Remarks by Angel Gurría, OECD Secretary-General, delivered at the China Development Forum
Beijing, Saturday March 21
Distinguished guests, ladies and gentlemen:
Hardly a day goes by without news of record drops in global trade, plummeting industrial production, steep increases in unemployment and falling GDP. We are facing a financial and economic crisis we have never seen before in our lifetimes.
The crisis struck at a time of great global interdependence. Even those countries that were not at the epicentre of the initial financial turmoil and downturns in housing markets are now experiencing the reverberations from these shocks. Contrary to past financial and economic crises, this one is truly global.
1. The economic consequences of the crisis are grim
The Asian economies are especially hard hit. And recent falls in industrial production have not been witnessed in the past half century!
China has not been spared from the slowdown either. Even though China’s current pace of growth is enviable to the rest of the world, the slowdown from 13 per cent in 2007 to less than 7 per cent by end 2008 has been abrupt. In fact, it’s a larger change in the pace of growth than observed in the United States and Europe over the past year. At the same time, prices of raw materials are plunging and the risk of deflation beckons.
Our projections suggest things will get even worse, before the situation improves. This bleak outlook for the world economy is attributed to the massive tightening in financial conditions, ongoing downturns in business investment and in global trade and the collapse in confidence. Against this, fiscal stimulus is in the pipeline and the full effects of monetary relaxation have not yet been felt.
In China, the forces pulling down economic activity differ in size. Most importantly, financial conditions are less constrained, and China’s banking sector is not significantly exposed to foreign high-risk assets. These features and the decision by the People’s Bank of China to relax the amount of bank lending have contributed to a surge in new credit.
What is certain now is that the global downturn will be much deeper and more protracted than envisaged at the end of last year. Moreover, the risks and uncertainties surrounding the outlook are higher than usual, and predominantly on the downside. Further failures of financial institutions cannot be excluded as the recession deepens and the number of insolvencies rises.
2. Tackling the crisis requires a global effort
The OECD is working to support governments in their efforts to restore financial stability and to cushion the impact of the crisis on our economies. We have also been providing specific contributions to the G20 Action Plan, ahead of the London Summit, and we are collaborating with the IMF, the World Bank, the FSF and others to maximise the collective impact of international organisations’ contributions. At the same time, we are intensifying our co-operation with non-OECD partner countries, sharing experiences and policy lessons.
The policy response to the crisis must involve three pillars of action. The first pillar relates to restoring banks’ capacity to lend. This is essential to put economies back on the path to growth.
Governments and their monetary authorities have already taken unprecedented action towards rebuilding confidence in the financial system and restoring the normal functioning of money and credit markets. They lowered interest rates to near zero, injected liquidity, established interbank loan guarantees and provided equity for troubled financial institutions. Although these measures have managed to avert the collapse of the financial system, they have not been sufficient to restore the normal functioning of the intermediation process, or to boost confidence.
More systemic financial sector stabilization is needed. It is necessary to identify and separate bad assets from good ones before further Capital is injected and to reduce uncertainty among market participants about the valuation of these assets and the capital regulations to be applied.
The OECD also emphasizes the need for financial policies that support long-run objectives which will prevent a similar crisis in the future. These include:
Providing better, more symmetric information flows to reduce the risk of liquidity crises;
Aligning regulations and incentives in the financial sector to ensure tighter oversight and improved risk management;
Addressing the “too big to fail” moral hazard issue; and
Ensuring competitive markets with level playing fields within and between countries.
The second pillar of response concerns the need for concerted and comprehensive action to boost demand and cushion the impact of the economic downturn. Central banks cuts of interest rates to levels close to zero have gone some way to compensating for the tightening in financial conditions. But further reductions in interest rates and in some markets, quantitative easing measures to enhance liquidity are still needed and welcome.
Virtually all OECD countries have introduced discretionary measures to support their economies, with a majority favouring tax cuts over boosting spending. The cumulative (2008-2010) size of the fiscal packages in OECD countries is equivalent to 2 ¼ per cent of GDP (3.4 per cent when weighted by the size of GDP).
The actual stimulus to GDP from these measures depends on the size of fiscal multipliers. Our analysis for the average OECD country, suggests that the impact from discretionary stimulus to GDP in 2009 will be of the order of 0.6 per cent, declining to about 00.5 per cent in 2010.
To this discretionary stimulus must be added the impetus that is “automatic” via higher government spending on social security and lower tax payments as economic activity weakens. The scale of the automatic stabilisers is estimated to easily exceed discretionary fiscal action in 2009. The overall stance of fiscal policy should thus provide a positive thrust in the face of the economic downturn in 2009.
One desirable feature of the fiscal packages we have analysed is that virtually all OECD countries have launched and/or brought forward public investment programmes. This helps to absorb some of the slack in the short term and also to foster long-term growth. Australia, Canada, Germany, Korea, Mexico and Spain are particularly active, with increases in public investment of about 11% of GDP or more.
China, of course, is also following a similar “double-dividend” fiscal strategy. Moreover, the magnitude of China’s investment plan is large. The size of the stimulus is larger than in the average OECD country. Another welcome feature of the package is the decision to cut the rate of VAT charged on exports and investment to zero, bringing it into line with standard international practice.
