Riding the Tiger: The Economic Dimension of Globalisation

 

by Angel Gurría, OECD Secretary-General
at the "Future Now" Conference, organised by the Danish Top Executives Organisation
Copenhagen, Denmark
23 January 2007

Mr. Chairman, it is a pleasure for me to be here today in Copenhagen and to speak to such a distinguished audience in such a successful country. Denmark, as the Economist Intelligence Unit has said, is expected to have the best business climate in the world for the next five years, after being ranked at the top for the previous five years.

While I must congratulate you, I should also warn against complacency because the world is changing so fast. 

The subject you asked me to address is "Riding the Tiger: The Economic Dimension of Globalisation."

Globalisation is certainly like a tiger. It is a powerful force in the world. It is fast-moving. And if you don't adjust to it, you may come to a sorry end. Conversely, if you can manage it well, then riding the tiger can be quite rewarding.

Certainly, this tiger frightens many people, who fear loss of employment, declining wages and shrinking benefits, a loss of quality of life, and a deteriorating environment. They see globalisation as a race to the bottom.

While I believe this view to be wrong, I understand it and am sympathetic to the families and communities that have been hit hard by the great transformation underway in the global economy today. We cannot ignore their concerns.

Nor are matters helped by periodic stories of excessive compensation and abusive stock options for corporate leaders. This merely reinforces a belief that globalisation is designed to make the rich richer and the rest of society poorer.

You and I know that, in reality, the examples of corporate abuse are few and far between. But I do believe that our business leadership, like our political leadership, has a major responsibility to abide by high standards of corporate social responsibility and the ethical corporate behaviour set out in the OECD's own guidelines for multinationals.

I raise this at the start because I believe that globalisation is at a crossroads. While the benefits outweigh the costs, there is the risk that those bearing the costs, along with those who fear for their futures, will trigger a political backlash. There is nothing inevitable about globalisation.

We see signs of this backlash already, at the ballot box and in trade and investment protection. We see it as well in the reluctance of governments to advance globalisation, for example by concluding the Doha Round. Governments have become afraid to make the hard but necessary decisions, for example in agriculture.

If globalisation is to go forward, and I believe it should because, as I have said,  the benefits outweigh the costs, then we have to reassure our publics that the policies and initiatives are in place to ensure that both the pain and gain of globalisation are shared in an equitable and sustainable way.

The Great Depression of the 1930s is a stark reminder of what can happen when globalisation is put into reverse gear.

Today, one of our greatest threats is the loss of public confidence in our political and business leaders to deliver a safer and more prosperous world for the next generation. A recent poll carried out for the World Economic Forum found that only 19 per cent of West Europeans and 26 per cent of Americans believe the world will be more prosperous for the next generation. Instead of rising expectations we have falling expectations.

Fortunately, Denmark has adopted an outward-looking vision for the future. The strategy for Denmark in the global economy, set out in the report, Progress, Innovation and Cohesion, and based on a broad social consensus, is one of the most impressive initiatives of any OECD country in planning for a successful future in the global economy.

In my remarks I want to outline the challenges we face, how I see the global economy evolving, what I believe needs to be done to achieve success, and why I am cautiously optimistic about the future.

So what are the challenges?

First is rapid and widespread technological change, what some call a paradigm shift because the changes brought on by the computer chip, the Internet and high-speed communications are so sweeping that they affect all industries and activities.

The explosive growth of global financial markets, the spread of offshoring and outsourcing, the development of global supply chains are just some of the examples.

The most likely scenario for the future is one of continuing, rapid and transformative technological change, but with a difference.

In the past, it was the rich countries that were the principal sources of new technology, leading to new industries. In this model, old industries such as clothing, shoes and plastic toys migrated to the developing world while the rich countries developed the new industries of computers, mobile phones, jet aircraft and pharmaceuticals.

But in the new paradigm, we are likely to see the emerging market economies become the source of many new technologies. Countries such as China and India are investing heavily in higher education and research, and starting to develop world-scale companies. At the same time, multinationals are locating R&D activities in these countries, reflecting confidence in the skills of their scientists and engineers.

While it won't happen overnight, it is only a matter of time before these countries begin to improve existing technologies or develop altogether new technologies. The experience of Taiwan, which has become a world centre for the semiconductor and semiconductor manufacturing equipment and testing industries, is just one example. South Korea, with its semiconductor, consumer electronics and automotive industries is another.

