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Global outlook and risks, and challenges for growth in Europe

 

by Angel Gurría, OECD Secretary-General
An address to the Confederation of Finnish Industries
Helsinki, Finland
29 September 2006


I would like to thank Christoffer Taxell for inviting us to the Confederation of Finnish Industries, for hosting this lunch and for this opportunity to say a few words on the topics on today’s agenda. I will begin with the global outlook and risks, and then highlight some of the key challenges for Europe. I will also touch briefly on improving competitiveness through boosting innovation, and finally conclude with the specific challenges for Finland.
I do not need to give you much background information on the OECD – the Organisation I have the privilege to lead. The OECD has a mandate to promote economic growth and development in countries throughout the world. We have 30 members and work with many other countries. We promote market-oriented economies and open, rules-based, and non-discriminatory trading and financial systems, supported by good governance.

Global outlook and risks

Now turning to my first topic – global outlook and risks. I have just come back from the World Bank and IMF meetings in Singapore, where these issues were discussed in detail.
Despite high and volatile energy prices, global expansion is expected to continue and broaden this year as well as next year. The US economy is running at around full capacity and expansion in Japan is on course to become the longest lasting in half a century. Growth in the euro area is likely to reach 2.7% this year – its strongest performance since 2000. Finland’s growth has been among the highest in the OECD, underpinned by a strong innovation performance and high educational attainment (Finland ranks top in the Programme for International Student Achievement (PISA)). All this is also helped by fairly supportive financial market conditions.
But this is not a time to be complacent, as we are indeed facing many challenges:

  • Current account imbalances are likely to remain high. Although they have not caused major disruptions, they cannot continue to accumulate without consequences.
  • Interest rates have been rising, which will increase household debt burdens.
  • Increased instability and confrontation in the Middle East, underlined by the events in Lebanon, coupled with growing oil demand and limited supply response suggest that energy prices are not going to fall drastically any time soon. 
  • Economic convergence among OECD countries has halted or even reversed. There are great differences in economic performance throughout the OECD; the gap with developing countries is widening, not just in terms of growth rates but also in terms of productivity and living standards. 
  • Population ageing is the biggest challenge for many OECD countries. This means putting more emphasis on the sustainability of pension systems and the performance of health care systems. Moreover, coupling this with the slow or negative population growth means that countries need to reassess their migration and integration policies. 
  • We are witnessing a resurgence of investment protectionism even among OECD countries. This is worrying because free trade and investment flows are the real engines for growth. As around two-thirds of global FDI come from OECD countries, it is important to fight against these protectionist trends. 
  • A successful outcome of the Doha Round trade talks is still possible. But the talks cannot move forward unless countries are ready to agree on modalities on Agriculture and Non-Agriculture Market Access (NAMA), and this has proven to be very difficult so far.

Labour productivity and labour utilisation

I want to touch very briefly on the need to boost labour productivity and on how to improve labour utilisation. There has been some progress in raising labour productivity.
First, entry barriers to labour market and other regulations inhibiting competition are being eased in some countries. For example, the administrative costs for start-ups are set to be slashed by one fourth in the Netherlands. The privatisation of government-owned commercial companies has continued in Finland and in Poland. And at the EU level, efforts are underway with the Services Directive albeit with limited success. But there is still uncertainty about Europe’s capacity to keep up momentum.
Second, concerning human capital formation, many countries are strengthening their education systems, even if reforms are still at an early stage.
But new initiatives to increase labour utilisation have been scarcer. In particular, too little has been done to reduce the implicit tax on work for the so-called ageing workers. That said, we do welcome the broad thrust of the measures announced in France to reduce hiring disincentives in the smaller firms, and, more recently, to boost the hiring of youth and the employment of older workers.

Competitiveness through innovation

Let me now turn to improving competitiveness by boosting innovation. We can divide the OECD countries into four clusters:

  • Leading innovators include the Nordics, the United States and Japan, most of which have enjoyed strong productivity growth over the past decade.  And most exhibit high graduation rates from tertiary education. But several face the challenge to boost innovation in services through more open and competitive markets.
  • At the other end of the innovation performance spectrum, improvements in education are called for in Southern Europe, and stronger product market competition both in Central and Southern Europe.
  • In the middle lie the non-US English speaking countries, where productivity performance has generally been good. A common challenge there is to strengthen the links between public research and industry.
  • The remaining countries – notably France and Germany – tend to display above-average innovation performance, but need to strengthen tertiary education and the contribution of universities to research. Most of them can also improve the cost-effectiveness of the financial measures taken to support private sector research and development.

Challenges for growth in Finland

I want to conclude with Finland’s structural challenges. There are three main challenges:

  • Ensuring the sustainability of public finances, which is threatened by the combination of comprehensive public welfare provision and population ageing which is among the earliest and most rapid in the OECD.
  • Raising the employment rate, which is low compared with other Nordic countries and relative to levels achieved during the 1980s. Moreover, longer working lives will be essential to cope with population ageing and increasing longevity. 
  • Broadening and enhancing growth potential. While the level of productivity in the manufacturing sectors is high by international standards, in the sheltered services sector it is poor and productivity growth has even been falling in many public services lately.

Thank you for your attention during my introductory comments. I now look forward to our discussion.

 

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Secretary-General's official visit to Finland (27 September - 1 October 2006)

 

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