Remarks by Angel Gurría, OECD Secretary-General, delivered at a International Institute of Finance, 30th Anniversary Membership Meeting.
Tokyo, Friday, 12 October 2012
(As prepared for delivery)
Ladies and Gentlemen,
It is a pleasure to be here with you in Tokyo to celebrate the 30th anniversary of the International Institute of Finance (IIF).
The world economy remains fragile and the global financial system remains weak.
According to the latest OECD Interim Assessment released last month, the global economic outlook has deteriorated significantly since the spring. Key European countries are entering a recession that is having an impact worldwide. The United States is projected to enjoy somewhat stronger growth, but failure to avoid the fiscal cliff might derail its recovery. China’s exports to the euro area are being hard hit and growth is slowing. The weak growth outlook is expected to push unemployment beyond today’s already high levels.
A number of downside risks lie on the horizon, the euro area crisis, a fragile financial sector, slowing growth rates in Asian and emerging economies, volatile oil prices and the increased risk of protectionism. You will be discussing these and other risks in your next session.
Action – by policymakers and private sector actors – is at the heart of my message today. As you take stock of what this means for the IIF 30 years on, I’d like to share with you the OECD’s own vision in three crucial areas for the global economy. Action to resolve the euro crisis. Action to strengthen the global financial system, and action to anchor growth in the longer-term. Let me outline the crucial actions we must take.
Resolving the euro area crisis is the most urgent priority
First, let’s not forget the courageous efforts already being made by some national governments. The austerity measures and structural reforms in Greece, Spain, Italy and Portugal are painful but critical. We should do what we can to support them in these vital reform agendas.
At the same time, the European Council and the European Central Bank (ECB) have also made important steps. Cutting interest rates, committing to intervene in sovereign debt markets under certain conditions, and agreeing to a banking union are important steps towards stability.
But it’s time to translate these words into action. We have seen that markets respond positively to political commitments, but that their optimism and confidence fades when implementation gets so complicated that it disappoints. That is why the ECB needs the freedom to intervene in struggling sovereign debt markets when the conditions are right.
Further progress towards a full banking union is crucial and should include euro area level deposit guarantees, a single supervisory mechanism, with a key role for the ECB and a common bank resolution regime. European banks also urgently need to be capitalised. In our view Europe needs over 700 billion Euros in new capital to alleviate pressures. Full recognition of non-performing loans, enforced by common supervision, and the availability of area-wide public funds for recapitalisation are crucial for severing the negative feedback loop between banks and sovereigns.
More broadly, action is needed to fix weaknesses in the global financial system
I have already said that the recapitalisation of banks in Europe is a priority, but the need to reform the financial sector goes much further than that. For a long time, the OECD has argued for two complementary reforms that we think would be more effective in addressing systemic risk in the financial system.
First, a simple leverage ratio is essential to control the problem of banks with too little capital. The complex Basel rules unfortunately gave banks ample scope to avoid such binding limits (via the so-called ‘risk-weight optimisation’).
Second, separating commercial banking from large-scale and complex securities (notably derivatives) businesses is essential. Put simply, central bank support for the profitability of banks in the aftermath of this crisis cannot be permitted to foster new bubbles and new crises.
Separation of well-capitalised, well-governed and deposit-insured banks from investment banking will improve the appropriate pricing of risk by reducing the cross-subsidisation and too-big-to-fail guarantees. This will also help to cushion domestic growth and jobs from bouts of extreme global market volatility.
The OECD’s preferred model of legal separation and ring-fencing in the corporate form of a non-operating holding company would prevent creditors of one troubled subsidiary pursuing those of another. The creation of more ‘bite-sized’ affiliates would also enhance the credibility of resolving them in the case of insolvency.
The Volker rule in the United States, the recommendations by the Vickers Commission in the United Kingdom, current proposals in Germany, and most recently, the Liikanen Report on Reforming the Structure of the EU Banking Sector are to be welcomed in this respect. It is vital that policymakers work closely with organisations such as the IIF, as well as other stakeholders, to ensure that these reforms are fit for purpose and consistent across country borders.
Beyond the short-term response to the crisis, we also need to take broader action to anchor growth in the long-term
Restoring stability and growth to the euro area and fixing the financial system will go a long way to securing stronger and more sustainable global growth. But the global crisis has left policymakers around the world a number of unwanted legacies; low growth, rising unemployment and inequality, high budget deficits and debt. Longer-term challenges also lurk, such as shifting wealth, climate change and persisting global imbalances. All pose a threat to long-term growth.
