The Korean G-20 leadership: Assessing the key issues for 2010 - New sources of sustainable and balanced growth

 

Remarks by Angel Gurría, OECD Secretary-General


Seoul, 17 November 2009

Distinguished guests, ladies and gentlemen:

A year ago the global economy was on the brink. Today, thanks to massive macroeconomic support and swift actions to stabilise financial markets a recovery is now underway. Avoiding the worst outcome required courage and leadership at the national level. But it also required increased cooperation in the international context and the emergence of the G20 as a premier forum for economic discussions and action.

These are good news for the world economy. Having been one of the founders of the G20 more than ten years ago, I believe this is the right setting to discuss global issues. The fact that Korea will be chairing the next Summit is a great source of confidence. Former Korean Prime Minister Han Chaired the 2009 Ministerial Meeting of the OECD. We enjoyed working with such a committed and well organised team and reached meaningful outcomes. Under the Korean leadership, we launched our Green Growth Strategy, which aims to achieve a sustainable recovery based on a low carbon economy. It can surely become one of the pillars of a robust G20 agenda.

But before getting into Green Growth, let me start by sharing with you the OECD outlook and the challenges forward.

 

Current situation and the way forward

Indeed, the worst scenarios were avoided with determined actions and international cooperation. The world economy is starting to rebound and most OECD economies (Korea included) are starting to leave the crisis behind. But we are not yet out of the woods, and exit strategies should only be implemented once the recovery has taken strong hold.

However, we need to start planning for the world “after the crisis”. This is not going to be easy.  Economic conditions will be tight, particularly with worrisome fiscal positions in almost all countries and high unemployment.

Unemployment is indeed the worst problem we are confronting. It is the human face of the crisis. Only in the OECD area, more than 13 million jobs have disappeared since the beginning of 2008, and the number continues to rise. Output may be permanently lower by some 4 per cent for the average OECD country as a result of the crisis. We need to get these jobs back and to restore sustainable and balanced growth!

 

1. The G20 Framework for Strong, Sustainable and Balanced Growth

This goal will require much more than the usual national economic policies to support the recovery. We should be looking for new sources of growth and new sources of job creation, such as innovation and green growth. But we are also talking about a paradigm shift; a new approach to economic co-operation.


This is a challenging task, but it is possible, provided we get the right policies in place, and by working together to assess how macroeconomic and structural policies are collectively consistent with sustainable and balanced trajectories of growth. That is the vision which G20 leaders in Pittsburgh shared when they launched the Framework for Strong, Sustainable and Balanced Growth.  It is an enlightened initiative and, if successful, a clear contribution of the G20 to the world economy.


2. The OECD and the G20: A decade old relationship

The OECD was asked by the G20 to support this endeavour at its St Andrews meeting earlier this month. We will, of course. In fact, we will continue to support the G20, as we have done since its inception. Our substantive contributions so far include work on bribery; on export credits; on the design of fiscal stimulus to cushion the economic downturn; on international trade and investment; on taxes; on labour issues; on innovation and on phasing-out fossil fuel subsidies to mention just a few. We also work on the employment area, and the recent OECD Labour Ministerial meeting in late September was mentioned in the Pittsburgh communiqué as one of the important steps towards the G20 Labour Ministerial next spring.


Our joint OECD-IEA analysis on the removal of fossil fuel subsidies, for example, showed that such a measure could reduce greenhouse gas emissions by as much as 10 per cent by the middle of the century compared to business-as-usual. It would also increase overall economic efficiency and free up budgetary resources to target them more directly to the neediest.


Based on work carried out by the OECD and the Global Tax Forum, the era of bank secrecy is now coming to an end! Since the G20 Leaders Summit in November 2008, unprecedented progress has been made to tackle practices that facilitate cross-border tax evasion, one of the darker sides of globalisation. We have established a broader Global Tax Forum and close to 100 Tax Information Exchange Agreements have been signed so far. This giant leap forward in combating tax evasion will help to raise the integrity and legitimacy of market outcomes, which this crisis has severely undermined.


However, the work is far from over. Thus, we will continue with our contributions on these and other important areas where the G20 has tasked the OECD, and we are collaborating with the IMF, the World Bank, the FSB, the WTO, the ILO and others to maximise the collective impact of international organisations’ contributions. I have already proposed that we create a coordination and communication mechanism “the Observatory for Policy Coherence” to better serve the G20 members. We are also intensifying our co-operation with non-OECD G20 countries. Currently, we work with 20 out of the 23 participating countries of the G20, plus the European Union.


3. The OECD and the G20: Strengthening the relationship

What cocktail of strategy, policies and framework conditions will enable economies to harness new sources of economic growth, prevent environmental degradation and enhance the quality of life? An initial step in this agenda is to identify the most promising areas to promote sustainable and balanced growth. In the remainder of my intervention I would like to suggest two such sources: innovation and green growth.


