Remarks by Angel Gurría, OECD Secretary-General, delivered at the Council on Foreign Relations
2 June, 2009, Washington DC, United States
Ladies and Gentlemen/Jessica:
We are facing the worst crisis of our life-time. A crisis that is a product of massive failures of regulation, of supervision, of corporate governance and of risk management. We all have a certain degree of responsibility. Governments, competition, regulatory and supervisory authorities, rating agencies, corporations, financial institutions, and international organisations. And it is time to face such responsibility and react accordingly. This is a very important opportunity to get it right this time, and to build a stronger, cleaner and fairer world economy.
On the good side of the story is the fact that unprecedented action has been taken to tackle the crisis from all the corners of the world. It brought us together in the search for common solutions. Central Banks, governments and international organizations are making positive contributions to address the problems.
The stimulus packages are starting to take hold. After 18 months of mostly bad news, we are seeing some positive news, or so called “green shoots”. Our next OECD projections will be the first in several quarters where our numbers will not be worse than the previous release. But we are not yet done. Not by far. We continue to anticipate a very weak first half of 2009. And for the whole year we forecast a substantial contraction in OECD area output, around 4% of GDP on average. The panorama in emerging economies is also gloomy, with average growth slowing down to about 2% during 2009 (down from 5.8% in 2008). Overall, the world economy is going to shrink by around 2.7% this year.
The global economy is still hampered by the presence of illiquid “toxic assets” in the balance sheets of banks in major financial markets. That means they are not lending. Global industrial production has been hit very hard and could be nearly 15% less than last year. International trade flows are expected to contract by 13% in 2009. Foreign Direct Investment (FDI) flows are expected to fall further in 2009, after contracting by 20% in 2008. Developing countries are being hit by several channels: less international financing; less international investment; lower export volumes; lower commodity prices; fewer remittances; and domestic credit tightening.
The social and human consequences of these economic contractions are dramatic. Unemployment in the OECD area rose in the year to March 2009 by almost eleven million, and it is projected to approach 10 per cent by next year. This implies that the crisis could swell the ranks of the unemployed, only in the OECD area, by about 25 million people, by far the largest and most rapid increase in OECD unemployment in the post-war period. For the world as a whole, the number of additional unemployed will increase to 50 million, in countries with less developed social systems.
In the medium to long term, we can expect that the potential growth rate of major economies will be lower, given the reduction of capital available, the level of unemployment, and the lower appetite for risk. The equilibrium unemployment rate may be higher.
Given the size of the crisis, it was important to have all international organizations helping member countries to address the major issues. The OECD was there from the beginning and was well equipped to do so.
The OECD committees, formed by government experts from member countries and supported by experienced OECD staff, are the pillars of OECD strength. When I gathered the group of Committees last year to define our strategy vis à vis the crisis, many of them had already identified the most relevant issue areas, be it in financial markets, regulation, competition, risk taking or corporate governance, and had started to work on them.
The same thing happened to me in the food crisis, in the spike of oil prices, in climate change and biofuels, in corporate governance, even in the need to strengthen financial regulation. By the time the respective crisis hit, we had already been working intensely on many of its facets. In many cases, we issued warnings.
Indeed, in June 1997, we already warned about the need for internationally consistent accounting and regulatory standards or for sufficient transparency in those standards internationally. The same happened with pension policies in 1996, when I warned about their lost value following the Enron case; or at the IMF-WB the same year, when we warned about the rapid growth of mortgage credits, and the fact that households did not fully appreciate the risks they are taking.
To do so, we rely on our capacity to measure and compare the effectiveness of policies between member countries. We are an internationally acknowledged standard setter, and the credibility of our Organisation is related to our capacity to develop and propose the best practices in practically all areas of public policy, perhaps with the exception of defense and the military dimension of security.
When the turbulence turned into an all-out crisis, we managed to put together, in a matter of weeks, the OECD Strategic Response to the Financial and Economic Crisis. Based on our multidisciplinary capacity to bring together several areas of policy making, to restore growth and sustainable development.
We don’t only look at the macro economic aspects or the financial challenges, but also at their interaction with the labor market, the green agenda -and climate change-, investment and trade protectionism, and the battle against poverty. Examples of this work include:
1) A revision of the framework for financial regulation, competition and corporate governance, to build a stronger and more coherent post-crisis financial system. A General Guidance and Checklist for Effective and Efficient Financial Regulation and Policy and a report on financial safety-net interactions, with special emphasis on deposit insurance were developed with this purpose.
