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New Approaches to Economic Challenges (NAEC) Group - What does NAEC imply for policy?

 

Remarks by Angel Gurría

Secretary-General, OECD

Paris, France

3 March 2015

(As prepared for delivery)

 

Mesdames et Messieurs, Ladies and Gentlemen,

 

Welcome to this sixth meeting of the NAEC Group.

 

For over two years now, the New Approaches to Economic Challenges initiative has helped to transform the OECD’s economic thinking and acting, to adjust and renew our analyses, models and recommendations. We have come a long way.

 

At our last Group meeting, we discussed the changes in the instruments and tools the OECD uses to develop analysis and policy advice. Today we take the next step and focus on what NAEC implies for policy. This is the ultimate goal of NAEC, to put the instruments and modelling work at the service of better policy decisions. For this, we need to maintain the NAEC momentum and, as Ambassador Pinheiro mentioned, to make NAEC a “way of life”, breaking policy silos and incorporating complexity.

 

The lingering legacy of the crisis

 

We need to do so the face the lingering legacy of the crisis. In recent years, our countries have been making enormous efforts to stabilise and leave the crisis behind. Many OECD countries have promoted broad and deep reforms, some of which are already bearing fruit. In spite of these efforts, many countries are still dealing with the heaviest legacies of the crisis: low growthstubbornly high unemployment levels and even higher inequality in many countries. Today, the average income of the richest 10% of the population is almost 10 times that of the poorest 10% on average in the OECD area. This was 7 times in the 1980s and 8 times in the 1990s.

 

These trends, which for some observers are the “new normal”, have compounded a crisis of trust in our governments and institutions. On average only 40% of OECD citizens today trust their government, while 57% feel that corruption is widespread in business. This is a very dangerous situation.

 

In many of our countries, governments are working very hard to boost growth and employment opportunities. We are trying to help them do this, but this time based on a new type of growth, one which places people’s well-being and the planet first. For that, we must change our mind-set, our policies and ultimately our economies.

 

New policy insight

 

NAEC is helping to foster this new mind-set. Let me remind you its four key elements. We are first and foremost placing well-being on centre stageWe are doing so based on our OECD Better Life Initiative. But we are now operationalising it, through the development of a multidimensional living standard or a new measure of job quality.

 

We are reminding the importance of finance and its linkage to the real economy, and are also calling for considering our global economy as a “complex adaptative system”. Finally, we are calling for integrating institutions and politics in a long-term perspective. All these changes in mind-sets have non-trivial consequences.

 

We discussed these fundamental points in the last NAEC Group meeting. Let me now focus on the session 3 the NAEC Synthesis, on policy recommendations. Not all of these are new. Nor do they provide the full “OECD policy menu”. But they do provide new insights.

 

Financing sustainable demand

 

We are making progress in better understanding how to address risk and instability in finance. New regulations and more stringent capital requirements are in place to improve banks’ strength and resilience. But we need policy recommendations on how the financial sector can better play its key role of financing the real economy.

 

To this end, we need to strengthen critical equity markets infrastructure and prepare non-bank actors to provide long-term investment. We also need to broaden the range of financing instruments, particularly for young and innovative firms, and to remove regulatory, legal and governance impediments to long-term investment.

 

Promoting long-term productivity gains

 

A return to strong growth that delivers for people requires tackling a possible decline in long-term productivity growth. Using new tools and specifically micro-data, we are gaining new insights on productivity. It has helped highlighting the key role played by young and innovative firms for aggregate employment and productivity growth.

 

These young and innovative firms should be enabled to emerge and grow through policies that reduce the costs of entry, experimentation and exit. It is also necessary to boost innovation without stifling reallocation, while implementing complementary social and skills policies to allow a more efficient allocation of skills, which are at the heart of social mobility mechanisms. 

 

Towards a more inclusive growth

 

Another major change in mind-set supported by NAEC is to put inequality and fairness issues back at the centre of the policy analysis and debate. The trickle down argument has been proven wrong. And we did not wait for Thomas Piketty to discover that we were “Growing Unequal” and that indeed “Divided we stand”.  What is new is that we are providing new evidence about the link between inequality and growth. We have shown that income inequality has a negative and statistically significant impact on growth, through the channel of skills’ development. 

