B Explanatory memorandum, by Ms Lilliehöök
1 Background
1. In October 2008, in Strasbourg, the enlarged Parliamentary
Assembly of the Council of Europe will hold its annual debate on
the OECD and the world economy. To prepare for this, the following
draft report contains a summary of the key topics and questions
discussed during the rapporteur’s meetings at OECD headquarters in
the first half of 2008. Provisionally approved by the Committee
on Economic Affairs and Development at its meeting on 20 June, it
will be distributed to national delegations for comment, and submitted,
after further revision, for final adoption at the formal session
of the enlarged Committee on Economic Affairs and Development and
the enlarged Parliamentary Assembly in October 2008.
2. The rapporteur wishes to thank all those at the OECD who have
offered their time and expertise to this project, and have made
the report possible. Against a backdrop of dramatic headlines and
rapidly changing economic indicators, the rapporteur found her wide-ranging
sessions with OECD officials particularly stimulating and useful.
So it is hoped that this report will offer a clear, if inevitably
cautious, perspective. It begins with an overview of the critical
factors that are driving economic prospects, and then provides a summary
of developments in some OECD member countries, and some key emerging
economies.
Note
3. This year, the report also pays special attention to developments
in the financial markets, examining in particular the need for improved
financial regulation and education, and assessing the rise of sovereign
wealth funds. In conclusion, it will provide updates on subjects
reviewed in recent reports, including the prospects for a successful
conclusion to the Doha Trade Round, progress in delivering international
aid more effectively, an update on the OECD’s anti-corruption work,
and plans for an expansion of the OECD’s membership.
2 Introduction: uncertain prospects for the world
economy
4. Much has changed in the world economy since last
year, when the rapporteur’s predecessor offered an upbeat view of
continuing, non-inflationary growth. At that point, it seemed that
the impact of rising energy prices would be limited and that, rather
than stalling, global economic growth was rebalancing. But 2007-08 brought
a series of distinct, though interrelated shocks: a sharp correction
in United States housing markets, triggering a global credit crunch
and a continuing loss of confidence in the financial markets, alongside
a growing inflationary threat, with rising oil and commodity prices,
spurred on by a weakened United States dollar, and their effect
compounded by sudden increases in global food costs.
5. The impact and duration of these shocks remain unclear. Given
the conflicting pressures they place upon policy makers, some commentators
viewed them as a “perfect storm”, making economic recession difficult
to avoid. Indeed, in March many were convinced that the United States
was already in recession, although the formal criterion of two quarters
of negative growth had not yet been fulfilled. On 3 March, the legendary
financier Warren Buffett said that, while conditions were nothing
like those of the 1970s, “from a commonsense standpoint we’re in
recession”,
Note and
a poll undertaken shortly afterwards by the
Wall
Street Journal found that 71% of US businessmen agreed
with him.
Note
6. In its interim update, issued on 20 March, the OECD agreed
that there was already a “recessionary effect” in the worst-hit
sectors of the economy. It revised its short-term growth forecasts
downward for most major economies, saying that “prospects have weakened
more than was projected” in its half-yearly report, published in
January. In particular, it said that inflation measures were trending
upward and “exceed comfort levels in many economies”, and noted
that the US economy was “now essentially moving sideways, if not contracting
outright”. The OECD’s chief economist suggested that there was a
“relatively high” risk that a recession in the US would actually
occur, noting that the perception of one was already shaping economic
and consumer sentiment.
7. Although the OECD had already lowered growth forecasts by
the time of its December 2007 report, it was still able to express
cautious confidence in March. It pointed out that, overall, world
trade growth remained exceptionally strong, with 7.1% for last year,
and 8% expected during 2008 (revised to 6.3% in June). Amongst OECD
members, GDP growth in 2007 had been 2.7% (equal to average growth
in the years between 1995 and 2004), and was expected to reach 2.3%
in 2008. In January OECD-wide inflation had been thought likely to
remain around 2.3%, while unemployment had been expected to continue
falling, to reach 5.3% by 2009.
8. The OECD’s Economic Outlook,
June 2008, predicted that “several quarters of weak growth” lay
ahead for most OECD economies. Growth for the area was scaled down
to 1.8% for 2008, and 1.7% in 2009. Moreover, headline inflation
“could remain high for some time to come”. Its projection for the
OECD area in 2008 was revised upwards to 3%, though falling to 2.1%
in 2009. This average of course reflected lower levels in Japan
than in the United States and particularly the euro area. The previously
predicted fall in unemployment was not set to materialise: the OECD
estimate was revised to 5.7% of the labour force unemployed in 2008 and
6% in 2009. Growth in world trade was also expected to slow to 6.3%
in 2008, but to recover slightly to 6.6% in 2009. The OECD’s June
Outlook acknowledged that the “current economic situation is particularly unsettled
and the distribution of risk around the projections is wide. In
this environment, economic policy in OECD countries needs to take
into account the growing importance of developments in non-OECD
economies; the influences of higher energy and credit costs on the
supply side of OECD economies; the possibility of upward drift in
inflation expectations; and the uncertainty as to the effects of
financial market developments on growth and inflation”.
9. On 4 and 5 June 2008, OECD ministers nevertheless agreed at
their annual council that “the overall performance has been better
than expected”, and called for “continued close policy co-ordination
to facilitate the expected upturn”. As for financial markets, “the
situation has improved since March but current credit conditions
are restraining investment”. They noted that commodity prices “have
risen tremendously and driven up headline inflation but may not
rise further in the near term”. However, they remained “concerned
about inflationary pressures and indications that inflationary expectations
may be drifting upwards”. They agreed that “attention needs to be
paid to fiscal balances, especially where inflationary pressures
persist”, and that structural reforms should be pursued. Regarding
housing markets, “continued cooling is expected in most OECD countries”.
10. According to OECD’s latest interim economic assessment, dated
2 September 2008:
“1. Financial market turmoil, housing market
downturns and high commodity prices continue to bear down on global
growth while at the same time evolving rapidly:
– banks appear to have recognised
most of the losses and write-downs related to sub-prime based securities.
Continued financial turmoil appears to reflect increasingly signs
of weakness in the real economy, itself partly a product of lower
credit supply and asset prices. The eventual depth and extent of
financial disruption is still uncertain, however, with potential
further losses on housing and construction finance being one source
of concern;
– the downturn in housing markets
is still unfolding, with reduced credit supply likely adding to
pressures. US house prices continue to fall, threatening further
defaults and foreclosures that may again depress prices and boost
credit losses. As regards construction, however, there are some
hints of eventual stabilisation with permits and sales of new homes
having ceased to fall and inventories of unsold houses coming down.
In Europe, downturns in prices and construction activity appear
to be spreading beyond Denmark, Ireland, Spain and the United Kingdom,
with sharply lower transaction volumes likely a precursor of downturns
elsewhere;
– the price of oil has fallen
from peaks reached around the middle of the year in response to
slower demand growth and record production from OPEC. Oil supply
conditions remain tight, however, contributing to volatile prices.
Prices of other commodities – notably food – appear to have steadied
at high levels. Food commodity prices may ease in the period ahead
as droughts end in some food-exporting countries and as higher food
production comes on stream.
2. Based on incoming high-frequency
indicators, OECD short-term forecasting models point to weak activity
through the end of the year. However, limited experience with some
of the main drivers of the current conjuncture as well as uncertainty
about some specific influences make for a particularly unclear picture.
In the United States, uncertainty as to the extent of weakness hinges
importantly on how rapidly the effects of temporary fiscal stimulus
will fade. In the euro area and its three largest economies, as
well as in the United Kingdom, activity is foreseen to remain broadly
flat. And in Japan only a partial bounce-back from the 2nd quarter
fall in GDP is expected.
3. Sharp increases in energy
and food prices have boosted headline inflation and sapped real
incomes of consumers across the OECD area. Statistical measures
of underlying inflation have also drifted up in most large OECD
economies, partly reflecting the ongoing feed through of higher
commodity prices. So far, wage increases appear to have been broadly
contained. If commodity prices are sustained at their recent, and
in cases such as oil, lower levels some moderation of both headline
and underlying inflation is to be expected.
4. The G7 economies face different
policy environments. In the United States, underlying inflation
is high but appears not to have drifted up further and widening
slack will be a disinflationary force. With headwinds from financial
constraints, this appears to vindicate existing expansionary policies. Underlying
inflation has been rising steadily in the euro area for some time,
suggesting that capacity pressures need to be reduced. Hence, at
this moment, there is little need to change existing policy stances.
Should a need to tighten or loosen the macro policy stance become
apparent, monetary policy would be the preferred instrument. In
Japan, different indicators of underlying inflation send mixed signals
and deteriorating business sentiment, as well as the need for a
buffer against the risk of deflation, argue for keeping monetary
policy on hold.”
11. In the rapporteur’s view, the financial crisis that has shaken
the global economy since this interim assessment was published shows
how uncertain the outlook remains. Some of the world’s most powerful financial
institutions have been toppled or shaken to the core and remain
vulnerable not only to the effects of the sub-prime mortgage debacle
but perhaps also to further shocks connected with the wide and complex range
of financial instruments dreamed up and marketed by these institutions
in recent years. The policy response to this evolving crisis has
been to seek to restore confidence, treading a narrow path between,
on the one hand, loosening credit and liquidity as well as stimulating
demand through tax reductions so as to minimise the threat of recession
and further bankruptcies and, on the other hand, tightening monetary
conditions in order to contain runaway borrowing and resurgent inflationary
pressures. The actions of both governments and central banks in
seeking to prevent systemic collapse appear to have struck the right
balance so far. One may, however, question their increasing involvement
in rescuing private financial institutions at the taxpayers’ expense,
in consideration also of the growing wish that the perceived need
for urgent action may increase with further losses and devalued
assets. There remains a pressing need for greater regulation of
financial markets, and it is to be hoped that the OECD, as well
as other institutions like the IMF, will quickly step up their work
on this issue with a view to avoiding in the future the financial
turmoil that has characterised the past year.
3 A survey of key economies
3.1 The United States
12. In the last few years private consumption has made
a greater and greater contribution to sustaining US GDP growth,
and this helped to offset the impact of a housing market in rapid
decline. During 2006 and 2007, disposable incomes rose strongly,
partly through bonus and stock-option payments and property loans,
and this underpinned domestic spending, even with the onset of the
financial crisis last summer. Foreign trade has also contributed
to growth, with exports benefiting from emerging country demand
and a weak dollar. This led to a decline in the US current account
deficit, to 5.3% of GDP in 2007 and an estimated 5% in 2008.
13. Overall, growth in the US during 2007 was at 2.2%, having
been at 2.9% in 2006. In its June 2008 forecast, the OECD projected
growth to be around 1.2% during this year, and 1.1% in 2009, as
the effects of the housing crisis, credit squeeze and higher commodity
prices deepen.
14. A key indicator of US economic prospects is the housing market.
During 2007 and 2008, prices decelerated sharply, with falls in
many areas – and this trend has continued. As the OECD noted in
its September 2008 interim assessment, however (see above paragraph
10), the increase in inventories of unsold houses and the decline
in new construction may have levelled off. The knock-on effects
of the mortgage crisis are well known; the financial markets have
remained agitated, with banks hesitating to lend to each other, causing
crises of confidence in specific institutions, causing spill-over
effects in the insurance industry, and equities in general. All
this is restricting the supply of credit to private and corporate
consumers, but strenuous efforts by the Federal Reserve appear to
have succeeded in staving off a full-blown recession.
15. Consumer spending and employment have declined. Private consumption
growth is likely to slow from 2.9% last year to 1.2% in 2008, and
to fall to 0.4% next year. Private sector employment growth slowed markedly
during 2007, with heavy losses in manufacturing, construction and
financial services, and in the first half of 2008 private sector
employment fell for five consecutive months. From January to August
a total of 605 000 jobs were lost. Overall, unemployment edged up
during 2007, and is expected to reach at least 5.4% this year and
6.1% next year.
16. Underlying inflation, as noted in the OECD’s September interim
assessment, is high but has not drifted higher – in part, because
of decrease in activity and the downward pressure on labour markets,
and partly because, despite the weak dollar, many imports come from
low-cost countries. Although headline inflation passed 3% in 2007,
driven by oil and food prices, core inflation was stable at around
2%. In March 2008, the Federal Reserve reduced its target interest
rate to 2.25% (and to 2% in April, where it has remained) – a full 3%
fall in six months – which the OECD suggested should be regarded
as a temporary policy response to reassure markets and improve the
distribution of credit across the economy. Should the reductions
be too deep or long lasting, however, there could be an inflationary
risk – and the August 2008 figures, showing US headline inflation
at around 5.4%, suggest a need for caution. In its Economic Outlook, June 2008, the
OECD recommends that US “monetary policy should be maintained at
the current accommodative stance until the recovery has taken hold,
but interest rates should be raised promptly when conditions normalise”.
17. The US Government deficit is likely to rise from 3% of GDP
in 2007 to 5.5% in 2008, in part because of lower tax revenues.
The government’s room for fiscal manoeuvre is thus limited. This
is all the more true as social security comes under unprecedented
strain from the first wave of retiring baby-boomers, without any significant
reforms in the system having been enacted.
