated to maximise societal well-being. This framework enables policymakers to identify trade-offs and complementarities between competing policy options. We would be very happy to work with APEC economies to develop a dedicated inclusive growth framework for the Asia-Pacific context.

 

The sustainability of growth also matters for wellbeing. I recognise many developing APEC economies are particularly vulnerable to climate change, given their reliance on natural assets. The OECD’s recent study, Aligning Policies for A Low Carbon Economy, can support these economies in their transition to a greener future.

 

Deepening regional ties by streamlining global value chains

 

As highlighted by our recent Future of Productivity report, another critical driver of productivity gains – that operates through the diffusion of innovations at the global frontier to national frontier firms – is trade openness and cross-border investment.

 

Regional economic integration has been at the heart of APEC’s agenda since its foundation more than 25 years ago. Global value chains (GVCs) are an important feature of regional economic integration. Over the past two decades, participation in GVCs by APEC economies has grown across the board. Between 1995 and 2011, the import content of exports in APEC economies rose from 15% to 22%. When we consider participation in value chains by Southeast Asian economies, recent OECD analysis shows that over 30% of intermediate inputs are now sourced regionally.

 

Of course, value chains are only as strong as their weakest link. OECD analysis estimates the WTO’s Trade Facilitation Agreement (TFA), which was endorsed by APEC trade ministers in Boracay, could reduce trade costs by as much as 17.5% for firms in some APEC economies. I urge APEC economies to prioritise implementation of the TFA in advance of the Leaders’ Meeting in November.

 

Reducing barriers to cross-border trade in services will also benefit APEC economies. The OECD’s Services Trade Restrictiveness Index shows that even modest reforms in regulations that restrict services trade could increase exports by up to 7%, and lower import prices by as much as 10%, in some sectors and economies.

 

Finally, the Bogor goal of liberalising investment must be advanced further. According to the OECD FDI Regulatory Restrictiveness Index, which looks at statutory restrictions on FDI, APEC economies are on average 2.8 times more restrictive than the average OECD economy. Building on our Policy Framework for Investment, which was updated in 2015 to take account of changes in the global economic landscape, the OECD is positioned to support your efforts towards improving the business climate and liberalising investment regulations.

 

Closing remarks

 

While I have only been in the Philippines for a short time, I have been struck by the strong Filipino spirit of bayanihan (working together to achieve a common goal). This spirit is not only reflected in our gracious Cebuano hosts, but in the productive and collegial dialogue that has characterised our discussions so far. I would like to reiterate the OECD’s strong support for APEC. We stand ready to support all APEC economies in their pursuit of stronger, sustainable, inclusive and more balanced growth.