International coordination is another way to bolster fiscal policy effectiveness. This is especially so in economies where trade and financial flows are closely integrated. A coordinated approach also helps in terms of consistency in the timing and the direction of fiscal stimulus across countries. Fiscal co-ordination, however, does not mean aiming for similar magnitudes of stimulus in each economy. The degree of stimulus needs to be country specific and calibrated to avoid endangering the long-term sustainability of public finances.
The “exit” strategy is another area where international coordination is important. While all efforts are currently focused, and rightly so, on containing the crisis and supporting economic activity, the exceptional measures introduced over the past half year will need to be withdrawn as soon as the economic recovery is entrenched. Individual countries acting on their own may find this difficult, which again points to the need for international co-operation and co-ordination.
In both these areas -fiscal stimulus and exit strategies- China has an incentive and a responsibility to engage in dialogue on the policy response to the crisis. The international community has a duty to work with China as equal partners.
3. Building a stronger, cleaner and fairer world economy
In addition to these financial and macroeconomic policy actions, we need to rethink how the world economy operates. This is the third pillar of action, where the OECD is forging its contribution. Our “Strategic Response to the Crisis” is making the case for both addressing the failures of our financial system and the policies that can make our economies stronger, cleaner and fairer.
Stronger means making our economies more resilient and able to deliver durable benefits in terms of material well-being. Cleaner is not only in the sense of environmentally sustainable, but also addressing the “darker” side of globalisation. Issues like money laundering, corruption and tax evasion that impede us from having a level playing field. And fairer means the fruits of economic output are more equally distributed.
There are a number of dimensions to this effort. First of all, to make the economy stronger we need to revitalise it, by improving regulation, strengthening corporate governance, developing policies for sustainable growth and promoting trade, investment and competition. On the latter, our analysis shows that countries have thrived on more open markets (e.g. Going for Growth and the recent OECD report on Globalisation and Emerging Economies). At the same time, there is still a considerable potential for both OECD and non-OECD countries to exploit a further market opening.
Of particular concern to us all is the risk that the economic crisis could lead to a tit-for-tat escalation of barriers to trade. This would repeat the mistake of the 1930s that transformed the economic downturn into the Great Depression. Keeping markets open and avoiding new protectionism is crucial to strengthen prosperity throughout the world.
We also have to make our economies cleaner to restore trust in globalisation. We can do this by promoting transparency and integrity in market transactions and government policy processes, by fighting corruption and money laundering and by combating tax evasion. OECD is working in all these areas, providing benchmark and policy instruments to help countries address these and other global challenges like trade and investment protectionism.
We are also working hard to promote a cleaner type of economic growth. Climate change might be a long-term global challenge, but action is needed now. Our responses to the crisis must keep our environmental challenges in mind; in fact they are an opportunity to bring about a greener growth. We must ensure that economic stimulus packages do not lock-in inefficient or polluting energy technologies or dirty modes of production and consumption, but instead promote clean alternatives.
In this regard, it is encouraging to see many governments placing “green” investments at the heart of their own crisis-response strategies. We are very happy to see China’s intention to focus an important part of its stimuli package to green projects. We also celebrate that the fact that one of the greenest fiscal stimuli so far is taking place in another Asian-OECD country, Korea, where they intend to devote around 80% of their financial stimulus measures to green projects.
Finally, to make our economies fairer, we need to share the benefits of prosperity. This crisis is a jobs crisis. All over the world, tens of millions of people are losing their jobs and cannot pay their mortgages or their children’s tuition. This has to be addressed. This we can do by boosting employment and social inclusion, by strengthening our social safety nets, by providing adequate education and healthcare and by fostering development.
Another point I would again like to stress is that the crisis not be used as a pretext for scaling down the Millennium Development Goals foreign aid commitments. A reduction in foreign aid would hit developing countries, resulting in even sharper contractions in economic activity and add to fragility in vulnerable states. This is why last year I issued, together with the Chair of the OECD Development Assistance Committee a call to the leaders of the world’s main aid donor countries to stand by their development pledges despite the economic downturn. Donors signed an Aid Pledge and it is now even more important that this Aid Pledge is honoured.
Ladies and gentlemen:
There is clearly a lot of work that needs to be done. To sum up, three pillars of action are needed: i) restoring bank’s capacity to lend; ii) concerted and comprehensive action to cushion the economic downturn; and iii) interventions that restore sustainable, long-term growth.
No single country or group of countries will succeed on their own. This is a task where we all have to join together. Global challenges require global answers. Otherwise, we will have insufficient results. In this interdependence, the contribution of China is crucial. The size and dynamism of its economy, but also its growing integration to the global economy and its different cultural perspective, make it a strategic partner in any collective response.
OECD has been working with China since even before the crisis, sharing policy experience, learning from each other. And we look forward to keep strengthening this partnership to build together a stronger, cleaner and fairer global economy.
Thank you for your attention.
Official visit of the Secretary-General to the People's Republic of China (Beijing, 20 - 25 March 2009)