Productivity and long term growth

Governments must maintain reforms for long-term growth during crisis, says OECD

 

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03/03/2009 - The current crisis offers governments the opportunity of combining emergency action with the important structural reforms needed to improve long-term growth and resilience in their economies, according to OECD’s latest Going for Growth.

“If the opportunity is seized to make lasting reforms that will improve long-term economic performance, we may look back at this period as one where we repositioned our economies to achieve stronger, cleaner and fairer growth”, said OECD Secretary-General Angel Gurría. (Read his remarks).

“The debacle in financial markets does not call into question the beneficial effects of recommended reforms of product and labour markets”, said OECD Chief Economist Klaus Schmidt-Hebbel. (Read his speech).

Going for Growth identifies key reforms to raise living standards in each OECD country. It points out that a number of policies, if carefully implemented, can both boost demand in the short term to soften the impact of the recession, and also raise economic growth over the long term.

This ‘double dividend’ is achievable by pursuing policies in a number of areas. They include:

  • Introducing infrastructure projects that can be brought onstream quickly or improve the quality of existing facilities, particularly in education.
  • Boosting spending on training programmes to give workers skills that will be needed as the labour market recovers.
  • Cutting taxes on labour income, particularly for those with low wages. This will help boost consumption and improve long-term job prospects.
  • Reform anti-competitive regulations in product markets. Obstacles to businesses entering new markets should be reduced to stimulate the creation of new products and businesses, so boosting demand. Over the long-term stronger competition will help raise productivity and living standards.

Because crises can unmask weaknesses in existing policies, there are periods when important reforms are often initiated. But the report warns that when politicians are under pressure to act quickly, they risk implementing policies that are ultimately bad for growth.

In the past, the erection of import barriers in the 1930s helped to transform a downturn into the Great Depression, and responses to the crisis in the 1970s that were intended to reduce unemployment with early retirement schemes damaged European growth.

“Under no circumstances should mistakes from previous crises be repeated”, warns Mr. Schmidt-Hebbel. In addition, state aid to help non-financial sectors risks delaying necessary adjustments to new economic circumstanstances and creating costly dependence on public support. If such measures are taken, they should be phased out quickly, the report says.

This report also has special chapters on taxation and economic growth, infrastructure investment and public policy, the stance of product market regulation, and the effect of population structure on employment and productivity.

For more information or to obtain a copy of Economic Policy Reforms: Going for Growth 2009, journalists are invited to contact Sara Sreberny-Mohammadi, OECD Media Division (tel: +33 1 4524 9700).

 


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