Investing in robust and inclusive growth
Nearly seven years have passed since Lehman Brothers collapsed in September 2008, marking the start of the worst financial and economic crisis in living memory. Although the worst is behind us and the global economy is gradually recovering, it is doing so at a much slower pace than in past cycles. Plenty of work and concerted effort will be needed to set us on a robust, inclusive growth path.
On the economic front, the hesitant recovery has yet to translate into more and better jobs. There are simply too many people unemployed, on precarious contracts or quitting the workforce. In addition, emerging markets have started to lose steam, dampening world trade and investment. None of this helps prospects in developing countries and makes it harder for all of us to address urgent challenges, such as climate change, rising inequalities, disease and poverty.
Low interest rates, cheaper oil prices and more favourable exchange rates may bring some relief, particularly in Europe, but a pickup in the headline numbers should not give room to complacency. People expect more than a temporary fix, and rightly demand a clear path to a brighter future.
In 2015 policymakers have a precious opportunity to live up to those expectations. Three major international summits stand out that could help spark new momentum towards achieving an inclusive, sustainable, global recovery: first, on the future of Development Finance at Addis Ababa in July; then on adopting the new Sustainable Development Goals at the UN in New York, in September; and last but not least, on combating climate change at the COP21 in Paris, in December. With the eyes of the world on these gatherings, world leaders must realise that failure is not an option.
This year, OECD Week will serve as a valuable prelude to these vital talks, when close to 2,000 policymakers and representatives from business, labour and civil society gather for annual discussions at the OECD Ministerial Council Meeting and the OECD Forum, on 2-4 June.
A major overriding theme this year is investment, which has been sluggish for far too long. Already a priority in the G20, investment is top of the agenda for Prime Minister Mark Rutte of the Netherlands, who will chair the OECD Ministerial Council Meeting. The Netherlands has much to offer in terms of their own experience when it comes to long-term investment in people, infrastructure, technology and nature, having transformed this low-lying land into one of the world’s most advanced countries.
Investment is a vital cylinder in the economic and social engine and concerns all three cross-cutting themes of this year’s OECD Forum–People, Planet, Prosperity–which are explored in this OECD Yearbook. Structural reforms remain essential to reinvigorate investment.
Investment dipped sharply during the crisis in advanced economies and in 2008-14 private investment was running at some 25% below pre-crisis forecasts. Without more investment and innovation, we can neither grow nor develop the infrastructure, the institutions and the markets we need in order to address climate change and make the shift to a low-carbon economy, which in turn could become a harbinger of future prosperity.
Investment in capital needs to be complemented with investment in people, to maximise productivity and promote well-being and inclusiveness. Governments should devise comprehensive policy packages so that investment translates into more and better jobs. Such packages should focus on education, adult skills and basic research, and promote the knowledge-based capital that drives wealth creation in successful economies. They should also include measures to reinforce the social services that encourage workforce participation, particularly among women, such as effective health systems and child care.
Investment will also be a determining factor for development policies, not least for the success of the new Sustainable Development Goals. A challenge in the post-2015 landscape will be to mobilise private financing and domestic resources alongside development aid in productive and complementary ways. Official development assistance, which at US$135.2 billion in 2014 matched previous highs, remains vital, particularly for poorer, fragile countries. But to plug the wide infrastructure gaps and develop potential in areas such as transport, renewable energy and skills, more private and institutional investment is required.
In 2012 and 2013 over $1 trillion was injected to developing countries through foreign direct investment. However, most of the trade in value added takes place in East Asia, Europe and North America; Africa’s share, for instance, is just over 2%. Reforms to reduce trade costs, integrate regional markets, tap into global value chains and stamp out corruption would boost this ratio. The financial sources for investment are there, in the cash reserves of corporations and the long-term investors such as sovereign wealth funds and pension funds. The OECD’s Policy Framework for Investment, used by over 30 emerging and developing economies, should prove invaluable in helping policymakers devise programmes for attracting such funds.
Finance for investment presents challenges for OECD countries, too. Banks are still behaving cautiously, although thanks to various quantitative easing measures, liquidity is on the rise, as booming stock markets show. What is lacking is confidence, and an appetite for long-term investment; only 1% of the assets of insurers, pension funds and sovereign wealth funds worldwide are invested in infrastructure (almost all of it in developed and emerging countries).
Meanwhile, with small businesses looking for finance, a market has emerged in so-called innovative financing, with the likes of crowd-funding, green bonds and microfinance helping to support new activities, notably in the sharing economy, which is changing how we work, travel, book holidays and more. Policymakers should help these investments to scale up and provide the kinds of activities people clearly want.
As the articles in this OECD Yearbook show, while people want pragmatic, feasible solutions that are appropriate to them, they do not want to return to the pre-crisis world, and will not be fooled by old wine in new bottles. They want results. And with new technology and communications, people will not wait.
The OECD has learned a lot during the crisis, and has led a rich and informative discussion about new ideas and approaches under our New Approaches to Economic Challenges (NAEC) initiative. Thanks to our forums and worldwide public participation in the OECD Better Life Index, we are not only forming a clearer vision of what makes a better world, but believe change is within reach. What we need is the leadership, co-operation and determination to make it happen.
So far, 2015 has been a testing year, with the brutal terrorist attacks in Paris in January, massacres in the Middle East and Africa, the tragic deaths of migrants in the Mediterranean, many geopolitical tensions, and the devastating earthquakes in Nepal. Staying positive in this context is a challenge on its own.
But if we pull together, 2015 can end well for everyone, for our planet and our future prosperity. As the Dutch say, only the sun rises for free (Voor niets gaat de zon op). The rest is up to us. Let us grasp the light and make sure that 2015 goes down in history as the year in which we finally made it happen.