2) Based on our investment instruments, monitoring investment policies, to help keep markets open and avoid new forms of protectionism. In fact, one effective way to help reactivate our economies and address our employment challenges is to successfully close the Doha round of trade negotiations. International trade flows are set to fall by 13% this year and this is having a tremendous impact on growth and employment, particularly in the poorest countries. Closed markets close factories, and that’s always the start of a negative global spiral in a highly integrated world economy.
3) Promoting a “green” and innovation-led recovery, given our work of two decades on climate change and renewable energies, and our analysis on how innovation can accelerate the way out of the crisis. During our upcoming Ministerial Meeting of the OECD Council, which will take place by the end of June, we will be analyzing options to that provide “double benefits”: to expand demand (through the stimulus packages) while at the same time creating jobs, and relying in environmentally friendly policies.
The crisis related slowdown should not preclude or weaken efforts to achieve long-term, low-carbon economic growth. On the contrary, it should be seen as a unique opportunity to shift to cleaner technologies, to boost green innovation and expand their business possibilities.
4) Advising our member countries on the best policies to address the social challenge derived from the crisis, particularly the high level of unemployment.
5) Tracking aid commitments and export finance.
6) Continue to address longstanding challenges of the global agenda such as Doha, climate change and poverty.
Another important area where OECD is responding promptly is on the fight against global corruption, and this area includes issues such as international taxation, bribery, corporate governance and money laundering, through the Financial Action Task Force, which is hosted at the OECD.
The recent success we have had in combating tax evasion, in close collaboration with the G20, is another example of this work against the “dark side of globalisation". It demonstrates how the OECD method of peer learning, benchmarking and monitoring, based on sound measurement and objective analysis can deliver results when combined with the high-level political will of our members and partner countries. In this area of fighting tax evasion, we have made more progress in the last three months than in the ten years before that.
Finally we are helping governments design intelligent exit strategies to revert their massive interventions in the private sector, once we reach the post-crisis phase. We have strongly maintained that such interventions have to be timely, targeted and temporary, with a plan for emergency measures to eventually be scaled back, once markets and institutions have begun to function more normally.
So I am pleased to say that the OECD is making very important contributions to solve the crisis. But there is still much work to be done. Economic international organisations have to make a big revision of their theories, methods and instruments. They have to update their capacities and adapt to a very changed world.
But more than that, the crisis has exposed with great clarity the deficiencies of economic global governance; the risk of having a highly integrated global economy with fragmented global economic decision-making and regulation. The world of BRICs, biofuels, CDOs, Facebook, climate change, the H1N1 virus, Sovereign Wealth Funds, wireless communications and 24/7 financial markets, is a very different place than the world in which our economic international organisations were created. We do need stronger, more inclusive and better coordinated international organisations. We need to build closer, better, networks to improve our impact. This is part of the request that Chancellor Merkel made to five international organizations (IMF, WB, OECD, ILO, WTO), and we are working on that.
But it is also true that international organisations can only go as far as their member countries allow them to. The role of early warning is crucial for an international organisation to help preventing a crisis like the one we are living. But it will not work if reports are ignored or watered down by governments. What is the point of having an alarm system if we disconnect it so that it will not upset those within?
The crisis showed the limits of the “one organisation per issue area” approach. During the last decade, there was the belief that a specific agenda should be assigned to a certain institution on an exclusive basis and the rest, even if they had contributions to make, would not be called to the fore. This is frankly inefficient. Even though all international organizations should coordinate and avoid duplication or overlaps, it is very useful to take a look at the same problems from different angles. And the contribution of institutions like the OECD, with its well known experience and knowledge on structural issues and long term growth, can be valuable precisely because it is multidisciplinary.
Finally, the crisis has also showed the need to keep a flexible global governance infrastructure where all relevant actors and organizations sit together. We have seen the emergence of different “G” configurations and the OECD work on all of them. But we need to keep our minds open, and follow up what would happen with the G20, the G8, and the G8+5.
Reactivating the global economy is a political, economic and moral imperative. But it is also a global challenge that needs a global response, and a multidimensional challenge that demands multidisciplinary action. It is therefore crucial that such a response take into consideration the new crucial role of emerging economies. We are now in the eve of the OECD’s Ministerial Council Meeting, next June 24 and 25, where our 30 Members and the five countries seeking accession; Chile, Estonia, Israel, Russia, and Slovenia; and the five countries of our Enhanced Engagement project; Brazil, China, India, Indonesia, and South Africa; will get together to discuss the crisis, the exit strategies, the green recovery, trade and investment and the way to achieve the stronger, cleaner, fairer world economy we all want.