This points to a quite different global competitiveness environment, one where the capacity for innovation will become much more critical. Those countries which are able to develop close links between their universities and their businesses, and successfully commercialize new knowledge, will have the edge in the future global economy. This is explicitly recognized in the Danish strategy though, of course, implementation is just as important.

The second great challenge of globalisation is the steady erosion of barriers to international trade and investment, the increased mobility of people, and the more rapid spread of ideas and new knowledge.

 For much of the past 50 years, globalisation was a reality for only a small part of the world - namely Western Europe, North America, and Japan, Australia and New Zealand. The Soviet Union and China were closed to the world. Latin America, including my own country of Mexico, as well as India, were pursuing import-substitution policies which meant they were inward-looking.

But over the past 20 years, almost every country has joined the global economy, adding one billion new workers to the global work force, with the prospect of another one billion workers over the next 25 years, virtually all of them in the developing world.

This has had a radical impact on the location of activity in the global economy. Low-cost and hard-working labour in Eastern Europe, Russia, the Ukraine, Latin America and many parts of Asia, but notably China and India, and more recently Viet Nam, led to increased flows of foreign direct investment into these countries, for production destined both for rich-country markets and domestic demand in these countries.

This competitive pressure will continue. At the same time these countries will work to move up the value-added ladder, from clothing to cars and from toys to computers. Yet, I believe it is important to bear in mind that competition is good, that it fosters innovation which, in turn, improves productivity, which in turn leads to higher living standards and lower prices.

But this means that in countries like Denmark, attention must be paid to the barriers to innovation - whether they are high costs in starting a new business or a lack of skilled workers with post-secondary education. Getting the fundamentals right on fiscal and monetary policy, competition policy and regulatory practices are critical. But an innovation agenda requires more than this, and I will come back to innovation shortly.

As the World Bank pointed out recently, emerging economies will have a rapidly-growing middle class that will represent a growing market for industries in the advanced economies. Today, much of the technology employed in the emerging market economies, along with software and other intangibles, is supplied by the advanced economies.

The OECD countries have to respond to this changing world. Here, perspective is important. The structure of our economies is much different from what it was 25 years ago. Our sources of wealth creation have changed significantly, from steel, shipbuilding, coal mining and heavy industry to knowledge-based activities and services.

Yet we are much better off. This is not because we have more of what we had 25 years ago, but because we have new and better products and services.

The structure of our economies will change significantly again over the next 25 years, and the OECD itself will have to change to welcome new members if it wants to remain relevant to the world economy. Some future Secretary-General of the OECD, one with Russia, China, Brazil, India, South Africa, Chile, Israel and other countries as full members, should be able to make this very same statement.

The third great challenge is the poverty that still afflicts much of the world. The great potential benefits of globalisation will not be achieved unless we can ensure that globalisation works for all. 

Today, a large portion of the world's population remains marginalised. More than 1 billion people live in extreme poverty, on less than $1 a day, and the number living on less than $2 a day is about 2.6 billion.

Going forward, we know that the world will add another 1.5 billion people by 2025 and that virtually all of this population growth will occur in the developing world. We simply cannot ignore these numbers. People need hope. If we look at the Middle East today, one of the greatest problems is that there are millions of young people there who do not have hope for a better future. It should be no surprise they seek other outlets for their frustration.

The fourth great challenge is to develop better ways to manage globalisation and to deal with the critical issues the world faces, such as climate change, migration, and water. We need strong global institutions to make this happen.

It is only by working together that nations around the world will be able to deal with the enormous changes we face. The alternative will almost certainly be conflict, so successful management of globalisation is very much an issue of global peace and security as well as global prosperity and sustainability.

 The OECD is one of these international institutions, providing room for cooperation between countries. At the OECD we put a great deal of emphasis on comparing and learning from one another and helping each other with what I call the political economy of reform - which means, among other things, helping governments adopt reforms in the face of opposition from vested interests or where there must be some short-term pain to achieve long-term gain.

I am proud of the fact that the OECD has a new mandate, which is to become the hub of globalisation, working closely with countries in every part of the world to integrate into the global economy.

