Remarks by Angel Gurría, OECD Secretary-General, delivered at the Prague University
Prague, 7 April 2010
Ladies and gentlemen,
It is a great pleasure to be at Prague University to address this distinguished audience.
I would like to share with you how we are working together to build a resilient global economy for the benefit of citizens worldwide. I will speak on the role of the OECD in the changing global architecture and then more specifically on the evolving relationship between the OECD and the G20.
In other words, I will discuss the future. And I am in the right place to do so. Scholars, students and universities shape the world of tomorrow. They generate and spread science and evidence based knowledge and information, which are critical to higher productivity and growth in a global economy. I am confident that Prague University will lead the way in further developing this country’s human capital and skills to successfully face your future challenges.
The global economy: stronger light at the end of the tunnel
But first the economy. The good news is that a recovery is now underway and it is slowly gaining momentum. Thanks to massive macroeconomic support and unprecedented actions to stabilise financial markets, most OECD and emerging market economies are growing again. Financial conditions are continuing to return to normal, world trade is picking-up and global imbalances have narrowed.
The Czech Republic was certainly not insulated from the global downturn. Indeed, despite sound fundamentals – manageable external and fiscal balances, low inflation, sound banks and no domestic financial bubbles – the Czech recession was about as sharp as the downturn in Germany, its major trading partner. This outcome is explained by the Czech Republic’s international openness and the steep drop in global trade and investment. Growth has since resumed and the strength of the Czech economy going forward will continue to hinge importantly on international developments.
But we are not out of the woods yet. We still face very difficult times and many challenges remain. The pace of recovery is uneven, and in the US and much of Europe, growth will be too sluggish to make sizeable inroads into the number of unemployed this year. Indeed, unless growth is strengthened, it will take many years to get the additional 16 million persons unemployed in the OECD area since late 2007 back into work. At the same time, we also have to make further progress in addressing the source of global macroeconomic imbalances. Otherwise, the same large imbalances evident before the crisis will re-emerge once the recovery gains momentum.
Another worry is that fiscal balances have ballooned in most countries and gross debt could exceed 100 per cent of GDP on average in the OECD area by 2011. Large consolidation efforts will, therefore, be needed. The pace and magnitude of consolidation, however, needs to be gradual and contingent on the strength of the recovery and the state of public finances in individual countries. The international dimension of consolidation must also be taken into account.
Adept policy makers are now crafting their exit strategies and indicating to markets how they will wind down the exceptional measures and implement fiscal consolidation in ways that are as pro-growth as possible. We are helping governments to do that. It means avoiding large increases in labour and income taxes and preserving, to the extent possible, growth-enhancing spending, such as on human capital, R&D and infrastructure development.
Complicating matters further, we estimate that countries in the OECD area have, on average, lost about 3 to 4 per cent of their potential output. This loss is due to a durable increase in unemployment, lower labour force participation, increased costs of capital and higher risk aversion, and reflects the severity of the crisis in most countries.
Overall, however, it is fair to say that during the past one-and-a-half years the best of a bad situation was made. The most important lessons from previous crises have been well learned. This time, in addition to the swift adoption of macroeconomic stabilisation measures, leaders avoided misguided labour market policies and committed to open markets as an integral part of getting the world economy out of the crisis.
As a matter of fact, last month we delivered, with the WTO and UNCTAD, our second report to the G20 leaders on Trade and Investment Measures. I am happy to share with you that we found that most G20 members are holding to their commitments to open trade and investment in the wake of the global economic crisis. Protectionism, at least so far, is a devil that stayed in the box!
But our joint report warns that discretion in the application of the many state support and rescue programmes for troubled firms may be used to favour domestic companies and disguise protectionism. And once in place, we know that trade and investment barriers are extremely difficult to undo and retaliation will almost certainly occur. This would have devastating long-term consequences on the global economy.
Keeping markets open and world trade flowing during the recovery phase is a crucial priority. There is no place for complacency. Protectionist sentiments are likely to increase with persistent unemployment and mounting pressures on government finances. This is why continued vigilance by leaders to keep protectionist pressures under control is needed and we will carry on supporting them through our monitoring reports. Bringing the Doha Development Agenda to a successful conclusion would also prevent backsliding, bring much needed stability and predictability to international markets, and give impetus to the recovery.
To put it in a nutshell, going forward we see three main challenges: how to ensure that a solid recovery takes hold, restoring fiscal sustainability and strengthening long term economic growth that is at the same time job’s rich, sustainable and balanced.
The role of the OECD in the changing global architecture
We will only address these challenges succesfully if we work together. The crisis brought to the fore that in a globalised economy, no single country has all the answers; multilateral action was a must in the search for common solutions. That is another of the positive lessons from the crisis. Moreover, with the worst of the crisis behind us, even greater co-operation and more inclusiveness is exactly what we need now. The early stages of recovery are full of risks. Everybody wants a larger share of a pie that is not yet grown to its previous size.
The crisis also exposed the limits of the “one organisation per issue” approach to global governance that was in favour over the last decade. The belief that a specific agenda should be assigned to a certain institution on an exclusive basis and the rest, even if they had contributions to make, would not be called to the fore is, frankly, inefficient. Even though all international organizations should coordinate and avoid duplication or overlaps, it is very useful to take a look at the same problems from different angles. The contribution of institutions like the OECD, an internationally acknowledged standard setter, with its capacity to measure and benchmark the effectiveness of policies between countries and to propose best practices in practically all areas of public policy is valuable, precisely because it is multidisciplinary.
