B Explanatory memorandum by Ms Vėsaitė,
rapporteur
1 Background
1. This year the Organisation for Economic Co-operation
and Development (OECD) celebrates its 50th anniversary. Like the
Council of Europe, which in 2009 marked 60 years of activity, the
OECD’s origins were in the spirit of post-war reconstruction and
recovery: indeed, it was created from the body which oversaw the delivery
of the Marshall Plan. So today, both organisations share a core
set of ideals and objectives. Just as the Council of Europe’s founding
treaty declares that “in the interests of economic and social progress,
there is a need of a closer unity”, and aims for the “further realisation
of human rights and fundamental freedoms”, so the OECD Convention
affirms that “economic strength and prosperity are essential for
… the preservation of individual liberty and the increase of general
well-being”, and calls upon nations “by consultation and co-operation
… to improve the economic and social well-being of their peoples.”
2. This anniversary comes at a very significant moment for the
OECD – and in a strangely turbulent period for the world economy
– as the organisation is expanding both its core membership and
its broader audience and developing new strategies for building
stable long-term growth. All this promises to give even more impetus than
usual to the annual debate by the enlarged Parliamentary Assembly
of the Council of Europe on the work of the OECD. The present provisional
report prepares for this debate, providing key findings from the rapporteur’s
recent meetings with OECD staff. It will be reviewed by the Committee
on Economic Affairs and Development and then revised, in consultation
with national delegations, before being submitted for adoption at
the formal session of the enlarged Economic Committee and the enlarged
Parliamentary Assembly. Four Assembly committees will make contributions
to the report at a later stage. These are: the Social, Health and Family
Affairs Committee; the Committee on Migration, Refugees and Population;
the Committee on Culture, Science and Education, and the Committee
on the Environment, Agriculture and Local and Regional Affairs.
3. The rapporteur expresses her thanks to all those at the OECD
who have helped in her work. Their advice and expertise have been
crucial in gaining an insight into the rapid changes in the world
economy, the challenges they present and the equally rapid changes
within the OECD itself. The report will begin with an assessment
of global economic prospects and priorities, as seen by the OECD’s
experts, and will then examine a series of key issues in depth,
notably the lessons learnt from the financial crisis, questions
of governance, sustainable growth and development, and measures
needed to address sharp fluctuations in commodity prices. It will
close with a look at developments within the OECD, particularly
in terms of engagement with the major emerging economies and increased
co-operation with national parliaments.
2 Introduction: an overview of key economies and
prospects for the world economy
A self-sustained recovery?
4. In its moderately optimistic, “Economic Outlook”,
published in May 2011, the OECD reported that, while global recovery
has been under way for some time, growth in trade and output slowed
slightly in late 2010, as the rebound effect from the recession
faded. Activity has picked up, however, and trade volumes have now exceeded
their pre-recession peak, being expected to grow by more than 8%
both this year and next. Global gross domestic product (GDP), which
fell by 1% in 2009, rose by 4.9% last year, with growth expected
to continue at 4.2% in 2011 and 4.6% next year.
5. However, in its latest Outlook, published in September 2011,
the OECD pointed to a number of factors that had darkened the picture
since its last report in May. These include the recent gridlock
over fiscal policy in the United States, the euro area sovereign
debt crisis, continued bank balance sheet problems and slowing trade
flows. As a consequence, “the risk of more negative growth going
forward has become higher in some major OECD economies, but a downturn
of the magnitude of 2008 and 2009 is not foreseen”, the report stated. Indeed,
the OECD now projects that growth in the Group of 7 economies (excluding
Japan) will remain less than 1% at annualised rates on average in
the second half of 2011. For the three largest euro zone countries —
Germany, France and Italy — the forecast is for 1.4% in the third
quarter and negative 0.4% in the subsequent three months. On the
other hand, the latest Outlook stressed that uncertainty surrounding
the projections was particularly high, the main risks in the second
half of 2011 stemming from a possible intensification of Europe’s
debt crisis, further balance-sheet problems for banks, weak consumption
and the risk that unemployment rates in some economies could become
entrenched.
6. These figures also reflect an important change. Indeed, a
major part of growth comes from non-OECD economies, since the centre
of economic gravity is moving from the United States, Europe and
Japan to the large emerging economies, particularly Brazil, China
and India, a process the OECD calls “Shifting Wealth”. Already,
this has brought about important improvements in poverty reduction
and inequality in the developing world. But it also implies a period
of readjustment for the traditional major economies, as recent growth
patterns bear out: in contrast to the global figures, OECD member
countries experienced a contraction of 3.4% in 2009 and grew by
2.9% in 2010, with growth anticipated at 2.3% and 2.8% during 2011
and 2012. In fact, while OECD members accounted for 80% of global
GDP 50 years ago, their share is today around 60%, and the OECD
estimates that by 2030 it will be around 40%.
7. A brief survey of major economies, as seen by OECD economists,
shows their contrasting fortunes at this stage; but in addition,
it suggests that, across the world, countries are still wrestling
with the challenges created, or made more difficult, by the crisis:
- Having faltered at the turn
of the year, a gradually strengthening recovery is likely in the
United States, with growth of 2.6% in 2011 and 3.1% next year. While
the effects of fiscal stimulus are fading, output growth should
gain traction, and unemployment should fall to 8.8% this year and
7.9% next year, though performance will be limited by continued
household de-leveraging, weak housing markets and initial moves
toward fiscal consolidation. The OECD feels that interest rates
should be kept low, and further quantitative easing may be justified
if growth turns out to be weak. However, a determined commitment to
gradual deficit reduction is vital, and the administration needs
to follow through on its plan to stabilise the debt to GDP ratio
by 2015.
- Despite moderated demand from the United States and ongoing
currency strength, Canada has continued its vigorous recovery, recording
growth of 3% last year, with 2.8% expected in 2011. Export volumes
have been strong, particularly in commodities, though there are
signs of this slowing down, and business investment is healthy.
Unemployment has fallen back, and, following recent elections, fiscal stimulus
should be phased out and deficit reduction plans undertaken.
- The outlook for Japan in early 2011 was already a matter
for concern. Deflation had become entrenched, and confidence was
weakening, as slow export growth and weak domestic demand were in
danger of stalling the recovery. In the aftermath of the devastating
earthquake and tsunami, industrial production, exports and confidence
have all been badly hit, and a GDP contraction of 0.9% is expected
for 2011. A strong recovery is, however, likely to begin in the
second half of the year, as reconstruction efforts gather pace,
and 2.2% growth is projected for next year. With gross government
debt approaching 200% of GDP, it is important that reconstruction
be funded by shifting expenditures and increased revenues rather
than borrowing. And while plans for aggressive fiscal consolidation
are needed, Japan’s monetary stance will need to remain accommodative
until inflation is once again firmly positive.
- Despite successive rounds of volatility surrounding sovereign
debt in some member countries, financial conditions in the euro
area overall have improved, given the extensive government support
and growing confidence. In most countries, access to credit has
improved and equity prices have risen, and with a strong rise in
exports and growing consumption and investment, growth should be
around 2% this year and next. A particularly strong German economy
is providing support to many of its neighbours, although the countries
with the greatest debt problems are still struggling to emerge fully
from recession. Headline inflation has risen strongly because of
energy price rises and indirect tax increases but should be restrained
by considerable economic spare capacity and high unemployment –
which was at 9.7% last year, with 9.3% likely in 2011. As the recovery
strengthens, there is an urgent need for credible fiscal consolidation
plans – and reforms to European Union fiscal institutions would
be particularly helpful here.
- Having paused at the end of 2010, a slow and uneven recovery
continues in the United Kingdom. What the OECD calls “substantial
but necessary” deficit reduction plans, though striking “the right
balance”, will combine with tax increases and weak household incomes
to keep growth subdued this year, perhaps at 1.4%. In 2012, this
is expected to reach 1.8%, as business investment recovers. Although
there has been a rebound in exports, the United Kingdom continues
to underperform in this area compared to other OECD economies. Unemployment
will therefore continue to fall only gradually, while inflation
will remain above target until 2012, when the effects of tax rises
fade out. Further public-sector reforms are called for, and while
monetary policy should remain accommodating, some upward adjustment
of interest rates should begin in 2011.
