Institute of International Finance Conference: The G-20 Agenda under the Russian Chairmanship
Much More than Growth!
Remarks by Angel Gurría, OECD Secretary-General
Moscow, 14 February 2013, 19:00
(As prepared for delivery)
Ladies and Gentlemen:
It’s an honour for me to address you today and share some thoughts on one of the most compelling policy questions of our time: how can we change the pace and pattern of growth to make it stronger, more sustainable and more inclusive?
We are confronted today with a dilemma: as we all look for stronger growth, we also recognise that growth alone does not necessarily translate into greater well-being for our citizens. In other words, we need not only stronger growth, but also ”better” growth.
The three key questions that I would like to address this evening demand innovative answers:
Let me share with you our views on these crucial questions.
Where is growth going to come from over the next decades?
Emerging-market economies and developing countries have become the world’s main engine of growth. We have documented this already in 2010, when we coined the term “shifting wealth”, to describe the shift in the centre of gravity of the world economy from North to South and from West to East.
The OECD Development Centre estimated that in the 1990s only 12 developing countries were growing at least twice as fast as the OECD average in GDP per capita terms. But the number of such “rapidly converging countries” rose to 83 in the last decade. This is an impressive change!
We have also looked at major trends for the global economy over the next 50 years. Our findings show that that the gaps in living standards between the world’s rich and poor countries will continue to shrink between now and 2060. In particular, China and India will experience more than a seven-fold increase of their income per capita and their combined GDP (in PPP terms) will exceed that of the current OECD membership by that time.
Still, despite strong growth, the levels of GDP per capita will continue to vary a great deal across countries. In 2010, 109 countries still had a GDP per capita lower than 25% of that of the United States. Even maintaining strong growth, only 60 developing countries will be able to double their income per capita in the next 20 years.
What our analysis shows is that many emerging-market and developing countries are unable to undergo the necessary structural transformations to sustain high-productivity growth. In other words, they are confronted with the perils of the “middle-income trap”: most middle-income countries face the growing competition from low-wage countries in global markets, but their firms are not competitive enough to break into those higher value-added segments of global value chains.
This is a wake-up call for all of us: structural reforms are crucial for growth not only in the advanced economies that are now mired by the crisis, but also for emerging-market economies and developing countries.
Burdensome regulation and heavy-handed State intervention, insufficient competition in domestic markets, deficient education systems, widespread informality in the labour market, these are all bottlenecks that discourage innovation, prevent productivity from rising faster and constrain growth.
Structural reforms are a formidable tool: they are about putting in place the policies that can remove those obstacles and unleash opportunities for growth and development. The pay-offs from structural reforms - carried out in advanced and emerging economies alike - are huge. According to our recent simulations, a comprehensive, internally consistent package of reforms could deliver an increase in world GDP by 2.5% at the beginning of the next decade compared to a baseline scenario of limited reforms.[i]
Let me now address the second question:
How sustainable will it be?
We cannot continue to grow by creating havoc in our environment. Stronger growth is indeed necessary, but we must stop our collision course with nature. The OECD Environmental Outlook to 2050, documents the economic, social and environmental consequences of maintaining a growth model that does not preserve our natural assets. The outlook is pretty scary!
Without resolute action, we show that world energy demand will be 80% higher in 2050, with most of this increase coming from the emerging-market economies. Growth will still be mostly - 85% - reliant on fossil fuel-based energy, which could lead to a 50% increase in greenhouse gas emissions globally and cause the global average temperature to rise by 3 to 6°C by the end of the century. The developing countries, where natural assets represent an average 26% of national wealth, as opposed to 2% in advanced economies, have most to lose from a continued degradation of the environment.[ii]
Making development more sustainable is good for the economy. There is no trade-off here! In the OECD Green Growth Strategy we identify policies that can make growth not only less carbon-intensive and more sustainable, but also help countries unleash the potential of green technologies and innovation as a new driver of prosperity.
This is also true for the developing countries: for instance, Ethiopia is developing an extremely ambitious green growth strategy and has requested the support of the OECD in this endeavour.
And now my third and last question:
Who is going to benefit from this growth?
The type of growth that we have been promoting has been unfair. It has benefited a happy few. We now have to make sure that the benefits of growth are shared equitably.
Strong growth has led to a sustained reduction of extreme poverty in the developing world. Still, even where extreme poverty has been reduced, large sectors of the populations remain vulnerable, in particular those working in the informal sector, who may be too wealthy to benefit from targeted programmes but too poor to afford formal protection systems. This “missing-middle” problem affects today a growing number of emerging-market economies.
