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The challenge of the financial crisis and faith in multilateralism

 

Remarks by Angel Gurría, OECD Secretary-General, delivered at the seminar in the Finnish Institute of International Affairs


Helsinki - Finland, 19 January 2009


Good afternoon Ladies and Gentlemen:

It is a great pleasure to be at the Finnish Institute of International Affairs to participate in this seminar on The Challenge of the Financial Crisis and the Faith in Multilateralism. These are both central issues for OECD. Thanks very much for the invitation.


The only way out from this crisis is multilateral co-operation. But the world economy has changed to such an extent in the last years that we need a new type of multilateralism, more inclusive global governance. We need to recover faith in multilateralism and these discussions help a lot.


1. The gravest crisis in our lives

Let me start by confirming the gravity of this crisis. It might sound commonplace, but this is indeed the gravest crisis of our lives. So far, it has cost the world economy trillions of dollars. But the damage in terms of confidence ─ the spinal cord of the whole economy ─ is perhaps more threatening.


In the last months we have seen the most impressive collective response by governments and central banks throughout the world: major liquidity injections, unprecedented bailout packages, historic reductions of interest rates, public capitalizations of banking institutions and the first crisis management meeting that included both developed and emerging economies. Still the pessimism in the financial markets shows no signs of abating. Banks are still fearful of lending to each other and companies are being starved of resources.


The financial system is the conveyor belt that moves the economy. If this belt gets blocked economic activity suffers a gradual paralysis. That’s what’s happening. According to our latest Economic Outlook, the slowdown has turned into a recession. During 2009, the OECD’s GDP is expected to decline by a 1/3 of a percent. And there is considerable uncertainty about the timing and strength of an eventual recovery.

The global contraction is starting to hurt families as unemployment mounts.


After falling for several years, the average unemployment rate in the OECD area is projected to increase from 5.6% in 2007 to 7.2% in 2010. This means about 10.2 million more unemployed people than in 2007.  Globally, the International Labour Organisation (ILO) projects the crisis could swell the number of unemployed in the world from 190 million people in 2007 to 210 million in 2009.


2. New rules for a better global economy

We are talking about a systemic failure. There is a growing recognition, even amongst some orthodox economists (Alan Greenspan, for example), that the financial and economic model that we had built was “based on a flaw”: that markets can rule themselves.


In contrast to other previous crises, this crisis was not caused by a specific external shock like an OPEC decision or a terrorist attack; this time the crisis was generated by the system itself; by inconsistencies, regulatory vacuums, supervisory failures and unsustainable global imbalances that were inherent parts of the system.


At OECD we have been pointing out the growing risks of these failures and imbalances for some time. I remember three years ago, during my hand-over ceremony speech, underlining that current account imbalances had reached unprecedented and worrying levels, that were by any measure unsustainable. In July 2006 we warned about the great need to improve corporate governance in OECD countries, and highlighted the great risk of pension funds holding close to 30-40% of their assets in equity. That same year, I remember I went to the International Monetary and Financial Committee in Washington and raised our concerns that households were not fully appreciating the risks they were taking in mortgage markets.


OECD has been a promoter of financial markets liberalisation and deregulation for many years. We must admit that. But at the same time we have been an important source of policy recommendations to make markets work properly. And we have worked intensely in building a set of international standards and guidelines to enhance transparency, to fight corruption and to enhance fair competition.


So now we have an even greater role to play.


Because the rules of a new international financial system and of the world economy itself have to be re-written. We need better regulation, better supervision and better coordination.


And the only way we can reconfigure the international financial system and the “operative system” global economy is through multilateral co-operation. Because this is a global crisis. Actually it is the most global crisis we have ever had. And, as Paul Krugman put it in a recent article, “there are already too many interdependencies for any country to go it alone”.


3. The only way forward: multilateralism

In a highly interdependent world, human progress is multilateral. One of the reasons why markets have taken so long to stabilise and regain confidence is the lack of tunning and coordination between countries while designing and implementing solutions.


