New Global Economic Challenges: Charting the Course for Policy Responses


Remarks by Angel Gurría, OECD Secretary-General
Lecture at the London School of Economics and Political Science
London, 1 March 2007

Dear Director, Ladies and Gentlemen,

It is a great honour to be at the London School of Economics and Political Science, a historical launching platform for new ideas and international progress. Thank you very much for this invitation.

Chaos theory says that the flap of a butterfly's wings can cause a tornado on the other side of the world. Globalisation works under a similar logic. Today, the risk that something happening in a far away country will have a serious impact close to home is greater than ever. Just a couple of days ago, a sell-off in the Shanghai Stock Exchange precipitated dramatic falls in world stock prices. Such an interdependent world poses constant policy challenges. I would like to address some of these challenges and the way in which the OECD is helping governments to cope with them.

Let me start by saying that globalisation is not "the mother of all evils". But it is neither the mother of all virtues. We need to balance these perceptions. Globalisation per se is neither good nor bad. Policies make the difference. Policies shape globalisation. At the OECD, we have identified eight key policy areas where we must make progress to profit from globalisation.  

1. Reducing poverty and inequality

Poverty is the ultimate systemic risk. The proportion of people living in extreme poverty has been halved since 1980. Yet, poverty is still widespread and deep-rooted: more than 2.7 billion people still subsist with less than $2 a day; 1 billion people don't have access to clean water; and 2.6 billion have no sanitation services.

Globalisation has facilitated the creation of unprecedented wealth, but inequality has increased at the same time. Recent studies report that the richest 2% of the world's adults own more than half of the global wealth. Within OECD countries, disparities have also grown: between 1994 and 2003, earnings' inequalities increased in 17 OECD countries (out of the 20 countries for which we have this information). 

The stubborn persistence of poverty and inequality create the conditions for the expansion of terrorism, armed conflict, environmental degradation, cross-border diseases and organised crime. A daunting example: the ILO reports that in 2007 there will be more slaves in the world than never before, with nearly 12.3 million people suffering this inhuman imposition.

Increasing development aid is not the only solution, but it is an imperative. Aid donors have to increase aid-flows faster than any other public expenditure in order to fulfil their commitments to increase aid to $130 billion and double aid to Africa by 2010.

Creating more jobs, well paid jobs, and generating sustainable growth is, however, still the best recipe against poverty.

2. Advancing global trade liberalisation

The reactivation of the Doha Development Round of negotiations is a must. It is an opportunity to re-balance trade rules in favour of developing countries while boosting the world economy. A successful outcome is still possible. 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 could be five times higher. The alternative to a Doha agreement is bleak. There is a danger that world trade will be dominated by litigation instead of regulated by legislation, that dispute settlement will take the place of rule making. 

Agriculture accounts for a small share of developed countries' economies (2% of the OECD's GDP). Agricultural tariffs and price support mechanisms do a poor job in providing income support for rural families, while also aiming to protect the environment and maintaining healthy rural economies. Food prices measured at the farm gate in OECD countries are 30% higher than in international trade. Support to farmers in OECD countries totals 280 billion USD annually. By contrast, official development assistance from OECD countries to developing countries amounts to $107 billion.

The Doha Development Agenda is the low hanging fruit. If we can't find a solution to move forward in these negotiations, how are we going to deal with more difficult issues such as climate change, drug- trafficking, poverty, energy or international terrorism?

3. Managing international migration

International migration has jumped up in the policy agenda in most countries of the world. It is hard to think of a nation that is not directly affected by this phenomenon. Today, we estimate that nearly 200 million people live outside their country of birth. Although it is difficult to calculate with precision the number of migrants worldwide, it is certainly one of the most dynamic features of globalisation. 

Almost three million long-term migrants enter OECD countries legally every year. The numbers will continue to rise as host countries grapple with falling birth rates and ageing populations: by 2025, the North's population is expected to fall by 29 million, while the South's will increase by 1.6 billion, according to estimations by The World Bank. Migration is a natural compensator for an unbalanced globalisation. Properly managed, it can provide solutions to many developed and developing countries' main economic and social problems. In contrast to the managed liberalisation of goods, capital and certain services, labour has been left "to its own devices".

The contribution of migrants to mitigate poverty is crucial, and often underestimated. International remittances received by developing countries doubled between 2000 and 2005, reaching nearly $167 billion (much more than the $107 billion rich countries sent in Official Development Aid). Furthermore, it is estimated that unregistered remittances normally double the amount transferred formally. Remittances have become increasingly important for developing countries. They go mostly to private consumption and some basic forms of investment like land and housing. They are hard-earned, not gifts.

Governments in OECD countries are faced with the delicate task of achieving a balance between openness to international migration, effectiveness in managing migration inflows, and the implementation of effective policies to ensure immigrants' successful integration.

4. Enhancing global education

In a globalised economy, where knowledge is the driving force of growth and development, education has become more vital than ever in determining people's capacity to prosper, and in helping economies to bloom. There are still 800 million people in the world lacking basic literacy skills and women account disproportionately for two-thirds of this total.

The education systems, with some exceptions, are not living up to the challenge of providing the high quality and problem-solving skills that are needed in a globalised world. The international comparison of education results in OECD's PISA study shows that there is a strong correlation between best performers and thriving economies.  

