1. Background
1. On 30 September 2009, the enlarged Parliamentary
Assembly of the Council of Europe will meet in Strasbourg for its
annual debate on the work of the OECD. Prepared specifically for
that debate, this report focuses on the economic aspects of its
work and is based mainly on information provided to the rapporteur
and to the Committee on Economic Affairs and Development by OECD
staff in June, as well on the results of the OECD’s Ministerial
Session on 24-25 June and on its mid-year Economic Outlook and September
interim revision. The revised provisional draft resolution will
be submitted for adoption at the meeting of the Enlarged Economic
Committee to be held on 29 September, and the resulting draft resolution
will be voted on by the Enlarged Parliamentary Assembly following
the debate the next day. It should be noted that parallel reports
are being prepared this year by the following committees: Social,
Health and Family Affairs; Culture, Science and Education; Migration,
Refugees and Population; Environment, Agriculture and Local and
Regional Affairs. These committees will also propose additions,
where appropriate, to the provisional draft resolution.
2. The rapporteur wishes to express her gratitude to all at the
OECD who have helped in the report’s compilation. In a period of
extraordinary economic drama, this has been a fascinating and thought-provoking task.
It has also demanded some caution, given the uncertainty attached
to forecasts and predictions at this time. Bearing that in mind,
the paper offers an overview of the factors driving economic circumstances
and a summary of developments in OECD member countries and other
key emerging economies.
3. Naturally, the report focuses on the OECD’s efforts to help
address the global downturn. It examines the OECD’s co-operation
with the G20, including action on tax havens. It assesses the specific
challenges faced by developing countries and discusses the OECD’s
priorities for a sustainable recovery.
2. Introduction:
prospects for the world economy
2.1. A synchronised
recession, extraordinary in speed and scale
4. In last year’s report, the rapporteur suggested that
prospects for the world economy were finely balanced, between what
the OECD called a “relatively benign” outcome and a darker scenario,
whereby a global credit crunch might feed through into domestic
markets, causing a global slump: “the fat tail to the downside”.
Last September, with the collapse of Lehman Brothers, the world
economy moved rapidly down this latter path, and by December the
OECD talked of being “on the verge of a protracted recession of
a magnitude not experienced since the 1980’s”. In an interim Economic
Outlook, published in March, the OECD downgraded its forecasts,
citing “the deepest and most synchronised recession in our lifetimes”.
5. Why did this happen, and with such remarkable speed? In essence,
the recession was triggered by a near-meltdown in global credit
markets, caused by excessive lending to high-risk areas, such as
low-income mortgages in the United States, using complex financial
products which were little understood, for which risk controls were
inadequate and whose scale and concentration have been disastrous.
But the recession’s ferocity was then driven by a sudden decline
in private demand, across all markets but especially in those countries
that had been most consumer-oriented, as sentiment gave way under
a combination of factors: the ongoing credit squeeze and uncertainty
as to its duration, continuing declines in property values and a
dramatic fall in stock prices, and a fundamental loss of confidence,
at first relating to retail banking and mortgages, but increasingly
driven by fears of unemployment, and even doubts as to the ability
of governments to manage the situation. All this exacerbated the
collapse in world trade.
6. This sudden recessionary shock has been all the more severe
because, unlike in previous recent downturns, no region has been
able to escape its effects, and thereby act as an engine for recovery.
In part, this is due to the integrated, globalised nature of today’s
trading system, and especially the power of global credit markets.
But as such, it is also associated with the imbalances that have
arisen in recent years between “consumer” economies, such as the
United States, the United Kingdom and Australia, and “saver” economies, such
as China and Japan. For some time, the OECD has been warning that
this makes global growth dangerously dependent on the confidence
of a relatively small number of consumers, and on a great deal of borrowing.
On top of that, many governments failed to use the years of buoyant
revenues to correct their fiscal positions, leaving them with little
room for manoeuvre in the face of the recession and significant
debt problems to come.