- Tighter monetary conditions have slowed growth in China;
while 10.3% was achieved last year, in 2011 a rate of 9% is expected,
and 9.2% next year. The trade surplus has fallen back to around
4.5% (having been 10% in 2007), as labour costs and commodity prices
have increased, and export growth has slowed. In fact, over the
past year, China’s share of world trade has ceased to expand. Inflation
has pushed up strongly, though the slackening level of domestic
demand is expected to reduce inflationary pressures next year. Further
price controls should be resisted, but tight monetary policies need
to remain in place, while greater exchange-rate flexibility would
also help to curb inflation. Reforms to labour migration rules would
improve the economy and restrain inflation further, while structural
reforms, for instance to reduce entry barriers, should be followed
through to improve competitiveness.
- Having expanded by more than 10% in 2010, growth in India
has also eased as stimulus is withdrawn, and it is this year expected
to be at a more sustainable level of 8.5%. This pace is likely to
be maintained by strong business confidence and infrastructure investment.
Inflation, though, has remained stubbornly high and, given rapidly
rising incomes and capacity constraints, has become generalised
throughout the economy. Some monetary tightening is in progress,
and this should continue so as to restrain inflation. Early progress
on fiscal consolidation is encouraging but is threatened by continuing
high levels of public subsidy – these should be remodelled so as
to target the neediest more effectively. Market liberalisation, in
particular relating to the rules governing foreign direct investment,
would help to improve the prospects for long-term sustainable growth.
- With growth of 7.5% in 2010, the economy of Brazil has
been running close to capacity, and a more moderate pace of 4.1%
is expected this year. High planned spending on infrastructure will
support an already strong level of domestic demand in the next few
years and will exacerbate inflationary pressures. With significant
capital inflows, the currency has been very strong, which has provided
protection against inflation, but as this effect dissipates and
labour markets remain tight, inflation could become a serious threat.
Accordingly, monetary tightening has begun, and the OECD recommends
that this should continue. It also suggests that announced spending
cuts should be augmented by a fiscal consolidation plan. In addition,
the development of domestic financial markets would improve Brazil’s
ability to absorb capital inflows and would raise growth potential.
- Growth in South Africa is expected to accelerate from
2.8% last year to 3.9% in 2011 and 4.2% next year, driven by strong
external factors such as commodity prices and a rise in employment.
Recent capital inflows have made the currency stronger, posing some
risks to growth though also helping to control inflation, which
is projected at 4.8% this year. The government should take this
opportunity to pursue fiscal consolidation, which would allow a
stable lower level for the currency and interest rates and boost
economic potential. This may entail public-sector reforms, particularly
wage restraint, and further structural reforms are needed to improve
the overall business climate and, most urgently, to address youth
unemployment, which is now close to 50%.
- Supported by high commodity prices, growth in Russia has
picked up, with 4.9% likely to be achieved this year. Domestic demand
is expected to strengthen, and the budget is likely to return to
surplus this year. Plans to reduce the non-oil deficit over the
next two years are, in the OECD’s view, “sensible”. The pressure
to spend additional oil revenues should be resisted since fiscal
improvements will make the economy less exposed to future oil price
fluctuations. Meanwhile, privatisation should be pursued as planned,
along with a range of structural reforms to improve the business
environment and make industry more competitive.
8. Overall, the OECD’s economists express cautious optimism that
the recovery is becoming self-sustaining, more broadly based and
less reliant on stimulus measures and artificially loose monetary
policies. But there remains a great deal of uncertainty, and the
OECD points out that while the globaleconomy seems to be exiting
from the recession, it is by no means returning to business as usual.
And so, in the aftermath of an unprecedented crisis, there is now
a considerable challenge to be taken up, in order to establish stable
and healthy global growth.
A durable recovery for all – four key challenges
9. In the words of the OECD, “the outlook is surrounded
by risks”. This year has seen a considerable rise in political uncertainty
in the Middle East, with the constant risk of a global economic
shock. Partly related to this, continued increases in energy prices
have depressed spending power in consuming countries and fuelled inflation.
Meanwhile, many of the issues associated with the crisis, such as
weak financial systems and restricted access to credit, are only
partially resolved. At this stage, growth appears unlikely to achieve
the levels reached in previous periods of recovery and seems unlikely
to create a “feel-good” consumer rebound as it has done before.
As the OECD says, “all this suggests that the global crisis may
not be over yet”.
10. In recent months, inflationary pressures have been particularly
damaging to consumer confidence, especially in food and energy prices.
Geopolitical factors aside, these pressures are partly linked to
dollar depreciation and partly to demand pressures beyond the control
of the monetary authorities, who are in turn unwilling to raise
interest rates for fear of stalling economic growth. This is particularly
so since, besides inflation, there is the challenge posed in the
developed world by unemployment, which has risen rapidly in recent
years and remains stubbornly high.
11. The OECD says that high unemployment cannot be accepted as
the “new normality”. Indeed, it regards combating unemployment as
one of the four central challenges confronting the world economy
today. Across OECD member countries, unemployment in 2010 stood
at 8.3%, versus 5.4% in 2007. In tackling this, governments face
difficult policy issues, balancing the twin imperatives of spending
restraint and job creation. The OECD is developing a Skills Strategy
that aims to help governments to identify and encourage essential skills
for a 21st-century economy, and to build up the concept of lifelong
employability and lifelong learning. But right now, the priority
should be active labour market initiatives focused on the most vulnerable
– in particular, the young.
12. Since the crisis started, some 3.5 million additional young
people have joined the ranks of the unemployed in OECD countries
– bringing the youth unemployment total to 18% this year; it is
expected to be 17% next year. But this figure misses many of those
who have left education and do not feature in the labour force statistics
– in fact, at least 17 million young people are neither at work
nor in training, and some 10 million of them have simply given up
trying to find work. In some countries, up to 40% of youngsters
are without employment.
13. In its special report, “Off to a good start? jobs for youth”,
the OECD describes how young people who struggle to find work early
in their career can find their future careers and life chances permanently
damaged. But even so, while young people are twice as likely to
be unemployed as others, few countries have specific programmes
to help them. As the OECD Secretary-General has said, “investing
in young people is vital to avoid a scarred generation at risk of
long-term exclusion”, adding that “we can learn from countries that
have made it easier for young people to find jobs”.
14. The OECD’s report looks at a range of cost-effective policies
introduced by various countries and designed to target those young
people most at risk. In particular, this means focusing on those
who leave school without qualifications, who come from immigrant
backgrounds or live in disadvantaged areas. Such specific policies
include:
- Placing an emphasis
on early-intervention programmes and tailored job-search assistance
for different groups of youth, as is being done in Denmark, the
Netherlands and Japan.
- Upgrading and increasing access to apprenticeships and
vocational training. A thorough approach to such schemes is traditional
in countries such as Germany and Switzerland and is becoming a priority
in many more. Currently, for instance, such programmes are being
expanded in Australia and in France. The OECD emphasises that appropriate
resources are needed, and relevant qualifications are essential. To
achieve this, a comprehensive partnership with employers needs to
be fostered.
- As a possible measure, governments could envisage the
introduction of targeted subsidies to employers to encourage the
hiring of low-skilled young people and young people who have completed
their apprenticeships. There should be a special emphasis on small
and medium-sized firms, where the potential for employment, and
the benefits of a subsidy, are often greater. In addition, young
people should be encouraged to become entrepreneurs through specific
educational programmes.
15. For the OECD, the other three fundamental challenges are:
to sustain current growth and avoid stagnation, to make real progress
on fiscal consolidation and to successfully manage and restrain
global economic imbalances. To tackle these, a complex but coherent
policy set needs to be developed, the key points of which include:
- Securing the transition from
a policy-driven recovery to self-sustaining growth. This implies
establishing a credible medium-term financial framework as extraordinary
measures are removed and securing the stability of banks. A steady
restoration of fiscal policy is needed, with interest rates being
gradually allowed to reach normal levels, which will combat the
long-term threat of inflation and reduce the distortions in financial
markets. As stimulus is withdrawn, financial policy will need to
provide what the OECD calls “a credible medium-term framework” to
anchor expectations and maintain confidence.