While we focused on growth, inequality kept rising, both in the developed and developing countries. Our publication Divide We Stand shows that the gap between rich and poor has widened in most OECD countries over the past 30 years.[iii]
Inequality is also rising in China and India. In other emerging economies, like Brazil, Chile and Mexico, inequalities have started falling, and this is good news, but at a very slow pace and disparities in these countries are still huge.
It is so important to make growth not only stronger but also more inclusive. It is not only about fairness, it is also about economics! With the same policy tools, we can promote inclusiveness and at the same time enhance growth. For example, investment in education and skills improves people’s earnings capacity and boosts productivity for the economy as a whole; deregulation to open protected sectors encourages investment that creates jobs and facilitates innovation.
These are three questions that will define our future, the quality of life of our children and grand children, the health of our only planet. To address these challenges successfully we will need two indispensable tools: 1. New Approaches to Economic Challenges; and 2. More inclusive multilateral cooperation.
Let me conclude with a few words on these two key elements:
First, we need to renovate our economic knowledge and thinking. Our traditional economic models have not only failed to avoid the worst financial crisis of our lifetime, in some cases they have produced it and fuelled it. This has cost millions of people their homes, their jobs, and their financial security for life. At OECD we believe that this crisis is a unique opportunity to rethink our models and concepts.
We cannot simply repackage tools and recipes of the past. We need to look for new drivers of growth and understand better the synergies and trade-offs that exist between different policies to promote growth, to preserve the environment, to make our societies fairer. The economics profession bears considerable responsibility for this crisis and if it is to be useful again “it must go through an intellectual revolution”, as Anatole Kaletsky put it recently.
This is why at the OECD we have launched our New Approaches to Economic Challenges (NAEC) initiative, through which we are trying to revise, update and improve our economic thinking and to connect the new ideas to policy-making. We already had two big NAEC meetings and this is proving to be a most necessary and healthy exercise. Thanks to this exercise the OECD economic advice is becoming broader, more modest, and more inclusive.
We also need to improve our understanding of the complex realities and specific circumstances of developing countries. This is what we are aiming to achieve with our Strategy on Development: to integrate the diverse perspectives and realities of developing countries into OECD analysis and policy advice, and combine more effectively our expertise in different areas to provide a more coherent approach to development.
Second, we need to foster more inclusive multilateral cooperation. The only way we can address the various challenges that we are facing is through effective and inclusive multilateral cooperation. This is why the G20 is so important. In addition to addressing the immediate and most pressing challenges posed by the crisis, it serves as a forum for policymakers to pursue the shared objective of strong, balanced and sustained growth.
We have already made significant progress in enriching the G20 agenda and focusing on the long-term challenges facing the global economy. The Korean presidency put development high on the agenda of the G20; the French achieved an ambitious Action Plan on agriculture, food security and food price volatility. And the G20 has made progress in the realm of green growth under the leadership of the Mexican Presidency.
But there is still a long way to go. I hear sometimes that there is a fatigue with the multilateral system and that the G20 is running out of steam. Let me be clear: we do not share that view. The G20 has ample policy space for action and unrivalled political and economic firepower. Yet, certainly, it still has to find the way to make the most of its leadership to tackle deep structural issues for the world economy.
Ladies and Gentlemen:
The crisis has given us a great opportunity to create a better world. We cannot waste it! As we build together the foundations of a better global economy let’s keep these three questions in mind: Where is growth going to come from? How sustainable will it be? And who is going to benefit from this growth? Growth is not a goal in itself, it is a medium to improve the quality of our lives, both in material and spiritual excellence.
Let’s not forget the words of the great Dostoevsky: “man [..] like a chess-player, is interested in the process of attaining his goal rather than the goal itself.”[iv] Let’s prove Dostoevsky right and show that we, collectively, including within the G20, are not just interested in growth as a goal, but also in growth as a process with critical social and environmental ramifications for the future of our world.
Thank you very much.
[i] According to recent estimates by the OECD Economics Department on the impact on global growth of an comprehensive structural and macro reform.
[ii] OECD, “Not just for the rich: green-growth and developing countries”, OECD Insights, June 12, 2012
[iii] Divided We Stand, Why Inequality Keeps Rising. Summary: http://www.oecd.org/els/soc/49170768.pdf
[iv] Quote from “Notes from Underground” by Fyodor Dostoyevsky.