Remarks by Angel Gurría, OECD Secretary-General, delivered at the OMFIF Golden Series Lecture.
23 February 2015 - 24 February 2015
London, United Kingdom
(As prepared for delivery)
Ladies and Gentlemen:
Thank you for this opportunity to present the OECD’s views on the global investment challenge.
Last time I stood here at an OMFIF Golden Series Lecture in February 2013, I stressed the need for governments to “Go structural, Go Social and Go Green” in order to recover from the greatest economic and financial crisis of our time.
Two years on, we have seen some progress, but the pre-crisis growth path remains elusive for a majority of countries. Emerging-market economies have fared better during the crisis, but growth has been less impressive in the last year or two. In most advanced economies, potential growth has been revised down. Even in the advanced countries that have done better, productivity growth is slowing, unemployment is too high and labour force participation is often falling. The UK is a slightly different case, with the strongest growth among G7 countries last year, and remarkable employment performance, although with slow productivity growth.
Investment, both public and private, is key to reversing these trends and building a more resilient, more inclusive and more sustainable growth. In spite of low interest rates, global investment has remained weak. In the OECD, the volume of fixed investment is still well below its pre-crisis peak. This is especially the case in the Euro area and Japan, where the volume of investment is 16.6% and 8.6% below its early 2008 level respectively. Global flows of foreign direct investment (FDI) remain 40% below their pre-crisis levels. Global FDI stocks have declined, possibly pointing to a worrying process of “de-globalization”.
Why is this happening?
There are two key reasons behind the weakness of investment. One of the central explanations is the impact of a long phase of balance-sheet deleveraging following the crisis, in public, corporate and household sectors. The second is the consequent major erosion of trust in markets, in governments, in the capacity of public and private leaders to consolidate the recovery and promote growth.
Another key factor is that traditional sources of investment - i.e. the banking sector – are not lending, impeding their ability to channel capital into long-term investment destinations. Small and medium-sized enterprises (SMEs) are particularly affected, since they are more dependent on bank finance than large firms.
The OECD’s 2015 SME Finance Scoreboard - which I will release in the margins of the next G20 meeting in April - will show that bank lending to SMEs has still not recovered to pre-crisis levels in many countries. In such circumstances, SMEs need to find alternative sources of financing. This is the subject of a recent OECD study “New approaches to SME and entrepreneurship finance: Broadening the range of instruments”. In it we map a wide range of alternative instruments, including asset-based, alternative debt instruments and hybrid products. But we also go beyond supply-side measures and identify actions governments can take to promote the financial literacy and skills of existing and would-be entrepreneurs.
We are facing an “investment paradox”: the world economy is awash with liquidities, but these are not finding their way towards long-term productive investment. What must we do now to unleash investment and restore a path to stronger, greener and fairer growth?
How can we overcome these obstacles? Unleashing investment
Supporting investment requires us to use all policy levers available, including macroeconomic policies and structural measures. In the OECD’s Going for Growth report, we identify some of the key structural reforms that can support investment. They include product market competition; employment protection measures; corporate governance reforms; R&D; innovation; and science policy reforms. They also include specific structural policies to boost intangible investment and to attract internationally-mobile investments. For example: addressing FDI restrictiveness, promoting trade openness, boosting infrastructure and establishing taxes.
It is also important to remove investment obstacles in network industries and knowledge-based activities. This would in turn have positive knock-on effects on other sectors of the economy.
Long-term financing issues that constrain infrastructure investment also need to be addressed. Policy makers need to tackle the barriers preventing long-term investment by pension funds and other institutional investors, such as regulatory barriers. The amount of institutional investor capital is huge and growing. Global institutional assets under management in the OECD amount to over USD 92 trillion (i). Encouraging market sources of financing can help to unlock this investment for productive use.
In the specific case of the UK, the Economic Survey that I will present with Chancellor Osborne tomorrow morning has a whole chapter dedicated to supporting infrastructure investment to raise productivity and living standards of UK citizens.
It addresses in particular financing public infrastructure and how to better develop the use of public-private partnerships. I can’t jump the gun and give you more details before the launch, but I do urge you to read it when you can, because it is a rigorous analysis of the UK economy, packed with recommendations to stimulate investment and sustainable growth.
OECD members are also increasingly becoming involved in many bilateral and regional trade and investment liberalisation initiatives. Initiatives such as the Transatlantic Trade and Investment Partnership (TTIP) strive to go beyond eliminating tariffs to tackle costly “behind the border” barriers that impede the flow of trade and investment. For example, regulatory harmonisation can significantly reduce the cost of doing business internationally by promoting greater compatibility and transparency of regulations and standards.
The need for multilateral cooperation
National and bilateral action is vital, but multinationals allocate investment on a global scale and we need global action if we are to find the necessary momentum. The good news is that coordinated action is starting to gather pace and the OECD is working hard to move it forward.
In the G20, we are working with the Turkish Presidency to elaborate country specific investment strategies by analysing their multiyear programmes and identifying good practices. We have also developed High-level Principles on Long-Term Investment Financing by Institutional Investors. These high-level principles are intended to help governments facilitate and promote long-term investment by institutional investors. In particular, among institutions such as pension funds, insurers and sovereign wealth funds, that typically have long duration liabilities and consequently can consider investments over a long period.
The Juncker plan, launched by the European Commission, is also in this spirit. As a European-wide effort it is likely to generate stronger growth effects than isolated country-level efforts. The plan has a number of other important features:
First, it offers a rallying point for European policymakers to speak with one voice in support of a Europe-wide policy to promote growth. This could help reduce policy uncertainty regarding the future of Europe. In addition, the impact on growth of each extra euro invested will be magnified because the plan promotes the completion of the single market. This includes regulatory harmonisation, which will lead to higher trade and cross border FDI. OECD estimates suggest that a broad reform package that reduces regulatory differences across EU countries by one fifth could increase cross-border FDI by between 7% and 25% in the EU.
Of course, the implementation of the Juncker plan presents challenges. In particular, it will be important to ensure that governments have the capacity to ensure that infrastructure projects are well-managed over their full life-cycle, from design and development to maintenance and renewal. The willingness of private investors to contribute is, of course, also uncertain at this stage. Ensuring the effective use of Public Private Partnerships (PPPs) will be vital.
To wrap up, reactivating global investment flows will demand a combination of simultaneous policy action, reforms and multilateral cooperation. This is why the OECD is very well-placed to help countries design new investment promotion strategies.
Ladies and Gentlemen,
Investment is one of the central engines of growth. But we don’t just need investment, we need intelligent investment. We need investment that fosters green growth, we need investment that supports innovation and entrepreneurship.
The OECD is working to mobilise public and private investment to support resilient, sustainable, green and inclusive growth which benefits the whole of society. Our 2015 Ministerial Council Meeting will bring together world leaders to discuss “Unlocking Investment for Sustainable Growth”. We are directing all of our efforts to help individual countries implement the necessary reforms; we are working on the international stage with the G20 and we have offered support to the European Commission in the implementation of their Plan. We are doing this because we know that unlocking investment is key to securing our objective at the OECD, which is to help design, deliver and implement “better policies for better lives”.
(i) Annual Survey of Large Pension Funds and Public Pension Reserve Funds: Report On Pension Funds’ Long-Term Investments (2014), p.10