Remarks (in progress) by Gabriela Ramos,
G20 Sherpa & Chief of Staff, OECD
Gaidar Forum 2013, Moscow, 16 – 19 January 2013
Dear Ksenia, dear Sergei,
Ladies and Gentlemen,
It is a pleasure and an honour for me to be here in Moscow today for the Gaidar Forum, to share OECD analysis on the G20’s answers to global challenges and on the role the Russian Federation can play herein as its Chairman. I believe that through its 50 years of experience of global economic governance – after all, we have played an integral part in the global economy since our creation! - the OECD has a privileged standpoint on the most important steps forward.
1. What is the G20 and what does it mean for Russia to take on its chairmanship?
The Russian Federation has just taken over the chairmanship of the G20, currently and most probably the most influential international forum dealing with global economic challenges. This is not by chance that the G20 has been designated as “the premier forum for economic cooperation” by Leaders in Pittsburgh in September 2009. It is indeed the only forum where global economic heavyweights from both the developed and the emerging world – and them only (which is making consensus easier to achieve) - are sitting together on an equal footing to discuss global economic policies and challenges. Representing 80% of world GDP, the G20 has potentially the clout and firepower to transform durably and profoundly the world economy.
By presiding over what can be seen as a “steering committee” of the world economy, by organising its work and driving its agenda, Russia is taking over a potentially very influential position. No doubt that this will be a source of international prestige and influence for Russia. By the central role it will play also in the G20 process in 2013, Russia will have an unparalleled opportunity for peer learning with other members of the group as well as with international organisations and with civil society that involved in or associated to the G20.
2. The role of the G20 in addressing key global economic challenges & the relevance of Russian priorities
What has been G20’s track record so far?
Let’s acknowledge that decisions made by the G20 have been key to the stability of the global economy at the height of the crisis and to avoiding an outright collapse of the international financial system – for instance by endorsing the largest internationally-coordinated stimulus package in history at the G20 London Summit; by committing to keep markets open; or by launching a major overhaul of the international financial and prudential regulation framework. The G20 has also achieved concrete progress in domains such as tax transparency and the fight against tax heavens thanks to the peer review process carried out in the Global Forum; we can also mention the reform of the international financial architecture or the design of mechanisms to stem food price volatility (AMIS).
But it has still a long way to go. As I said, the G20 has been instrumental in avoiding a collapse of the world economy in 2008-2009. But it has been far less effective at building the blocks of a strong, sustainable and balanced recovery.
What are the challenges faced by the G20 going forward?
First and foremost, in the short-run, through collective action and enhanced policy coordination, the G20 must make a decisive contribution to fixing the economic and financial crisis and ensure a strong and sustainable recovery based on new and solid sources of growth. There are several dimensions and aspects to this imperative:
i) Creating the conditions for an upside growth scenario
First, it is absolutely critical that the G20 creates the conditions for an upside growth scenario, specifically at a juncture where the global economy is facing – again! - strong headwinds and grappling with downside risks:
- the fiscal cliff in the US has been overcome but the fiscal situation in the US remains unsustainable;
- toxic feed-back loops between the banking sector and sovereign debt persist in the euro-area that will remain in or near recession into well 2013;
- reform fatigue and social resistance are becoming increasingly visible in many of G20 countries.
This is what makes Russia’s willingness to refocus the agenda of the G20 towards the objective of re-igniting global growth so relevant and timely.
To achieve this objective, we, at the OECD, believe that G20 countries need ambitious and wide-ranging economic reforms on the supply-side.
- Several countries in the Group of 20, especially in Europe (including Germany itself) posted slow growth of productivity over the past decade that was insufficient in most of them (with the notable exception of Germany) to keep up with rising unit labour costs. As a result, they lost competitiveness, leading to economic divergence within the euro-area and to widening intra-euro-area imbalances. These countries need a full-fledged and comprehensive competitiveness programme, ranging from strengthening competition in network industries and reducing barriers to foreign ownership and investment; to reducing restrictions on labour mobility and labour market dualism, reforming the wage bargaining system to bring trend in unit labour cost in line with productivity, or improving labour force participation. It refers to the improvement in public sector efficiency and to the reform of the tax structure to make it more labour-friendly.
This is precisely the kind of reform agenda which the OECD is currently crafting in partnership with some of the European members of this Group, such as Italy, Spain or Portugal. Pay-offs are potentially high, equivalent to an increase of 0.5% to 1% per year depending on how thorough, comprehensive and well sequenced the reforms are.
