Angel Gurría, Secretary-General of the OECD

20/01/2012 - The economic outlook for 2012 is very different than it was a year ago. The cautious optimism that reigned in the first half of 2011 has faded amid renewed uncertainty about the state of the global economy and malaise about the future. The road to recovery is a difficult one, and strong leadership and resolute collective commitment to change are now needed to unblock progress in 2012. Sinking into helpless pessimism is not an option: we need to re-inject hope and confidence.

While no one expected a miraculous recovery from the flagging growth and stubborn unemployment that had beleaguered most advanced economies since 2008, a number of signs pointed to at least a fragile recovery. European countries came under pressure as markets began to worry about the public debt not just of Greece, Ireland and Portugal, but of larger countries as well. This caused debate over the future of the euro, as this Yearbook shows, fuelling efforts to reinforce the basis of the currency union. In Japan debt rose above 200% of GDP partly as a consequence of the tragic earthquake and the related reconstruction efforts.

Meanwhile, a stalemate in the US over budget negotiations did little to shore up market sentiment.

Despite repeated negotiations and public pronouncements, financial markets remained fraught, while economic conditions deteriorated. Today, many of the world’s largest economies are close to standstill, trade is stalling and we really cannot expect any easing in unemployment before 2013, when the OECD average is projected to dip back below 8%. Growth is slowing in emerging-market economies too, with Brazil’s GDP decelerating from 7.5% in 2010 to an expected 3.2% in 2012.

But there is an upside scenario, which can be realised through good policies, determined leadership and international co-operation. Steadfast action is essential to unblock the situation in the short run, but policymakers must adopt a farsighted approach and not be swayed by daily headlines.

Consider the sovereign debt crisis. Putting public finances on a sustainable track over the medium term requires appropriate fiscal frameworks and a commitment to credible and clear consolidation plans. Because deficit and debt reductions require economic growth, fiscal consolidation needs to be as growth-friendly as possible. With interest rates so low, there is limited room to ease monetary policy further. A promising way to go is to improve the basic structure and nature of our economies and societies. In this second OECD Yearbook I highlight what we consider to be the main areas for concrete policy action in 2012.

Go structural

The “go structural” agenda we have been promoting focuses on strategic areas such as education, health, labour markets, competition, taxes, green growth and innovation. Take new sources of growth and the related structural reform in product markets. More effort is needed to improve competition—not least in financial markets where no institution should be allowed to become “too big to fail”—but also in the likes of services and energy supply industries, where restrictions hold back investment and job creation.

Innovation is one of the most important new sources of growth. Concrete policies can produce more investments and jobs, as our Innovation Strategy of 2010 made clear. We must reboot our economies with a more intelligent type of growth, driven by new start-ups, innovative research, and the dynamism of small and medium enterprises. We need new ideas, new entrepreneurs, new business models. And we need renewable energies and green technologies to move to a low-carbon era.

In the large emerging-market economies, structural reforms can do much to narrow national and global balances in a durable manner. In China efforts to bolster social welfare systems could reduce the need for precautionary saving and lift consumer demand. This in turn could help curb the large current account surpluses there, while bolstering exports from deficit countries.

And go social

But simply returning to growth is not enough. It is impossible to overstress this point. Human suffering and social strife have been the most tragic consequences of this crisis. Moreover, as this Yearbook shows, rising inequality and discontent among the middle classes risk undermining the entire economic system.

I see three pressing social challenges to restore confidence: stop unemployment from becoming entrenched in many countries, focus more attention on youths, and reduce the inequality which threatens social cohesion and living standards. In 2012 governments must “go social” by deploying appropriate structural and social policies.

Unemployment is the human face of the crisis. More than 200 million people are unemployed worldwide, and 45 million of them are in OECD countries. The situation is even more dramatic if we look at young people. Even before the crisis in 2007 and early 2008 when the OECD economies were at their strongest and the overall unemployment rate was less than 6%, average youth unemployment remained stubbornly high, at over 15%. Today, it stands at about 20%. The situation is worse still in some countries: one in four youths currently in the labour market in France or in Italy is jobless. Youth unemployment in Spain has risen to close to 49%. We must use every means possible to avoid the current risk of a “lost generation”.

“Stronger!” This was the central message in the OECD Employment Outlook 2011 and behind the G20’s significant decision to set up a Task Force on Employment focusing on youths. What can governments do in 2012? A two-pronged approach is needed.

First, they must ensure that their labour market programmes are active, with counselling, job-search assistance and temporary hiring subsidies for low-skilled youths.

Then, to give all youths a better start in the labour market in the long run, they may need to review their whole education systems and get started on the job of equipping youths with the basic skills they need. There may be vocational education and training programmes to design or best practices to emulate. For instance, youth unemployment rates are lower in countries with successful apprenticeship systems, such as Austria, Germany and the Netherlands.

