Remarks by Angel Gurría, OECD Secretary-General, delivered at The Chicago Council on Global Affairs Corporate Program
9 March 2012
Chicago, United States
(As prepared for delivery)
Ladies and Gentlemen,
It is a great pleasure to be at the Chicago Council on Global Affairs. I would like to share with you my perspective on the global economic outlook, the challenges ahead, and the possible ways to address them.
The world economy is once again in intensive care.
This time last year, the global recovery seemed to be on track. It appeared to be both self-sustained and broad-based. Unfortunately, circumstances took a turn for the worse. The troubles in the euro area flared up, and the shock of the Japanese disaster reverberated around the world just as the world was beginning to recover from the recession, growth suddenly slowed down.
Indeed, the prospects for the global economy in our November 2011 Economic Outlook looked very gloomy. And we entered 2012 with confidence rapidly evaporating. Decisive policy action was urgently required, both to address the euro-area sovereign debt crisis as well as the fiscal policy impasse in the United States.
Now, as we get closer to spring, our policy efforts are once again producing “green shoots.” In the United States, non-farm payroll employment rose by more than 200,000 a month over the past two months. In Europe, the terms of the Greek support package were agreed and banks have been shored up with the help of one trillion of cheap, three year funding from the European Central Bank. A fiscal compact was agreed among 25 of the 27 European Union members. Borrowing rates for Italy and Spain have stabilised, albeit still at a high level.
However, fragility remains. Economic activity slowed down in many countries over the past few months, some actually experienced negative growth. Many OECD countries are affected by unacceptably high and persistent unemployment. Youth unemployment in OECD countries by the end of 2011 (Q4) was above 16%; in some countries it has reached almost 50%.
There are also clear signs of a slowdown in the large emerging market economies – in particular Brazil, India and China. Policy makers in these countries have already engaged in an array of expansionary policies but they are aware that they also face serious structural challenges.
It is essential to tackle the European sovereign debt crisis
We need decisive measures to halt the sovereign debt woes, restore fiscal stability and avoid contagion into other countries and into the banking sector. These are all necessary conditions for Europe to re-establish confidence. But they are far from sufficient to get the continent back onto a sustainable, long-term growth. We also need to address structural policies, as well as to deal with the most vulnerable.
The United States is still facing significant challenges, despite its recent progress
On this side of the Atlantic, the US must take credible steps to put its fiscal policy on a sustainable path. Annual budget deficits would settle at around 4-5% of GDP, even with the full implementation of the expenditure cuts mandated by the Budget Control Act of 2011. This does not account for rising health-care costs and population ageing, which will add to public debt, push up interest rates, reduce investing and ultimately hinder economic growth.
Further budget consolidation should be delivered in a manner that is as growth friendly as possible, both in the short and the long term. It must come from a combination of increased tax revenues and reduced mandatory expenditures. Reducing discretionary expenditures is not a viable option in the long-run – it could seriously impact the functioning of the federal government and its investments in education and research and development. This in turn, would compromise long-term growth prospects.
Budget consolidation is a difficult and politically costly endeavour. The European experience shows how difficult and absolutely crucial it is to strike an appropriate balance between consolidation and support for growth. Continuing the recent stand-off in policy in the US could lead to negative market reactions. But at the same time, fiscal excessive tightening can harm the recovery. Economic policy makers have to make extremely delicate balancing decisions.
How can we address these highly complex short term challenges and still build a sustainable, job-rich growth?
The best way to address these challenges depends on each country’s situation, but there is a growing agreement on the need for structural reforms to move forward. Many of our governments have run out of fiscal and monetary fire power, which is why we believe it is time to Go Structural.
Going structural means that we need to lay the groundwork now for strong, sustainable and inclusive growth in the future. Structural reforms are essential to boost growth and they can at the same time help achieve other important goals, such as boosting jobs and fostering competitiveness.
For example, OECD analysis shows that reducing taxes on labour to the lowest level among G20 countries would increase average employment rates by 3.5 percentage points. Further opening markets for trade and investment would boost business confidence, income and employment at no fiscal cost. And reforms of education systems to boost human capital and skills can offer even larger payoffs.
A few weeks ago, I presented our 2012 Going for Growth study which presents compelling evidence that structural reforms don’t just help to enhance economic growth in the long run; if well designed and implemented, they also boost recovery in the short-term, particularly those reforms aiming to increase employment.
At the OECD we recommend not only going structural, but also to “Go Green” and to “Go Social.”
In planning new structural reforms, it is equally crucial that we immediately embark on a more sustainable, greener path of growth. The OECD Green Growth Strategy offers practical policy tools in this direction, helping us reboot growth while addressing the serious risks posed by climate change. The cost of inaction on climate change is high and it gets higher the longer we delay policy measures that bring “green” and “growth” together.
We also need a more inclusive economic model. In the last few years, inequalities in OECD countries have reached record levels. The average income of the richest 10% of the population today in the OECD is about nine times that of the poorest 10% - a significant increase compared to thirty years ago. In the US, the factor has now grown to 14 times. This increasing inequality threatens the fabric of our societies.
To maintain political and institutional stability, we have to implement policies that help us meet our populations’ expectations for a better life for themselves and their children. Tax and benefit policies are a direct instrument for tackling income inequality. But there are other policy levers, such as “up-skilling” the workforce to increase “employability.” I touched on the importance of addressing the skills mismatch when I presented the “OECD Territorial Review of the Chicago Tri-State Metropolitan Area.”
Ladies and Gentlemen,
Tackling the economic crisis, implementing structural reforms, generating jobs, mitigating climate change and reversing inequality are huge challenges. We will overcome them faster if we work together.
For fifty years now, the OECD has offered a platform for sharing experiences and developing policy options. It has helped its member states weather many a headwind in the past – I am confident that it will equally help us confront the current challenges and build a stronger, cleaner and fairer global economy.
Thank you for your attention.