- Specifically, the health of the banking system – at a
global and, in many cases, national level – still needs to be secured,
with a credible system of regulation devised and established. Open
and healthy capital markets are essential for long-term growth,
and this needs to be borne in mind when reviewing the short-term
measures that have been put in place over recent years. In the new
world economy, devising an effective and well-balanced regulatory
framework will require an overtly collaborative effort.
- Acting to correct the global imbalances that have remained
during the crisis. For years, the OECD has warned of the dangers
posed by high deficits in some countries, while others run large
surpluses, and of artificially set exchange and interest rates.
We can now see that many of the elements of the crisis lay in these
problems – for instance in large amounts of liquidity being transferred
from the savings of emerging economies into developed countries'
housing markets, fuelling an unsustainable boom. Already, there
are signs that these imbalances are widening again: in some cases,
countries such as China that have managed exchange rates are seen
by slower-growing trading partners as operating a form of “soft
protection”; in addition, low returns in the developed world are
driving capital flows towards emerging economies, causing exchange
rate instability; meanwhile, commodity exporters are experiencing
hugely increased revenues, which they will want to spend or invest.
Such imbalances, both in trade and finance, pose risks of a protectionist
response, which would be disastrous for the recovery. This policy
challenge – which implies not abolishing global imbalances but keeping
them at a sustainable level while avoiding misallocation of capital
both within and between countries – requires a co-operative response.
- Achieving fiscal consolidation, both in order that debt
levels become sustainable and so as to regain the ability for normal
financial mechanisms to apply. In the OECD’s view, such consolidation
needs to be under way now. At the same time, the fiscal positions
of most OECD countries have deteriorated significantly as a result
of the crisis and need to be brought to a more sustainable path.
There is, of course, a risk to the recovery if measures are pursued
too vigorously, and a careful balance will be needed for some time
to come, but the OECD feels that, given the current consolidations
planned by its members, “adverse consequences are likely to be limited”.
- Encouraging private investment. If public debt is left
to accumulate at its current pace, the cost of borrowing is likely
to rise, damaging growth and suppressing private investment. In
the aftermath of the crisis, companies have taken strong measures
to improve their balance sheets and should now be in a position
to ramp up investment, if conditions are right – and this is precisely
what is needed, in order for growth to reach sufficient levels to
bring down unemployment and consolidate a self-sustaining recovery.
- Ensuring that fiscal consolidation is conducted in a “growth-friendly”
manner, by looking closely at the structure of public finances.
Measures taken should aim to improve public-sector efficiency while safeguarding
areas such as education and innovation. Consolidation measures should
concentrate first on cutting government spending, the OECD says;
when additional revenue is required, emphasis should be placed on
the least distortive taxes, such as those on property, rather than
on labour income. In fact, for many countries this could be an opportunity
to restructure their tax systems in favour of growth and employment.
- Implementing structural reforms, a process that has slowed
in most countries during the crisis. While some progress is being
made – thanks to international efforts – in financial market reform,
much work is needed to improve domestic markets. This is urgent
in terms of labour regulation, where employment will be increased
if regulation is reduced and labour mobility improved. Product market
reform is another priority, and a reduction in domestic barriers
to competition, particularly in service sectors such as retail, and
an end to restrictive housing policies would foster growth – and
could themselves have a dramatic effect on employment.
16. All in all, the OECD is calling for a rebalanced policy framework
for the global economy. Indeed, it calls for a rethinking of what
it dubs ”the policy paradigm”. To do this, international collaboration
is absolutely essential; this is a theme that will dominate this
report. Here, the OECD’s work with the G20 will be crucial. As the
Secretary-General (who was an early proponent of a G20 group when
serving as Finance Minister of Mexico) has pointed out, the G20
proved to be pretty efficient in dealing with the worst period of
the crisis, but “now that we have put out the fire, the recovery
challenge is more complex”. The G20, he says, “must show that it
can set new global economic governance into motion for the post-crisis
world”, given that we are in a “multiple speed recovery in which
policy requirements in one region may affect growth prospects in
others”.
17. The key to this, he believes, is the G20’s “Framework for
Strong, Sustainable and Balanced Growth”. Working together, the
global institutions need to get this new framework right – and here,
with its wealth of experience, its analytical expertise and ability
to share information, the OECD is making a significant contribution.
This report will look at a wide range of areas – in all of which
the G20 is now taking a lead – which are important for future economic
well-being, and represent critical challenges in the effort to design
an effective global governance system. The task is imperative, for,
once again in the words of the Secretary-General, “the global financial
and economic crisis has cast a light on all the precious things
that are at stake in a global economy with deficient global governance.…
I can think of no other economic crisis that has been so costly
for so many people in so many countries”.
3 Lessons learned by the OECD from the financial
crisis, and the way forward
18. Amongst the institutions created after the Second
World War, several were tasked with surveillance of economic developments,
both in terms of specific national policies and in an international
context. The International Monetary Fund (IMF) provides perhaps
the most comprehensive overview since almost every country is a
member, but the OECD also plays an important role, and increasingly
so as its membership expands and its involvement with non-members
deepens. Specifically, it is charged with maintaining an overview
of macroeconomic and structural policies so as to promote prosperity
within, between and beyond its member countries.
19. Both organisations produce regular, in-depth global reports.
The OECD Economic Outlook, along with the individual Country Surveys,
on which this rapporteur, like her predecessors, relies, provides
a series of updates. Twice yearly, the OECD also produces “Financial
Market Trends”. In addition, the OECD policy surveillance includes
what could be termed as structural policy surveillance with publications
such as “Going for Growth”, which analyses the effects of pro-growth
reforms on public finances and global imbalances, and the “Employment
Outlook”, which monitors key labour market trends and assesses the
effectiveness of policy responses to deal with labour market challenges
such as globalisation and ageing populations, and the risk of high
and persistent unemployment. These publications are reviewed at
regular meetings of member countries, which are also attended by
observers. They are also publicly available, and an increasing quantity
of previously confidential research is now also being published
in one form or another.
20. In the aftermath of the financial crisis, a great deal of
criticism has been levelled at governments, banks and regulatory
bodies, which evidently failed to appreciate the risks being taken,
or to make adequate contingency plans in case of problems. Questions
have been asked, too, about the role of institutional surveillance:
were the dangers appreciated, and, if so, were they clearly communicated?
And for the future, what lessons can be learnt?
21. It is important to note that the crisis represented something
of a “perfect storm”, with a number of interacting forces producing
a unique event, one that would have been extremely difficult to
foresee exactly. Moreover, it will be clear to the readers of reports
by this rapporteur’s predecessors that the OECD was very much aware
of many of the dangers in the world economy. They repeatedly warned
of the risks posed by growing global imbalances, with savings surpluses
in countries such as Germany, Japan and China expanding as the deficits
in countries such as the United States and the United Kingdom widened.
It called for action to encourage private savings in deficit countries
and for deficit reduction measures across the developed world to
be undertaken during the benign period of the economic cycle. It
also sounded a note of caution about the overheating of housing
markets and the need for a tighter monetary policy, particularly
in the United States.
22. In 2005, the OECD wondered whether the United States was undergoing
a “housing bubble” and, while it felt the evidence was not conclusive,
noted the decline in lending standards and pointed out that “the
risk of a sharp slowdown … is significant”, adding in 2007 that
“a sharp fall in housing prices would prevent households from extracting
further housing equity and put borrowers under stress, with possible
large macroeconomic and financial consequences”.
23. There was also concern regarding financial innovation: in
2003, the Financial Markets Trends report declared that “uncertainties
continue to exist regarding the functioning of the relatively new
(and rapidly growing) market for credit risk transfer instruments.
