Prospering in a Low-growth Era - Conference of Montreal Keynote Address


Remarks by Angel Gurría,

Secretary-General, OECD

14 June 2016

Montreal, Canada

(As prepared for delivery)


Ladies and Gentlemen,

The state of the global economy is far from satisfactory. The OECD’s latest Economic Outlook portrays the advanced economies as stuck in a low-growth trap. And the dynamics for emerging market economies are even worse, reflecting both the slowdown in China and recessions in commodity-exporting economies like Brazil and Russia. Taking advanced and emerging economies together, global growth continues to limp along at around 3%, as it has for the past 5 years. This is well below the average of about 4% from the mid-1990s until the onset of the crisis in 2008.

Today’s theme – prospering in a low-growth era – suggests that growth rates have declined permanently and that we should focus on how to prosper in such new conditions. And such an approach can certainly be defended. There are many problems facing us today not directly related to the pace of economic growth. Indeed, some challenges, like climate change, may actually be eased by slower growth. And there is a need to achieve a better distribution of the fruits of growth, whatever its pace. Most advanced countries, including Canada, have had a long-term uptrend in inequality. Moreover, some would question how much it matters if average living standards double only every 70 years instead of every 35. And finally, some argue that today’s slower growth rates reflect factors like demography, over which we have little control, or that the earlier faster growth was driven by transformative technological advances that are not likely to be repeated, and thus, that we had better make the best of the new situation.

But our sense is that it would be a mistake to be fatalistic about growth. For one thing, we can partly reverse the effect of population ageing on growth by extending working lives and getting more people, particularly women, in the workforce. But we will still need rapid productivity growth to maintain the living standards of those not in the labour force. More generally, growth generates extra resources to tackle public challenges, whether they be trends like climate change, one-off emergencies like the recent fires in Alberta, or humanitarian challenges like the refugee crisis in Europe. Productivity growth generates more resources for research into disease prevention, for protecting the environment, and for any number of other public objectives. We should not forget that the success in meeting the Millennium Development Goal on poverty reduction was achieved mostly thanks to the rapid productivity growth achieved in China.

For these reasons, I would like to suggest that the way to prosper in a low-growth era is to get out of that era. And how to do this is something that we, at the OECD, spend a lot of time thinking about. We do not accept that nothing can be done to get back to faster trend growth rates for productivity.

For one thing, given the advance in technology, it should not be taken as a given that the transformative technological change of the past cannot be repeated. It is an open question.

Much of the post-crisis slowdown is a result of a weakness of demand, reflected in inflation rates well below central bank targets across the advanced economies. Although central banks have taken decisive action to ease monetary conditions, the evidence shows that this is insufficient to get the necessary demand response. We argue that monetary accommodation should be complemented by governments with fiscal space to expand public investment and other high-multiplier spending. This, indeed, is what Canada is now doing, and when I released the 2016 OECD Economic Survey of Canada yesterday alongside Finance Minister Morneau, I welcomed it. But as our analysis shows, collective action by all countries with fiscal space would be better still. It would be a case of mutually reinforcing efforts.

Also, when we look at what has been happening with productivity over the past two decades, we see a number of factors at play which look like they could be reversed by policies.

Our recent work points to three such factors.

One is what appears to be a widening dispersion of productivity across firms -- in particular, between leading firms, operating at the global productivity frontier, and the others. This suggests that there has been at least a partial breakdown of the diffusion of innovation from leaders to laggards.

Another is the decline in the pace of business creation. In most countries, the share of young firms in total businesses has been falling. In the United States, for example, the share fell from around 22% in the early 2000s to about 16% in 2011. And in Canada, firm entry rates have fallen from around 17% in the mid-1990s to less than 13% in 2013. The Economic Survey of Canada looks extensively at this issue.

And the third trend that deserves attention is the slowdown in the growth of investment in knowledge-based capital, such as R&D, skills and organisational know-how.

There is evidence that these 3 phenomena are paramount among those that have led to a slowdown in productivity growth. And we have some ideas on how to counteract them.

Consider first the growing productivity gap across firms. Leading firms are mostly multinationals, which creates a concentration of innovation efforts -- 250 firms account for more than half of all business R&D. The intensity of cross-border connections via trade, FDI and the mobility of skilled labour is crucial for the diffusion of knowledge from these globalised “frontier” firms to national firms. That is one reason why we must give international trade and investment a fresh boost. Over 1,400 protectionist measures have been taken since the crisis, by G20 countries alone!

As regards the decline in firm entry rates, this trend suggests the need for reforms of competition policy, bankruptcy legislation and product market regulations to provide a level playing field between new firms and incumbents. Pro-competition reforms are particularly needed in services, which are critical to enhance participation in global value chains.

Next, consider the decline in the growth of investment in knowledge-based capital. This suggests that traditional incentives to boost private spending on innovation, such as R&D tax credits, may be ineffective, especially for young firms. There is a case for including or strengthening cash refunds and/or carry-over provisions. Also, grants should be considered as a complementary tool to tax incentives.

So there are identifiable problems associated with the slowdown in productivity growth in advanced economies, and there are policy responses that could address these problems, which tend to have the common thread of boosting competition. That is why it is worrisome that our 2016 Going for Growth report found that the pace of reforms appears to have steadily declined since 2011-12.

There is also some evidence, perhaps more tentative, that the problem of slower productivity growth is driven by the rise in inequality. At the OECD we are working on this nexus between productivity and inequality, which was the theme of our recent annual Ministerial Meeting.

For example, the widening dispersion of productivity across firms is reflected in a similar dispersion of wages. So, the weakening of technology diffusion may also be contributing to earnings inequality.

In the other direction, some cross-country studies suggest that rising inequality is associated with slower GDP growth. It could be in part that disadvantaged groups with low skills and limited access to finance or connectivity are unable to improve their contributions to a dynamic economy. It could also be that a concentration of income among the very rich, who tend to have a high propensity to save, is sapping the growth of aggregate consumption, which then induces firms to invest less and contributes to the low-growth trap that I referred to at the beginning. More work is needed to understand these relationships better and to identify the mechanisms.

What is clear is that even if we managed to get out of the low-growth era via higher average productivity growth, we would not really be “prospering” unless the fruits of growth are widely shared. So we need to work on both boosting growth and making it inclusive. One aspect of that, by the way, is ensuring that firms and individuals pay their taxes, making a fair contribution to the provision of public services. And I am proud to say that the OECD has been at the forefront of international efforts to ensure that this happens.

So, to sum up, the best way of prospering in a low-growth era is to move into a high-growth era. And for that we need collective action to sustain demand and encourage investment; pro-competition structural policies to encourage innovation and dynamism; and a special focus to ensure that growth is inclusive. It can be done. We are working on it. As our motto says, we seek to design, develop and deliver better policies for better lives.


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