Building a sustainable recovery: the OECD experience.
Angel Gurria, Secretary-General, OECD
03 March 2010 - Speaker Event Transcript
Good afternoon Ladies and Gentlemen:
It is a great pleasure to be here with you to deliver the Inaugural Leeds University Business-School Annual Alumni Lecture.
Many things have changed since I did my Masters Degree on Economics at Leeds University, back in 1974. Since then, the world economy has been transformed into a highly interdependent and fast-changing constellation. The Internet has become the main transmitter of knowledge. The warning of global warming has become a proven reality. And I became a grandfather and the Secretary General of the OECD.
I am here today, in the aftermath of the greatest financial and economic crisis of our lives, to share with you my views of the main challenges that we have to face to fully recover from this shock and to build a stronger, cleaner and fairer world economy.
1. Rebalancing global growth
Let me start with a very important structural challenge: the need to rebalance global economic growth.
The crisis has left deep scars in the world economy, like massive unemployment, systemic distrust in financial markets and unprecedented fiscal deficits around the world.
Global current account imbalances have now come down as a result of the crisis, but they are set to rise again as the recovery gathers steam. A reduction of some of the largest emerging markets propensity to save and greater flexibility in the US dollar/yuan parity over time, would contribute positively to the adjustment.
As Lorenzo Bini Smaghi stated in a recent paper: “External imbalances are often a reflection, and even a prediction, of internal imbalances. Economic policies should not ignore external imbalances and just assume that they will sort themselves out.” We need to address the global dislocations between savers and spenders. And this will demand a great deal of economic policy coordination through multilateral Organisations.
2. Fiscal consolidation and exit strategies
The fragile recovery in the OECD area is signalling that we must proceed with the full implementation of the stimulus measures planned for 2010. However, sharp increases in budget deficits and government indebtedness demand well articulated longer-term consolidation strategies to anchor expectations, avoid a large increase in bond yields and allow flexibility in implementation. The pace of consolidation will depend of course on the particular conditions in each country.
Moreover, consolidation should be as pro-growth as possible by avoiding large increases in labour and income taxes, seeking efficiency gains (in health care and education, for example) and preserving growth-enhancing spending (on human capital accumulation, R&D and infrastructure) from cuts.
3. The curse of unemployment
Stimulating employment is one of our main challenges. Since the beginning of the downturn in late 2007, the OECD unemployment total has soared by more than 17 million. On current projections, it will keep rising before declining slowly in 2011. This is imposing a heavy burden on our people.
Employment and social policies play a central role in helping families cope with the consequences of the economic downturn. A first priority for policymakers is to avoid the loss of viable jobs, while maintaining the labour-market dynamism that is needed for recovery. To limit unemployment durations and facilitate job finding, effective employment services need to be provided to a rapidly growing pool of jobseekers.
At the same time, there is a need to ensure that the most vulnerable of them do not lose contact with the labour market and drift into inactivity. Training and skill formation are important elements of such a strategy. And they also play an important role to ensure that workers are well-equipped with the appropriate skills for emerging jobs; like the ones we need to “green” our economies.
4. Growing greener: building sustainable economies
While exiting the crisis, a defining factor for building more sustainable economies will be the way we manage to foster economic growth and development while also preserving our environmental capital. Green and growth can no longer be considered in isolation. They go together. They should reinforce each other.
Without a global shift to a greener, low-carbon economy, the world is on track for increasing greenhouse gas emissions by 70% by 2050, and temperature increases of 4-6°C by the end of the century. This is far from the target countries recently agreed in Copenhagen of staying within a 2°C increase. And clearly a 4-6°C increase would lead to devastating effects on the economy, on human health and welfare, and on the environment.
Countries need to develop national plans for greening their economies in the longer-term. The UK's Low Carbon Industrial Strategy is a prominent example of an action plan to ensure that the transition to green growth is a source of quality jobs and business opportunities. OECD stands ready to support such initiatives through our Green Growth Strategy, requested of us last year by Finance Ministers from 34 countries.