7. The scale of the slowdown has been astonishing. OECD-wide
economic activity fell by -7.8% in the fourth quarter of 2008 and
-8.3% in the first quarter of 2009. After two decades of almost
unbroken growth, a -16% fall in world trade is expected this year,
and growth of only 2.1% is suggested in 2010, which will imply continuing
recession for many countries. Accordingly, unemployment in the OECD
area, which was 5.6% in 2007, will reach 9.8% in 2010; over the
same period, fiscal deficits will worsen from -1.4% to -8.8%, while the
“output gap”, which measures demand versus production capacity,
will go from a positive 1.7% of GDP, suggesting supply constraints
which tend to force up prices, to -5.8%.This heralds near-zero inflation
and, in some countries, deflation.
2.2. Signs of a slow
policy-induced recovery, posing new challenges
8. However, the OECD considered in its June Economic
Outlook that the recession was approaching the bottom, although
the recovery was likely to be “weak and fragile for some time” and
the negative economic and social consequences of the crisis would
be “long-lasting”. Nevertheless, the growth projections published
in that issue had been revised upwards since the previous issue
“for the first time since June 2007”. Apparently, the lessons of
the 1930s having been borne in mind, the response to the crisis
has been broadly correct. Heavy intervention in financial markets
averted disaster, and brought an element of stability, while interest
rates were brought to near-zero and a range of monetary “easing”
policies introduced to address credit shortages. In particular,
the stimulus packages put in place by most OECD members and some
other major economies had a positive impact, with the measures announced
for the period 2008-10 likely to amount to some 3.5% of OECD-wide
GDP, according to the March Interim Report.
9. A policy-induced recovery is therefore likely to gather pace
during 2010, with the United States and China – which both have
substantial stimulus programmes – leading the way. Indeed, the latest
(for July 2009) OECD “composite leading indicators” (which attempt
to indicate turning points in economic activity approximately six
months in advance) pointed to stronger signs of recovery in most
of the OECD economies. Clear signals of recovery are now visible
in all major seven economies, in particular in France and Italy,
as well as in China, India and Russia. The signs from Brazil, where
a trough is emerging, are also more encouraging than in June’s assessment.
10. All this suggests that the worst is probably behind us – but
“on the way out it looks as if recovery will take hold in a staggered
manner across countries” and it is too soon to be confident that
further shocks will not, once more, transform the picture. The very
scale of recent declines should make us wary of predicting a straightforward
rebound, and a host of challenges will remain in the aftermath of
the crisis, which will leave the global economy vulnerable.
- The financial system, while
fairly stable, has not fundamentally recovered, and the issue of
“toxic assets” remains; significant further action will likely be
necessary. When this is achieved, governments will be left with
a host of emergency measures that will need to be unravelled if
it is once more to drive global growth.
- Many governments will be left with a combination of hugely-inflated
deficits, high unemployment and deflationary pressure. There is
a risk of rising protectionism in the context of a “deflationary
recovery”, in which growth rates are stubbornly low; or conversely,
this may be countered by a burst of inflation that secures short-term
growth but forces up interest rates and creates a whole new set
of economic problems.
- As mentioned above, the boom of recent years was founded
on growing imbalances between consuming and saving nations. If the
recovery is based solely on persuading those consumers to spend again,
this pattern is likely to continue, increasing the likelihood of
a recurrence. Similarly, the place of developing countries in the
world trading system needs to be addressed, if they are not once
again to be at risk of the disproportionate difficulties seen during
this slowdown.
11. To amplify these points, we will take a brief look at the
specific circumstances in the world’s key economies, as seen through
the lens of the OECD’s experts. We will then assess in more detail
how the OECD has actively engaged with the challenges posed, and
look at the solutions it is promoting, to help the world economy
to emerge in good long-term health.