18. The US fiscal package consisting of temporary tax rebate cheques
posted out in May 2008 as well as temporary investment incentives
will have a short-term impact on economic activity likely to be
felt mainly in the second and third quarters of 2008. And although
the weaker dollar means that export growth is likely to slow only
moderately, while lower domestic spending should restrain the inflationary
effect of more expensive imports, the implied improvement in the
current account balance will be limited, because of declining inward investment
– the US is expected to have a net investment deficit by early 2009.
19. Overall, the OECD expects that despite a continued positive
contribution from US exports, growth will virtually stagnate over
the rest of 2008. Activity should gradually recover in 2009. Assuming
flatter commodity prices, inflationary pressures should eventually
ease as a result of the output gap and the higher (above 6%) unemployment
rate. However, recovery could be jeopardised if financial turmoil
is prolonged.
3.2 Asian economies
20. There has been some slowing in Japan’s growth – from
2.4% in 2006 to 2.1% last year – but the longest recovery in its
post-war history continues, and growth of 1.7% is expected in 2008.
Exports continue to play a powerful role, despite an appreciated
yen, with regional demand offsetting the slower US market, and unemployment
has fallen to its lowest level since 1998.
21. The decline in real wages recorded during 2007 has been reversed
this year, reflecting higher compensation for full-time workers
and an end to the shift towards lower-paid part-time work. However, consumer
prices have risen, in line with more costly energy and food. Headline
inflation accelerated from 0.1% in 2007 to over 1% in the first
quarter of 2008, although core inflation(excluding volatile energy
and food prices) remained around zero and is expected to rise only
slowly.
22. With the persistence of low underlying inflation, Japan’s
short-term policy interest rate has remained at 0.5% since early
2007. The OECD believes that this is sensible, and suggests that
rates should be held in this context.
23. In June, Japan was thought likely to see the GDP growth rate
slow to about 1.25% during the rest of this year and then increase
in 2009 to just over 1.5%. The key risk to this outlook is the likely
weakness in exports owing to slower world growth and an appreciated
yen. However, domestic demand seems likely to have enough momentum
to avoid recession, buoyed by a rebound in residential investment,
strong underlying corporate profitability leading to increased business
investment, and continuation of the positive trend in wage growth.
24. Growth in Korea, which rebounded after a difficult period
to 5.1% in 2006, remained steady at 5% in 2007 but is expected to
fall to around 4.3% this year, with export growth declining from
12.1% in 2007 to 8.6% in 2008. Employment growth has slowed and
gains in household income are being eroded by higher consumer price
inflation, 3.8% in the first quarter of 2008 over 2.5% in 2007,
reflecting the spike in oil prices and depreciation of the won.
But the inflation rate is projected to ease back to within target
range.
25. The housing market continues to stagnate, with lower construction
orders and the largest stock of unsold apartments since 1996. In
August 2008 the government announced measures to boost the housing
market, but there is worry about real estate financing operations
and mortgage defaults impacting on banks.
26. Korea’s growth is expected to rebound to 5% in 2009, close
to potential, fuelled by planned tax cuts expected to boost business
investment and stronger exports on the back of higher overseas demand
and a weaker exchange rate. Korea stands to benefit from improved
prospects for economic co-operation on the Korean peninsula, and
the implementation of its free trade agreement with the US. The
OECD has advised that prospects for a return to growth should be
maximised by regulatory and reform measures to reverse the declining
trend in foreign direct investment, steps to avoid any severe slowdown
in the housing market, and the adoption of reforms to boost productivity,
especially in the service sector.
27. After a brief slowdown in 2006, China’s growth has once more
accelerated to reach 11.9% in 2007, and robust domestic demand has
partly offset moderating export growth and investment. GDP growth
is likely to be around 10% during this year and 9.5% next. The current
account surplus continues to increase, although not at the same
pace given the boom in imports, recorded at US$354.7 billion in
2007 and likely to reach US$435.8 billion by 2009.
28. Consumer prices have increased sharply, at 5% in 2007, reaching
8.7% in February 2008 and expected to average 6.4% this year, its
highest level in a decade and more than double the official target.
While much of this can be attributed to food prices, official oil-product
prices are being adjusted upwards, and other costs are also growing.
In response, urban wage increases were running at around 20% in
the first part of 2007. In mid-2008, labour income was at a twelve-year
high, with wages continuing to grow faster than national income.
29. The government is making some efforts to slow the economy
down. There have been several interest rate rises, and an upward
adjustment of the currency – by a cumulative 4.5% against the US
dollar in the first five months of 2008, which the OECD points out
has been too little to ensure an effective appreciation. Efforts have
been made to restrict the money supply through commercial banks
and to sterilise the continued rise in China’s foreign exchange
reserves.
30. Tighter fiscal policies are also being pursued. Last year,
the government’s revenues grew significantly faster than spending,
and the national budget moved to a surplus of 0.7% of GDP; the social
security system’s surplus has increased, reflecting buoyant wages,
and taxes have been imposed on some energy-intensive exports, while
VAT rebates on some other exports have been removed. Altogether,
the combined fiscal surplus is estimated to have exceeded 2% of
GDP in 2007. Higher wages and inflation should provide a further
brake on the economy, denting export competitiveness. Even so, the
OECD thinks macroeconomic policies need to continue working to combat
the danger of overheating.
31. China’s economy therefore faces two opposing risks: if the
world economy slows significantly, this should help to address domestic
imbalances, but will challenge the progress of development, and
the job creation needed to overcome poverty and spur rural emigration.
But on the other hand, if the economy withstands the current slowdown,
China may be subject to significant inflationary overheating, which
would encourage short-term speculation, threaten asset prices and
undermine the balance sheets of its banks.
32. In the three decades after independence, India’s growth averaged
1.75% per year. In early 2007, it topped 10%, supported by surging
foreign investment, strong industrial output and a recovery in the
agricultural sector. Perhaps the most striking feature has been
the attitude of foreign investors, with surveys suggesting India
is now the second most-favoured FDI destination – and in the electronics
and telecommunications sectors, investment has doubled. Overall,
FDI levels have reached 20% of India’s GDP, confirming the OECD’s view
that “reforms have progressively moved the Indian economy towards
a market-based system”. However, growth slowed during 2007 to 8.5%
in the last quarter, partly in response to tighter monetary policy.
33. Nevertheless, consumer and wholesale price inflation picked
up, both reaching 8% by the spring of 2008 while the latter reached
an estimated 12.4% in August. Higher oil and commodity prices seem
likely to push the current account deficit up to 2% of GDP in 2008.
The strength of investment helped to offset a slight slackening
in consumer demand in 2007, particularly in areas reliant on credit,
as steps were taken to combat this. But as 2008 began, it was notable
that industrial production had weakened, although farm output was buoyant.
34. India’s progress in fiscal consolidation in 2006 continued
in 2007, with the combined central/state deficit falling back from
6.4% to 5.4% of GDP, with government foreseeing a further reduction
this year to 4.5%. This is a notable performance, though it should
be remembered that off-budget subsidies to oil refiners, food distributors
and fertiliser companies are not included, nor a pay award to public
sector workers due in fiscal 2008 amounting to 0.9% of GDP. The
OECD warns that the pay award, as well as debt write-offs for small farmers,
should be introduced gradually to avoid fiscal shock. Moreover,
a national value-added tax should replace current state and union
indirect taxes.
35. Meanwhile, monetary conditions have tightened during 2008,
while the exchange rate has been relatively stable against the dollar
following a 12% appreciation of the rupee in 2007. This, together
with rising inflation, is helping to widen the trade deficit. Domestic
monetary policy has aimed to neutralise the effects of ever-increasing
capital inflows and resurgent inflation, with the Reserve Bank of
India raising its benchmark interest rate three times in the summer
of 2008, to reach a seven-year high of 9% on 29 July. Even so, India’s growth
is expected to fall only slightly, to around 7.8% in 2008.
36. To improve the economy’s long-term strength, the OECD has
encouraged deficit reduction, making more room for private investment,
while tariffs should continue to be lowered and the bureaucratic
burden on business reduced. In addition, restrictive labour practices
should be addressed, promoting long-term employment, and special
emphasis should be placed upon enhancing public services, particularly
in education and national infrastructure. The OECD says that the
economy’s impressive reaction to reforms already enacted should
give policy makers confidence that further liberalisation will deliver
further growth, and speed the progress of poverty reduction.
3.3 The euro area
37. The economic recovery described in last year’s report
has slowed in 2008. From 2.9% in 2006, growth fell back to 2.6%
last year, and is expected to be around 1.7% this year, and 1.4%
next year. The June Outlook indicates a sharp fall in GDP growth
from a surprisingly high 3.1% in the first quarter of 2008, reflecting temporary
factors in Germany, to 0.2% in the second, then rising from 1.1%
in the third and 1.2% in the fourth quarters and slowly but steadily
upwards thereafter.
38. Higher interest rates, a strong currency, tighter credit markets
and rising prices had already reduced the pace of growth in 2007
and hampered retail sales in the euro area. Consumption tax increases,
particularly in Germany, also had an effect. This combination slowed
housing markets where they had been active, and exacerbated problems
in countries where the housing market had already peaked. In Ireland,
house prices have been falling since the second half of 2006, and
housing investment levels have fallen sharply; in Spain, too, the
slowdown has been severe, and accompanied by a plunge in residential
building permits. In Denmark, the Netherlands, and to a lesser extent
in France, spectacular gains of a few years ago have been replaced
by markets that are flat.
39. Investment and exports have been central to the euro area’s
recent growth. In general, these have held up well against international
uncertainty, and there have been gains in competitiveness. Investment
in Germany was particularly strong in the first quarter of 2008
and German export growth has held up well in the face of euro appreciation
and slower demand in the United States, in part because the slack
has been taken up by oil-producing countries and because of sustained
demand from the rest of Europe. Germany accounts for about a third
of all euro area exports and thus its consistent trade surpluses
help to balance the often sizeable deficits of other eurozone members
such as Greece, Portugal and Spain.
40. Additional growth for the eurozone will depend on the resilience
of domestic demand. Although demand has been dampened by tighter
credit, higher inflation and the slump in the housing market, it
will be buoyed as some (albeit slower) job creation and modest wage-growth
continue. Overall, unemployment in 2007 was at 7.4%, having fallen
from 8.2% in 2006. However, cost pressures have now increased and
growth in productivity has declined, and unit labour costs are increasing
at around 2% annually. Thus the OECD predicts that unemployment
will begin to edge up this year and next.
41. Demographic trends have been at work, however, with a decline
in workers joining the labour force. In Italy, for instance, growth
in the working age population is almost entirely due to immigration,
while in France, moderate private sector employment growth has been
sufficient to offset slower state recruitment. At the same time,
labour market participation has risen particularly strongly amongst
women and older workers, but there is evidence that a “two-speed”
labour market is still in place, with unemployment among the young
and low-skilled still very high by international standards. Therefore,
despite the overall improvement, the OECD says that further reforms
are needed, both in countries where restrictive practices are hindering
access to employment, and in those countries where tight labour
markets have begun to restrain growth.
42. Rising oil and food prices have pushed up euro area inflation.
In the OECD’s Economic Outlook,
June 2008, it was expected to reach 3.4% in 2008, before beginning
to fall back to the ECB’s 2% target, with 2.4% predicted for 2009.
The OECD sees present policy stances as appropriate, with the ECB’s
current policy interest rate at a seven-year high of 4.25%. There
is, however, an obvious need for caution in the light of the potential
effects of the September financial crisis on growth prospects, with
pressure building for a downward move on rates as inflation eases.
43. Over the period 2005-07 the recovery saw a noticeable improvement
in fiscal positions, with the structural budget deficit reduced
by 1.5%. The OECD judges that although some of the improvement was
due to structural reform, much could be attributed to cyclical revenue
increases, and warns that efforts toward fiscal consolidation need
to continue. In any event, in the cyclical downturn, the so-called
automatic stabilisers (for example, lower tax revenue, greater transfer
payments and lower imports tending to cushion demand) should be
allowed to do their work.
44. The OECD underlines that despite some improvements, many European
countries still carry high levels of structural debt – in France,
for instance, the debt ratio is at least two thirds of GDP – and
that more needs to be done if countries are to successfully confront
the demographic trend of ageing populations, a challenge that faces
Italy in particular. In this regard, it calls for rigorous implementation
of the recent pension reform in Greece, as well as comprehensive
reform of its health care system, and commends the progress made
by Portugal – where a comprehensive reform of civil servant contracts,
health and pension systems should enhance growth prospects.
45. During the remainder of 2008, the key risk for the euro area
lies in the depth and duration of the slowdown in the external environment,
particularly the US, its effect on the strength of the euro, and
on exports. These effects could be particularly serious to the extent
that they feed through into global markets and reduce demand in
emerging markets, where European exporters are particularly strong.
There is also a danger that further financial market turmoil, inflation
and credit restrictions may lead to general difficulties in obtaining
bank lending, with a knock-on effect on consumer spending and a
further deterioration in some housing markets. In response, the
OECD has suggested that euro area countries should act to strengthen
the working of the internal market, which would enhance growth prospects
and improve the working of monetary union; in addition, it would
certainly be worthwhile to review the current, fragmented, system
of financial supervision.