While these are seen as having enhanced the resilience of the financial
system, they could also complicate the task of credit analysts and
supervisors to understand the distribution of risks … this could
complicate crisis management”. They added that the “contractual
framework in some of the markets for new instruments can be improved,
for instance by providing more transparent and standardized documentation”.
24. All in all, the OECD correctly identified most of what would
turn out to be the key features of the financial crisis, even if
these were isolated risk warnings, issued in the context of generally
upbeat assessments. Perhaps the most important lesson to be drawn
is twofold: first, that such messages need to be set out clearly, confidently
and consistently; second, that there is an immense challenge for
surveillance to keep up with the awesome complexity of a globalising
economy – in other words, to put all of the risks together and form
a scenario in which we could suffer the sort of “perfect storm”
that has actually taken place. For instance, this means taking account
of the way in which surplus savings in Asia could feed through,
via cheap credit, into a housing bubble in the United States, and
from there, producing actionable advice.
25. How might this be done? First, perhaps, all of us – the public
as well as surveillance authorities – will want to show greater
scepticism towards regulatory and supervisory frameworks and subject
them to closer scrutiny. Specifically, surveillance bodies may wish
to review how their own departments collaborate in producing analyses,
so that information is assessed in its full significance. Similarly,
they may wish to consult with each other more closely – as the OECD
does, for instance, in inviting IMF staff to OECD committees. Analytical
models should perhaps also be renewed, the better to take account
of today’s complex financial linkages, particularly as affected
by regulatory policies. Fundamentally, modern forecasting needs
to ensure that it considers constantly changing economic and financial
relationships.
26. This shift would reflect developments already in progress
at the OECD, where specific policy guidance is being strengthened
via the structural surveillance process, which aims for a systematic
benchmarking exercise that ensures consistency between countries,
but avoids a “one size fits all” approach. A range of tracking studies
and reports has also been introduced. A good example of this is
“Going for Growth”, a regularly updated publication that assesses
many countries simultaneously and offers specific guidance to each
of them on achieving the types of structural reforms most relevant
to them. Such practical, results-oriented projects should help to
bolster a “political economy of reform” and help governments to
see the wider implications of domestic policy. And it might make
sense to conduct regular, specifically timed surveillance of the
major national economies, co-ordinated so that the work of different
surveillance bodies is complementary and does not overlap. Also,
one-off surveillance could be commissioned when underlying problems
are evident to analysts, even if those problems are not of great
public concern at the time. This would give a sharper, more timely
focus to reporting, and scope to provide “early warning” of future
threats.
27. There are also issues surrounding the presentation of material.
This is perhaps a particular issue for today’s OECD, as the number
of member countries grows and more and more non-members are in attendance as
observers or full participants, making the “peer pressure” aspect
of its mission harder to achieve. On the other hand, the growing
involvement of new members and non-member observers in OECDcommittees can be seenas a clear opportunity for the
organisation.
28. When reports are published, there is also a need for messages
and issues of concern to be presented in a clear and eye-catching
format. One difficulty with this is that such points are very often
supported by confidential data received from members; careful thought
would therefore need to be given to exactly what supporting information
can be released; once that is done, surveillance authorities may
need to be prepared to speak publicly in support of their assertions.
It will also perhaps be helpful to draw upon the assessments of private
and external analysts, who can help in gaining public and political
acceptance of a need for action. The OECD could encourage and even
collaborate with them and could certainly assist them, as it is
increasingly doing, by ensuring easy access to statistical data
and other information. There could be a benefit in fostering a culture
of diverse opinions, even if this sometimes results in the presentation
of dissenting voices.
29. As discussed elsewhere in this report, the G20 has taken several
initiatives to improve surveillance, in particular in tasking the
Financial Stability Board with conducting, on a multilateral basis,
robust and transparent peer reviews of the financial systems of
G20 countries. This is to be welcomed, and the OECD is providing
input and support to the process. However, these reviews will take
place only every five years, and will focus on very specific sectors
of activity. They will not be broadly based reviews of economic
and financial developments. And while the G20 is able to involve
all the major economic nations, the very scale of its work may make
it hard to achieve effective consideration of policy, especially
given that the G20 lacks a permanent staff capable of independent
analysis.
30. It may be that we have yet to find an ideal format for exercising
“peer pressure” amongst the key players in the world economy, both
traditional and emerging. Even the best surveillance will not succeed
in inspiring appropriate policy changes if there are large differences
in countries’ ideas and views on economic policy, as is often the
case today. In this context, it may also be interesting to analyse
how decision-making within the OECD, based on the “consensus rule”,
influences its surveillance activities. On the other hand, one may
ask whether the “consensus minus one” rule, as practised by the
parties to the OECD Anti-Bribery Convention or by the Global Forum
on Transparency and Exchange of Information for Tax Purposes, could
be a more effective format to exercise “peer pressure” among OECD
members.
31. One OECD body, the Corporate Governance Committee, is in a
unique position since it is responsible for one of the 12 FSB Key
Standards for Sound Financial Systems: the OECD Principles of Corporate Governance.
The Committee, which now includes Enhanced Engagement countries
and other FSB jurisdictions, reviewed the lessons for the financial
crisis in a series of publications, concluding that corporate governance
weaknesses in the financial sector played a key role in the propagation
of the crisis. While the Principles covered the identified weaknesses
well, there was clearly a problem in achieving in practice the outcomes
advocated by them. The Committee therefore decided to launch thematic
peer reviews using the “consensus minus one rule” where necessary,
and that would be open to member and non-member countries alike.
The first review, covering boards and executive remuneration, was
undertaken in November 2010, and two thematic peer reviews are expected
to be undertaken each year covering around eight countries in total, with
a more discursive treatment of the remaining participants of the
Committee in each review.
32. Clear directions for improving analysis and forecasting do
exist, as well as for obtaining greater attention and respect for
the findings. Speaking before our Assembly last year, the OECD Secretary-General
spoke of the need to restore trust and confidence, both in government
and business, and the recommendations of his organisation can certainly
help to do that. Moreover, he pointed out that international co-operation
was “more necessary than ever because of the financial crisis: co-operation,
co-ordination and coherence, what I call the three 'C's. This is
needed to prevent the fourth 'C' – another crisis”. With the world
economy becoming ever more complex and unpredictable, it is not
an easy task, but to this rapporteur it is a vital one and will
be a key element in extending, into the next generation, the unique
hallmark of international bodies such as the OECD.
4 Improving the quality of life through better policies
and governance
33. Encouraging better policymaking is at the heart of
the OECD's work. This section reviews a range of its current and
upcoming projects, linked by their focus on the fundamental quality
of people's lives, through which the OECD aims to maintain its place
as a global “standard setter”.
“Better Life Index”
34. The term "gross national happiness", or GNH, was
first coined in 1972 by the then King of Bhutan, and the concept
continues to gain in importance, not least because economic indicators,
such as GDP, were never designed to be comprehensive measures of
well-being. But for GNH to become an accepted measure, a series of
defining indicators is needed – indicators that are, in their way,
as clear as GDP but more inclusive of other dimensions of progress
– in particular, measuring environmental and social standards. This
will enable a broader assessment of challenges such as climate change,
poverty, resource depletion and health, so that they can be tackled
more inclusively.
35. Many organisations have been working on this concept in recent
years, notably through the European Commission and Parliament’s
“Beyond GDP” project. The OECD has collaborated with this, within
its “Measuring the Progress of Societies” project. The OECD has
been keen to take a leading role in the implementation of this new
measurement agenda and its linkage to policies, and its efforts
have included hosting the follow-up of the Stiglitz-Fitoussi-Sen
Commission, convened by President Sarkozy. In May 2011, the OECD
unveiled an interactive tool, designed to model well-being in OECD
countries. It provides a comparative guide to how well countries
perform against 11 criteria – such as housing, income, safety and health
– identified by the OECD as essential to quality of life. Users
can vary the weighting accorded to each of the criteria, so as to
view the model from different perspectives.