- Even the best performers within the Group, advanced [Germany, Australia, Korea, Canada] and emerging market economies [China, Brazil, Mexico, Turkey] alike, must do their “homework” - so to speak – on the supply-side. Their economies are suffering from deficiencies – lack of innovation and inefficient education system for some; insufficient diversification and State’s excessive role in the economy in some others; heavy regulation and insufficient competition in certain sectors such as services for most of them, etc.. These are bottlenecks that are constraining growth and/or impeding the rebalancing toward domestic demand.
Countries have already made ambitious economic policy commitments– often identified with the help and support of the OECD - in the context of previous G20 Leaders’ Summits, notably in Cannes and Los Cabos. Now is the time to deliver on them! The OECD will help the Russian presidency and members of the G20 to craft a new Saint Petersburg Action and to track the delivery of existing commitments.
Yet, it is illusive to believe that we will achieve this upside scenario without making the financial sector work for and finance the real economy again.
This is not an easy issue, as banks have been asked to square the circle by simultaneously deleveraging, reducing non-performing loans, meeting new regulations and rebuilding their capital base… while at the same time continuing to finance the real economy!
Certainly, the G20 has developed a full-fledge and impressive financial regulatory agenda based on the excellent work done by the FSB. But we need perhaps a more practical and down-to-earth approach to financial regulation, we need in particular:
- to further investigate the nexus between financial regulation – and its reform – on the one hand and growth on the other hand;
- to track closely how much banks are resuming normal rates of lending, and how much work there still to be done for them to perform this basic duty;
- to find ways to prevent bad deleveraging (banks shrinking their balance sheet by reducing credit activity) and to elicit good (recapitalisation) deleveraging;
- to address the unfinished agenda of financial regulation: for instance, we believe – and we are not alone in this - that the standard Basel Tier 1 ratio captures the risks taken by banks on their balance-sheets rather imperfectly.
For the financial sector and banks to play again their role as conveyor belts of the real economy, it is important to make our banks genuinely safer through proper recapitalization. This is a precondition for re-instilling confidence in the banking sector, break the feed-back loop between sovereign debt and banks solvency, and repair the interbank market. The OECD has put innovative proposals on the table in this respect :
- We are advocating a very simple and powerful measure of the adequacy of bank’s capital: an unweighted leverage ratio of 5% that would complement the standard Basel Tier 1 ratio. By this measure, an extra USD700bn would be required to ensure an adequate recapitalization of the banking sector in OECD countries.
- We are also making the case for global banks to move more forcefully towards separation of commercial banking from large-scale and complex securities businesses and to refocus their business models towards onto the financing of the real economy. This approach has been confirmed by several reports (Vickers, likanen, Volker) and is being implemented in several countries of the G20.
We need to reactivate traditional sources of financing but also to tap new sources of finance for investment, long term investment such as infrastructure in particular. The OECD will provide the Russian presidency with specific inputs and suggestions related to the potential role of institutional investors – and their USD71Tr. assets under management - in this domain. Currently indeed, less than 1% of pension fund assets are allocated directly to such infrastructure projects! And many obstacles to increasing such allocations remain – e.g. the illiquid nature of infrastructure assets, the lack of adequate financing vehicles or the existence of regulatory impediments. So we need to look at how to facilitate this, by governments adopting national infrastructure strategies, checking on regulatory barriers, and development of appropriate financial vehicles.
A G20 roadmap setting out the conditions conducive to an increased involvement of institutional investors in the financing of long term investment (including infrastructure) could be a very relevant deliverable for the G20 to consider.
In any case, it is extremely relevant that Russia identified financing for investment as one of its priorities as it will give us the opportunity to look deeper into these issues of the financing of the economy at a juncture where investment, that has declined significantly after the crisis, is not recovering and is holding the recovery back.
There are a couple of other critical issues we need to consider when looking at the conditions for an upside growth scenario:
- No need to say that at the current juncture, the global economy would badly need a “free stimulus” from additional trade liberalization. This objective seems far-fetched right now. But while multilateral trade negotiations are at a stalemate, the OECD, jointly with WTO, is taking a fresh look at the way international trade is being organized and is evolving, through the lens of Global Value Chains. The emergence of global value chains, i.e. the ever important cross-border fragmentation of production chains and processes, is actually making the case a more ambitious trade and investment agenda. It shows for instance that success in international markets now depends as much on the capacity to import efficient inputs as on the capacity to export. Take my country for instance: Mexico. As part of the emergence of GVCs, Mexico has also become an important location for final assembly. In the electronics and automotive industries, parts and components are imported mainly from the United States and assembled into final products which are then exported back to the United States. As a consequence, Mexico’s exports and imports have increased by more than 700% between 1990 and 2010, reaching almost 700 USD billion in 2011! In other words, export performance suffers when countries levy tariffs on imported intermediates or restrict access to imports. This is a good illustration of the self-defeating force of protectionism. By being at the forefront of developing new and better evidence on GVCs and its corollary – Trade in Value-Added – the OECD is hopefully contributing to deconstruct certain myths about international trade and investment and will gradually build the blocks of a renewed momentum in international trade discussions.