While the scope of the OECD’s work is truly global and unique, we also need to be global and inclusive so as to maximise our contribution and effectiveness. And this is why the OECD is opening up!
Through our Enhanced Engagement initiative, we are strengthening our dialogue and cooperation with five major emerging market economies (Brazil, Indonesia, South Africa, India, China) to promote the necessary convergence of policies and actions among developed and middle income countries. We already have around 100 non-member countries participating regularly as equals in the work of our committees, expert meetings and forums, on issues ranging from education, health to combating bribery and corruption, taxation, competition, investment and regulatory reform to name a few. We have regular consultations with non-governmental stakeholders. We are stepping up our work on development, incorporating more effectively the development dimension in all aspects of our work so our policy experience and expertise can reach more people. Last, but not least, after more than two years of joint workm we are in the process of welcoming Chile, Israel, Slovenia, Estonia as new member countries. We expect Russia to follow in a not so distant future..
The OECD today is inclusive and including group of countries, a more open and pluralistic organisation, sensitive to the priorities and to the complex challenges of countries at different levels of economic development. But we know new ideas and approaches to engage with our partner countries are needed. We are committed to finding ways to strengthen effectiveness and to take a quantum leap forward in multilateral co-operation.
We know that governments want to harness the comparative advantages of different international organisations. To further this idea of inter-governmental co-operation, I have proposed the creation of an Observatory for Policy Coherence, bringing together the international organisations involved in the G20 (IMF, World Bank, OECD FSB, ILO and WTO), with the objective of improving co-ordination and exchange of information between them, thus making sure that leaders will get the best possible advice.
In short, the crisis has accelerated the speed at which the global governance architecture has to be updated and revamped. The most significant and positive development so far has been the emergence of the G20 as the premier economic forum for economic discussions and action.
The OECD and the G20
Now that the policy debate is moving away from crisis management towards speeding up the recovery and laying the groundwork for a more sustainable and fairer economic future, the OECD has a responsibility to offer its expertise and knowledge on structural policies in support of the G20 process.
I would like to stress that the OECD is strongly committed to the notion that non-G20 countries, such as the Czech Republic, can have through OECD involvement in the G20 process, an additional channel by which your voice can be heard. This role will remain central to our efforts.
G20 leaders have called on the OECD to provide contributions on employment and social policies, on investment and trade, on bribery and corruption, on fossil fuel subsidies, on development, aid-effectiveness, on taxation and on promoting strong, sustainable and balanced growth, known in the jargon as The Framework.
At the G-20 Summit in Pittsburgh, OECD work on these areas was acknowledged, and we were asked to continue working on them. Let me now elaborate on some of these areas on which we are working with the G20, starting with fossil fuel subsidies. One of the response measures to climate change that we identified was to phase out fossil fuel subsidies. We estimated that this would save budgetary resources, increase economic output and reduce GHG emissions by as much as 10% in 2050. This, of course, is not on its own sufficient, but is part of a package of measures that could tackle the threat of climate change.
These conclusions were extensively quoted, including by President Obama himself and we were asked to continue our work together with the IEA, World Bank and OPEC. We are now developing a framework for identifying fossil fuel subsidies, updating our modelling work examining the impacts of their phasing-out on energy demand, prices, trade and GHG emissions and synthesising the lessons we have learned on how to reform fossil fuel subsidies while addressing their social impacts. The Joint Report will be discussed at the G20 Finance Ministers and Central Bank Governors meeting in Washington in a fortnight from today.
Taxation is another area where thanks to the combination of G20 political support and OECD work the world has achieved important breakthroughs in combating tax evasion. Such is the case of exchange of information for tax purposes, where since November 2008 we made more progress than in the last 10 years. We have just established the most ambitious peer review process that includes over 90 countries ready to measure compliance based on OECD standards. The first phase of such peer review and the monitoring of agreements has just started and we expect to deliver, when in full swing, up to 40 reviews each year.
Also later this month, the OECD is invited to the G20 Labour and Employment Ministerial, where ministers will put forward recommendations on how to tackle unemployment based on a joint ILO and OECD report. Our contributions will chart OECD countries’ labour market policy responses and impacts through the crisis and during the early phase of the recovery and highlight the policy tradeoffs that must be faced against the background of severely-constrained public finances in many countries. We will also focus on policies to foster and invest in skills development and re-training.
On the way forward, the G20 is also paving the way to build a stronger, more balanced and sustainable growth process. This is one of the major achievements in Pittsburgh that will also be discussed at the G20 Finance Ministers and Central Bank Governors meeting in Washington DC.
The Framework can be seen as a compact that commits countries to work together to assess the coherence of national policies and their consistency with the common objectives agreed at the G20 level. The OECD will contribute to this excellent initiative, using our methods of peer learning, benchmarking and monitoring, based on sound measurement and objective analysis.
Ladies and gentlemen,
No single country or group of countries will succeed on their own. This is a task where we all have to join forces. Though governments must lead the way, we also need stronger, more inclusive and better coordinated international organisations. Our success will be measured by the impact on the lives of citizens worldwide. The OECD is ready to continue to support this effort.Thank you for your attention.