The recovery of the global economy, the challenges ahead and the role of OECD: Where do we go from here?

 

Remarks by Angel Gurría, OECD Secretary-General

University of Ljubljana

Slovenia, 1 June 2010

 

 

Minister Gaspari, Rector Pejovnik, Excellencies, Ladies and gentlemen:


I am delighted to be at Ljubljana University to address this distinguished audience. Coming to Slovenia is always a great pleasure, but today it also has a special meaning.

 

Only a couple of weeks ago, Slovenia was formally invited to become a member of the OECD. This morning Prime Minister Pahor signed the Accession Agreement. This makes me feel very much at home. Thank you for the invitation.

 

Universities are where the future is born. So I will take this opportunity to share with you briefly the OECD’s perspective on the challenges ahead for the global economy and the crucial role of multilateral cooperation in addressing these challenges and building a stronger, fairer, cleaner world.


 

1. The global economy


Let me start then with our perspective on the global economy.


Good news first: the global recovery is now underway. It is slowly gaining momentum. Beyond GDP, financial conditions are returning to normal in many countries. World trade is picking-up. Encouraging signs are coming from housing markets. Business confidence is firming almost everywhere. For these and other reasons we have revised upwards our global growth forecast for 2010 and 2011 to around 4.7%.

 

However, this does not mean that we are out of the woods. The pace of global recovery is uneven. Most OECD economies are coming out of the crisis with deep scars. Many are facing new critical pressures.


GDP growth in OECD countries is still sluggish (around 2.7% in 2010 and 2011). Potential output has fallen. This means that unemployment remains high. Over the two years through the first quarter of 2010, the ranks of the unemployed in OECD countries rose by over 16 million.  We expect to close the year with an average record unemployment rate of 8.5% of labour force. 

 

In the meantime, the OECD-wide budget deficit will remain close to 8% of GDP in 2010, falling only slightly next year to below 7%.  Average gross public debt will reach 100% of GDP in 2011. Slovenia is no exception to this overall picture.


 

2. The Slovenian economy: emerging from the crisis


Slovenia was certainly not insulated from the global downturn. During 2009, its GDP fell by around 8% , as Slovenia was highly exposed to the collapse in global trade and the earlier boom in housing investment unwound. Like many other countries, the deterioration in bank balance sheets inhibited banks’ lending ability, which in turn dragged on growth.

 

In response, the government substantially loosened fiscal policy, and implemented appropriate measures to support the stability of the financial sector. These measures, together with the recovery in global trade and financial conditions, helped to stabilise the domestic economy and labour market.

 

We expect growth to improve steadily in the coming years, but it will still remain relatively low at around 1.4% in 2010 and 2.4% in 2011.  This is only slightly above the average growth for the Euro zone as a whole (1.2% and 1.8%), so the process of convergence is only moving slowly. As in the rest of Europe, the recovery in the labour market is expected to lag the recovery in activity with the unemployment rate not peaking until early 2011.

 

At the same time, the fiscal situation has deteriorated. The fiscal measures that supported the recovery turned a balanced budget in 2007 into a deficit of 5.5% of GDP in 2009. This deficit is likely to remain above 5% in both 2010 and 2011, so the public debt ratio could continue to rise in the next few years.


So Slovenia’s economic picture is similar to the rest of the OECD. We share the same challenge: How do we balance these contradictory forces of having to consolidate our fiscal positions while still supporting a fragile recovery.

 

At the OECD we think that the solution to this dilemma is complex but not impossible. We believe the answer will come from a combination of three ingredients: 1) coherent and convincing exit strategies; 2) structural reforms; and 3) the promotion of new sources of growth.


 

3. Towards a job-rich recovery and sustainable growth


First, let’s bring confidence back! We need to develop and communicate credible and transparent fiscal consolidation strategies; while at the same time avoiding a “jobless recovery” by implementing structural reforms and comprehensive and innovative employment and social policies.

 

The OECD member and partner countries have much to contribute to the economic recovery, but we must do it in a balanced, country-specific way. This means that some countries will need to adopt tough fiscal measures, while others with room for manoeuvre keep up demand supporting economic dynamism. The recent approval of the EU’s package for Greece, the huge financial support package agreed by the Euro-group, and the rigorous austerity plans announced in many other European countries last week are three major steps on the road to confidence. The broad conclusion is clear; decisions need to remain coordinated to ensure that the global economy moves to sustained growth.

 

Second, structural reforms. In addressing the urgency of the crisis and the solvency and liquidity risks, we should not forsake our long-term structural challenges. The worst of the crisis might have passed, but much of our pending homework to introduce structural reforms is still there. This brings to my mind the shortest story ever written, by that wonderful Guatemalan writer Augusto Monterroso, the story reads: “Upon awakening, the dinosaur was still there”.