As part of our effort in supporting policymakers, we will be issuing the OECD Skills Strategy in 2012, identifying the skills that are needed to ensure a shift from lifetime employment to lifetime employability, and examining the most effective policies.

A vital step to deal with the unemployment scourge is to reverse the steep rise in the number of people who have been unemployed for a year or more. Today, this concerns a third of unemployed workers in the US and about 40% in Spain, meaning wasted resources and, worse, exclusion and poverty. Given the crisis, governments must introduce pro-active, cost-effective measures, such as hiring subsidies which support companies ready to expand their workforces, and investment in training to boost skills and give jobseekers a better chance of finding decent work.

Fighting inequality

Going social will also help reduce inequality; this was already rising before the global financial crisis and may well have accelerated since. The title of our new publication on this issue sounds an ominous warning: Divided We Stand: Why Inequality Keeps Rising. In fact, inequality is on the rise in most advanced and emerging-market G20 economies and so threatens welfare globally, putting more and more ordinary people and their families in difficult circumstances. It doesn’t have to be that way.

Clearly in many OECD countries, deficiencies of the tax and benefit systems and the inability to redistribute income are to blame. These systems must be redesigned. However, our labour market, education and training programmes must also work to maximise opportunity and inclusiveness.

Action must be taken. For a start, policymakers must draw lessons from the countries where the social fallout of the crisis has been contained. Also, they should target policies on burden sharing and helping the most vulnerable. As past recessions have shown, across-the-board cuts in social programmes hurt low-income groups who depend most on social benefits. Tax cuts, which have often tended to favour the rich, have widened disparities and chipped away at social cohesion.

OECD countries are not the only ones that must go social. Expanding the coverage of basic social protection is starting to help emerging economies reduce poverty and exclusion, for instance, through conditional cash transfers that combine income support with investment in the education and health of children. In short, governments must prioritise families and children when deciding their tax and spending strategies.

Empowering women

The condition of women is particularly important, both from a social and an economic perspective. As this Yearbook shows, the employment rate of women lags far behind that of men in most countries. Yet no economy can achieve its potential if it fails to take full advantage of the contribution of women. This was the impetus behind the launch of the OECD Gender Initiative in April 2011. US Secretary of State Hillary Clinton added her voice to that of other ministers in support of this important initiative when she chaired our 50th anniversary Ministerial Council Meeting in May.

The initiative could not have been more timely. When the crisis first hit, men were more likely to lose jobs than women, whose working hours actually increased while men’s fell. This kept many households resilient. Policy in 2012 must bring more women into the workforce by supporting female entrepreneurship, promoting equal opportunities in education systems, and improving part-time work conditions, family services and pay.

Greening growth

In today’s world, well-being is no longer a choice between a growing economy and a cleaner planet; it is about both. Ever since the Rio Earth Summit two decades ago, we have known that green and growth go together. With the Rio+20 anniversary summit scheduled for June, we must ensure that 2012 becomes the year of “making it happen”. Our 2011 OECD Green Growth Strategy will assist policymakers and stakeholders in addressing the major global environmental challenges, while expanding economic opportunities.

Green growth makes economic and environmental sense. In natural resource sectors alone, commercial opportunities related to investments in environmental sustainability could run into trillions of dollars by 2050. With the right policies—core fiscal and regulatory frameworks, support for innovation, and incentives to use natural resources efficiently and make pollution more expensive—we can create jobs, increase prosperity, preserve our environment and improve the quality of life.

Governments can check their approaches against the strategy to make sure they have appropriate policies in place. For instance, is their spending on R&D appropriately geared, are their carbon markets functioning or is the proportion of renewable energy as high as it should be? They can now answer these questions and move forward.

Measuring progress

Whether structural or social, whether environmental or fiscal, all our actions must be about putting people back at the centre of our policy efforts. You, me and everyone: we all want better lives. In May 2011, we launched the OECD Better Life Initiative. It is the first attempt to bring together internationally comparable measures of well-being for all OECD countries and other major economies. It looks past GDP measures by putting the many facets of people’s lives, their needs, their aspirations and their feelings in the spotlight. The aim is to bring the perspective of our citizens back to the policy debate. The key questions are not only “which growth?” but also “whose growth?”, not only “whose society?” but also “which society?” and not only “whose world” but also “which world”.

Though it is still early days, the initiative shows that wellbeing is about social ties and a strong sense of community. It is about opportunity and removing barriers such as poverty and illiteracy. The Better Life Initiative received an important boost in October 2011 with the launch of How’s Life?, which also shows that well-being is about how people feel about their own lives. This publication is part of our mission to produce international guidelines for measuring subjective well-being on a comparable basis across the world.

