Bribery and corruption

Managing globalisation and the role of the OECD


by Angel Gurría, Secretary-General of the OECD
Korean University Business School, 20 September 2006

While globalisation is without doubt a powerful motor of prosperity and poverty reduction, the management of globalisation is becoming ever more complex. I would like to share with you some points on this, and above all, I would like to hear your views on this particular issue.

Globalisation and open markets

There is no one accepted definition of globalisation. This makes many debates about globalization rather confusing.  At the OECD, we interpret economic globalisation as a process of closer economic integration of global markets: financial, product and labour. 

Economies have been becoming more integrated for centuries. But in the past half century globalisation has accelerated.  In particular, over the past couple of decades, many East Asia economies, especially Korea and China, have been participating more in the global economy, as have the former communist countries of central and eastern Europe, along with emerging and developing countries from all parts of the globe including my own region of Latin America.

In fact, there has been an acceleration in globalisation as reflected in rapidly rising shares of trade, finance and migration. The share of trade in global GDP has tripled since 1950. The level of outward FDI relative to GDP among OECD countries has quadrupled since the early 1970s -- global FDI was about $610 billion in 2004. And the number of immigrants entering OECD countries on average each year has more than tripled over the past twenty years.

These trends have been driven by multilateral and national initiatives to open markets, as well as declining transport costs and rapid technological change.

And while open markets have proven to be an effective tool for economic growth, there is always resistance of different kind. In this sense, I am concerned about some recent developments in the trade area. It is particularly frustrating to see the stall of the Doha Development Trade Talks in July, as this Round is an opportunity to re-balance trade rules in favor of developing countries. 

The Doha talks reportedly collapsed largely because of disagreements over agriculture, but clearly that is not the whole story. Indeed, some rich countries were not ready to accept larger tariff cuts or bigger reductions in trade-distorting domestic subsidies for farm products. Emerging market countries, meanwhile, offered what some saw as only modest improvements in market access for goods and services. All this is the more striking as I see an enormous gap between what officials’ say when they meet more openly in Paris and when they define their positions in the WTO in Geneva.

The present impasse is a lose-lose situation, in which all countries suffer but where the poorest will suffer most. The OECD has estimated at nearly $100 billion the gains in terms of increased economic activity – and hence prosperity – that could be obtained from full tariff liberalisation for industrial and agricultural goods. The benefits from liberalising trade in services – the fastest growing sector of the world economy - could be five times higher, at around $500 billion. A Doha agreement on trade facilitation, by clearing away procedural barriers, could contribute at least $100 billion more. Developing countries are projected to reap as much as two-thirds of these gains.

The failure of the Doha talks would mean that these potential benefits are lost. More importantly, it would risk undermining the multilateral trading system and unleashing a wave of protectionism that reasonable politicians will find hard to counter.  It’s time for the developed countries to show leadership and start putting into practice the recommendations that emerge from their own discussions at the OECD.

Another area where I am greatly concerned about possible backtracking on open markets is foreign investment. In Europe, there has been some reticence about international mergers and acquisitions in sectors as diverse as steel, banking, energy and even yoghurt. The United States expressed concern about take-overs of a small oil company and of some of its port facilities. In March of this year, Chinese officials began to make warning statements about foreign involvement in their economy. And, we have recently witnessed a resurgence of expropriation in some Latin American countries.

Governments obviously have the right to safeguard national security and other public interests.  But, we need to be clear -- protectionism is not the solution.  It poses a serious threat to the health and good functioning of the world economy.

The third issue that I want to address is migration. As markets get more integrated, it becomes clear that the movement of people is one of the most difficult aspects to manage globally. All governments restrict the entry of migrants into their countries. But today, most OECD countries are facing ageing populations and slowing or negative population growth. "Enlightened migration" can be a win-win for both sending and receiving countries. This is an area to which Korea (and your neighbor Japan) will have to give further consideration in the years to come, as Korea's birth rate has plummeted over the last two decades.

Reaping the full benefits of globalisation

As I have said, open markets are the key to globalisation. But reaping the full benefits of globalisation requires a lot more than that. The full range of sound macroeconomic and structural policies are necessary, such as sound monetary and fiscal policies, labour market policies that develop human skills and adaptability, economic policies that allow for firm creation and exit, an efficient regulatory framework, and good and effective corporate and public governance.

I would like to highlight just a few of these issues. Human capital development is an area which is essential to reaping the full benefits of globalization. When I speak of human capital, I speak of health as well as education.

Foreign investors are obviously more attracted to countries with well-qualified and healthy workforces.  And countries with high levels of human capital are much more able produce exportable products for global markets, and climb the value chain as development gets launched.

Human capital is one area, among many where Korea has excelled. Let me cite just a few indicators.  Among the OECD countries, Korea registered the greatest gains in life expectancy between 1960 and 2003, with an overall increase in longevity of 25 years bringing Korea's life expectancy to the OECD average of around 78 years.