Fostering Innovation

Let’s start with innovation – the introduction of a new or significantly improved product, process or method – as it will be one of the keys to accelerating recovery and putting countries back on a path to sustainable and “smarter” growth.


At the OECD we have done empirical work on the links between innovation and growth. Our evidence shows that the benefits of strong innovation policies are high. Using R&D as a proxy for innovation, we found that an increase in business R&D intensity of 0.1 percentage points would raise GDP per working age person by 1.2 percentage points. This result suggests that if the intensity of business R&D in the average OECD country were raised to the same level as in the US, GDP per capita could be almost 10 per cent higher. That’s more than double our estimate of the loss in potential output as a result of the crisis.
Innovation not only contributes to growth. It is also key to addressing global challenges. Urgent issues, such as climate change, health, food security and poverty depend on stronger innovation and new forms of international cooperation. Yet, many countries have barely begun to tap the potential of innovation to bolster economic prosperity and well-being.

Obviously, innovation is not only about more R & D and not something governments can decree. Nurturing innovation is a challenging task for governments. Having a few targeted policies to boost this or that sector, this or that “champion” will not do the trick. Success in innovation requires a systemic approach. At the OECD we think there are many drivers of innovation. There are also many little-noticed impediments to innovation, and removing these may do more good than promoting headline-grabbing schemes.


There are also key channels and structural policies that have a positive impact on innovation performance. We can show that policies that involve ICT, human capital and entrepreneurship, alongside policies to mobilise labour and increase investment are likely to bear the most fruit over the longer term. But the development of innovation policies needs to be supported by conducive framework conditions: sound macroeconomic policy, competitive markets, sound regulations, openness to international trade and FDI, a supportive tax climate and a healthy financial system. Governments play an important role in creating these conditions.


We also know that the challenges for innovation policy differ across countries, and that policy advice needs to be tailored to the specific needs of each country.


Over the coming year, we will continue our work on innovation to identify the specific policies, frameworks and governance mechanisms that can accelerate scientific and technological progress and diffuse innovation as widely as possible. After these years of work, in June 2010 we will deliver the final report of our Innovation Strategy, a mandate from our 2007 Ministerial Council Meeting. This topic is well suited for the G20 agenda, as the global debate moves from the immediacy of the response to the crisis, to forward looking policies for a balanced and sustainable growth.


Green Growth

Turning now to green growth.
Green growth has emerged as a strategic priority for countries worldwide, putting forward a new paradigm that would enable economic growth and development, prevent environmental degradation and enhance quality of life.


Green growth is about promoting economic growth and development while reducing pollution and greenhouse gas emissions, promoting the efficient use of natural resources, and maintaining biodiversity. It means making investments in the environment a driver for growth and development. We are convinced that the conversion of our economies into low carbon economies can be an important source of growth and employment. The OECD was mandated to develop a Green Growth Strategy to help governments identify the policies, the incentives and the frameworks that can achieve clean, resource efficient, low carbon economic growth and development.

Achieving the objectives of green growth will require a broad and flexible mix of instruments that cut across several policy areas (e.g. investment, taxes, innovation, technology, trade, employment and education), and applied in a way that ensures coherence and avoids costly overlaps.

Countries will need structural reforms to achieve green growth. Green tax reforms and price based approaches -- such as carbon taxes, auctioned permits in cap and trade schemes as well as the removal of harmful fossil fuel subsidies, are one element of necessary policy reforms. Taxes and auctioned permits can also help to bring in revenues to invest in energy efficiency to offset reductions in other taxes or to contribute to fiscal consolidation.

Carbon taxes are also under consideration or planned in many countries as well as other environmentally-related taxes. It is also encouraging to see many governments placing “green” investments at the heart of their own crisis-response strategies, as well as looking at the international co-operation needed for green investments globally.

Tackling climate change is a fundamental part of achieving green growth. And financing the fight against climate change will be a key element of a successful commitment in Copenhagen. The OECD has built up considerable experience in this area. We are examining how to scale-up public and private financing flows, as well as working on robust and transparent measurement, reporting and verification systems for finance that will be needed to ensure accountability.

The Development Assistance Committee at the OECD has been tracking bilateral aid flows for climate change mitigation for over a decade, and will initiate the same monitoring for adaptation.

Ladies and gentlemen:
The global economy is on the threshold of a major transformation. G20 leaders have fully committed to supporting new sources of balanced and sustainable growth. No single country or group of countries will succeed on their own; this is a task where we all have to join forces. And though governments must lead the way, they need the support of international organisations and professional groupings like the IIF and of civil society representatives.

The OECD is ready to support this endeavour. Our strong track record of evidence-based analysis and policy advice, and the wealth of information and knowledge accumulated over many decades are at the full disposal of all G20 governments. Only together can we rise to the challenge and tap the sources of a stronger, cleaner and fairer world economy of tomorrow.
Thank you for your attention.

 

 

 

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