As we have been recommending for several years, it is time to "Go Structural." Structural reforms offer multiple dividends: they can help us unleash productivity, develop new sources of growth and rebuild confidence; they can even facilitate fiscal consolidation and help address imbalances. And the best news: our analysis has proved that if properly targeted and combined, structural reforms can deliver results much faster and at lower short-term costs than generally expected.
Let me provide you with an example of the kind of structural reforms I am talking about.
It is no secret that higher labour utilisation "getting more people to work" and higher productivity "getting each worker to produce more" can deliver stronger long-term growth in all countries. In fact, from my experience this is something that is currently occupying the minds of many world leaders.
Structural reforms that boost women's employment and provide better access for the young and the old to the labour market can achieve increased labour participation. Not only this, but such reforms will also help reduce inequalities and mitigate the effects of ageing societies. A challenge many countries, including Japan, face today.
Productivity can be increased through a wide array of structural reforms: through reforms to promote knowledge-based assets such as employee skills, organisational know-how and various forms of intellectual property; but also, through deeper and more rapid reforms to increase competition in product markets and to open economies to trade and investment.
There are some excellent examples of how such structural policies can work.
Australia successfully boosted productivity and growth by further reducing import tariff barriers, vigorously enforcing new competition law and improving regulation in a wide range of sectors. It also simplified and decentralized its system of industrial relations, allowing it to derive large benefits from globalization and its proximity to dynamic Asian markets.
Working closely with the OECD, the Italian Government has introduced legislation in the last 12 months covering a wide range of competition and regulatory policy areas, which we estimate could add up to 4% to GDP over 10 years. Not insignificant numbers when you potentially face years of stagnant growth.
In our efforts to promote growth, we must not forget the well-being of citizens
When implementing productivity and growth-enhancing reforms we need to be aware of their potential unintended consequences. For example, policies to foster competition in product markets, and increasing adaptability of labour markets can lead to widening wage disparities and contribute to inequalities.
In fact, recent OECD analysis has taught us that the benefits of growth do not automatically trickle down. Income inequality in OECD countries is at its highest level for the past half century. The average income of the richest 10% of the population is about nine times that of the poorest 10% across the OECD, up from seven times 25 years ago.
Thankfully structural reforms can be both the cause and the remedy. Structural reforms are also crucial in combating inequality. Addressing this issue not only improves well-being, it can also restore balance, competitiveness and boost productivity. Tax, health, social security, and other policies are needed. But it is particularly important that countries focus on education and skills.
Without adequate investment in skills, people languish on the margins of society, technological progress does not translate into economic growth, and countries can’t compete in today’s economies. There are also plenty of unemployed graduates on the streets, while employers search in vain for people with the skills they need. This tells us that skills do not automatically translate into better economic and social outcomes.
The OECD Skills Strategy calls for a shift from "lifetime jobs" to "lifetime employability". This means investing in skills throughout the life cycle; from early childhood, through compulsory education, to the transition into the workforce and beyond. Linking the world of learning and the world of work is crucial and calls for proactive engagement from all players, including the private sector.
Last, but not least, we cannot afford to ignore our environment
I can hear the groans already. At a time of crisis, it is easy to throw out the green and go for any colour of growth going. But we are on a collision course with nature and the costs and consequences of environmental inaction could be absolutely colossal, both in economic and human terms.
At the OECD, we strongly believe that growth and environmentally sustainability go hand in hand. Encouraging greener sources of growth fosters innovation, while at the same time mitigating the expensive costs of problems like climate change, biodiversity loss, or water scarcity. Structural reforms can also contribute here by addressing barriers to green innovation. The private sector also has an important role to play in integrating environmental considerations in their growth strategies.
Finally, let me leave you on a note of challenge…
The global economic crisis has been a wake-up call to policymakers, to financial sector participants, to individuals around the world. The economic meltdown of 2008 exposed serious flaws in the underpinnings of mainstream economics.
As an international organisation, we are taking a long hard look at ourselves in the mirror. That’s why the OECD has launched work “New Approaches to Economic Challenges (NAEC),”- to reflect on and analyse the overall structure of our thinking and its effectiveness. This initiative will enable us to identify the root causes of the crisis and more importantly, take stock of the lessons learnt from it. This isn’t about writing a book, or holding a seminar. This is about taking a cold, hard look at policy, and we invite you to join us in this soul searching exercise.
Ladies and Gentlemen,
Today you have heard my call to action. I am sure as you will discuss these issues in more depth in your next session. But my message today is simple. The global economy is on the ropes. I urge everyone to take action to restart growth in the euro area, to strengthen the fragility of global banking system, and to set us on a long-term path towards inclusive and sustainable growth.