3.4 The United Kingdom
46. In 2007, growth was above trend levels, rising from
2.8% to 3.1%, but there has been a sharp slowdown this year, with
the OECD revising its June prediction of 1.8% for 2008 to 1.2% in
September. Indeed, the OECD forecast that GDP would actually shrink
by 0.3% in the third quarter and by 0.4% in the fourth, making it
the only OECD member state to sink into recession, technically defined
as two consecutive quarters of negative growth.
47. Strength in the service sector, and resilient domestic demand,
helped to maintain momentum during much of last year, and offset
a decline in investment and a gathering slowdown on the housing
market. But housing market activity has continued to weaken in 2008:
with tightening credit, mortgage approvals have fallen substantially,
and overall price levels have dropped, leading to a dissipation
of the house value collateral and wealth effects, and a significant
slowing in consumption growth and residential investment.
48. Despite this context, and the fact that wage increases remain
moderate, consumer price inflation has accelerated in 2008, reaching
4.7% in August, due to upward pressure from energy and food. Further contributing
factors have been the 16% fall in the effective exchange rate from
July 2007 to August 2008 and tight profit margins in the retail
sector, leading retailers to pass on higher costs to consumers.
Nevertheless, the OECD sees inflation falling back to close to target
during 2009, with the unemployment rate set to rise from 5.5% to
5.8%. To avoid inflation expectations becoming entrenched, it recommends
holding policy interest rates steady (the Bank of England maintained
its 5% rate on 4 September), although further cuts are likely to be
necessary as the economy slows.
49. The United Kingdom fiscal deficit is likely to reach 3.8%
for 2008, given a substantial slowing in tax revenues, declining
very slightly to 3.7% in the following year. With net debt perhaps
approaching 40%, the OECD warns that the government may need a much
tighter fiscal policy, so that its “golden rule” and medium-term
goals for sustainable investment can be met. To assist the housing
market, it suggests that the government should aim to streamline
planning regulations, and consider better incentives for land development.
In particular, it recommends a redefinition of “green belt” planning
boundaries, as recently recommended by the Barker Review.
3.5 Other key economies
50. The Canadian economy, having grown for several years
above potential, decelerated sharply in late 2007 as a result of
slower exports and manufacturing output. Lower external demand,
especially in the US, and a strong appreciation in the Canadian
dollar have dampened activity, and growth in 2008 should fall back
from 2.7% in 2007 to around 1.2% this year. But it is likely to
bounce back next spring to reach an annual rate of 2%, as external
factors improve and credit market difficulties are overcome.
51. Canada’s economic fundamentals in 2007 were sound, with both
employment and domestic demand strong, and income growth boosted
by sharply improved terms of trade on account of higher commodity
prices. The housing market has been in fairly good shape, with relatively
few defaults on mortgages. Tight labour markets and low unemployment
levels also boosted incomes and supported consumption – despite
a poor productivity performance and rapidly rising unit labour costs.
Inflation pressures, however, have been moderate – with sales-tax
cuts and the strengthening Canadian dollar helping to keep inflation
expectations within the central bank’s target range.
52. With the cooling economy maintaining a benign inflation environment,
the OECD believes the Bank of Canada can pursue an easing monetary
policy stance into 2009. Overall fiscal policy needs to remain prudent at
all levels of government, the OECD believes, while provision should
be made for future increased spending, as the population ages, by
setting aside windfall commodity gains.
53. Key risks to Canada’s outlook would be a prolonged US credit
crisis and slowdown, or a sustained appreciation in the value of
the Canadian dollar and a resulting decline in the external balance.
54. Mexico, too, has been affected by slowing US demand, with
growth reaching only 3.3% in 2007, compared to 4.8% the year before.
This is expected to dip further to 2.8% in 2008, before returning
to 3.3% in 2009. Domestic demand grew relatively strongly in 2007,
but the negative impact of foreign trade upon growth increased,
as imports remained strong while export growth declined, and oil
production suffered technical constraints. As a result, the current
account deficit is widening, from 0.8% of GDP in 2007 to an estimated
1% in 2008 and 2% in 2009.
55. Employment continued to expand in the formal sector until
the end of 2007, particularly in construction and services, while
the value of the peso in relation to the US dollar has been broadly
stable. On the back of soaring food prices, inflation, though, is
strongly up, at 4.6% annual rate in April 2008, above the upper
end of Mexico’s target range. The central bank therefore raised
interest rates in 2007, but has eased them in 2008, and inflation
may well surpass 4% for this year before falling back in 2009. Both
FDI and domestic investment have been performing strongly, and recent
fiscal reforms are expected to encourage this still further.
56. The key change to the tax structure has been a minimum business
tax introduced in September 2007 that is estimated to raise revenue
by about 1.2% of GDP; together with oil industry regulation changes,
this will mean an appropriate rebalancing of revenues, with the
non-oil component up substantially. A balanced budget was achieved
in 2007 and is targeted for 2008, with both revenue and spending
rising, and increased funding for infrastructure, education and
health. An infrastructure fund was established in February 2008
to encourage investment programmes beginning this year, and in March
reductions were granted in taxes and social security contributions.
57. Looking ahead, the main risk is delay in a US recovery resulting
in a durable slowdown in Mexican exports.
58. In Brazil, the rebound in growth from an earlier slowdown
continued strongly in 2007, with growth reaching 5.4%. This has
been driven by strong private demand, with increases in credit,
falling unemployment and rising wages. There has also been a notable
expansion in investment, helping to alleviate emerging capacity
constraints. As a result of higher demand, imports are now surging,
especially of capital goods and intermediate inputs, but this has
been offset by a strong export performance. Encouragingly, capacity
utilisation data and industrial production indicators have risen
substantially, suggesting structural improvements in the economy.
In line with the global outlook, however, GDP growth is likely to
slow down to 4.8% in 2008 and 4.5% in 2009.
59. Inflation has risen substantially since mid-2007 on the back
of food and energy prices. Late in 2007, a process of interest rate
cuts was reversed because of continuing demand growth, and in April
2008 the central bank pushed up its policy rate by 50 basis points
to 11.75%. Overall conditions are strong, with the currency gathering
further strength and the central bank continuing to accumulate reserves
which, at around US$200 billion, now exceed the country’s external
commitments. Measures have been taken to reduce pressure on the exchange
rate.
60. Brazil’s 2008 budget has sought to raise taxes and spending
and increase payrolls. In fact, government expenditure has been
rising strongly for some time, particularly to support increased
federal payrolls, supported by buoyant revenues. There have been
some measures to reduce the tax burden, particularly on investment, but
Brazil’s revenue-to-GDP ratio has been increasing, and restraining
public expenditure growth remains one of the country’s most pressing
challenges over the medium term.
61. Poland’s economic growth has continued to surge, reaching
6.6% in 2007, with a robust 5.9% expected this year. Growth has
been driven by strong domestic demand and foreign investment, high
government spending and falling unemployment. In fact, there have
been growing labour shortages; and with high capacity utilisation
in the economy, and increases in unit labour costs, inflation has
begun to rise. Consumer price inflation was expected to reach 4.5%
in 2008 and 5.5% in 2009. Poland’s growth may slacken in 2009, but
is likely to remain above its long-term potential, at around 5%,
with the present deterioration in the current account expected to
continue.
62. Despite recent improvements in its fiscal position, current
plans to increase spending and cut taxes put at risk the government’s
plans to bring the budget deficit down to 2.8% by 2009. In the OECD’s
view, a strict implementation of the budget plans will be essential.
It approves the government’s “50+” scheme, which aims at increasing
the participation of older workers, notably by limiting access to
early retirement schemes. Since interest rates will be the main
instrument for containing both the deficit and inflation, the main
interest policy rate is likely to reach 7% during 2008, which may
threaten the sustainability of Poland’s high growth rate, and call
into question its objective of joining the euro.
63. In the Czech Republic, growth is likely to fall back from
6.5% to 4.5% this year, as a result of higher inflation, at 7.5%
year-on-year in the first quarter of 2008, which has squeezed real
household disposable incomes. Unemployment, which was 7.9% in 2005,
is expected to be 4.6% in 2008, and 4.4% in 2009. The tightening
labour market is exerting further inflationary pressure, but other
factors have been rises in indirect taxation and the relaxation
of regulated prices. With increasing food costs, and a series of
EU-inspired tax rises being implemented, interest rates began to
rise in the later part of 2007.
64. Monetary policy is expected to contain inflation in this case,
and the rate is expected to be much lower at 2.9% in 2009, with
economic growth regaining its potential rate of around 5% in that
year. The government deficit for 2007 was lower than expected at
1.6% of GDP, despite welfare spending increases. For 2008, reforms
are bringing some uncertainty in revenues and spending, but the
government deficit is predicted at 1.5% for this year and 1.3% in
2009. The planned 2010 entry to the euro has been postponed, and
no new date has been set. In the OECD’s view, the key challenges
are to ensure full implementation of reform plans, ensure fiscal
sustainability in the face of future population pressures and to
expand labour supply and improve education in order to prevent labour
and skills shortages from hampering growth potential.
65. Hungary has faced a series of difficult challenges, particularly
over levels of public expenditure. Spending cuts, tax increases
and falling private consumption saw growth slump to 1.3% in 2007,
against 3.9% the year before, while consumer prices surged by 8%.
Manufacturing remained healthy, though, with exports up by more
than 14%, and overall economic growth is expected to pick up during
2008 to 2%, reaching 3.1% in 2009, while inflation falls back to
6.3% this year and 3.7% next, partly in response to higher policy
interest rates.
66. Indicators suggest that exports will continue to be the main
engine of growth, stimulating investment. The main challenge remains
a successful restoration of public finances, so as to provide more
room for lowering taxes and social security payments. This would
also increase the room for manoeuvre of the monetary authorities.
The government’s current plans foresee the budget deficit falling
from 9.3% in 2006 to 3.5% by 2009. Along with measures to reform
the labour market, which should reduce the grey sector of the economy, all
this should help stabilise growth in the longer term. The OECD has
warned against any rapid spending increases in the run-up to the
next elections, due in 2010.
67. Growth in Russia, which had been expected to moderate in 2007,
accelerated on the back of strong investment and high commodity
prices, reaching 8.1%. While uncertainty about energy pricing makes
forecasts difficult, the OECD expects growth to slow slightly, to
7.5% this year, and 6.5% in 2009. A crucial part of Russia’s recent
performance has been a boom in investment, which was up by 22% in
the first half of 2007, especially in the energy and construction
sectors – and while investment will remain buoyant, this level of growth
is not likely to be maintained.
68. Domestic demand, which has been boosted by rising wages and
expanding credit, is expected to advance strongly. In the last few
years, private consumption has been growing at double-digit rates
– and so, while export volumes grew at 6.4% last year, import volumes
increased by 27.3%. Unfortunately, inflation has also risen sharply,
to 11.9% in 2007, and is predicted to reach 13% this year, well
above the Central Bank’s target of 8%. Rapid money supply growth,
fiscal loosening as well as sharp rises in food prices are contributory factors.
69. The OECD says that conflict within the government over economic
policy has sharpened, some agencies favouring the intensification
of industrial policies including the creation of further state entities.
There are also pressures for greater domestic investment by the
National Welfare Fund, a sovereign wealth fund originally designed
to invest only in foreign assets, and the Ministry of the Economy
has sought a value added tax cut to boost growth. The Ministry of
Finance, however, is anxious to limit the budgetary cost of new initiatives.
The OECD sees attempts to modernise and diversify the Russian economy
as understandable, given the high volatility and lower growth stability
that often characterise resource-dependent economies. But it warns
against any “proliferation of expensive interventions which do little
more than distort markets and waste resources, while undermining
fiscal sustainability and exacerbating overheating and pressures
for real appreciation of the rouble”.
Note Thus,
long-term investor confidence will critically depend on procompetitive market
regulations and a reduction in state intervention.
70. The OECD sees the prices of export commodities in general,
and of oil and gas in particular, together with net capital inflows,
as the key to the momentum of domestic demand. But these are also
the main areas of uncertainty looking forward. The OECD considers
that Russia would be best advised to combine neutral fiscal policy
with a monetary policy more firmly directed towards price stability
and structural reform to increase growth potential.
4 Key questions relating to the financial markets
4.1 Regulation and supervision
71. Although the credit crisis emerged in the US, stemming
in the first instance from sub-prime lending, its effects have spread
rapidly – throughout the financial markets, and to markets all over
the world. This has highlighted the interconnectedness of today’s
markets, and shows how a chain of unexpected events can expose weaknesses
or shortcomings in the system, in this case triggering the collapse
of a regional bank in Germany, a bank in the United Kingdom, investment
banks, mortgage lenders and a global insurance company in the US,
and multi-billion dollar write-offs by major banks all over the
world, Understandably there have been widespread calls for action
– but what should be done?
72. Looking specifically at the origin of the turmoil, the OECD
says that while the “securitisation”, or bundling, of risk has increased
access to credit, it has proved to have some serious flaws. For
one thing, it may have encouraged the mis-selling of mortgages and
other credit – a problem which can be addressed by general regulation.