Building sustainable economies will depend a lot on the countries’ innovation capacity.
5. Innovation: the only way out
As countries seek to rebound from the economic and financial crisis, innovation will be one of the keys to accelerating recovery, creating jobs and putting firms and countries back on a path to sustainable, smarter and greener growth.
Innovation is a key driver of economic growth. Much of the rise in living standards over the last century can be attributed to innovation. Today, the ability to address increasingly urgent issues such as climate change, cross-border diseases, declining populations, food security and poverty depends on stronger innovation and new forms of international collaboration.
At the OECD, we are currently finalising an Innovation Strategy. This policy tool will provide guiding principles and best practice examples in five key areas: 1) Empowering people to innovate; 2) Unleashing innovation in firms; 3) Investing in innovation and reaping its returns; 4) Applying innovation to address global challenges; and 5) Improving the governance of policies for innovation.
Even in this difficult budgetary environment, investments in innovation must be maintained and strengthened as an essential prerequisite for prosperity and progress in the future. And we must make sure that policies across government are coherent and well-coordinated, so that we can get the most “bang” for every tax-payer “buck”.
Our innovation capacity in the coming years will be defined by another key driver: quality education for all.
6. The magic of education
Education also has a crucial role to play in fostering a sustainable recovery. Education is key to economic growth, people’s ability to earn a living and to achieve broader social well-being. It is the most effective tool that governments have to empower the people to help them make the most of globalisation.
The UK economy, for example, could gain enormously from improvements in labour force skills. Recently published analysis using data from OECD’s international assessment of the skills and knowledge of 15-year olds – PISA –suggests that if the UK increased the quality of learning outcomes at age 15 to that of the highest performing country, Finland, this would add $ 7,000 billion to the UK’s economic output over the next 80 years.
If better education leads to more money, will more money lead to better education? Our analysis shows that many of the world’s best performing education systems are not the most expensive ones. Increased investment in education can therefore only be part of the answer.
Finally, I have left the most pressing challenge for the very end of my presentation; so that you walk away with it in your minds. I am talking about the urgent need to reduce world poverty.
7. The renewed importance of development policies
The crisis has revealed great differences in the exposure and resilience of low income countries. However, two things are now certain: 1) the weak projected recovery means that most developing economies will still be operating below their level of potential output in the near future; and 2) donor countries will not be able to meet their Gleneagles and Millennium Development Goals (MDG’s) commitments on time.
These two factors, coupled with the fact that these countries face limited capacity to act counter-cyclically, is leading to a significant impact on poverty. By the end of this year, the number of poor people in the world is expected to increase by close to 90 million, while the total number of hungry people will go beyond 1 billion. These trends have to be reversed.
Development policies and policy coherence for development are more important than ever. We must work intensely to revamp our ODA effort and meet the MDGs, even with some delay. I personally promoted the launch of a pledge among members of our Development Assistance Committee (DAC) to maintain the aid promises throughout the crisis. We are also working hard to help increase the effectiveness of aid flows, to measure and improve aid for trade, and to help developing countries turn their fiscal and tax systems into effective development tools.
One of the big questions here is: what is the plan for the post MDGs era? What’s next? At OECD we will address these and many other crucial questions as we turn development into one of the highest priorities of the OECD.
Ladies and Gentlemen:
I know that time is no longer on our side. As Yan Arthus-Bertrand used to say, “it is too late to be pessimistic”. Change is always possible, but we need new ideas to propel it. As decision-makers, we need to keep tuned and updated to the effervescence of ideas of institutions like Leeds University, our alma matter; we have to constantly upgrade our conceptual framework.
I am pretty confident that by sharing knowledge, promoting innovative policies and more inclusive multilateral cooperation, we can turn these trends around and help our children read the poem by Jonathan Read backwards and say: “I can change the world / and I refuse to believe that / I am part of a lost generation”.
Thank you very much.