Finance

The Global Economy and OECD: Distilling Lessons from a Financial Crisis

 

Speech by Angel Gurría, OECD Secretary-General, to the Parliamentary Assembly of the Council of Europe

Strasbourg, 1 October 2008

Mr. President, Ladies and Gentlemen:

 

As always, it is a great honour for me to address this Parliamentary Assembly. This is my third visit to the Council of Europe and I can tell you that the more I come, the more I enjoy the occasion. I appreciate the warm welcome.

Before I dive into the sizzling waters of the global economy, I would like to congratulate Lluís Maria de Puig for his appointment as president of this Parliamentary Assembly. It was a real pleasure to meet him and to exchange ideas and viewpoints.


Mr Gurría addressing the Parliamentary Assembly.  

I am also grateful to the Economic and Development Committee of this Assembly for their work on the report “OECD and the World Economy”, and in particular to this year’s rapporteur, Mrs. Anna Lilliehöök, for her excellent work in preparing it.


Daring to write a report on the world economy under these circumstances is an act of bravery. Chapeau to Mrs. Lilliehöök and her team!

I would like now to share with you a few brush-strokes on the OECD’s perspective of the global economy in the context of the current financial crisis; the central issue of the moment.

Let me start by saying that the situation is indeed critical. We are facing the worst financial crisis since the Great Depression and its consequences are already spreading beyond the financial sphere, throughout the globe.

The financial system is a conveyor belt through which the economy works. And if the financial system is partially blocked or paralysed, as it is now, then the economy cannot work normally.


We have already seen the first troubled European banks being rescued in the UK, Belgium, the Netherlands, and Germany. And OECD experts suggest that, considering the exposure of European financial institutions, we might have to start thinking of a systemic plan for Europe if things don’t improve on the other side of the Atlantic. The piecemeal approach may not work in Europe either.


Since its announcement, OECD has supported the adoption of the US systemic rescue plan. I am confident that in the coming days the US legislators will reach an agreement to provide this crucial tool.

Beyond the emergency measures, it will also be essential to go to the roots of the problem, to draw our lessons and conduct a major debate on the necessary reform of the international financial system.
Bubbles and crises will still occur if the sources of underlying imbalances are not addressed directly. Understanding causality is thus a pre-condition for correct policy making.


The current financial crisis had its origin in traditional factors that have led to past banking crises in the US and other countries; but also in non-traditional features that are idiosyncratic to this one.

Among the conventional features we see a boom period of large credit growth, a sustained rise in asset prices ─ especially in the housing markets ─ and explosive lending to non-creditworthy economic agents (in this case, sub-prime mortgage debtors).

But there were also unconventional or novel features that contributed to the breadth and depth of the sub-prime crisis. For example:


1. The development of the originate-and-distribute model of transferring risk;
2. A high appetite for yield that nurtured a growing demand for high-risk assets;
3. Ex-ante ignorance and ex-post uncertainty on the risk features of mortgage-based securities, related derivatives and credit-default swaps;
4. Inadequate corporate governance and management incentives in financial institutions;
5. The role of regulators and rating agencies.

We must learn from these flaws. OECD is an appropriate forum to exchange views on these issues and to propose new approaches to these challenges.

We need to start thinking about what longer run solutions might look like, and the OECD committees will play a strong role in this respect. The starting point will be to review the main regulatory and market failures that have emerged during this crisis.

The breakdown of financial markets – even if largely reversed in coming days – will affect the short and medium-term prospects of activity and inflation throughout the world.

At least several quarters of weak growth lie ahead for most OECD economies. The G7 area is expected to grow by a mere 1.4% in 2008. Developing countries will feel the pinch too. Growth prospects for 2009 are more uncertain now and headline inflation could remain high for some time to come.

The current financial crisis has cast a shadow over the global economy, but nonetheless there have been some positive developments which must also be taken into account.

Beneath the dark clouds of this financial storm, global current account imbalances have been decreasing, global FDI inflows reached a record 1.8 trillion dollars in 2007, oil and food prices have started to come down and emerging economies ─ while slowing ─ are still showing remarkable stability and resilience.

The OECD has been adapting to the new circumstances; working hard to produce a more inclusive globalisation.

During the past year we have provided member countries, and a growing number of non-member countries, with innovative instruments to improve global dialogue and policy-making in key areas: like climate change, agricultural development and food prices, education, Sovereign Wealth Funds, innovation, structural reform, the Internet economy and development aid effectiveness.

To help strengthen financial markets, we will intensify our collaboration with governments, central banks and international institutions in proposing and supporting implementation of regulatory and supervisory reforms that address the main market and regulatory failures of this financial crisis. We will advance through the OECD Financial Education programme to issue, by early 2009, a set of principles based on good credit practices.

To respond more effectively to this type of challenges in a more plural and complex global economy, we will keep advancing steadily in our enlargement and enhanced engagement processes. We are becoming more global, more inclusive.

We will increase our already rich relations with developing countries through initiatives like the Heiligendamm Dialogue Process, the Partnership for Democratic Governance, the activities of our Development Centre in Asia, Africa and Latin America and the increasing participation of these countries in the work of our committees and bodies.

And we will certainly focus on helping decision-makers like you, to design, promote and implement better reforms. The political economy of reform is becoming more and more important. The current financial crisis has exposed with remarkable clarity the many risks of postponing economic reforms. The complications in approving the bailout plan revealed the importance of building stakeholder support for crucial reforms.

To better deliver on all these tasks, coming here to the Council of Europe’s Parliamentary Assembly, is increasingly relevant. Your ideas broaden our perspective. Your experience as policy-brokers, as decision-makers from a wide variety of countries and cultures, represent both a highly appreciated input and a great opportunity to understand and build together the stable, sustainable and inclusive global economy that our children deserve.

The times might be uncertain; but our commitment is not!

Thank you very much.

 

 

 

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