But subsequently, there is a lack of information as to where in
the system such risk is concentrated, and therefore who holds it,
plus a serious difficulty in valuing it, and therefore re-pricing
the assets involved. That combination has made the current situation
prolonged, and full of uncertainty. Even now, it is hard to tell how
long it will take, or how much will need to be written off (the
OECD has estimated this at between US$350 billion and US$420 billion;
the IMF at US$500 billion). And since it remains unclear who holds
how much debt, mutual trust and confidence have been undermined.
This restricts general credit availability, causes rumours and speculation,
and threatens even institutions which are credit worthy.
73. The OECD suggests that, as the problems encountered are fully
understood, the regulatory framework surrounding securitisation
will need to be thoroughly reviewed with a view to improving risk
management and enhancing transparency, to see whether and how it
can be prevented from failing in the future.
74. Looking forward, the OECD feels that a clear decision may
be needed on the extent to which “off balance-sheet” activities,
such as the bundling of sub-prime debt, is to be permitted. But
more broadly, how can we ensure better regulation of markets, and
more effective supervision? The OECD has a range of suggestions:
- first, it cites the need for
constant updating and revision of financial regulations, given the
speed with which markets are evolving, and new products being introduced.
This should include a continuing effort to streamline the system
of supervision itself, so that it remains integrated, connected
with regulators in other countries, and adapted to the market itself.
It notes that Canada stages a regulatory review of its entire financial
system, every five years. In conducting regulatory reviews, it suggests
that policy makers should look to the Basel Framework, which provides
accepted standards that banking regulators can use, particularly
when creating regulations about how much capital banks need to put
aside to guard against financial and operational risks;
- in some countries, specific regulations may need to be
introduced to prevent predatory lending practices, and to improve
the quality of disclosure to borrowers. Moreover, the level of charges
and fees that can be levied should be examined – as well as steps
to make them more transparent, to ensure that they are understood;
- customer compensation schemes are in general need of updating;
in many OECD countries, the guaranteed sums available are nowadays
too little to maintain consumer confidence when an institution is
in difficulties, and six OECD members have no scheme in place at
all. The consequences of this were all too clear recently in the
United Kingdom, where a small compensation scheme is in place, and
a string of emergency announcements had to be made, in an attempt
to shore up confidence in the Northern Rock bank;
- the role of credit rating agencies should be reviewed;
the current turmoil has raised many questions about their effectiveness
in assessing risk, and whether there is sufficient competition between
them.
75. It is in the interests of everyone that good regulation is
achieved. Certainly, it is in the interests of the financial sector
itself; and careful supervision is more important for governments
than ever, in an age where policy makers must steer between “moral
hazard” – the need not to reward failed institutions, in a way that
could debilitate the entire sector by removing all risk – and the
threat of disaster for distressed consumers. The political pressures
involved in such a case are acute, which leads some observers to
wonder: in an age where consumers have substantial private investments,
often made with encouragement from government, can a bank or institution
be allowed to fail at all? Judging by recent US experience, with
bailouts of Bear Stearns, Fannie Mae, Freddie Mac and AIG, together
with plans for a massive US$700 billion scheme to allow the Treasury
to buy up the financial sector’s risky and illiquid mortgage-backed
assets, the answer seems to be no, at least where there appears
to be a risk of systemic collapse and damage to the real economy.
4.2 Financial education
76. As this situation suggests, improving the quality
of financial understanding among consumers is an ever more important
topic, and it is a priority for the OECD. Market developments on
the one hand, and demographic and social changes on the other, mean
that individuals are becoming increasingly exposed to complex financial markets
and products – through home ownership, personal savings, private
pensions, etc. Yet studies across OECD countries consistently demonstrate
a low level of financial awareness and literacy – from a lack of awareness
of the need to save, to a poor understanding of the products in
which individuals invest. Also worrying is the evidence that individuals
tend to overestimate their financial literacy, whilst the most vulnerable (lower
income and education groups) often display the lowest levels of
understanding.
77. These developments raise important policy challenges: from
ensuring that even theoretically sophisticated investors really
understand the financial risks to which they are exposed, to finding
ways to ensure that the most vulnerable consumers have access to
a bank account (which is still not the case for 3%-10% of OECD populations).
The challenges are only greater for those managing developing economies.
78. The OECD’s financial education project was launched in 2003
to look at financial education programmes across OECD and selected
non-member countries, analyse their effectiveness and provide policy
support for governments and other players launching such programmes.
In 2005 the first major international survey on financial education
was published – Improving Financial Literacy –
along with a set of guidelines for financial education and awareness
drawing on international good practice. These guidelines promote
the role of major stakeholders (governments, trade unions, financial
institutions, employers, etc.) and recommend action in a number
of areas, from savings and debt management to private pensions.
79. In 2006 the G8 finance ministers recognised the importance
of financial education and called on the OECD to develop further
guidance on the topic. Good practices for financial education in
the field of private pensions and insurance were published in the
spring of 2008. Further work is also being carried out on consumer
protection regulation in the financial markets area, with a specific
focus on private pensions. The main output from this work is the
OECD’s regulatory guidelines on the protection of the rights of
members and beneficiaries, approved in 2004. The organisation is
currently focusing on policy issues related to financial education
in the area of credit. The urgent need for such education has recently
been emphasised through developments in the mortgage and credit
markets and, most notably, the sub-prime crisis. A set of OECD good practices
on financial education and awareness relating to credit will be
completed by the end of 2008.
80. As in previous years, the OECD continues to promote international
co-operation on financial education. In 2008, the organisation has
been particularly active on that front, organising three high level
conferences highlighting the importance of and developments in the
financial education field (in the US in May, Mexico in July and
Indonesia in October). To enhance information exchange and further
co-operation amongst key international financial education stakeholders,
the OECD also recently set up the International Network on Financial
Education, a platform for exchange of information, including on
emerging good practices, as well as the International Gateway for
Financial Education, which serves as the international clearing
house for financial education programmes and issues around the globe.
4.3 The rise of sovereign wealth funds
81. So-called sovereign wealth funds (SWFs) are, in essence,
government-owned or controlled investment vehicles that are funded
by foreign exchange or other assets such as natural resources. While
this concept is not new (the first such entity was the Kuwait Investment
Authority established in 1953, although Kuwait became a sovereign
state only in 1961), their number and size is growing rapidly. Six
have been established over the last five years (by Russia, China,
Qatar, Australia, Korea and Venezuela). Total reserves amongst the
funds are estimated at around US$3 trillion. Around half of this
total is held by countries that are substantial exporters of oil
and gas. With global reserve accumulation running at around US$1
trillion every year, and more funds likely to be established in
the near future, their importance in financial markets will continue
to grow.
82. According to data from the Peterson Institute for International
Economics (end 2007 or most recent available),
Note the 10 largest SWFs
are:
82.1 Abu Dhabi Investment Authority
and Council, Abu Dhabi, UAE (1976): US$500-875 billion (est.);
82.2 Government Pension Fund Global, Norway (1990): US$375
billion;
82.3 Government Investment Corporation, Singapore (1981): US$200-330
billion (est.);
82.4 Kuwait Investment Authority (1953): US$213 billion;
82.5 China Investment Corporation (2007): US$200 billion;
82.6 Reserve Fund, Russia (2008): US$128 billion;
82.7 Temasek Holdings, Singapore (1974): US$110 billion;
82.8 Investment Corporation of Dubai, UAE (2006): US$82 billion;
82.9 Qatar Investment Authority (2005): US$60 billion;
82.10 Libyan Investment Authority (2006): US$50 billion.
83. It is difficult to evaluate the exact holdings of such funds.
Each is managed according to its own rules, and some have a portion
of their holdings in domestic assets or dedicated to domestic investment,
while others have assets that are included in government reserves.
The largest, though, is clearly that of the Abu Dhabi Investment
Authority, with around a third of all funds held, followed by that
of Norway, and that of Singapore. The largest of the recent funds
is China’s CIC. Russia’s Stabilisation Fund has been split into
a National Welfare Fund and a Reserve Fund, with holdings of US$32
and US$128 billion respectively. Although China’s fund is designed
to manage assets of around US$200 billion, most of this total is
to be invested to recapitalise domestic banks, and only around US$66
billion is available for international investment.
84. Over the last few years, as these funds have grown, and been
more actively managed, their effects have become more visible. SWFs
have tended to favour high-quality, fixed-income types of investment,
which is thought to have had a general lowering effect on long-term
interest rates. Now, with signs that their focus is shifting, these
rates may tend to rise. A conservative approach has been pursued
by SWFs domiciled in OECD countries – but one involving widely dispersed
portfolios of stock as well as fixed-income paper. SWFs in emerging
countries have for some time invested part of their portfolios in
alternative investment vehicles, including real estate and private
equity (PE). If their investments move towards the stock market,
this is likely to drive up equity prices. Any such movements will
be particularly pronounced in emerging markets, where the SWFs are
currently thought to have much of their assets, and where there
is a relative lack of other investors.
85. In developed markets, SWFs have begun to make the headlines
with a series of investments announced, or under discussion, in
high-profile businesses. In particular, they have taken stakes in
those banks most in need of liquidity: by late January, these investments
had reached more than US$60 billion, with US$20 billion being invested
into Citigroup and Merrill Lynch alone. They are also focusing on
private equity, with the Abu Dhabi fund investing in the Carlyle
Group, and the UK group Apax selling a 10% stake to a collection
of SWFs. Moreover, there are indications that such private equity
firms will increasingly turn to them as sources of finance. In February,
Guy Hands of the Terra Firma group said that “as banks … are unable
to underwrite mega-deals, we will start having to raise money from
pension funds, Sovereign Wealth Funds and even the global money
markets”.
Note SWFs and pension
funds have long been the main investors into private equity. The
new development is that they appear to be moving up the value chain,
taking shares in the management companies and, increasingly, pursuing
PE strategies themselves.
86. The commercial logic of these developments is undeniable,
and SWFs can provide great benefits to international markets; indeed,
they have been a source of stability in recently volatile times,
providing much needed sources of foreign investment to many OECD
countries. According to the OECD’s April 2008 report on SWFs and
recipient country policies, SWFs “help to recycle savings internationally
and generally have a good track record as long-term investors”,
contribute to the economic development of their home countries,
and, in the recipient countries, “bring the benefits normally associated
with foreign investment such as stimulating business activity and
creating jobs”. However, the OECD acknowledges that “the growing
role of SWFs raises issues”, including “the smooth functioning of
financial markets” and “legitimate concerns in recipient countries about
protecting national security”. The OECD recognises that the problem
is aggravated by lack of transparency, and insists that “when new
actors emerge on the international financial scene, the players
need to become better acquainted”.
87. Such a situation is clearly incompatible with a commercial
environment in which the practice of good governance is a crucial
part of social development. Norway’s fund is widely seen as a successful
model of transparency; it has public codes of conduct, publishes
both its governance process and investment strategy, and guarantees
to maintain open and accessible reporting on its operations. The
highest level of transparency in a large SWF outside the OECD area
is arguably to be found in Temasek Holdings. The Kuwaiti Fund, too, makes
a significant effort to achieve transparency, and there is evidence
that other funds are responding to concerns.
88. Expectations regarding SWF disclosure need to be fair. That
is, disclosure norms need to embody comparable expectations for
comparable investors and they need to respond to the various (possibly conflicting
needs) of the individuals and organisations affected by SWF operations
(for example, host governments, investors, other stakeholders, and
home country citizens). There is certainly a case for making SWFs
subject to the same disclosure requirements as other commercial
entities, for instance in terms of revealing partners and co-investors.
But the OECD points out that any moves toward investment protectionism are
likely to be counter-productive, especially at the present time.
It is therefore in the best interests of both SWFs and potential
investment recipients to reach a level of agreement on working practices
and standards – and the OECD is one of the international bodies
now addressing this.
89. Following a request from the G7 Finance Ministers and other
OECD members in October 2007, the OECD countries and their partners
are looking at how to address these concerns without imposing unnecessary
restrictions on international investments.
90. The OECD wishes to avoid any discriminatory reaction towards
foreign government controlled investments, and maintains its long-standing
commitment to promote the freedom of investment (for example, through
its Codes of Liberalisation and the National Treatment instrument
in the Declaration on International Investment and Multinational
Enterprises).
91. Representatives of the OECD countries and their non-member
partners are therefore working on ensuring that policy responses
to national security concerns are consistent with existing national
agreements, and that any restrictions on investments are guided
by the principles of proportionality, transparency, predictability
and accountability. So far, the OECD has examined investment measures
currently in use by governments, and identified a set of core principles
to minimise their impact on legitimate activity.
92. Meanwhile, the SWFs themselves are being encouraged to improve
their governance and transparency in order to improve acceptance
of their activities. This should help to address suspicions that
their investment strategies might be as much political as they are
commercial – and that their activities might be damaging not just
in terms of external control but also to the functioning of effective
local markets.