Note
36. Additionally, a “Compendium of OECD Well-Being Indicators”
has been published, marking one of the first attempts to create
a comprehensive basis for comparing the conditions of peoples’ lives,
both within the OECD area and beyond. It is planned that this will
be updated regularly, in the light of experience gained and progress
made, and it prepares the way for the “How’s Life?” project, to
be launched in October 2011, which will aim to provide an in-depth
view of people's living conditions, outcomes and inequalities, within
and across countries, based both on objective measures and subjective
information. “How’s Life?” will be structured along the lines set
out by the Stiglitz-Fitoussi-Sen Commission and will monitor core
elements and indicators relevant to the assessment of the well-being
and progress of communities, with a focus on the most important
features that shape the day-to-day lives of contemporary people,
both in terms of average household conditions and specific population
groups.
37. 37. The rapporteur is convinced that the Better Life Index will
have a “transformative impact” on debate and policy formulation.
Indeed, we must begin to find new ways of paying particular attention
to the balance between social justice and economic competiveness:
“We need to shift the focus of how we understand work from measuring
economic production to measuring people’s well-being” – as Danilo
Türk, President of Slovenia, rightly put it at the Annual Forum
of the OECD in May 2011. The strengths of the OECD’s new index are
obvious: it brings together the experience and expertise of the
organisation in collecting and processing reliable data; it invites
the involvement of citizens, which could potentially stimulate a
major debate and lead to better policies; it facilitates comparison
between countries and within countries, helping to frame the trade-off between
different social policies; and it provides a base for further development
and innovation in this field.
Fighting corruption and promoting responsible business
conduct
38. As at the Council of Europe, fighting corruption
is a priority for the OECD. Curtailing bribery and corruption and
improving public governance are crucial for bettering the quality
of life – particularly in developing countries –the OECD estimates,
for instance, that in some cases up to 15% of GDP, or $US400 billion,
is lost due to corruption in public procurement. Since its entry
into force in 1999, the OECD Anti-Bribery Convention has done much
to improve the quality of national administration, as all Convention
countries
Note must criminalise the bribery of foreign
public officials in international business transactions. On 25 May 2011,
the OECD Ministerial Meeting adopted a new update of the Guidelines
for Multinational Enterprises to ensure their continued role as
a leading international instrument for the promotion of responsible
business conduct in a global context. Many of the major emerging
economies, as well as a wide range of stakeholders and experts, have
been involved in this update, including parliamentarians from around
the world.
39. Without doubt, fighting corruption needs a comprehensive and
collaborative approach. So the OECD, under the framework of the
2010 Declaration on Propriety, Integrity and Transparency in the
Conduct of International Business and Finance, and through the Clean.Gov.Biz
initiative, is also looking at an organisation-wide, policy-oriented
framework to tackle corruption at every level. This will bring together
many of its existing agreements and instruments in this field and
will involve a range of partners. The OECD has also joined forces with
G20 countries to implement the key priorities of the G20 anticorruption
agenda, especially regarding foreign bribery, whistleblower protection
and partnership with the private sector. This inclusive approach implies
close collaboration with the Council of Europe's Group of States
against Corruption (GRECO).
40. Tax evasion is another priority area, and the OECD’s work
has been strongly supported by the G20 – in fact, the OECD believes
that more progress has been made in the exchange of tax information
in the past two years than in the previous ten. The Convention on
Mutual Administrative Assistance in Tax Matters (ETS No. 127), developed
jointly by the OECD and the Council of Europe, is now in line with
international standards on information exchange and has been opened
to countries that are members of neither institution. The OECD’s TRACE
project, launched in 2010, is developing more efficient procedures
for claiming reduced rates of withholding tax on cross-border portfolio
investments, consistent with the European Commission recommendation
of 19 October 2009. These procedures are expected to be finalised
in 2013 and will enhance countries’ abilities to ensure proper compliance
with tax obligations through increased exchange of information. At
this year's OECD ministerial meetings, representatives welcomed
the establishment of an OECD Tax and Development Programme, which
is designed to help countries to develop more effective tax systems
and to combat offshore tax evasion.
Environmentally sustainable and socially balanced growth
41. The OECD continues to work on a wide range of initiatives
that will enable more environmentally sustainable and socially balanced
growth. The G20 has placed emphasis on issues of environmental taxation and
subsidy; at its request the OECD has developed an analysis on the
phasing out of fossil fuel subsidies and in late 2011 will release
a first-ever inventory of the measures that support fossil fuel
use and production in OECD countries. The OECD’s continuously updated
database of environmentally related taxes has been of great value
here, as it has in the project “Taxation, Innovation and the Environment”,
now publicly available. Further specific work is under way on the
links between carbon taxes and emissions trading schemes (including
the tax treatments of such permits), as well as the practical outcomes
achieved by road-pricing systems. In addition, the implications
of the forthcoming European Union emissions trading scheme for aviation on
regional and international tourism is one of many issues explored
in the recently completed OECD/United Nations Environment Programme
(UNEP) report “Climate change and tourism in OECD countries”. The
report analyses policies and issues related to climate change adaptation
and mitigation in the tourism sector and provides policy recommendations
in the area of climate change and tourism policy.
42. Amongst a range of reports finalised in the past year, “Harnessing
freedom of investment for green growth” is designed to build on
the rapidly growing private sector interest in low-carbon development
and renewable energy. Specific emphasis has been placed on the policies
required to stimulate renewables, particularly in terms of investment
in physical capital, and measures that governments can take to support
the establishment of renewable energy plants. The OECD is also looking
more broadly at how public policy can incentivise private investment,
including the role that institutional investors can play, with a
report due in late 2011 on “The role of pension funds in financing
green growth”. In addition, “How public investment can generate
sustained growth” presents an analysis of policy options for central
and local governments to prioritise and achieve successful investment
and services delivery at a time of tight fiscal constraints.
43. The OECD believes that by assessing economic and environmental
policies together, a practical and effective platform can be created
for achieving a low-carbon economy that is compatible with growth.
Since, in its view, innovation and “green growth” are mutually supporting,
the OECD has already published an “Innovation Strategy” – containing
concrete proposals on governance, R&D (research and development) spending
and human capital development – and has now unveiled an overarching
approach to environmental policy that seeks to answer the question:
How can the development of human resources and green growth be part
of a comprehensive model for socially sustainable growth?
44. Entitled the “Green Growth Strategy”, this project was launched
at a public session of the OECD’s Ministerial Council meeting in
May 2011. Its synthesis report, “Towards green growth”, provides
a practical framework for governments to increase growth whilst
cherishing the environment. It does this by setting out two broad
streams of policy: the first offers methods to improve growth while
conserving natural capital, by correctly balancing fiscal and regulatory
rules and applying innovation policies; the second proposes measures
that reward the efficient use of natural resources, make pollution
and environmental degradation more expensive and encourage economic
activity to take place where it is of best advantage to society
over the long term. The report underscores the need for better ways
of measuring economic progress: measures to be used alongside GDP
which more fully account for the role of natural capital in economic
growth, health and well-being. Accordingly, some of the key areas
of focus include:
- improving
resource management and boosting productivity;
- a decisive approach to taxes and regulation;
- industrial restructuring and new technologies;
- creating green jobs and improved social measures;
- addressing the political economy of reform;
- introducing reliable green measurement and indicators;
- a system of peer review and co-operation between OECD
member and partner countries;
- recommendations for extending stakeholder involvement.
45. Recent years have shown how difficult it can be to achieve
decisive action on the environment. Of course, replacing natural
capital with physical capital is expensive in the short term – for
instance, the infrastructure needed to generate clean electricity,
stop water pollution or prevent soil erosion can be costly – but
the economic rewards can be worthwhile and the cost of inaction
would be higher still. The OECD report argues that “greening growth”
is essential to prevent further destruction of natural capital,
such as increased scarcity of water and other resources, more pollution,
climate change and biodiversity loss, all of which would undermine
stable future growth.