 

For many, the reform of the financial system stands out as the most urgent structural change on the list. This is highly important and we are working through multilateral co operation to make it happen.


However, labour and product market reforms also need to be implemented to raise potential output, support innovation and prevent high unemployment from becoming structural. Ageing population and its pressures on weakened public finances demand a thorough pension reform in many countries. In some other countries, educational, environmental and energy reforms will be crucial to develop new sources of growth.

 

New sources of growth: innovation and green growth


To achieve a job-rich recovery and build sustainable long-term growth we will need to promote new sources of growth. Innovation and green growth are two major avenues to move forward.


Innovation is the basis of highly competitive individuals, businesses and economies. But it acquires additional importance in the context we are in. Governments need to start seeing innovation as a wide-ranging system that goes far beyond research and development (R&D).


The current crisis makes it even more urgent to push through necessary reforms to increase the innovative capacity of societies. Governments battling to get their economies onto a sustainable growth path need to reduce administrative hurdles for new and existing companies and make their tax policies more friendly to innovation and entrepreneurship.

 

Governments must continue to lead and invest in research in these areas, but also do more to co-ordinate their policies across borders and foster the dissemination of innovation. This involves promoting international mechanisms to share the cost of innovation through co-operation and technology transfer between countries.

We need to think about how to transform innovation into higher productivity and growth; more and better jobs and; more and better public services, enterprises, social welfare, renewable energies and green technologies. The OECD’s Innovation Strategy, presented to our Ministers last week, is designed to help countries move in this direction.

 

Green growth  can become another crucial new source of growth, one that produces the double dividend of creating more and better jobs and fighting climate change.


Without a global shift to a greener, low-carbon economy, the world is on track for increasing greenhouse gas emissions by 70% by 2050, and temperature increases of 4-6°C by the end of the century. This is far from the 2°C target increase that countries recently agreed to in Copenhagen. And clearly a 4-6°C increase would lead to devastating effects on the economy, on human health and welfare, and on the environment.

 

Countries need to develop national plans for greening their economies in the longer-term and to reap jobs from this process. OECD stands ready to support such initiatives through our Green Growth Strategy.

Finally, let me close my presentation by stressing one very important point: the only way to achieve these objectives, the only way to avoid a jobless recovery and build a sustainable growth, is through inclusive multilateral co-operation. Our interdependence leaves us no other option.


 

4. Inclusive multilateral cooperation and the role of the OECD


An internationally synchronised crisis demands synchronised responses. This is why multilateral cooperation has become so strategic. This is why global governance has to become more inclusive.

 

The OECD has been working hard to become more plural, more inclusive. Chile has recently joined the OECD as full member and the second Latin American country, after Mexico. As I mentioned before, this morning we signed the accession agreement with Slovenia. Last week we also formally invited Estonia and Israel. And we expect Russia to follow in a not so distant future.

 

These accessions are part of a broader process of global outreach through which we are also strengthening our collaboration with emerging economies (like Brazil, China, India, Indonesia and South Africa) and with many other developing countries through regional activities in the Middle East, North Africa, Latin America, Southeast Asia and Africa.

 

We are also strengthening our collaboration with other international organisations and contribution to main multilateral fora, such as the G20. We have provided contributions to the G20 on employment and social policies, on investment and trade, on bribery and corruption, on fossil fuel subsidies, development, aid-effectiveness, taxation, and on economic policy convergence.
 
To improve co-ordination and exchange of information between the international organisations involved in the G20 process, I recently proposed the creation of an Observatory for Policy Coherence, bringing together the knowledge of the IMF, the World Bank, the OECD, the ILO and the WTO to address some global challenges. Global governance is changing indeed.

Ladies and gentlemen:


Let’s learn the lessons of this crisis. If we do not recognise our failures and correct our ways, how can we make progress? It is time to build a stronger, fairer and cleaner global economy. It is time to advance towards a new era of economic progress based on green growth and, at its core, on values and compromises of propriety, integrity and transparency. The OECD countries, plus Brazil, Russia and other non-members, have just signed a Declaration on this “trilogy” to frame the conduct of international business.

 

At the OECD we are fostering new economic thinking, new ways of multilateral cooperation, new forms of innovation and energetic sustainability. Therefore, exploring new ways for “Measuring the progress of societies” will continue to be one of the key priorities of the OECD. 

 

Focusing on people’s well-being and societal progress will require looking not only at the functioning of the economic system but also at the diverse experiences and living conditions of people and households.

 

We invite your perspective, your experience, your ideas in this process, to build a stronger, cleaner, fairer world economy.

 

Thank you very much.


 

 

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