93. There is evidence that this public debate is indeed changing
the attitudes of the SWFs. China Investment Corporation recently
confirmed that it is drafting a charter of principles, indicating
that it will be run on commercial lines and at arm’s length from
the government. In March, the US Treasury Secretary met with representatives
of Abu Dhabi and Singapore, who confirmed that their funds would
disavow “geopolitical goals”. They agreed to greater disclosure
in areas such as their purpose, objectives and returns – and to
put in place strong risk controls, and comply with the regulatory
and disclosure requirements of the countries in which they invest.
The US Treasury Secretary commented: “The US welcomes Sovereign
Wealth Fund investment and looks forward to continuing to work with
these two countries and others to support the initiatives underway
at the IMF and OECD to develop best practices for Sovereign Wealth
Funds and recipient countries.”
94. The European Commission, too, is proposing a set of principles
for transparency, predictability and accountability that would apply
to the funds as well as to donor and recipient nations. In practical
terms, these could include an annual statement of a fund’s investments
and assets, details on the size of its resources and information
on any voting rights it exercises. The President of the Commission
underlined that “we cannot allow non-European funds to be run in
an opaque manner or used as an implement of geopolitical strategy,”
though he emphasised that SWFs provide welcome investment, and should
not be seen as “a big bad wolf at the door”. Speaking in Oslo, he
described Norway’s fund as “the gold standard … we would like others
to look at your example and follow the rigorous standards you are
applying”.
95. The OECD indicates that through its Investment Committee,
member countries and other participating governments will, through
ongoing dialogue and strengthened peer surveillance, seek to help
all governments keep markets open for international investors while
also safeguarding national security. The OECD will also continue
to co-ordinate its work with that of the International Monetary
Fund and the European Commission. So at this stage, there seems
to be a good prospect that reasonable working practices can be agreed
for SWFs, without the need for draconian legislation – this is certainly
in the interests of all, and the OECD is playing an important role
in ensuring that this is possible. And it is interesting to note
that London’s private equity industry, which has recently faced
some similar concerns, moved last year to introduce a voluntary
code of conduct.
4.4 Private equity firms and hedge funds
96. There are, of course, significant differences between
the workings of private equity and sovereign wealth: private equity
is, for instance, overtly commercial in its activities, with registered
partners, and its investors are mostly wealthy individuals, pension
funds and other institutional investors. It is also very much subject
to the trends in the financial markets. But there have been questions
about the transparency of the funds themselves, and the level of
disclosure about the deals they transact.
97. In fact, pools of private capital, such as private equity
and hedge funds, have greatly increased in size in recent years
– though they remain very small in comparison to the global mutual
funds industry, and the vast majority of acquisitions are still
made between public companies. The OECD’s Corporate Affairs Division
has investigated the role which these activist investors can play
in promoting good corporate governance, and whether there is effective
oversight to ensure that company boards and management pursue objectives
which are in the interests of shareholders and other stakeholders.
98. The OECD believes that their role is generally positive. Through
engaged and informed ownership (for example scrutinising corporate
management and strategies, dividend policies and acquisition plans),
capital can be allocated more efficiently throughout the economy,
offsetting the increasing number of “passive” institutional investors.
The OECD says that company performance does appear to improve after
acquisition, and that the impact on employment is not inherently
negative, though this aspect could be further examined. It is worth
noting, too, that hedge funds have recently played a positive role
in stabilising world markets, by buying up debt that they believe
has depreciated too sharply.
99. Such investors are often accused of being short term in outlook,
driving for quick returns rather than focusing on long-term, value-creating
strategies. But the OECD points out that it is the very lack of
such strategic direction than often makes companies targets for
these groups, so that, even if they have a limited investment horizon,
their aims are likely to be compatible with good corporate governance.
The OECD’s Steering Group on Corporate Governance feels that the
corporate governance issues surrounding these investors are best
addressed within the existing OECD principles so that a separate
international code focused on them is not necessary. The principles
already cover transparency by institutional investors and the need
for a transparent market for corporate control, issues which are
frequently raised by the actions of activist hedge funds and private
equity buyouts. Effective implementation might well require regulatory
changes in some jurisdictions.
100. There is also a place for industry codes such as the Walker
Committees in the United Kingdom, which calls for semi-annual disclosure
for portfolio companies held by private equity along the lines of
that required for public companies. In addition, private equity
partnerships are also recommended to disclose more information about
themselves to the public rather than only to their investors. There
is also a set of principles covering hedge fund behaviour, including
standards for activist hedge funds regarding voting borrowed shares.
101. There is some disagreement about whether these steps go far
enough to satisfy critics, and the debate is likely to continue.
In the OECD’s view the key to policy in this area is to ensure that
the regulatory framework is up to date in areas such as ownership
disclosure and market integrity rules. Greater transparency by these activist
investors about their operations can only assist with this.
5 An update on other topics of interest
5.1 Prospects for the Doha Round
102. Like the world’s financial markets, the global trading
system has expanded hugely in recent years. Thanks in large part
to the efforts of the General Agreement on Tariffs and Trade (GATT),
and subsequently the World Trade Organization (WTO), the expansion
of world trade has provided an engine of growth that has benefited
both developed and developing countries. And as the OECD points
out, at a time of global uncertainty it is more important than ever
that free trade is adhered to and, as far as possible, expanded.
But can it be done?
103. The stakes are high. According to one analysis presented for
discussion by some of the world’s top economists in the framework
of the Copenhagen Consensus 2008, conclusion of the Doha Round could realistically
increase global income by US$3 trillion per year, over 80% of which
would go to the developing world, representing exceptionally high
cost-benefit value. The OECD has estimated gains in the service
sector, excluded from trade talks for many years, but now the fastest-growing
sector of the world economy, of up to US$500 billion. Moreover,
it sees gains of around US$100 billion, if there were full tariff
liberalisation for industrial and agricultural goods – and the same
amount again, if there were agreement on trade facilitation. Developing
countries would benefit particularly from this, reaping up to two
thirds of the benefit. And specifically, Doha offers an opportunity
to address distortions that hinder growth in the poorest countries.
Partly because they were not represented in earlier trade rounds,
tariffs are much higher on goods primarily produced by developing
countries than on those produced by wealthy countries.
104. The WTO Doha Development Round has been in difficulties for
several years. Discussions between the US and the EU have captured
the headlines, especially over agriculture, but there are many areas
of concern within the group of emerging economies too, particularly
on tariff reduction. For instance, Brazil is concerned about the
prospect of cheap manufactured imports, in particular from China.
105. Towards the beginning of 2008, there were some positive signals.
Following intensive negotiations, WTO Director General Pascal Lamy
reported to the organisation’s General Council on 5 February that
“we are on the last lap and we have now started the final sprint
towards establishing modalities. I think we have a broad agreement
on the urgency of what we are doing, and on the basic steps we need
to take to reach a deal.”
106. Draft positions were circulated, representing a measured assessment
of what tariff and subsidy reductions might be agreed, and the provisions
necessary to make them happen, forming the basis of a possible agreement.
The OECD thought that a deal was possible, noting that higher food
prices should help to reduce the arguments over agricultural subsidies.
But they emphasised that no trade round had ever been so complex,
and that concessions would be needed on all sides.
107. But while gathering economic difficulties made an agreement
more important, they also made concessions harder to accept, and
the US presidential handover was expected to delay a deal, unless
done very soon. Unfortunately, participants at the ministerial meeting
the WTO called in July failed to strike a deal. The main problem
was the insistence of India and China that they and other emerging
and developing countries should be allowed to impose prohibitively
high safeguard tariffs if a surge of agricultural imports from developed countries
threatened to overwhelm their producers. This position was rejected
by the United States and other food producing countries, so the
talks broke down.
108. In the absence of an agreement, there is a risk that the world
will increasingly proceed via bilateral and regional agreements
which, by their exclusions, will foster subtle protectionism. The
US, for instance, is making a range of bilateral deals, particularly
in Latin America, while in Asia there is talk of an “APEC only”
Free Trade Agreement (FTAAP). This would leave the WTO acting increasingly
as a centre of disputes, with global trade proceeding by litigation,
rather than legislation. The OECD therefore regards the Doha Round
as a low-cost insurance policy against the revival of protectionism
and trade wars, and urges that the key players grasp what it describes
as the “low hanging fruit” of the world’s trading architecture.
After the collapse of the July WTO ministerial negotiations, which
he said had “added significant elements to a package of potential
final results”, the OECD’s Secretary-General, Angel Gurría, urged
negotiators to “go the last mile” to a successful conclusion of
a multilateral trade agreement, “particularly at a time when the
global economy is showing signs of weakness”.
5.2 Towards a global energy crunch?
109. In recent years, many have predicted that energy
costs would moderate, or decline; instead, they have continued to
rise relentlessly, even as the outlook for global growth has diminished.
As we have seen, this is itself one of the key factors depressing
economic prospects, and a major cause of inflationary pressure.
But it is difficult to address, since there are a myriad of reasons
for continuing price rises: in part, they are an inevitable offsetting
of the weak dollar, in which oil and gas are priced, and in part
they reflect notable geopolitical uncertainty and security concerns
in the regions of the world where much of the current, and most of
the future, production will occur.
110. On top of this, as the International Energy Agency (IEA),
the OECD’s energy agency, points out, there are long-standing problems
of underinvestment. Low prices in the 1990s, political issues for
investors in producer countries and the difficulty of tapping more
remote and inaccessible fields means there is a dearth of new supply
– while despite some improvements in distribution, there is still
a lack of transport and facilities to handle the new geographical
pattern of economic activity, and environmental concerns have contributed
to a shortage of new extraction, refining and generation capacity
in developed countries. But perhaps more than anything else, it
is the long-term projection of supply and demand that is keeping
prices high: on current terms, the global energy market is likely
to remain tight for the foreseeable future. This could represent
a considerable constraint to the world economy and to the development
of emerging economies, as well as an environmental disaster.
111. According to the IEA, if governments around the world stay
with their existing policies, the world’s energy needs will increase
by more than 50% by 2030. Their latest “World Energy Outlook” points
out that, far from declining, this growth trend has actually risen
in the last year. And while energy consumption continues to increase
worldwide, the growth is most apparent in China and India, to which
the IEA report pays particular attention. In these countries, energy
use is set to more than double between 2005 and 2030. This is more
than offsetting any global trend away from fossil fuels, with coal
consumption likely to grow most rapidly, driven largely by power-generating
demand. Indeed, world coal prices have almost doubled recently.
112. On this basis, global energy-related emissions of CO2 will
rise by 57% between 2005 and 2030, with China likely to have become
the world’s largest carbon emitter during 2007, and India becoming
the third largest by around 2015. By 2030, China’s per-capita emissions
will almost reach those of the OECD’s European members.
113. At the same time, supply is likely to remain constrained.
Consuming countries will increasingly rely on oil and gas imports,
much of them from the Middle East and Russia, while net oil imports
by China and India will almost quadruple by 2030, and will exceed
the current imports of the US and Japan combined. World oil output
is expected to become more concentrated in a few Middle Eastern
countries, though further investment will be needed to secure this.
And although production capacity at new fields is expected to increase
over the next five years, it is very uncertain whether it will compensate
for the decline in output at existing fields. So the IEA believes
that in the period to 2015 a “supply-side crunch”, involving an
abrupt escalation in oil prices, cannot be ruled out.
114. What can be done to address this alarming scenario? The IEA
says that if world governments were to implement policies they are
considering today, the increase in oil demand by 2030 could be reduced
by 14 million barrels per day, equivalent to the entire current
production of the US, Canada and Mexico. Meanwhile, energy-related
CO2 emissions would level off in the 2020s and could be around 20%
lower than predicted by 2030. The key to achieving this, in their
view, is energy efficiency, which they see as the cheapest and fastest way
to curb demand and emissions, particularly in China and India. For
example, tougher efficiency standards for air conditioners and refrigerators
in China would, by 2020, save the amount of power produced by the
Three Gorges dam. Emissions of local pollutants in both countries,
including sulphur dioxide and nitrous oxides, would also be reduced
sharply.
115. But even in this case, global CO2 emissions will have increased
25% by 2030. In its “450 Stabilisation Case”, which projects a potential
long-term stabilisation of greenhouse gases at around 450 parts
per million, the IEA sees a possibility that global emissions could
peak in 2012 and then fall sharply, declining below 2005 levels,
by 2030. Savings would come from improvements in industrial efficiency,
in buildings and transport, and by switching to nuclear power and
to renewable energy sources, as well as widespread use of CO2 capture and
storage. But they warn that exceptionally quick and vigorous policy
action by all countries – and unprecedented technological advances,
with substantial costs attached – would be needed to make this case a
reality. And even this model would be jeopardised if economic growth
were faster than expected.
116. Over the last generation, the developed world – and in particular,
Japan – has made rapid progress in becoming more energy-efficient,
and in diversifying its energy sources. To meet the challenges outlined
by the IEA, this will clearly need to continue: but in addition,
there will be a need for enhanced technology, which offers new market
opportunities, and for new forms of technology transfer, which can
perhaps be seen as enlightened generosity. For the governments of
Europe, many of whom have shown leadership on these issues so far,
this should be a natural formula.
117. Launching the latest report, Nobuo Tanaka, the IEA’s new director,
said that “the next ten years will be crucial for all countries,
including China and India, because of the rapid expansion of energy-supply infrastructure.