46. Green growth therefore makes economic as well as environmental
sense. In natural resource sectors alone, commercial opportunities
from investing in environmental sustainability could run into trillions
of dollars by 2050. Increasingly, governments should look to the
green economy to find new sources of growth and jobs, and to do
this they should focus on encouraging the spirit of green entrepreneurship
and innovation now evident in many parts of the world. As the OECD’s
Secretary-General said at its launch, “this report shows that green
and growth can go together. With the right policies in place, we
can create jobs, increase prosperity, preserve our environment and
improve the quality of life – and all at the same time”.
47. In addition to the Synthesis Report, the OECD has produced
several supporting documents. “Tools for delivering on green growth”
outlines the specific instruments and options available to policymakers
who wish to implement and foster green growth strategies, while
“Towards green growth – monitoring progress: OECD indicators” puts
forward methods for measuring progress over time. In June 2011,
a preliminary Green Growth Strategy for Food and Agriculture was
released, and in autumn 2011, a joint OECD/International Energy Agency
study on green growth and energy will be published. Green growth
is being further mainstreamed in OECD's work programme. This entails
integrating green growth in the Organisation's national and multilateral policy
surveillance work, including country economic reviews, environmental
performance reviews and innovation surveys.
48. A report on green growth and developing countries is already
under way, and the OECD is also aiming to produce a scoping paper
on green growth for China for November 2011. Issue-specific studies
will, for example, cover green innovation, biodiversity, green growth
and cities, rural development, and green jobs. The outcomes of these
studies and reports will form an integral part of the OECD’s support
to stimulate green growth globally in the run-up to the Rio+20 Conference
next year, the successor to the original Earth Summit of 1992. At
the same time, the OECD is working closely with other international
organisations to align and further strengthen global efforts to
promote green growth. An important initiative in this context includes
the recent Green Growth Knowledge Platform, which has been jointly
established by the OECD, the UNEP, the World Bank and the Global
Green Growth Institute. The Platform aims to advance knowledge about
green growth and supporting policy implementation in both developed
and developing countries.
49. The OECD hosted discussions and conducted an expert consultation
on the relationship between international investment law, including
bilateral investment treaties, and environmental law and policy.
This culminated in the adoption by government delegates to an OECD-hosted
roundtable of a communication on harnessing freedom of investment
for green growth, which addressed a range of issues including investment treaty
practices and the environment, green protectionism and the transparency
of investor-state arbitration
50. In many countries, a notable feature of recent growth has
been that top-level incomes have risen a great deal faster than
those at the lower end. The OECD has been working on a study on
the causes of growing inequality in OECD countries, and this will
be published toward the end of 2011. It includes an analysis of
trends in the shares of top income recipients and their implications
for tax policy. The 2012 issue of “Going for Growth” is also scheduled
to include a study on macroeconomic risk and how this is to be shared
efficiently and equitably across individuals and households.
51. The OECD is finalising the follow-up of “Growing Unequal?”
for publication later this year. This new work will update the trends
on income inequality and analyse the main drivers. Moreover, it
will focus on trends among top earners and examine why the redistributive
impact of the tax and transfer system has become less important.
Significantly, it will highlight a range of policies that can create
greater equality of opportunities in the long run.
52. Moreover, the rapporteur is convinced that women’s economic
empowerment is critical to stronger and fairer economic growth.
Ensuring an adequate supply of skills and maximising the use of
those skills in the workforce and in entrepreneurial activity are
keys to boosting economic growth and promoting social progress and
inclusion. At present, women often represent an “underexploited
resource”, and their increased and more productive participation
in the labour force and in entrepreneurship would indeed promote
growth and poverty reduction.
53. Greater economic empowerment of women and greater gender equality
in leadership are essential components of the OECD’s wider agenda
to develop policies for stronger, better and fairer growth. The
OECD is actively helping governments promote gender equality in
education, employment and entrepreneurship (the “three Es”) through
its “Gender Initiative”. Building on the expertise and data of the
OECD and other international institutions, the OECD’s Gender Initiative
will identify, bring together and update a set of indicators on
these key dimensions. The project will also examine why barriers
to gender equality persist; illustrate the importance of gender
equality for a stronger and fairer economy; establish standard indicators
to measure progress; and develop a database framework and comparable
data on entrepreneurship. A one-stop data portal for indicators
on gender equality in the “three Es” will be launched by the end
of 2012.
International development
54. Despite a decade of work, progress towards the United
Nations’ Millennium Development Goals remains uneven and is in some
cases very disappointing. In fact, much of the progress made can
be attributed to the gains of global economic growth rather than
development efforts. Last year, in an attempt to make these efforts more
focused and cohesive, international development was added to the
G20 agenda, and at the Seoul summit, a Development Consensus for
Shared Growth was adopted.
55. The underlying principles of this are a focus on economic
growth and on partnership, with an emphasis on systemic issues –
particularly relating to infrastructure and trade – so as to tackle
the underlying causes of poverty rather than its immediate symptoms.
Private-sector involvement is being encouraged and efforts co-ordinated
so as to be mutually reinforcing and geared towards achieving demonstrable
results. Delivery of the Consensus takes the form of a Multi-Year
Action Plan, with nine specific pillars: knowledge sharing, growth
with resilience, food security, domestic resource mobilisation,
financial inclusion, infrastructure, human resource development,
trade and private investment and job creation.
56. The establishment of the G20 Global Partnership for Financial
Inclusion (GPFI) in December 2010 elevated the commitment to improve
access to finance for the poor and for small and medium-sized enterprises (SMEs)
to a permanent priority within the G20. The OECD is contributing
to the G20 SME financing agenda, by evaluating the impact of the
financial crisis on SMEs, assessing governments’ support measures
and developing a measurement framework to monitor SMEs’ and entrepreneurs’
access to finance.
57. Through the mechanism of the Development Assistance Committee,
the OECD plays an important role in improving the administration
and effectiveness of international development assistance. Accordingly,
it provided significant input to the design of the Seoul Consensus
and has been specifically tasked in six out of the nine action areas.
Its work includes the encouragement of more robust and effective
tax systems, including steps to reduce corruption, better labour
and regulatory practice and steps to mitigate volatility in the
price of basic foodstuffs.
58. As momentum builds towards the High-Level Forum on Aid Effectiveness,
to take place in Busan, (South Korea) in November, the OECD has
stepped up its co-operation with other international organisations
working on the Multi-Year Action Plan and is co-ordinating closely
with France, this year’s G20 chair. At Busan, delegates will target
results-oriented solutions for development, drawing on a range of
experience and knowledge from developing countries, the Development
Assistance Committee and other key donors, civil society organisations,
the private sector and other major participants in global development.
This process offers parliamentarians the opportunity, through the
OECD, both to gain an insight into the progress made and to make
their voices heard so as to help shape future development efforts.
59. The rapporteur considers this process all the more essential
as today we are witnessing a new demographic reality. For the first
time in history, the global population will reach 7 billion in 2011.
Out of the total population, there are 1.2 billion young people
who will soon start their own families. Their reproductive choices
will play a critical role in determining the future of the planet.
Rapid demographic growth in developing countries is bad news for
the world, as it will likely outstrip the gains of economic development.
It is also a wake-up call. If donor countries do not begin investing
far more seriously in family planning, much of our progress in fighting
poverty, climate change and preventing conflicts in Sub-Saharan
Africa and the rest of the developing countries achieved over the
past century may be lost.
60. In parallel with this renewed global effort, the OECD itself
is initiating a comprehensive new approach to its international
development work. At this year’s ministerial meetings, the framework
for an OECD Strategy for Development was endorsed, with the goal
of achieving higher, more inclusive and sustainable growth. Ministers
agreed that the OECD should focus its development strategy on the
following areas: innovative and sustainable sources of growth and
the mobilisation of domestic resources for development, including
by fostering a favourable investment climate and tackling corruption,
by promoting good governance and by systematically measuring progress.
Greater collaboration and knowledge sharing will be the key to success
here, including sharing policy results and engaging in mutual learning,
as well as deepening partnerships between the organisation and developing
countries that want to engage.