We are working for a globalisation that must meet three important tests - it must, of course, bring prosperity and opportunity. But it must also bring equity and fairness, so that all gain. And it must be environmentally sustainable because we now know that economic growth that ignores the environment will be a recipe for global disaster.
 

From the viewpoint of the economy, and particularly the Danish economy, this means we have to become much more innovative, in our products and services, in the way we run our businesses and deliver public services, in our institutions, including our schools and universities. But innovation is not just about new products. It is about logistics, distribution, management systems, financial controls, or the implementation of e-commerce, for example.

It is also related to the quality of human capital and how our countries invest in innovation and health. We need people who are educated to be innovative and this is why education is always the starting point.

If we are to create opportunity for people and the capacity for innovation, then we need a high-quality population, starting with early childhood development. The early years determine the later years.

More than ever before, we must ensure that our citizens have the opportunity to obtain a high-quality education including access to post-secondary education at the university or vocational level.

But we have to do more, ensuring that all our workers have access to training and retraining, through access to lifelong learning, and that immigrants and older workers are not discriminated against. We need the capabilities of immigrants, just as we need the experience and commitment of older workers.

Here, Denmark still has work to do. While Denmark invests heavily in education, this is not reflected in results.

Its secondary students do not score that well in OECD PISA tests in math, science and reading. A low proportion of young Danes go on to university, and when they do they take too long to complete their degrees and graduate. Indeed, at a time when Denmark faces a declining labour force, it is more important than ever that every young person gets the best possible education and training and that every older worker have the option and opportunity to continue working later in life.

Moreover, there is more that can be done to integrate immigrants into the labour force. As our recent International Migration Outlook 2006 shows, the immigrant participation rate in the labour force is much lower than the native-born population for all levels of education. Yet immigrants bring many capabilities with them. As some countries, notably Canada, the United States and Australia have shown, immigrants can make a significant contribution and have founded many successful business enterprises in those countries.

Denmark has much to gain by successfully integrating its immigrant population into the society.

Denmark has made improvements in its social welfare system, and has shown it can be quite innovative in public policy. Its "flexicurity model" is a unique system to bring unemployed people back into employment, and is now being studied by many other countries.

Entrepreneurship is also critical. Entrepreneurs are the people who develop new products or services, or new ways of doing things, generating the new activities that will replace those that disappear or relocate offshore.

New jobs will come from new activities. This means that we need to make it as easy and as low-cost as possible for people to start new businesses and to facilitate a financial system that is designed to support entrepreneurs and their level of risk. In the rankings of the relative ease of doing business produced by the World Bank, Denmark last year ranked 7th out of 155 countries. That's not bad at all.

The government appears to recognize it must do more. One indication is its target to reduce administrative burdens for business by 25 per cent before 2010.

In our work at the OECD we have identified many other factors that shape innovation and competitiveness.

They include the importance of investing in R&D in both the public and private sectors, the development of effective systems of commercialization of new knowledge, investment in strategic infrastructure such as communications and transportation, the development of high-quality corporate governance, the design of active labour market policies that focus on helping the unemployed return to a job, and the development of innovative city-regions that attract talent and investment and deliver a high quality of life.

Those nations that recognize the need for change, and develop comprehensive strategies to deal with change through innovation, as Denmark is doing, will have the best chance to prosper in the years ahead. Business leadership has an important role to play in helping countries understand the importance of change and what needs to be done to create jobs and wealth, with social equity and environmental sustainability, in the future.

At the start of my remarks I said that I was optimistic about the future. Why do I say that, given the huge problems we face in the world today?

One reason is that we are developing a much better understanding of what we need to do, so that we can overcome the pain of globalisation for those who lose jobs or suffer declining real wages.

Innovative and knowledge-based societies will provide more rewarding opportunities for individuals to achieve a higher level of opportunity in their lives.

We know that for this to be achieved, the billions of people who live in poverty must have a way out. China has already lifted several hundred million people out of extreme poverty as a result of joining the global economy. Globalisation will offer several billion more people the opportunity for themselves and their children to move out of poverty and into more decent lives. This is a powerful reason to pursue with globalisation.

At the end of the day, globalisation can be a positive-sum gain. But for it to succeed, our political and business leadership must show its commitment to all three legs of successful globalisation: prosperity, equity, and sustainability.

Let's ride that tiger.

Thank you.

 

 

 

Countries list

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