We need to act now to bring about a radical shift in investment
in favour of cleaner, more efficient and more secure energy technologies.”
He emphasised the importance of the agency’s links with both countries,
and set further improved co-operation as one of his priorities –
and he held out the possibility of their ultimately becoming IEA
members.
5.3 Solutions for a planet under pressure
118. More than ever before, the issues of energy supply
and environmental protection are inextricably linked, and difficult
to reconcile. To meet, on the one hand, the needs of poverty reduction
and the expectation of growing populations in developing countries
for a better lifestyle, while on the other hand protecting the environment
that everyone depends on, is perhaps the greatest challenge of this
generation.
119. In March, the OECD released its Environmental
Outlook to 2030, offering an analysis of economic and environmental
trends, and exploring a range of policy initiatives to address the
key problems. “Without new policies,” it says, “we risk irreversibly
damaging the environment and the natural resource base needed to support
economic growth and well-being.” However, the report makes clear
that there are solutions, and that these are both affordable and
achievable.
120. On climate change, the environmental outlook report echoes
the findings of the IEA. The situation is increasingly urgent; some
level of global warming is already under way, and further increases
are generally agreed to be inevitable – but there is still time
to avoid the worst effects, projected to take place in the second half
of the century. The OECD Environmental
Outlook to 2030 emphasises the importance of using market instruments
such as carbon taxes, carbon-trading schemes, and removal of energy
subsidies as key to addressing climate change, together with other
instruments such as investment in clean technologies. It points out
that world GDP is likely to double by 2030, and to triple by 2050
– and that it would only cost about 0.5% of that GDP in 2030, and
2.5% in 2050, to achieve the goal of stabilising greenhouse gas
(GHG) concentrations at 450 parts per million. While new cost estimates
in a forthcoming OECD report are likely to be higher, it is still economically
rational to take action sooner as estimates for the cost of inaction
are also being revised upwards. Underlining that technology-based
efficiency policies are the least-cost approach, and will be most
effective if started immediately and with all countries participating,
the OECD Environmental Outlook to 2030 advocates using
the incentive of a global emissions price, which would start at
just over US$2 per emission tonne, and rise to over US$150 per tonne
in 2050.
121. The report looks at several areas where environmental and
energy policies have, in recent years, come into conflict. To take
one particularly hotly debated example, the report examines biofuels,
which received some US$15 billion of subsidy in OECD countries during
2007, but whose use is increasingly controversial, given pressure
upon rainforests and agricultural land. In a recent policy brief,
the OECD and IEA jointly suggested that the assumed benefits of
biofuels are actually smaller than expected, and that even these
are not being widely achieved, given the lack of regulatory and
policy frameworks. It says that further research on the economics
of biofuels, and on their wider impact, is needed; in particular,
it calls for better certification and carbon-intensity measurement
systems. Looking ahead, it calls for careful study of the potential
of the second-generation biofuels now becoming available, particularly
those that can be made from sources other than crops, such as animal
waste. In the meantime, it offers policy-reform recommendations
for governments seeking to balance these issues, particularly in
the transport sector.
122. In addition, the report addresses measures necessary to tackle
coastal flooding, and the consequent threat to major cities, and
the infrastructure on which they depend, and turns to a sequence
of environmental issues that, while often associated with climate
change, pose quite distinct challenges to policy makers. For instance:
- as the world’s population expands,
and becomes more affluent, agricultural land use will need to expand by
around 10% by 2030 under policies in place as of 2005. Therefore
agriculture will continue to be the source of greatest pressure
on biodiversity – particularly given the increasing problems of
drought and soil erosion from previous deforestation. The OECD says
that, given current policies, this will result in the loss of two
thirds of the mature forests in South Asia, a quarter of those in
China and Africa, and nearly as much in eastern Europe and Australia.
Apart from the other implications of deforestation, this will accelerate
the global loss of biodiversity, which some are already calling
an “extinction epidemic”. This has grave long-term implications
for agriculture and the pharmaceutical business, amongst others, and
runs parallel to a threatened collapse in global fish stocks, raising
fears of severe food shortages in the future;
- even as life expectancies have been rising through poverty
reduction, the negative health impacts of environmental degradation
are becoming increasingly pronounced. Air pollution, for example,
is an ever-increasing problem; on current terms, the number of premature
deaths per million inhabitants caused by “ground-level ozone” is
likely to quadruple by 2030, while premature deaths per million
linked to “fine particulates” could more than double, to reach over
3 million per year;
- by 2030, with current policies, almost half the world’s
population will be living under severe water stress – that is, 3.9
billion people, compared to 2.8 billion today. Most of these will
be living in developing countries – and while around two thirds
of the population in Brazil, Russia, India and China are currently under
medium-to-severe water stress, this will increase to 80% unless
better resource management systems are introduced.
123. The OECD accepts that there are no simple solutions to such
immense challenges. However, it believes that the application of
a mix of policies can make a significant impact, particularly if
costs are kept low by basing policy upon economic and market-based
instruments. For instance, it believes that airborne pollution could
be reduced by a third if the greenhouse gas (GHG) reduction investments
described earlier were made. As components of its favoured policy
mix, the OECD especially advocates green taxes, efficient water
pricing, emissions-trading and polluter-pay systems, realistic waste
charges, and the elimination of environmentally destructive subsidies,
such as those which support fossil fuels and agriculture. Such initiatives
must, of course, be based upon sound infrastructure investment,
to improve service and delivery, and will need to be buttressed by
technological advances. This, in turn, will make stringent regulations
and standards more meaningful, especially in the transport and construction
sectors, and will encourage investment in research and development
– although this will require that some key questions in the area
of intellectual property rights are confronted.
124. Moreover, the OECD report identifies ways to share the cost
of policy action globally. It points out that developed nations
have been responsible for the majority of GHG emissions so far,
but that by 2030 the annual emissions of Brazil, Russia, India and
China will together exceed those of all the OECD member countries. Speaking
at the report’s launch, the OECD Secretary-General said: “We must
be aware that getting it right in the field of the environment is
not only about what to do and how to do it. We also need to address
the question of who will pay for what. The global cost of action
will be much lower if all countries work together.”
125. The 2008 environmental outlook report is part of a wider focus
in this area by the OECD, which includes this year’s annual ministerial
meeting of the OECD Council, where the main topic of analysis was
the economics of climate change, and the OECD 2008 forum. As the
Secretary-General has said, “We aim to develop a sound economic
footing for the post-Kyoto architecture.” Ongoing OECD work on the
economics of climate change is to provide an input to the United
Nations Framework Convention on Climate Change (UNFCCC) Conference
of Parties (COP) 14 hosted by Poland in December 2008, and COP15
hosted by Denmark in December 2009.
5.4 Innovation strategy
126. The 2008 OECD Ministerial Council discussed progress
on the OECD Innovation Strategy launched in 2007. The overarching
objective of the Innovation Strategy is to improve economic performance
and social welfare. Innovation is recognised as a critical means
for achieving these ends. An improved understanding is needed of
precisely how innovation is contributing to this and how modern
innovation systems work in practice. The Innovation Strategy is
designed to assist policy makers in harnessing innovation to achieve
sustainable growth and development. It aims to provide sound evidence
on the changing nature of innovation, innovation ecosystems and
innovation performance as well as analysis and best practices for
the effective promotion, reporting, measurement, and assessment
of innovation. The outcome should be coherent, government policy approaches;
better targeted innovation to help meet global challenges (for example,
climate change, health and economic development); and effective
ways to encourage the creation and strengthening of human capital. A
final report on the OECD Innovation Strategy will be provided to
the OECD Ministerial Council in 2010.
127. An OECD ministerial meeting on the Future of the Internet
took place on 17 and 18 June 2008 in Seoul, Korea. This meeting,
addressed by Council of Europe Deputy Secretary General Maud de
Boer-Buquicchio, called attention to the growing importance of the
Internet for economic growth and prosperity and resulted in the
Seoul Declaration for the Future of the Internet Economy endorsed
by 39 countries and the European Commission.
Note
128. The key messages from the Seoul ministerial meeting on the
future of the Internet economy included the following:
- policies affecting the Internet
can no longer be seen as narrow sectoral policies having to do with telecommunications,
but as mainstream economic policies reflecting the fact that the
Internet has become a fundamental economic infrastructure;
- the Internet plays a critical role in the creativity and
innovation process (for example, lowering barriers, broadening collaboration
and the exchange of ideas – the essence of innovation). The OECD
will work to better understand this as a key element of its Innovation
Strategy;
- the Internet offers a huge potential to address pressing
societal challenges (for example, ICT and environment). A high-level
OECD conference on this issue will be hosted in 2009 by Denmark
in support of the UN Conference on Climate Change (COP15).
5.5 Increasing the effectiveness of development aid
129. In the Paris Declaration on Aid Effectiveness, agreed
in March 2005, the world’s key donor and recipient countries agreed
“to reform the ways we deliver and manage aid”. The declaration
made commitments to harmonise aid delivery, by strengthening national
development strategies, eliminating duplication of effort, simplifying
donor policies and agreeing common criteria and measures of performance.
Overall, it is designed to tackle what may be the critical challenge
to the delivery of the Millennium Goals, increasing the capacity
of recipients to make best use of new resources, through a process
of “country-owned change”.
130. The OECD is supporting these aims through the Development
Assistance Committee (DAC) – which brings together those countries
responsible for the overwhelming proportion of foreign aid and the
major recipients, and works in partnership with international institutions
such as the World Bank. On 14 February, the DAC launched the most
recent edition of its annual Development Co-operation Report. In
this, Richard Manning (DAC Chair from June 2003 to January 2008)
looked at the 12 measures of success that he established in 2003.
The resulting “scorecard” shows progress is being made, but there
is still a long way to go to improve the effectiveness of aid and,
in particular, the official development assistance (ODA) provided
by the members of the DAC.
131. In 2007, total ODA provided by the members of the DAC fell
to US$103.7 billion, 8.4% lower than in 2006. The fall was expected.
ODA had been exceptionally high in 2005 ($107.1 billion) and 2006
(US$104.4 billion) due to large debt relief operations for Iraq
and Nigeria. Excluding debt relief grants, ODA by DAC members rose
by 2.4%. This means that DAC members are well behind on their commitment
to reach aid levels of US$130 billion by 2010 (at constant 2004
prices). Though EU commitments are impressive, the OECD has criticised
the bureaucracy of their efforts and consequent slow rate of spending.
132. But as noted in the 2007 Development Co-operation Report,
when measured in 2002 dollars, total delivered aid has reached US$77.8
billion. Although some US$7 billion of this went to Iraq, the report
regards this total as a significant achievement, fulfilling the
first of the benchmarks set in 2002, since for many years the figure
was around US$50 billion. There is evidence of better targeting
too, with the proportion of aid going to the world’s poorest countries
rising significantly, from 40% in 2002 to 46% in 2006 for bilateral
aid, and from 47% to 49% when multilateral aid is included. Overall,
the report believes that both donors and recipient countries have
made considerable efforts to improve the quality and effectiveness
of ODA.
133. A higher proportion of aid than previously is “untied”, and
so not restricted to purchasing products and services from the donor.
Correspondingly, recipient countries have gained greater independence
by increasing their expenditure on public services, such as health
and education, and raising their own share of revenue contribution
to development projects. In these sectors, in particular, management
has improved and better results are being achieved.
134. However, as last year’s rapporteur pointed out, the bulk of
the recent aid increases have not been “programmable aid” – rather,
much of it has been in the form of debt relief. The proportion of
aid going to countries that have been good performers has declined.
While this could raise questions as to how well current strategies
are rewarding successful project management, much of the decline
is due to donors engaging more with states in fragility or coming
out of conflict. It should also be noted that while the need for
humanitarian aid – in particular in response to natural disaster
emergencies – has increased in recent years, there have been signs
of “donor fatigue”.
135. Moreover, despite the efforts of the DAC and other bodies,
the aid sector remains fragmented. With more than 280 donors (from
the Desert Locust Control Organisation for Eastern Africa to the
International Potato Centre), and emerging economies increasingly
becoming donors themselves, international efforts often threaten
to become confused. On average, a recipient country has to deal
with 18 different donors; for example, Tanzania received 542 donor
visits in 2005, and Vietnam had 791, while India has recently restricted
to six the number of aid partners it works with. There are signs,
though, that donor countries are taking this challenge seriously:
Sweden, for instance, has recently moved to sharpen its aid focus,
with a system of “delegated co-operation”, providing greater autonomy
for field management.
136. The DAC points out that such fragmentation is expensive; efforts
to reduce the “transaction costs” involved by working together –
for instance, in joint analytical studies – are currently uneven,
and thought to be saving between 12% and 80%. More can be done here,
and progress is also needed in project definition: for instance,
what is reported as “technical co-operation” still varies widely
among donors, making it difficult to measure whether there has been
progress in making efforts more co-ordinated and country-owned.
But certainly, further work is needed to align aid with local country
systems, ensure equity, and provide aid priorities and processes
that are appropriate to the context.