61. It is hoped that this new approach can play a part in helping
to shape the international development co-operation architecture
that will emerge from the Busan Forum. It is also worth noting that
OECD ministers also discussed the upheavals in the Middle East and
North Africa, affirming that recent events underline the extent to
which good governance and transparency are indispensable for development,
as are policies to encourage innovation and entrepreneurship. The
ministers therefore asked the OECD to develop proposals for further work
on these issues – within the framework of its existing MENA (Middle
East and North Africa) programme – with the goal of helping governments
in designing and managing measures to combat and prevent corruption and
to improve the local investment climate.
5 Ensuring better use of resources and tackling
commodity price volatility
62. The volatility of commodity prices, particularly
in energy and metals, has been a consistent feature of recent global
economic growth. But in the past couple of years, severe instability
in the pricing of food commodities – particularly basic foodstuffs
– has become an increasingly important issue for the most vulnerable
economies. The spectacular price rises of 2007/2008 were quickly
followed by equally spectacular falls, but in recent months prices
have been surging again, raising renewed fears about affordability
in many countries.
63. The OECD closely watches these commodity markets. So its findings
can be of particular value in understanding the circumstances underlying
developments, in devising recommendations on how to reduce excessive
volatility and, when markets are volatile (as is inevitable), how
the world’s most vulnerable consumers can be helped to cope with
the consequences. Looking at recent food price surges, the OECD
sees a series of trends and special factors influencing the market:
- Rapid economic growth in developing
countries, coupled with rising populations, causing a huge increase
in demand.
- Since commodities are priced in US dollars, there is a
currency dimension that creates a complex mix of higher prices and
higher demand between different countries. Given the loose US monetary
policy, the dollar has been in decline for some time, and this causes
prices to rise, as producers compensate for its lower value. Those
countries with flexible exchange rates see prices going down (or
see global price rises offset), which boosts demand and makes their
imports cheaper and exports more expensive. Meanwhile, those countries
with exchange rates fixed to the US dollar are exposed to the full
force of any price rises.
- Exacerbating the currency effect, there is an increasing
link between food and energy prices; this is partly due to costs
related to transport and fertiliser production and partly to public
subsidies and mandates for biofuels, the feedstocks for which compete
directly and indirectly with non-fuel foods.
64. Alongside these, there are several one-off or short-term circumstances
that may have added to market volatility:
- A succession of poor harvests around the world, associated
with droughts and severe climatic events.
- Low levels of foodstuffs held in stock around the world.
- Taxes and restrictions imposed by producing countries,
particularly protectionist measures designed to reduce exports.
An example of this is Russia’s recent wheat export restriction,
which turned out not to be necessary but caused massive instability
in the market.
- A phasing out of long-standing domestic food subsidies,
which can no longer be afforded as demand rises.
65. In addition, there is the difficult question of the extent
of speculative activity. As the OECD’s Chief Economist puts it:
"Fundamentals are surely strong drivers of commodities prices. Speculation
is there also, but we cannot say how big its role is”. It certainly
appears that it was a contributor, especially given the market deregulation
that had taken place. Indeed, it is notable that the amounts flowing
to commodity index investment, - by non-traditional investors -
have risen markedly in recent years.
66. Interestingly, the OECD’s research suggests that, rather than
being directly responsible for price surges, these non-traditional
investors were following price changes already under way. However,
views remain quite divided on this issue, and more research is needed
to understand fully what impact non-traditional actors may have
been having on these markets. Despite these differences there is
widespread agreement that, for agricultural commodity derivatives
markets to function well in terms of hedging and price discovery,
appropriate regulation needs to be in place across all relevant
exchanges and markets.
67. Overall, in the OECD’s view, the severity of the price spike
was a result of several factors, some long term in nature, some
more short term, exacerbated by hasty and unco-ordinated reactions
by various parties, including some governments. In light of the
complexity and multiplicity of the causes, action is needed in several
areas if reoccurrences are to be prevented and coping capacity improved.
These include improving planning, boosting the flow of information
about stocks available, removing trade restrictions, reforming biofuel subsidies
and mandates and putting in place timely and effective assistance
programmes. But ultimately the solution lies in improving the longer-term
productivity and resilience of the agricultural sector, especially
in the developing countries. Specifically, this means:
- Achieving an increased level
of food stockpiling around the world. Fortunately, there are signs
that this is happening, but ensuring that sufficient stocks remain
available will require greater transparency on the part of governments
and producers, so that it is known what is held where, thus preventing
market panic and manipulation. This implies a global set of management
and information standards, and guidelines based on best practice.
- Market distortions and restrictions need to be removed
as far as possible. It was notable that in 2007/2008, the steepest
price rises took place in those commodities (e.g., rice) that are
least traded (thin markets). There should, in addition, be guidelines
applying to emergency measures, such as export bans and surcharges,
to prevent them being used to the detriment of the poor.
- There needs also to be a greater emphasis on technology,
for instance, by producing new strains of drought-resistant crops,
to reduce the need for fertilisers and by improving yields generally.
Farming accounts for 70% of the world’s water consumption, and there
is an urgent need for greater efficiency here. As the OECD notes,
the erratic nature of yields in rapidly growing areas of global
food production, as well as fears of the effects of global warming
in those areas, is itself a source of investor anxiety and contributes
to driving up prices. There should also be a rethink on government
biofuels policy, with the aim of removing a market distortion that
increases food costs for little overall environmental benefit.
68. Concerning financial derivatives, regulators need to find
the right balance between regulation and the need to ensure that
the markets in question are fully able to play their role in providing
for hedging and price discovery. The G20's regulatory task force,
the Financial Stability Board, and other regulators like the International
Organization for Securities Commissions are now looking at the relationship
between physical and futures markets in commodities. Meanwhile,
regulators are examining measures for improved transparency in off-exchange
markets but admit there is some way to go regarding physical markets
and how to assess overall data from all types of markets to spot
underlying trends in trading.
69. At this point, the United States is re-regulating some aspects
of commodity derivative markets, including introducing position
limits in some of its own commodities markets. The European Union
is also expected to give supervisors powers to intervene when needed.
But there is evident caution about overly restrictive interventions,
which could remove liquidity and diminish the capacity of these
markets to provide the hedging and price discovery mechanisms needed.
70. Each year, the OECD and the United Nations’ Food and Agriculture
Organization (FAO) produce medium-term projections for commodity
production, consumption, trade and prices; their work suggests that, overall,
prices will on average be noticeably higher over the coming decade
than they were in the decade preceding 2007. Volatility is likely
to continue. The OECD and the FAO have also been working closely
with the G20 on issues of price volatility and food security, together
co-ordinating preparation of a report on the issue, to which several
other international organisations have contributed. A comprehensive
set of recommendations is being developed for consideration by the
G20.
71. Clearly, as the OECD’s Secretary-General has pointed out,
“commodity markets need to function better and more transparently”.
He went on to say that “agriculture markets have always been volatile,
but if governments act together then extreme price swings can be
mitigated and vulnerable consumers and producers better protected”.
The rapporteur believes that this will become a more urgent priority
for collective global action, given that many of the structural
pressures on commodity prices are likely to be with us for years to
come.
6 The OECD’s global relations strategy
72. A dominant theme of this year’s report is the rapidly
growing complexity and interdependence of the world economy and
the increasing number of pivotal national players. While the scope
of the OECD’s work is vast and unique, it needs to have a global
reach so as to maximise its contribution and effectiveness and to remain
relevant. Partly, this inclusiveness is being achieved by new memberships:
2010 saw Chile, Slovenia, Israel and Estonia become members of the
organisation, making 34 in total. Progress has also been made towards
full membership of the Russian Federation; the OECD’s invitation
to the Russian Federation in May 2011 to join the OECD’s Working
Group on Bribery and its forthcoming accession to the OECD’s Anti-Bribery Convention
marks an important step in this regard. (Like all members of the
Working Group on Bribery, Russia will undergo detailed reviews of
its anti-bribery laws and practices to confirm that its legislation
meets the convention’s standards and is effectively implemented.)
