Key global challenges and the OECD


by Angel Gurría, OECD Secretary-General
Institute for Global Economics,
Seoul, Korea
21 September 2006

I am delighted to be here today, on my first visit to Korea as OECD Secretary-General, to discuss with you the global challenges facing us in the next few years.

A benign outlook: Steady growth with tame inflation

The world economy continues to grow vigorously. The economies of the major OECD countries are all expected to grow steadily in the next 18 months. Emerging economies as a group continue to excel, with China and India in particular remaining major drivers of the global expansion.

In spite of higher energy and commodity prices, core inflation is tame, largely because monetary tightening in the major economies seems to have prevented a major pick up in price expectations and wage demands. In fact, core inflation in the US for August was -0.4%.

Risks surrounding the outlook

While the near-term global outlook seems rather benign, these are precisely the times when it is important for policymakers to avoid complacency and remain alert for possible risks. I will just cite four of these risks:

A. Oil prices

The first relates to oil prices, which have declined in recent weeks, but remain high and volatile. Further spikes on prices would probably provoke monetary tightening.

Oil demand is already responding to higher prices, increasing at about half the pace registered in 2004 when the global economy was growing roughly at the current rate. And investment in refining capacity should pick up, encouraged by wider margins in the refining business. This will help ease one of the main bottlenecks in the industry. But oil prices have been affected by geopolitical tensions and negative supply surprises which are not easy to tackle and which will probably persist.

The OECD and its sister organisation, the International Energy Agency (IEA), are working on energy issues. We are looking for instance at alternative energy sources, at measures to promote conservation and at ways to encourage countries to dismantle investment barriers that prevent a faster increase in supply. Our work is designed to help member countries tackle both the short-term and long-term challenges related to high energy prices.

B. External imbalances

The second risk relates to external imbalances and the related exchange rate and interest rate uncertainty. Current account imbalances have reached unprecedented levels. The US current account deficit has reached almost 7 per cent of GDP. This is matched by high current account surpluses in China, Japan and other Asian countries, as well as in most oil-exporting countries.
Although these imbalances have not yet caused much disruption, they cannot continue indefinitely. A reversal is increasingly likely and there is growing fear that any rebalancing may involve a dollar depreciation, higher interest rates and a slowdown in US domestic demand. And this of course could have a strong impact on other economies.

We need to remain vigilant and we need to promote exchange rate flexibility and fiscal prudence for all and for major players in particular. One of our goals is to help our member countries ensure that when the necessary adjustment comes, it happens smoothly and that the cost in terms of world growth is as small as possible.

C. The risk of protectionism

Let me say a word about the third risk, which is more long-term. This is the risk of protectionism, the risk of not completing the Doha round.

Global trade volume has picked up this year and is growing at a pace of close to 10%. Rapid trade growth is essential to support sustained longer-run economic growth world-wide. Indeed, trade has been a powerful engine of growth in the past 50 years, helping to lift millions out of poverty. Korea is one of the most glaring examples of success in this regard.

An open and rules-based multilateral trading system has contributed a lot to this, helping international trade work as an engine of growth and development. But we cannot and should not take it for granted.

We need to support a Doha agreement because substantial barriers remain and, as OECD research shows, there is room for large gains from further liberalisation. But more importantly, we need to support it because the alternative is bleak.

Failure to continue the Doha process risks unleashing a wave of protectionism that reasonable politicians will find hard to counter. And without the disciplines of a strong multilateral system, there is a bigger chance that bilateral and regional trade deals will introduce inefficiencies. OECD analysis shows that businesses are already feeling the strain and the cost of the proliferation of different rules of origin and product standards.

In a world full of difficult challenges, such as high energy prices and massive financial imbalances, the Doha development agenda is a low-cost insurance against the revival of protectionism and trade wars.

Responsible politicians and businessmen must unite to ensure that we can successfully conclude the Round. It is within our reach to deliver a boost to the world economy and contribute to fairer distribution of wealth. We should seize this opportunity.

D) Housing markets developments

The housing market in some OECD countries is showing clear signs of a slow down (-6% in August in the US), given higher interest rates and over supply. The outcome in terms of consumption, confidence and house prices is of obvious consequence to the overall economic outlook.

What to do in this environment

There is a need to address global economic challenges. But this has to be matched by continuous economic reform and fine tuning at home. Global economic integration requires sound domestic policies in all areas of the government agenda. Besides macroeconomic measures, such as sound public finances and vigilant monetary policies, there is a need to continue pursuing economic reforms in other areas.

In many member countries these reforms have to do with sectors such as health, education, pensions and labor markets. If domestic economies function well, they become the key drivers of international economic expansion.

But economic reform is not easy to achieve. The measures that sometimes need to be taken are painful to certain groups that could well organise to block them. Those that benefit from reform are less easy to mobilize. The logic of collective action plays a role here. But also the logic of the political economy of reform. The best drafted economic reforms can become null when they face opposition to be adopted and implemented.

We must achieve the policy adjustments necessary for our economies to grow and prosper. Addressing emerging challenges requires tailor made and timely responses. The OECD has developed a strong analytical basis in this area, and is ready to help countries in their quest for reform, either by evidence-based recommendations or by convincing the public of the benefits of reform, drawing on experiences of successful countries.

Korea is an excellent example of a nation that has been able to take advantage of a more integrated world economy and has successfully advanced domestic reforms. The development of the Korean economy over the last 50 years is truly one of the miracles of modern history. Korea is a country that rose from the ashes of war, and achieved rapid economic development through an export-led strategy.

And when economic crisis hit in 1997, Korea did not turn away from the global economy. It launched a wide-ranging reform program and further opened to international competition. This has made Korea one of the few countries that have been able to catch up to the most advanced countries in the world in just one generation.

To successfully face globalization, countries need to be strong domestically and enjoy a consensus for their reform efforts in their own countries. The OECD is ready to help them on both scores.