Towards development effectiveness

Developing countries now account for about a quarter of world trade, and their welfare is everyone’s welfare. Yet, there are more than one billion people around the world who go to bed hungry every night and billions without access to quality water, sanitation or energy. Changing this unacceptable reality is one major reason why we are working on a new OECD Strategy for Development to also share our knowledge with partners in the developing world and so to improve the outcomes of development policies.

This new thinking moves away from paternalistic policies, shifting up a gear to more holistic and coherent ones. Mobilising domestic resources, setting up effective fiscal systems, tapping new sources of growth and building effective governance systems will be elements of our development strategy.

Aid remains an essential tool for development, but not the only one. The Busan High Level Forum on Aid Effectiveness moved the focus from aid effectiveness to development effectiveness. Indeed, OECD countries make up some 90% of bilateral development assistance, and for decades the OECD has been working to promote better aid effectiveness.

Armed with the OECD Strategy for Development, we will use our collective experience to contribute to more effective policies, focusing on outcomes. This means challenging conventional wisdom and policy advice. An example is international trade. Open trade and investment regimes are pre-conditions for growth and development, but they are not ends in themselves and must be defined by results, as measured against improvements in standards of living, human welfare, inclusiveness and a healthy environment.

New global governance: we need to make it work!

In the early days of the current economic crisis, many policy leaders, myself included, repeated the words “a crisis is a terrible thing to waste”. Policymakers should ask if this has always been the case. As secretary-general of the OECD, I can say with conviction that our organisation has strived to squeeze out every lesson that this crisis has to offer, and to turn those lessons into better policies that work to improve the lives of people everywhere.

Take tax evasion. The fight against tax havens is paying off. Over the past two years, and despite initial scepticism, the veil of bank secrecy has been lifted. The Global Forum on Tax Transparency—put in place by the OECD in response to the G20 call at the London Summit in 2009—is an instrument of irreversible change towards a more transparent tax environment that is now delivering 59 reviews. Some 700 information exchange agreements have been signed.

The G20 meeting in Cannes in November 2011 continued this excellent progress, notably with the new Multilateral Convention on Mutual Administrative Assistance in Tax Matters, a powerful instrument of the OECD and the Council of Europe. The OECD has estimated that almost €14 billion of tax revenues have been collected from over 100,000 wealthy tax payers in about 20 countries who now see the futility of keeping their undeclared assets offshore.

We expect much more as exchange agreements come into force. But there is more to tax compliance than additional fiscal revenues. Better tax compliance improves the fairness and effectiveness of our tax systems. We need to show that the tax burden is shared fairly and that those who evade taxes or hide their windfall earnings are held to account.

We must also show them that we are serious in our efforts to stamp out bribery and corruption. The OECD’s leading role in this area has been backed by the G20, and it received extra impetus in May 2011 when Russia joined the OECD working group on bribery, an important step toward acceding to the Anti-Bribery Convention. We cannot allow the fight against bribery and corruption to fall under the shadow of the economic crisis; but rather, we must step up our efforts here in 2012.

Improving financial education is another lesson from the crisis and an area where real progress is being made. In October 2011, G20 finance ministers and central bank governors endorsed the High-Level Principles on Financial Consumer Protection, developed in co-operation with the Financial Stability Board. This is welcome news for those of us committed to protecting consumers, as financial markets and their products become increasingly sophisticated and complex and thus difficult for most people to understand, let alone rely on for their pensions and other welfare investments.

This crisis revealed with blinding clarity the enormous risk of living in an integrated global economy with fragmented international governance. We cannot sustain progress without better co-ordinating our acts of government, institutions and policies, whether to overcome imbalances, promote effective development or help the euro area through its crisis.

Despite the enormous complexity of building consensus and striking new balances between developed and developing countries, the G20 has achieved some important successes, such as introducing decisive measures to put an end to banking secrecy, creating the Framework for Strong, Sustainable and Balanced Growth and designing the Seoul Development Consensus for Shared Growth.

The OECD has contributed to this progress by helping develop the Cannes Action Plan for Growth and Jobs, based on the Framework for Strong, Sustainable and Balanced Growth. We also supported the G20 in several areas, including corruption, food price volatility, jobs, trade and investment, fossil fuels subsidies, financing for small and medium enterprises, taxation, and reform of the international monetary system. We look forward to building on this progress in 2012 under the Mexican presidency.

It is difficult to think back to a year beginning with greater economic uncertainty than this one. But we face an open door in 2012, with opportunities as well as tests for the global community. Better policies will make the difference and that means providing leadership. Governments have the eyes and hopes of the world upon them. The OECD is there to offer our experiences of good policies as support, determined to help make a better, more inclusive, greener world economy the positive legacy of a terrible crisis.

© OECD Yearbook 2012