Cross-border education is a positive trend that also requires maximum attention by policy-makers if it is to become a major global asset. Students that go to study abroad become much more sensitive to global policy challenges.  And this is a growing trend: the number of foreign students in OECD countries has doubled over the past 20 years to 1.6 million (this is 85% of the world's foreign students). ITC can also be a formidable tool to improve global education performance. Innovative global initiatives like the $100 Laptop can make a huge contribution and give access to hundreds of millions to the modern world.

5. Protecting the environment

Protection of the environment is one of the main global policy challenges of this new century.

We have definitely entered "a period of consequences". The recent Stern Review, commissioned by the UK's Government, estimates that the cost of inaction could range between 5% and 20% of global GDP each year -against 1% if we act now. The Intergovernmental Panel on Climate Change (IPCC) recently reported, with scientific certainty, that human activities are warming the climate.

The OECD is working to address these challenges on two simultaneous tracks: through the elaboration of country surveys, like the recent Environmental Performance Review of China, 2007; and through the execution of wider policy studies such as the book "Bridge Over Troubled Waters", which studies the linkages between climate change and development, the study on "Environmental taxes and Green Tax Reform" or the flagship "OECD Environmental Outlook". Our aim is to provide a sound economic basis to support the architecture of the post-Kyoto regime. The science is clear. Getting the numbers right will be decisive in choosing the best path.

6. Optimising energy

Energy is globalisation's main vital sign. Economic growth and development depend on this critical input. It is a finite resource faced with a voracious pattern of global consumption.

In spite of the recent escalation of energy prices, global demand continues to grow. The International Energy Agency (IEA) forecasts that global energy demand will increase by more than one-half by 2030; with over 70% of that demand coming from developing countries, 30% from China alone. Will the planet resist?

Our energy habits are unsustainable. They are dirty, wasteful and disastrous for the environment. Is there a silver bullet for resolving the energy challenges of our time? The answer is no. Renewable energy technologies as they exist today are simply incapable of meeting future energy needs. Unfortunately, fossil fuels will still provide for the majority of our energy needs for some time to come, thus the challenge of the CO2 emissions. Energy and the environment have to be addressed together.

 The OECD and the IEA will keep working with governments to design better policies and strengthen international co-operation. Three concrete problems will be determinant: rising energy demand (which we must curb); security of supply (which we must negotiate); and carbon dioxide emissions, which will require us to: a) generalise the emissions trading system for greenhouse gases; b) apply "green taxes", including a carbon tax and other taxes on polluting activities; c) intensify research to develop technologies that can deliver the energy growth we need without destroying our planet.

7. Good governance

There can be no higher priority for any democratic government than maintaining the trust of its citizens. At the OECD we are constantly discussing with members how to improve the accountability, transparency and the functioning of our governments. The key element of these reforms is a resource-oriented allocation and management of resources as well as effective channels of consultation with, and information for the public at large.

Combating corruption is also crucial to win people's confidence. Corruption undermines democracy, public policy and social capital, and has a disproportionate impact on the poor. More than $1 trillion dollars is paid in bribes each year globally, according to the World Bank Institute. This is equivalent to nearly 10 times what we channel to developing countries in aid flows. The size and complexity of this challenge demands a co-ordinated action, a genuine anti-corruption global partnership among international organisations, national governments, the corporate sector and civil society. 

Our Convention on Combating Bribery of Public Officials in International Business Transactions and our work on fighting tax-related corruption and mismanagement of public procurement are generally acknowledged milestones. Our Guidelines for Managing Conflict of Interest in the Public Service are also becoming a landmark. Strong and trustworthy institutions are a precondition for many countries' capacity to reap the benefits of globalisation.

8. Implementing structural reforms

Improving economic performance in a globalised economy depends critically on the implementation of structural reforms. Only thus can governments improve productivity, competitiveness and employment. Reforms often entail highly visible costs for some clearly identifiable groups, whereas the benefits, while greater, come later and are less certain and more diffuse. Not surprisingly, they face increasing opposition, and their advancement is one of the hardest tasks for today's democratic governments. 

Countries that advance their reform agenda improve their performance. Spain, Ireland and Finland managed to boost employment based on the recommendations of our OECD Jobs Strategy of 1994; Sweden's regulatory reform in the 1990's resulted in excellent macroeconomic performance with high rates of growth, low unemployment and stable inflation; the more recent liberalisation strategies of Poland and Slovakia are examples of how economic reform can unleash growth.

The OECD works with leaders to turn reforms into successful political platforms. Reforms should not be a political liability; they can be a political asset. In a rapidly changing global economy, countries that don't reform slide backwards.

Ladies and gentlemen:

The way in which we face these global policy challenges will shape the future. The list I present is not comprehensive; there are certainly many other pending challenges. However, solutions in these eight areas are crucial and will have positive spillover effects in many other related areas. 

The future of mankind is increasingly being shaped by issues beyond any single nation's ability to address them. This is why there is a growing demand for multilateral co-operation, but also for innovative and effective policies. Together the OECD and the LSE can help the global community in this fundamental task. It will be a privilege to work alongside with such a prestigious partner in this worthy endeavour.

Thank you very much.


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