A highly integrated global economy needs effective mechanisms of international regulation. In a recent paper, Henry Kissinger exposed the risks of having a globalised world economy without powerful international institutions. A gap has opened between the economic and the political organisation of the world. We must bridge that gap.

The only way we can reconfigure the global economy is through enhanced international co-operation. And for that we need stronger, more inclusive and agile international organisations. The world has changed and the global governance architecture must change with it. In fact it is already changing.


As we have seen in recent years, through the emergence of different innovative schemes like the G8+, the Major Economies Meeting (MEM), the OECD’s Heiligendamm Process or the G20, there is a growing realisation that we cannot build a stable global economy without including developing countries in the decision-making process.


The name of the group is irrelevant. It doesn’t matter if it’s called G8+, G8+5, G8+5+3, G33, whichever name, as long as it is representative enough to effectively address the challenges on the agenda.


At OECD we believe the G20 can be an ideal help to build a more stable and balanced global economy. It gathers the main economic and financial players; representing 90% of global GDP, 80% of world trade flows  and two thirds of the world’s population. But it is also important to find ways to include countries like Finland, with important views and experiences to share, into the discussions of these groups.


In fact, OECD is developing a growing relationship with the G20. Last September, I was asked by John Kirton, the Director of the G20 Research Group, to write a piece about the importance of this group in the emerging global governance architecture. OECD is now assisting the G20 Working Group 2 in the configuration of their Action Plan in the area of “Reinforcing International Cooperation and Promoting Integrity in Financial Markets”.


Most importantly, we have recently put together the OECD Strategic Response to the Financial and Economic Crisis, to help governments redesign the international financial system and revive economic growth. And we have serious indications that many of the elements of this Strategic Response can feed usefully the G20’s Action Plan.


We look forward to work with the G20 and other international organisations throughout 2009. All the global challenges have a short term solution if we work together.


4. And we mustn’t forsake structural challenges

Finally, let me stress one very important point which we at OECD consider essential for any response or solution to address the current crisis.


It is fundamental that while addressing the urgency of the crisis, we don’t lose sight of our longer term structural challenges. Urgency should not forsake the important.


The crisis is demanding huge efforts from governments, new policies, and extra reforms. All these new measures cannot be disconnected from our main global structural challenges, like reducing poverty and inequalities, like liberalising trade, reducing global fiscal imbalances or fighting climate change. On the contrary, this crisis is a great opportunity to tackle these challenges frontally.


Let me give an example. In the coming months, two very big countries are going to give birth to something very important. China and the United States will produce, each of them, close to 1 trillion dollars worth of economic stimulus in tax cuts, transport, infrastructure, mass transit and energy systems, etc. If these packages promote environmentally friendly projects, green energy technologies, and recycling education programs, this will be the opportunity of our lifetimes. If they rely on our current dirty fossil fuels, our children’s future is doomed. This applies to other fiscal stimuli in other countries.


Let’s not forget that the current crisis is, before anything, a big opportunity for change; a colossal opportunity to bring about a greener economic growth, a more inclusive and reliable globalisation.


Conclusion:

The financial crisis has confronted us with the world we have created. Like a big mirror it has revealed the fragility of a global financial system; the risks of excessive deregulation with bad supervision; the vulnerability of a global economy based on the understanding that ever increasing production and consumption was the key to success.


It is time to change. It is time to re-write the rules of a more reliable and balanced globalisation. But this will not only require better international organisations and better global governance; this will also demand a change of mind, a change of culture. As Robert Skideslky put it recently, “any great failure should force us to rethink”.


The big lesson of this crisis is that we are all one. As the song says, “we all go together when we go”. And this realisation of this interdependence is an opportunity to revise our theories, our concepts, or daily behaviour and its relation with the economy, with society, with the environment. At OECD we are making a big effort to adapt to the new global economic reality. But we must act together, for now we know this is not a “solo” challenge, and surely you all have an important contribution to make.


Thank you very much.

 

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