- We equally need new to secure government revenues at a time when many countries are going through a specially harsh and painful phase of fiscal consolidation. Tax base erosion constitutes a serious risk in this regard: this is a risk to tax revenues, but also to tax sovereignty and tax fairness for OECD member countries and non-members alike. There are many ways in which domestic tax bases can be eroded, but a significant source of base erosion is profit shifting by multinational enterprises. This problem of profit shifting is illustrated by figures on FDI: Did you know for instance that in 2010 Barbados, Bermuda and the British Virgin Islands received more FDIs (combined 5.11% of global FDIs) than Germany (4.77%) or Japan (3.76%)?! This gives you an impressionist measure of the magnitude of profit shifting by MNE. There is clearly a tax compliance issue, as evidenced by a number of high profile cases. But more fundamentally, profit sharing is evidencing that domestic rules for international taxation and internationally agreed standards are still grounded in an economic environment characterized by a lower degree of economic integration across borders – they originated with principles developed by the League of Nations in the 1920’s! - rather than today’s environment. The latter is characterized by global taxpayers such as multinational enterprises, by the increasing importance of intellectual property as a dematerialized value-driver, and by constant developments of information and communication technologies that make it easier for companies to shift profit from one jurisdiction to the other and make the most of tax arbitrage. This is why the OECD has embarked, with the support of G20 members, on a comprehensive and very ambitious work programme called BEPS (Base Erosion and Profit Shfting) aimed at revisiting rules of international taxation such as double-taxation or transfer pricing. We will report regularly to the G20 on progress made in developing this project and will come up with concrete recommendations in the field of international taxation.
ii) Addressing long term challenges
Beyond the immediate and most pressing challenge represented by the crisis, the G20 also needs to address deep, global, structural and systemic challenges that will have a strong bearing on the stability of our world over the medium to long term. In other words, the G20 must be careful to engineer a recovery that will make our economies and societies fairer and cleaner instead of prolonging current unsustainable social and environmental trends:
- First, the G20 needs to address the challenge of creating jobs, fighting unemployment – youth unemployment in particular - as well as growing inequalities. Youth unemployment which is traditionally 2 to 3 times higher than overall population unemployment in most G20 countries has grown even faster in the crisis. Also, income inequality in OECD countries is at its highest in the half a century. The average income of the richest 10% of the population is about nine times that of the poorest 10% across the OECD, which is seven times more than 25 years ago. This is creating social despair, bringing about reform fatigue and this is potentially conducive to political instability and extremism.
- We equally need also to stop our collision course with nature. The OECD Environmental Outlook to 2050 projects that, without immediate action, by 2050 we will see a 50% increase in greenhouse gas emissions, with a disastrous impact on the well-being of people worldwide, such as a doubling of premature deaths from exposure to air pollution; and a further 10% decline in terrestrial biodiversity. At the same time, we need to unleash the potential of green technologies and innovation as a new and sustainable driver of growth. The G20 has already made progress in this domain, under the leadership of the Mexican Presidency who made green growth a priority and a crosscutting issue of its agenda. The G20 would be well advised to build on this momentum.
The OECD has been actively contributing to the G20 agenda on these two fronts:
- In the realm of labour, we provided inputs for the preparation of the three G20 Labour and Employment Ministerial Meetings, highlighting good policy practices, for instance on youth employment, drawing from our extensive policy reviews and analyses.
- on green growth, building on our internationally-recognized green growth strategy, we provided recommendations to the G20 on mainstreaming Green Growth and Sustainable Development Policies into its Structural Reform Agenda of the G20; and we developed, with other IOs, a Toolkit of Policy Options to Support Inclusive Green Growth in developing countries.
By and large, we know what it takes to turn confidence around and achieve an upside growth scenario. We need decisive policy action, we need to deliver on our commitments. Still, knowing what needs to be done does not make it necessarily easier! This is why the OECD stands ready to assist the G20 and the Russian authorities in developing a more concrete, operational, and ambitious agenda of policy reforms ahead of the Saint Petersburg Summit.