137. Assessing progress towards the Millennium Development Goals,
the Development Co-operation Report says that we are still awaiting
much of the definitive statistical data that we need to make positive
conclusions. The progress on the poverty goal is encouraging, though,
and if present trends continue it will be reached before 2015, thanks
particularly to the performance of China and India. Both, however,
still have hundreds of millions of people below the poverty line.
And while there are indications of accelerating and encouraging progress
on the other goals, it is still unlikely that the MDGs will be reached
by 2015 in many countries and regions. Sub-Saharan Africa, followed
by the Pacific, stand out as the regions where least progress is
visible.
138. In addition, the Development Co-operation Report sets out
a series of lessons learned from the experience of DAC peer reviews.
The DAC has also published a synthesis report, Effective Aid Management: Twelve Lessons from
DAC Peer Reviews, which identifies common measures that
appear necessary to improve the management and delivery of development
assistance by DAC members. By looking at what has, and has not,
worked in the past, these publications offer practical, first-hand
guidance, both for donor and recipient countries.
139. Since the publication of the Development Co-operation Report,
a broad alliance of development partners – developing and donor
countries, emerging economies, UN and multilateral institutions,
global funds and civil society organisations – have met at the Third
High Level Forum on Aid Effectiveness, hosted by the Government
of Ghana and organised by OECD and the World Bank, in Accra, Ghana
(2 to 4 September 2008). Participants at the High Level Forum endorsed
the Accra Agenda for Action (AAA) – a set of measures to accelerate
progress towards the Paris Declaration commitments on aid effectiveness.
Under the AAA, developing countries have committed to take control
of their own futures, donors to co-ordinate better amongst themselves,
and both parties to the agenda have pledged to account to each other
and their citizens. Key actions include:
- predictability – donors will provide three- to five-year
forward information on their planned aid to partner countries;
- country systems – partner country systems will be used
to deliver aid as the first option, rather than donor systems;
- conditionality – donors will switch from reliance on prescriptive
conditions about how and when aid money is spent to conditions based
on the developing country’s own development objectives;
- untying – donors will relax restrictions that prevent
developing countries from buying the goods and services they need
from whomever and wherever they can get the best quality at the
lowest price.
“Aid for trade”
140. The Paris Declaration emphasises that aid effectiveness
relies on encouraging local ownership, integrating projects within
national systems and strategies, and harmonising donor efforts.
This approach is encapsulated in the idea of “aid for trade”, whereby
projects are developed with the particular aim of helping countries
to expand trade so as to enhance growth prospects and reduce poverty,
and to benefit from opportunities created by WTO agreements. Broadly,
this involves projects that provide support for trade policy, regulation
and development, trade-related infrastructure, production capacity
and trade-related adjustment. This approach has assumed growing
importance in most donor programmes, and was reaffirmed by the 2005 Hong
Kong WTO ministerial declaration. Most major donors have developed
or are developing institutional remits, dedicated teams and guidelines
in place to improve “aid for trade” effectiveness.
141. In 2006, the OECD and the WTO initiated a joint monitoring
system which consists of: global monitoring of aid-for-trade flows
based on the OECD Creditor Reporting System data; and donor and
partner country monitoring, in the form of self-assessments. Last
year, the two institutions published the first global review of aid
for trade, containing data on global flows of aid for trade, and
feedback from both donor and recipient countries. The value of this
monitoring system lies in creating incentives, through enhanced
transparency, scrutiny and dialogue (that is, putting a “spotlight”
on progress), to foster synergies between trade and other economic
policy areas in developing countries, as well as improve the coherence
of aid for trade with overall aid strategies – both essential components
of an effective aid-for-trade partnership between partner countries and
donors. One of, if not the most, significant achievements of this
initiative so far is the strengthened dialogue around trade. That
is, the initiative has brought together the aid and trade policy
communities to work more closely and coherently, so as to help developing
countries benefit from enhanced growth and poverty reduction through
participating in global trade.
142. Between 2002 and 2005, donors committed on average US$21.6
billion per year on the aid categories most closely associated with
aid for trade. In 2006, total aid-for-trade commitments from bilateral
and multilateral donors rose by more than 10% in real terms, from
an average annual flow of US$20.8 billion during the 2002-05 baseline
period to US$23 billion in 2006. A large share of this increase
was spent on the funding of regional aid-for-trade programmes. Given
the large size of typical infrastructure projects, aid to support
the developments of economic infrastructure naturally dominates
overall aid for trade at US$12.2 billion in 2006; an increase by
8.6% in real terms compared to the 2002-05 baseline period. Activities
to enhance productive capacities also increased in 2006 by 8.7%
to US$9.7 billion. Technical assistance in the field of trade policy and
regulations rose by almost 60%, reaching nearly US$1 billion in
2006. It is worth noting that, while the total volume of aid for
trade amount is rising, its share of the total aid budget is actually
declining slightly, as donors place priority on social projects.
But if the recent rate of increase continues, it will deliver an
extra US$8 billion a year by 2010, with total commitments reaching
US$30 billion.
143. Large multinational and regional institutions, such as the
World Bank and the European Commission, are the largest aid for
trade donors, generally providing around 50% of their sector support
to “aid for trade” activities. Amongst donor countries, Japan, Italy
and Denmark have similar proportions. The regional breakdown of
bilateral and multilateral aid-for-trade commitments shows that
Asia and Africa receive the largest share of total aid-for-trade
flows. This is not surprising because both Asia and Africa are home
to the highest concentration of poor people.
144. The feedback provided by the report, both from donors and
recipients, suggests that aid for trade is an extremely useful way
of focusing development resources. Increasingly developing countries
are choosing to make trade a part of their development strategies.
And while many of the challenges encountered are seen generally
in the development sector, one stands out: the regional dimension.
Constraints such as poor cross-border infrastructure and bureaucracy
were frequently cited, and there were suggestions that specific
use should be made of regional bodies such as the Association of
Southeast Asian Nations (ASEAN), as frameworks for members to reach
international technical standards and establish market information
systems. There is also a general need for resources to modernise
customs facilities, and for training and skills improvement.
145. At this stage, there is little evidence on results that can
yet be translated into policy improvements, but the OECD/WTO report
is set to be updated regularly, and will provide both data and feedback
from the projects now under way. It is hoped that this report will
act as a stimulus for development, and over time will allow the establishment
of a specific set of best-practice criteria. In addition, it is
expected that the next report will focus on improving the quality
and the presentation of the global numbers by containing not only
the funding commitments made by donor countries, but also the actual
level of disbursement, developing better performance indicators
to benchmark countries’ progress, and ensuring greater partner country
involvement.
5.6 An international commitment to combat corruption
– Ten years on
146. In November 2007, the OECD celebrated the tenth anniversary
of the Convention on Combating Bribery of Foreign Public Officials
in International Business Transactions, also known as the OECD Anti-Bribery Convention.
Its signatories – currently all 30 OECD members and seven other
governments – are bound to implement a comprehensive series of legal,
regulatory and policy measures designed to prevent, and to detect and
prosecute, the bribery of foreign officials. It also requires the
confiscation of bribes and any profits involved. All parties also
agree to work together to ensure that the convention’s objectives
are met, for instance through the gathering and sharing of evidence,
and by facilitating extradition.
147. This convention has proved to be a landmark event, helping
to mobilise world opinion, and putting the OECD at the forefront
of developing anti-corruption instruments and protocols. Like the
Council of Europe, a close partner in this field, the OECD sees
corruption as the leading contemporary threat to good governance, accountability
and sustainable economic development.
148. And more than ever, it is the world’s emerging economies that
have most to lose from corruption, since they often have to work
through weak judicial structures, incomplete criminal legislation
and poor administrative-control mechanisms. In addition, many now
have to cope with a rapidly rising volume of international transactions,
as globalisation and high commodity prices bring strong growth,
and international development efforts increase in scale and complexity.
149. Indeed, the OECD’s Secretary-General has described corruption
as the “cancer of globalisation”. Speaking at the anniversary celebrations,
he paid tribute to the new anti-bribery laws and tougher sanctions introduced
by many countries over the last decade, and praised the improved
level of international co-ordination and co-operation. But he warned
that “some countries are still holding back”, and that pressure
on governments to return to “business as usual” was an ever-present
danger. “The only way to prevent this is to ensure that everyone
plays by the same rules”, he said. “We need practical measures,
and, more importantly, we need political commitment.”
150. Mark Pieth, the Chair of the OECD’s working group on bribery,
underlines that although international efforts to tackle bribery
have intensified, the problem itself is growing. In part, he thinks,
this is because of the greater sums being transacted across borders,
and in part because greater vigilance is uncovering more cases. The
convention, though, has already had a huge impact, and can continue
to do so, since its signatories are major exporters. He points out
that, not long ago, writing off bribes against tax was even allowed
in several OECD countries!
151. Strict monitoring of performance and peer review is used to
ensure that all participants implement the convention seriously.
In the first review phase, legislation is examined, and in the second,
enforcement procedures are assessed. When the working group on bribery
considers that there are weaknesses in the legislation or its enforcement,
it makes recommendations for improvements. By the end of 2006, some
27 countries had been examined, including all of the G7. Reviews
will be completed for all the remaining nine countries during 2008,
and the resulting reports are made available online.
152. The impact of such transparency is obvious: today, over 100
foreign bribery investigations are being conducted by signatories
to the convention. As Mark Pieth says, “Never underestimate the
power of peer pressure. People care. Colleagues care. Countries
attempting to justify bribery are likely to find themselves in a
minority, if not completely isolated.”
153. To increase the coverage of the convention, the OECD is urging
other countries to become signatories, with a particular focus on
emerging economies, and candidates for OECD membership are being
encouraged to take the first phase of assessment that the convention
sets out. And to mark the tenth anniversary a review of the convention
guidelines, and the experiences of those who implement them, is
being conducted, with comments invited from all stakeholders in
the process.
154. Over the last decade, the OECD has broadened the scope of
its work in this field. It has developed a range of anti-corruption
tools and expertise, particularly relating to taxation, public sector
governance and integrity, commercial governance, export credits
and development aid. But crucially, it has maintained its focus on
building participation amongst governments, since fostering genuine
political will is crucial to success in combating corruption.
155. Amongst its chief initiatives are the 2006 OECD Council Recommendation
on Bribery and Officially Supported Export Credits, the production
of a bribery awareness handbook for tax examiners, the Guidelines for
Managing Conflict of Interest in the Public Service and Guidelines
for Multinational Enterprises. This latter publication covers issues
of business ethics, international information disclosure and transparency,
and involves 39 participating governments who encourage local companies
to take part. It also includes a mediation facility (that has now
been used nearly 100 times). Most recently, the Principles for Enhancing
Integrity in Public Procurement were agreed upon to prevent corruption
in government contracts.
156. In December, the OECD was honoured by Transparency International,
the leading international NGO campaigning against corruption. Mark
Pieth was named as one of two recipients of its annual Integrity
Awards, while the OECD’s Anti-Corruption Division was “Highly Commended”
for its recent work with South Africa. Earlier in the year, South
Africa had become the first African country to sign the OECD Anti-Bribery
Convention, joining the OECD working group on bribery as its 37th
member.
5.7 An update on the OECD project “Going for Growth”
157. “Going for Growth” is an annual OECD publication
that uses comparative benchmarking to test the position of individual
member countries against a range of economic policy and performance
indicators. It was introduced in 2005, as a response to the increasing
divergence in growth rates and living standards apparent amongst
OECD members, and was designed to offer practical recommendations
that are relevant to specific individual countries, rather than
to form a competitive index.
158. Last year, the report set out five structural priorities for
each member country, and for the European Union, to improve GDP
per head – which, as discussed in a previous year’s report, the
authors regard as a good proxy for material well-being. These priorities
aim to address policies that discourage efficiency and productivity
– particularly in terms of labour and product markets, but also
relating to education, health and welfare services.
159. Overall, the report concludes that progress has been, at best,
moderate. It suggests that the economic upswing of the last few
years has generally dampened the impetus for reform, and while some
progress was made on most of the priorities, the changes continued
to be incremental. The greatest activity was seen in the area of
labour productivity, where many countries took steps to improve
education and training, to ease entry and operational controls on
business, and reduce market distortions – though agriculture remains
a difficulty. But in respect of labour utilisation, much less was
done or is, it seems, intended. Reforms of employment law to, for
instance, encourage older workers, offer flexible work or liberalise
wage-bargaining have been lacking. Only in the areas of disability
and welfare reform was much progress made, along with some measures
to encourage women to re-enter the workplace. Labour taxation is
one area where the rate of progress has been high.
160. Therefore, in the author’s opinion, the vast majority of the
priorities set out in last year’s report remain valid. In continental
Europe, where measures to improve the labour market account for
most of the policy priorities, there has been modest progress: Germany,
for instance, has reduced social charges, and is introducing health-care
reforms that will promote efficiency; in France a package of employment
reforms has been agreed between employers and unions, and Italy
has reduced the tax burden on low-skilled workers. But employment
regulation remains a challenge to growth, and the report points
out that in Spain, Greece, the Czech Republic, Luxembourg and Portugal
there has been no significant action in this area. In other regions, and
particularly in low-income countries, raising productivity remains
the key challenge, and so there the focus is on liberalising of
product markets and services (interestingly, this is also true for
Japan and Switzerland). English-speaking countries, meanwhile, tend
to have good labour market performance, but share in common the
need to raise their skills levels.