73. The rapporteur is of the view that it is important to continue
the OECD enlargement process in a transparent and objective manner,
expanding to those countries that are ready to implement the body
of OECD standards and would further strengthen the organisation
and promote its values. Consequently, those European Union member
countries that have not yet become members of the OECD but have
expressed their determination to seek OECD membership should be
considered as strong candidates during the next enlargement process.
74. Crucially, the OECD is also strengthening its engagement and
collaboration with emerging/developing economies – and particularly
with Brazil, China, India, Indonesia and South Africa. This now
goes well beyond the brief analyses that have for some years been
found in editions of the “Economic Outlook”. Examples of specific
studies in the past twelve months include the first Economic Survey
of South Africa, as well as economic surveys on Brazil and China
and an Investment Review of India. All told, such contacts now involve more
than 100 non-members and are co-ordinated by the Centre for Co-operation
with Non-Members, which develops and oversees the strategic orientations
of the OECD’s global relationships. Many non-member economies now
attend OECD discussions and workshops, and, as is evident from this
report, an increasing amount of the OECD’s work addresses their
needs and priorities. In this way, the OECD is responding to the interconnected
nature of today’s global economy.
75. Indeed, the OECD’s active participation in the work of the
G20 – many of whose nations are not OECD members – underlines the
transformation in its role and its increasingly global dimensions.
Behind this, there are a myriad of multilateral initiatives in place.
Some of these are OECD ventures, such as a series of global forums,
established to address trans-boundary issues, where the OECD’s work
relies on policy dialogue with non-members. Others are joint bodies,
such as the SIGMA programme, an OECD-EU initiative that aims to help
improve public governance and management in European Union candidate
countries, potential candidates and European Neighbourhood Policy
partners.
76. Finally, in the context of creating global and inclusive projects,
the OECD’s pioneering and world-renowned PISA studies, which test
educational standards across differing cultures, are worth mentioning.
More than 60 countries participated in the latest assessment, enabling
them to chart progress and compare educational methods on an unprecedented
scale.
77. Each year, an important part of the Organisation’s public
calendar is the OECD Forum. But in 2011, as the OECD celebrates
its 50th anniversary, the Forum was of special significance, unveiling
a series of initiatives – many of which are covered in this report
– and, in the rapporteur’s view, demonstrating an organisation embracing
rapid change. Moreover, with attendees from all over the world,
it provided an ideal public platform for the OECD to project its
rapidly evolving approach to global relations and its priorities
for the world economy.
7 Mobilising parliaments towards more active participation
in the G20 process and the OECD’s work
78. The OECD sees its relationship with parliamentarians
as a vital element in its mission to help policymakers implement
reform, and it is expanding the breadth and depth of its contacts.
It has, of course, long-standing links with the Council of Europe
Parliamentary Assembly and also with the NATO Parliamentary Assembly.
In recent years, it has also developed a strategic partnership with
the European Parliament, and there are discussions under way on
how to strengthen this. Ideas include regular appearances by the
OECD Secretary-General at the Committee on Economic and Monetary
Affairs, an exchange between committees and relevant OECD directorates
and an annual exchange of views at the OECD or in Brussels or Strasbourg.
79. Such increased intensity of contact allows for an even more
specific exchange of information and viewpoints in order to guide
policymaking and to shape the OECD’s work, and it complements the
OECD’s existing high-level parliamentary seminars, which take place
twice yearly and are an opportunity for lawmakers to discuss key
policy challenges with OECD experts.
80. Furthermore, an OECD Parliamentary Network is now in the course
of being established. Contacts have been made with the speakers
of national parliaments, and full details of the initiative are
to be announced later this year. The rapporteur sees this as an
excellent initiative, which could potentially play an important
role in improving the effectiveness of research and the quality
of policymaking, at national and international levels.
8 Concluding remarks
81. The OECD is celebrating its 50th anniversary this
year. This anniversary comes at a significant moment for the OECD
– and in an astonishingly turbulent period for the world economy
– as the organisation expands both its core membership and its broader
audience and develops new strategies for building stable long-term growth.
Indeed, the global economic environment has changed dramatically
in recent years. The 2008-2009 financial and economic crisis accentuated
the increased complexity and interconnectedness of today’s world as
well as the need for enhanced international co-operation to address
common concerns. If the OECD, jointly with other international institutions,
fulfils its mission, we have a good chance of not repeating the
mistakes that led to the most serious economic crisis in our lifetime.
82. The economic crisis had led to record unemployment in many
OECD countries amid fears of a jobless recovery. The rapporteur
believes that our main aim should be to learn from the policy mistakes
that caused the financial crisis in the first place and to chart
a new way forward that will allow a more equitable and sustainable
recovery. Although financial market conditions have recovered, the
financial crisis has evolved into a serious job crisis, the consequences
of which are still very much with us. Estimates suggest that the
recession destroyed around 30 million jobs globally and that there
is a need to generate 200 million new jobs over the next decade.
83. Recent events in the Middle East and North Africa provided,
for many governments, a frightening illustration of the impact that
a large number of unemployed young people can have. Almost everywhere unemployment
among young people – who make up more than half the population of
many developing countries – is higher than for any other group.
This is an appalling waste of resources as well as a personal tragedy
for millions of people.
84. The rapporteur understands that today’s key challenge is to
strike the right balance between policies aimed at achieving fiscal
consolidation and those supporting recovery and job creation. There
is an urgent need to tackle youth unemployment and to prevent high
long-term unemployment rates from becoming entrenched. The greatest
threat to our economies is a persistent period of modest growth,
or prolonged stagnation, with negative long-term structural consequences.
The rapporteur believes that appropriate labour market and social policies
can do much to promote a job-rich recovery. As many countries face
the challenge of fiscal consolidation, it is particularly important
to continue to make room in budgets for cost-effective labour market programmes
that support workers at greatest risk of becoming long-term unemployed
and thus losing contact with the working world. Simultaneously,
green growth tools and indicators can help expand economic growth and
job creation through sustainable use of natural resources, efficiencies
in the use of energy and the appropriate valuation of ecosystem
services. A turn towards green growth is indeed essential to prevent
further destruction of natural capital, such as increased scarcity
of water and other resources, more pollution, climate change and
biodiversity loss, all of which are bound to undermine stable future
growth.
85. When we speak about the necessary “paradigm shift” in economic
policies, a fundamental issue is inequality. Imbalances in society
existed before the financial crisis, but they have worsened as a
result of the recession. These include discrimination, income inequalities
and gender disparities. For instance, wages as a share of global
output have fallen to their lowest level in decades, while unemployment
has remained persistently high, threatening to prevent a resurgence
of consumer demand. In addition, the growing importance of grey,
or informal, economies threatens to undermine government efforts
to boost the formal economy. Similarly, the significant widening
in income differentials in favour of those at the top of the earnings distribution
certainly does not stimulate economic growth. As well as social
costs, inequality has economic costs because it undermines economic
growth. Moreover, in a longer perspective there should be no contradiction
between measures to ensure economic growth and stability and those
to protect and care for the most vulnerable. Austerity measures
that exacerbate inequalities will only postpone problems and in
some fields make it even more costly to resolve them at a later
stage.
86. The rapporteur remains deeply concerned about the general
consequences of the recent crisis since it is not enough to establish
a new institutional framework to bring about economic recovery;
we also need to restore public trust in the governments after the
crisis. Trust is fundamental to the strength of the democratic process,
and during the emergency public confidence in the functioning of
the economy has been undermined. The credibility of governments
is at stake. And their room for manoeuvre has considerably decreased
as a result of the financial and economic crisis.Through “better policies for better
lives”, all of us have to do our best in our countries and communities
to rebuild that trust. These policies should support, not undermine,
fairness in society and sustainable enterprises and decent and productive
work in stable, peaceful communities. We need financial policies
that promote productive investment, restrain speculative financial
practices, modify consumer behaviour, ensure transparency and contribute
to rebuilding credibility in the system. We need major new thinking
about regulation and markets, about accountability and ethics. We
need game rules based on a better balance between markets and governments.
