“Neither economists nor market participants, nor indeed governments foresaw a financial crisis of the type and magnitude we have now. The collapse of trust and subsequent credit freeze in the wake of the Lehman Brothers collapse was a shock.”
These remarks by Klaus Schmidt-Hebbel, then OECD chief economist, were made in October 2008, a month after Lehman Brothers fell. His assessment reflected the mood well. As the former chief economist warned, the crisis would last a long time indeed.
OECD Secretary-General Angel Gurría acted promptly, and by January 2009 our organisation had launched a strategic response to the crisis. Governments also acted swiftly and in a concerted fashion to save the financial system (“the lifeblood of our economies”, as Mr Gurría described it), slash interest rates and apply fiscal stimuli. They relied heavily on monetary policy, as central banks resorted to unorthodox approaches such as quantitative easing.
Another Great Depression was averted, though the impacts of the crisis still cause widespread hardship. Everyone realised that the crisis could not be allowed to happen again, and that more effort was needed for the long term. But were current policy tools fit for the purpose?
The crisis struck at the core of tightly held economic ideas, models and policy. Confidence in the global consensus about unfettered liberalisation and the ability of markets to self-correct had crumpled. As governments acted to avoid the worst, long-held beliefs that state intervention in markets should always be kept to a minimum were proven wrong. Economic policies had focused on short-term growth, rather than well-being. They proved ineffective in the face of market excesses and imbalances in our societies, such as rising inequalities, environmental degradation and climate change. They could not capture the global economy in all its complexity and interconnectedness. Simplistic models led to simplistic answers that failed to address what really matters for growth and well-being.
Global imbalances had also emerged, notably with the resurgence of China, while the game-changing effects of information and communications technologies on the world economy and society had made reality far more complex. The need for improved governance, nationally and internationally, backed by some analytical audacity had become patently clear. The G20 also found its wings, to become “the premier forum for international economic co-operation”.
Poignantly, the OECD’s 50th anniversary in 2011 was a timely opportunity for a healthy recalibration of our organisation’s mission. New leitmotifs were coined: “Stronger, fairer, cleaner”; “Better policies for better”; “the long term starts now”. However, our mindsets still had to be unshackled from the consensus and groupthink that predominated, to refresh our analytical approaches and to learn from stakeholders. We put people’s well-being at the heart of our efforts, on the understanding that human needs and aspirations go beyond material well-being. It was time to broaden our perspectives, accept that the ultimate goal of economic policy is to improve people’s lives, and start looking beyond objectives of efficiency at the distributional aspects of well-being and the sustainability of our decisions.
It was to respond to this need that New Approaches to Economic Challenges (NAEC) was born at the OECD in 2012. OECD member countries warmly welcomed and encouraged this comprehensive organisation-wide effort, both to learn from the crisis and to help avoid future crises. The initiative would gather ideas and challenge received wisdom, with a view not to reinvent the world but to stand back and see it in a new light. NAEC took on board the suboptimal outcomes of pre-crisis policy approaches too, from wider inequalities of income and opportunities to environmental degradation and climate change. The goal of NAEC is therefore to build a “sustainable and inclusive growth agenda”.
Over the past three years, NAEC has catalysed an effort to improve OECD’s analytical framework and policy advice. The process has stimulated a multidimensional approach, generated new data, and led to more collaborative programmes and a revision of long-standing analytical approaches across several policy areas. All of this is distilled in the NAEC Synthesis Report to be presented at the OECD Ministerial Council Meeting in June 2015.
So, what is new? NAEC first re-examines the overarching goals of policy with a focus on well-being and its distribution to ensure that growth delivers progress for all, not just the lucky few. Growth and productivity became the means to an end, with policy choices determined by outcomes. Our focus shifted to promoting inclusive growth and to those elements besides income that make for a fulfilling life. And we began referring to inequalities, in the plural, since having access to opportunities (in education, health, etc) also affects people’s well-being.
Such an integrated approach to policy helps understand trade-offs, and address economic challenges in a more realistic and effective fashion. It privileges collaboration and coherence in addressing integrated problems, removing the compartmentalised approach that damaged policy before. It also requires a more sophisticated policy design for the real world in which systemic spillovers can be beneficial as well as damaging. To avoid a repeat of the financial crisis, for instance, NAEC urges a clearer integration of the financial sector in government economic models to bolster financial stability.
Policymakers need to think about the economy as a complex adaptive system. This has many implications. It suggests policymakers should be constantly vigilant and more humble about their policy prescriptions, act more like doctors than mechanics, and be open to systemic risks, uncertainties, spillovers, strengths, weaknesses and human sensitivities. New economic tools, such as behavioural economics, but also old friends such as history, sociology and psychology, were found useful to inform economic analysis in a way that helps understand better the context and the outcomes of the decision-making process.
The domestic anatomy must be better understood, too, its historical forces, institutions, social norms and political choices. This demands more tailored policy solutions that adapt broad solutions to country-specific settings, within evolving best practices.
We also need to take a longer-term perspective, and even have plans B and C for alternative futures. This means improving our strategic foresight, working outside the box and making a virtue of devil’s advocate to broaden our vision.
The OECD built its reputation on solid data and frameworks, but clearly our data needed reinforcing. That is why we are carefully developing new measures, instruments and tools, and generalising their use. The OECD Better Life Index, our data on productivity and the environment, and on quality jobs are just some of the advances which enrich our understanding of sustainable growth and well-being.
Our “distance to default” analysis is helping us to anticipate and hopefully avert bank failure. We are setting out to gauge stocks more completely, not just manufactured inventories and assets, but natural and social capital, too. And we are pushing the envelope in our analysis of micro-data and big data, so as to better inform policy recommendations.
Against a backdrop of high unemployment and widening inequalities, we are building an agenda for inclusive growth, to redress the distribution trends that have caused the top 10% to capture higher shares of the national income, while leaving the bottom 40% behind, living from day to day. We are building the analytical tools to show that inequalities not only destroy the social fabric and cause tensions and instability, but hamper the capacity of our economies to grow.
The OECD is mainstreaming this effort into its flagship publications, which monitor progress across a range of economic, social and environmental indicators. Financial risks, systemic tensions, resilience, stress tests, vulnerabilities, domestic and international asymmetries: these all receive added weight.
Have we learned? Time will tell. Today, the world’s stock markets are surging despite high unemployment and global uncertainty. Are we heading for another crash? Or can we tap that wealth to invest in our human, productive, social and natural capital?
We must ask such questions, at OECD Week and beyond; we must be audacious in our ideas and thinking–and take the new approaches to economic challenges that can truly deliver better policies for better lives.
For more on NAEC, visit www.oecd.org/naec