161. Specifically, it is worth revisiting some of the key topics
raised by last year’s rapporteur, and looking at the progress achieved
in a selection of the countries mentioned at that time:
- the ageing demographic profile
of many OECD members requires reforms to improve the prospects for older
workers, and to overhaul welfare and benefit systems. In Greece
and Austria, the government is consulting on some of the pension
issues raised in last year’s report, while Belgium has taken no
new measures beyond the implementation of the 2005 Solidarity Pact,
and the Netherlands has decided not to extend work capacity reassessment
to disability claimants aged over 50. Meanwhile, Norway is moving
towards more flexible retirement, from the age of 62 onwards, while
Sweden has announced measures to tighten sickness and disability
rules;
- improving the opportunities for education is also a widely
shared priority: in Germany, secondary school exams are now almost
universal, while Australia has increased secondary funding and established
new technical colleges, and the United Kingdom is raising the school-leaving
age, and developing new vocational diplomas. While no specific action
has been taken in Italy, the Greek Government has enacted a comprehensive
university reform bill, as in France, where university funding has
been raised and autonomy increased, though student fees have not
been increased. Austria has not moved to increase tertiary education
fees, instead planning exemptions for those undertaking social work;
- many countries were advised to raise the level of competition
and access to services in network industries such as energy and
telecommunications. Australia has announced a new national operator for
electricity and gas, while encouraging the privatisation of local
providers; in Greece, too, the energy regulator has been strengthened,
while liberalisation of the electricity and gas markets is under
way. In the Netherlands, full ownership separation of the energy
distribution networks and supply companies will be implemented this
year, and competitive tenders are being introduced for public transport.
162. In addition to its benchmarking exercise, this year’s “Going
for Growth” report contains a series of special studies:
- the first of these has involved
the creation of a standardised database to measure working hours,
so as to examine the wide variation in hours worked across the OECD,
from nearly 2 400 per year in Korea, to less than 1 400 hours in
the Netherlands. In particular, the study suggests that such variations
account for a “sizeable fraction” of the gap in per capita income
levels between the US and Europe.
The average employed person in the US works 41 hours per
week, says the study, and has two weeks off per year, while the
average European works 38 hours per week, with four weeks off. About
half of this difference is accounted for by a shorter working week
in Europe, and by statutory caps and regulations, which have a particular
impact on men. In addition, it observes that marginal tax rates
are higher in Europe on average than in the US, and finds that differences
in marginal tax rates account for part of the difference between
the US and European countries in the number of hours worked. In
particular, the higher marginal tax rates have an especial disincentive
effect on second-earners in a family, most often women. Greater
union power, it says, is associated with fewer hours worked for
men, but more hours worked for women. Of course, the average figures
given hide wide variations between European countries, though it
seems that much of this is explained by the level of part-time working:
the Netherlands has the highest part-time workforce on the continent,
at some 45%.
Taken overall, it is striking that the position has changed
dramatically since the 1970s, when Europeans worked much longer
hours than in the US. While US figures have remained relatively
stable over time, there has been a fall of around 25% in the western
European average, so that US workers have been working longer hours
since the early 1990s. Interestingly, the OECD thinks that much
of this change can be attributed to shorter hours worked by part-time
employees, since the hours worked by full-time employees, conventionally seen
as the core of the workforce, have not fallen to nearly this extent.
This analysis suggests that European countries have two mechanisms
available in order to raise the number of hours worked. On the one
hand, working could be encouraged among part-timers, particularly women,
if some countries (for example, the Netherlands and Germany) were
to lower effective marginal tax rates – although the report accepts
that specific social implications would need to be taken into account.
And on the other hand, reducing the regulations and caps upon fulltime
employment, which particularly applies to men, would also have a
significant impact. “Policy setting in these areas may in many cases
have gone too far from a welfare perspective,” the study concludes,
“and where this is the case, reforms may raise not only GDP per
head but also overall welfare.”
- in
addition, the report examines means for improving investment in
higher education. It points out that this sector is widely under
pressure, due to rapidly expanding numbers of students, and that
the justification for “near-free” public funding is not clear cut.
It points out that students come disproportionately from affluent
backgrounds, are increasingly internationally mobile, and stand
to enjoy an income premium, across OECD countries, of between 30%
and 100%. The report suggests mechanisms for increasing investment,
including higher student contributions and the provision of a mix of
loans and grants, while preserving or enhancing equality of access.
It also offers further possible directions for reform, involving
more autonomy in student selection and staff policy, more reliance
on independent evaluation, and funding based on outputs rather than
inputs. In addition, it sees potential for shorter and more diversified
courses, to provide a more flexible response to individual learning
needs;
- a further study looks at the impact of economic geography,
and the so-called “death of distance” that some see as having resulted
from new technology and globalisation. The report finds that, while telecommunications
costs have fallen sharply and the Internet has had some impact,
there is little evidence that the cost of transporting goods has
fallen relative to their price. Overall, it says, the impact of
distance on the structure of trade has not declined over time. Indeed,
“distance to market” continues to significantly affect the GDP per
head of a country – with an adverse effect of perhaps 10% to countries such
as Australia and New Zealand, and a beneficial effect of perhaps
6% to countries such as Belgium and the Netherlands. At the same
time, it notes that large natural resource endowments can have a strong
positive impact on GDP per capita, estimating this at around 8%
in the case of Norway, and 2% in Australia;
- in its final study, “Going for Growth” reviews the nature
of international trade in services, and current levels of domestic
regulation. It points out that services are often sheltered from
competition in OECD economies and that, despite attempts to liberalise
this sector, international trade in services has, in recent decades,
barely increased relative to trade in goods. Although formal barriers
to services are rare in OECD countries, the report points to a wide
array of local regulations, which restrict the entry of foreign suppliers
and make it harder, and sometimes prohibitively expensive, for domestic
suppliers to compete in markets abroad.
163. The report contends that if all OECD countries were
to move to the lowest levels of trade-impeding regulation currently
seen amongst members – such as those in Australia, Canada and the
United Kingdom – the overall trade in services could rise by around
90% on average, and by 140% in those countries that are currently
most regulated, such as Italy, Hungary and Turkey. The increase
in GDP per head as a result of these gains could be around 2% on
average and around 3% in those countries that are currently most
restrictive. And the report says that there is perhaps still more
potential than that, since “heightened competition could strengthen
these gains dynamically by encouraging innovation”.
164. At their Ministerial Council in Paris on 4 and 5 June, OECD
ministers reaffirmed their appreciation for the OECD’s work on the
political economy of reform, based on methods of evidence-based
comparative analysis and peer review. They expressed the wish that
the OECD continue to provide analysis and increase support to governments
in the domestic reform process.
165. To quote from the summary drawn up by the Chair, French Economy
Minister Christine Lagarde: “The Chair began by presenting the reform
strategies she deemed effective in the light of her own experience, emphasising
the timetable and simultaneous implementation of reforms. Mexico,
Slovenia and Sweden offered lessons on the political economy of
fiscal and labour market reforms. In the informal discussions, Ministers found
that presenting a balanced ‘package’ of reforms was often helpful
in gaining public acceptance and overcoming resistance from special
interest groups. They agreed that advisory mechanisms, such as ad
hoc commissions, were particularly useful in designing an ambitious
reform programme. Ministers highlighted the importance of conveying
a clear message speaking directly to citizens, in order to increase
understanding of the case for reform. They pointed out that the
approach to reform depended on country contexts. In many cases,
building broad coalitions transcending political majorities can
be instrumental for successful implementation.”
5.8 A renewed impetus for OECD enlargement
166. Global involvement and outreach to non-member countries
has been an integral role of the OECD since its foundation. At that
time, OECD member countries made up the overwhelming share of global
trade and GDP, but in an era of globalisation this position is,
of course, shifting – though its 30 members still produce nearly
60% of the world’s goods and services. For some time, the OECD has
been engaged in an enlargement process, and since the mid-1990s,
six new members have joined. In May 2007, this process entered a
new phase when the organisation decided to invite Chile, Estonia,
Israel, Russia and Slovenia to open discussions for membership,
and to offer “enhanced engagement”, with a view to possible membership,
to Brazil, China, India, Indonesia and South Africa and to expand
the OECD’s relations, including through enhanced engagement, with
selected countries and regions of strategic interest to the OECD,
with priority given to South-East Asia.
167. The accession process is complicated, and can be time-consuming,
since it involves detailed assessments of a candidate’s policies
and governmental framework, and their adherence to OECD standards and
benchmarks. The accession discussions with the candidates have been
launched in accordance with the accession road maps established
by the OECD Council. The rapporteur would urge the OECD to reserve membership
for those countries which fully respect democracy, human rights
and international law.
168. “Enhanced engagement”, meanwhile, is intended to achieve the
direct and active participation of each partner in the work of the
organisation. It provides a mix of several elements, tailored to
the country itself, and including committee participation, economic
surveys, adherence to instruments, integration into the statistical reporting
and information systems, sector-specific peer reviews and other
policy dialogue initiatives. This is intended to be mutually beneficial,
providing assistance to the enhanced engagement partner in its policy reform
efforts, while also strengthening the OECD’s work. It builds on
the substantial co-operation efforts that the OECD has made in recent
years, such as the OECD-China programme, launched in 1995; in fact,
today there are 25 non-member countries and economies participating
regularly in a wide range of main committees and working groups.
Reporting committee: Committee on Economic Affairs and Development.
Reference to committee: standing mandate.
Draft resolution adopted by the enlarged committee on 30 September
2008.
Members of the committee: Mr Márton Braun (Chairperson), Mr Robert Walter (Vice-Chairperson), Mrs Doris Barnett (Vice-Chairperson), Mrs Antigoni Papadopoulos (ViceChairperson),
MM. Ruhi Açikgöz, Ulrich Adam, Roberto Antonione, Robert Arrigo
(alternate: Mrs Marie-Louise Coleiro
Preca), Mrs Veronika Bellmann, MM. Radu Mircea Berceanu,
Vidar Bjørnstad, Luuk Blom (alternate: Mr Tuur
Elzinga), Predrag Bošković, Patrick
Breen, Mrs Anna Maria Carloni, Mr Erol Aslan Cebeci, Mrs Elvira Cortajarena Iturrioz, MM. Valeriu
Cosarciuc, David Darchiashvili, Joan
Albert Farré Santuré, Relu Fenechiu, Zahari Georgiev, Francis Grignon, Mrs Arlette Grosskost
(alternate: Mr Alain Cousin),
Mrs Azra Hadžiahmetović, MM. Norbert Haupert, Stanislaw Huskowski, Ivan Ivanov, Igor Ivanovski, Jan
Jambon, Miloš Jevtić, Ms Nataša Jovanović, MM. Antti Kaikkonen, Serhiy Klyuev,
Albrecht Konečný, Bronisław Korfanty, Anatoliy Korobeynikov, Ertuğrul Kumcuoğlu, Bob Laxton,
Harald Leibrecht, Ms Anna Lilliehöök, MM. Arthur
Loepfe, Denis MacShane, Yevhen Marmazov,
Jean-Pierre Masseret, Miloš Melčák,
José Mendes Bota (alternate: Mr Maximiano
Martins), Mircea Mereuţă, Attila Mesterházy, Alejandro
Muñoz Alonso, Mrs Olga Nachtmannová,
Mrs Hermine Naghdalyan, Mr Gebhard Negele,
Mrs Mirosława Nykiel (alternate: Mrs Danuta
Jazłowiecka), Mr Mark Oaten, Mrs Ganira Pashayeva (alternate: Mr Sabir Hajiyev), Mrs Marija Pejčinović-Burić, MM. Viktor
Pleskachevskiy (alternate: Mr Nikolay
Tulaev), Claudio Podeschi, Jakob Presečnik, Maximilian
Reimann, Roland Ries (alternate: Mrs Josette
Durrieu), Andrea Rigoni, Mrs Maria
de Belém Roseira, MM. Rafael Salas Machuca (alternate: Mrs Maria del Carmen Quintanilla Barba),
Giuseppe Saro, Mrs Gitte Seeberg, MM. Samad Seyidov, Steingrímur
J. Sigfússon, Leonid Slutsky, Serhiy
Sobolev, Mrs Aldona Staponkienė, MM. Christophe Steiner,
Vjačeslavs Stepanenko, Vyacheslav Timchenko, Mrs Arenca Trashani,
Ms Ester Tuiksoo, MM. Miltiadis Varvitsiotis (alternate: Mr Aristotelis Pavlidis), Oldřich
Vojíř, Konstantinos Vrettos,
Harm Evert Waalkens, Paul Wille, Mrs Gisela Wurm, Mrs Maryam Yazdanfar.
Canada: Senator Prud’homme
Japan: Ms Kaneko
Korea: Ms Song, Ms Bae
Mexico: Mr Buganza Salmerón, Senator Jiménez Macías, Mr Soto
Sánchez
NB: The names of the members present at the meeting are printed
in bold.
See 33rd Sitting, 1 October 2008 (adoption of the draft resolution,
as amended); and Resolution
1629.