In the area of education, you may have heard of the OECD's Programme for International Student Assessment, better known as PISA. This programme has developed a set of reliable and comparable international indicators on student performance for 15 year olds. PISA measures how well students have acquired analytical skills to help them succeed in the knowledge society. This year, we will present the third edition of PISA focussing on the science and technology area. Previous exercises focused on mathematical abilities (2003) and literacy (2000). In the 2003 edition of PISA, Korea was near the top of the league in mathematics, reading literacy and science, and at the top for problem solving. 

I would now like to turn to corporate governance. One of the weaknesses identified by the OECD and other analysts after the Korean financial crisis 1997 was in the area of corporate governance. Good corporate governance is critical for ensuring the efficiency of investment.  It is also essential for attracting foreign investment -- something which has become even more important for Korea.

While Korea always had high levels of investment, especially by the chaebols, it was not always very efficient.  However, Korea has made very impressive steps to improve the quality of its corporate governance drawing on the OECD Principles of Corporate Governance

The last point under this section is the importance of adjusting to structural change. Fears that globalisation have led to increasing job losses and lower wages are an important source of public concerns about globalization in many OECD countries. However, analysis by the OECD suggests that technological and demographic changes are much more important drivers of structural change than international trade and investment. In any event, the best response to structural change is to facilitate the mobility of labour and capital to more efficient uses and locations. 

Tackling the dark side of globalisation

As I have mentioned, open markets and rapid technological change have clearly been a motor for prosperity and poverty reduction. However, they may also have facilitated the expansion and globalization of a wide range of illicit activities, such as bribery and corruption, tax evasion, money laundering, counterfeiting and piracy, and human trafficking.

It is important to address these problems. The OECD is at the forefront of many initiatives to tackle this dark side of globalisation. OECD countries and six non-member countries have signed a far-reaching Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Its effect has been to make bribery illegal in many countries that had previously condoned it as a practice even to the extent of allowing bribes to be tax-deductible.  In the taxation area, the OECD has a wide range of activities which seek to improve transparency, and information exchange, and combating fraud and non-compliance. 

Turning to counterfeiting and piracy, we are carrying out a major project, for which we recently received a mandate from the G8 in Saint Petersburg, to strengthen the international legal framework to combat them.  Our work shows that the production of counterfeit and pirated goods has become more sophisticated. The high returns on counterfeit and pirated goods are fanning corruption and criminal activity. Links to organised crime and terrorist groups have been established. 

At present the outlook is not promising.  While most countries appear to have adequate legal and administrative mechanisms for combating counterfeiting and piracy, enforcement actions have not been sufficient. The first phase of our project should be completed by the end of the year.

Global problems need global solutions, and the OECD stands ready to contribute.

Role of the OECD

This takes me to the role of the OECD. The Organisation I head has a key role to play in managing globalisation – understanding it, explaining it, analysing its effects, and making policy recommendations to maximise its benefits and to tackle its challenges. We do this through many means:

(i) Peer reviews and surveillance, like our twice-yearly Economic Outlook and regular economic surveys – for example, one of the reason that I am visiting Korea is to launch the OECD’s survey of Korea’s environmental policies; 

(ii) Benchmaking performance through exercises like PISA that I referred; and

(iii)  Instruments like the OECD Corporate Governance Principles or the Anti-Bribery Convention.

Another key aspect of the OECD today is the globalisation of our own activities as we work with some 70 non-member economies.  China, your neighbor and very close economic partner, is also a close partner of the OECD. Over the last year, we have published an economic survey, and reports on agriculture, foreign investment, public expenditure and governance. And we plan to involve them closely in our project against counterfeiting and piracy.

The last aspect that I would like to mention today is importance of communications.
I mentioned that one of our roles is to explain globalisation. As we see increased public concern about the process, and as we also experience the dark side of globalisation, it is important to have a well informed view on these issues and to communicate them properly to the public. Globalization has also been signaled as the cause of higher income disparities. It is true that in more competitive markets, the less prepared individuals and regions will suffer. But avoiding the process is not the answer. It is necessary to equip these people and regions with the instruments to take the best out of it. It is also necessary for economies to keep the phase for economic reform.

One of the great challenges for the policy agenda for reaping the full benefits of globalisation is the so-called political economy of reform.  How can governments implement the necessary reforms without having to wait for crises to occur.  In many countries, well-designed reforms have failed to be implemented or sustained due to the near-term political costs that they entail, and the fact that opponents are vocal and well-organised while benefits tend to be more diffuse and delayed.  Too often we have to wait for a crisis before reforms get launched – but with greater pain for all concerned. 

This points to the need to inform and convince the broader public regarding the benefits of such reforms -- or the costs of the absence of reform.  In this endeavour, the OECD can offer a wealth of information and analysis, based on the experience members have shared over the decades under its auspices, drawing on the expertise of its committees and staff.

In this context, I personally greatly value contact with students and youth like yourselves.  You are the leaders of tomorrow.  You will make the world of tomorrow.  And establishing dialogue and relationships with you is of critical importance in a continent like Asia which is undergoing dramatic generational change.

Thank you very much for your kind attention and maybe you have questions, comments or even objections to my remarks.


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