 

NAEC has also placed an emphasis on assessing the transitional costs and distributional consequences of structural reforms. Our most recent Going for Growth publication assesses the effects of pro-growth structural reforms on inequality.

 

However, the issue is not just income inequality. The inclusive growth project looks at inequalities also in non-income dimensions, such as health and employment. It provides a coherent, evidence-based and policy-oriented framework to deepen existing work on well-being and inequality.

 

To promote a more inclusive growth, structural policies need to be designed to take into account equity and fairness as well as growth and efficiency. Taxation systems must be reformed to be more effective and progressive at the same time. It is also critical to promote access to education at the earliest stage possible and to a broader range of skills, cognitive as well as social and emotional. In doing so, governments should focus their attention on disadvantaged and at-risk groups.

 

Green growth

 

As part of the NAEC policy package, and in the context of the up-coming COP21, we must keep the focus on green growth and how to shift to a low-carbon economy. We must ensure that this transition does not further increase inequalities, but rather creates opportunities for all.

 

The ambition to better consider the environmental impact of our economic activities has always been there. But this time we are working on the development of tools that will allow their systematic integration. And this is delivering promising outcomes. The CIRCLE project involves modelling together the economic consequences of reduced availability and quality in land, water and energy resources. Such an approach is novel and essential in guiding energy, agriculture and natural resource management policies.

 

Indeed the environment is a key area of well-being and it must be preserved. It is thus at the centre of our new NAEC narrative. A key element in fostering environmental sustainability is to improve our data on the stocks of natural capital.

 

Crucially, through NAEC, we have learned that environmental policy stringency does not undermine productivity. We have also learned that reforms that are good for the economy and the environment can also be good for distribution and for the poor. What’s more, the rationale for increasing taxes on energy or removing fossil fuel subsidies is further strengthened by considering how such reforms can actually increase progressivity. Policy makers should thus develop policy packages that make environmental policies progressive and facilitate their adoption.

 

Restoring trust in government and markets

 

We need to tackle low levels of trust in government and market institutions. This is required if the ambitious policy agenda laid down by NAEC is to be politically feasible and socially acceptable.

 

We need to continue our efforts to overhaul the process of policy-making. A lot remains to be done to ensure transparency, open government and stakeholder engagement. Lobbying and political finance thus need to be properly regulated to address conflicts of interest. Business and finance must also be appropriately regulated and responsible business conduct encouraged. Foreign bribery and illicit financial flows should also be more decisively tackled. To rebuild trust in the fairness of the tax system, we are delivering with the BEPS Action Plan and the Automatic Exchange of Information (AEOI) framework. These are truly game-changers.

 

Need for continuous improvements

 

The OECD is thus developing new measures, new instruments and is using new models. In a nutshell, we are broadening our toolkit and this is leading to new policy recommendations. NAEC is a way to trigger and mainstream these changes.

 

But we should not drop the ball too early. We need to continue harvesting and building a new dynamic for improvement. Let us maintain a space for fresh thinking by exposing our policy thinking to external perspectives who challenge entrenched thinking.

 

We need to more systematically integrate NAEC’s findings in our day-to-day work.  The broad policy agenda outlined in the Synthesis will require careful implementation – it calls for political leadership, strong inter-ministerial co-operation and even international co-ordination. This is why we have discussed NAEC with TUAC, BIAC and Key Partners; in China, India and just yesterday in Brazil. We are also currently looking at how NAEC could contribute to the SDG discussion.

 

Ladies and gentlemen, today’s discussion will focus on how NAEC will help our members deal with future challenges. And let me say that NAEC is all about our Members. But NAEC does not end with this policy agenda – it is not the last word. Many of these recommendations are tentative and further insights will emerge. We need to build on the body of work produced by NAEC, test its implications and applicability as well as its relevance for policy, examining more closely how Members are changing their policy approaches.

 

We have learned lessons from the crisis, but should continue to update and review our analytical approaches. The lasting legacy of NAEC is that the OECD as an organisation is more thoughtful, more reflectiveless complacent and more open to outside critique, ideas, economic thinking and debate.

 

We will reflect this afternoon on how to further mainstream NAEC guidance and results in our day-to-day work, and on what should be the next steps in our NAEC initiative.

 

In that spirit I present the first draft of the NAEC Synthesis for your consideration.

 

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