3. A survey of selected
economies
3.1. The Americas
12. In the United States,
consumer demand (representing about 70% of economic activity) has
been crucial to sustaining growth during the last few years, even
as house prices fell drastically. But with the addition of the credit
crunch, reduced stock values and sharply rising unemployment, consumer
confidence suddenly collapsed in the United States, with GDP shrinking
by -6.3% in the final quarter of 2008 alone, and -5.7% in the first
quarter of this year. But this rate of decline has slowed dramatically
(to -1% in the second quarter), so that the United States’ economy
is projected to contract by only around ‑2.8% this year, and should
achieve growth by early 2010 if not before. Unemployment, however,
will continue to surge, from 5.8% in 2008 to 9.3% this year, and
10.1% in 2010. This will have a dampening effect on consumer spending,
down by 1.2% in the second quarter of 2009, while the savings rate,
close to nil before the crisis has risen to 5.2%, the highest since 1998.
13. In the OECD’s view, the projected recovery will be largely
attributable to the Federal monetary policy and fiscal stimulus,
which represents some 2.1% of GDP in 2009 and 2.4% in 2010. As long
as commodity prices remain low, there is thought to be little threat
of inflation – in fact, deflation is more likely, given that a wide “output
gap” is emerging, as production capacity outstrips demand. To tackle
this, the Federal Reserve will want to maintain its near-zero interest
rate stance. The OECD underlines, however, that once a recovery
is in place, it will need to move promptly to reverse this so as
to restrain inflation. For the present, the OECD would like to see
the announcement of an inflation target to more firmly anchor inflation
expectations. With the deficit already projected to reach 11.2%
of GDP in 2010, once the projected recovery takes hold, the Federal government
will need to undertake a stringent overhaul of its finances.
14. It is worth remembering that the key to securing a recovery,
in the United States and beyond, lies in ensuring stable financial
conditions and normal flows of credit. Despite recent improvements
in financial markets, the measures of the Financial Stability Plan,
including “stress tests” for the major banks, and the Public-Private
Investment Program, the OECD believes that government may still
need to inject public funds in pursuing the systematic restructuring
and recapitalising of banks and other financial institutions encumbered by
bad assets. Financial supervision and regulation need further improvement.
Overall, the financial system remains fragile.
15. For Mexico, with around
20% of its economy geared to exports to the United States, the effect
of lower demand has been acute. GDP shrank by -8.2% during the first
quarter, and though lower oil production was partly responsible,
manufacturing exports fell by -22.8%. The influenza epidemic will
also have contributed to the downturn, with its negative effects
on businesses and tourism. Despite the sharp drop in demand, however, inflation
has remained relatively high, mainly because of a lag in adjustment
to lower world prices. This has limited the central bank’s scope
for lowering interest rates. With Mexico likely to see its weakest
economy since 1995, government spending has been increased by some
13%, and a fiscal deficit is expected this year and next. With monetary
and fiscal stimulus, and world activity reviving, the OECD projects
that demand should stabilise, with quarterly growth rates becoming
positive towards the end of 2009 to reach an annual rate of some
4% by the end of 2010.
16. Since late 2008, exports from Canada have
also fallen sharply, as have all forms of household spending, especially
on housing. GDP fell by 5.4% in the first quarter of 2009, although
the decline has slowed since then. This year the economy is likely
to contract by -2.6%, stabilising in 2010. The unemployment rate
was 8.7% in August, and is expected to stabilise at just below 10%
in 2010. Authorities have taken action to support financial markets
and stimulate the economy through expansionary measures and monetary
easing, with the Bank of Canada, for example, lowering its policy
interest rate to 0.25% and committed to holding that level until
the end of June 2010 on condition that inflation follows the expected
path. Given the strong fiscal position established in recent years,
the OECD says there is scope for further stimulus, should economic
conditions warrant. However, lower tax revenues and increased government
spending measures will result in a large general government deficit
for the first time since the mid-1990s.
17. In the case of Brazil,
the OECD feels that the current policy mix is supportive, and current
monetary easing policies can be continued for the time being; there
is, however, little room for further fiscal initiatives, given the
pressure on domestic credit markets. Having grown 5.1% last year,
the economy is likely to contract by around -0.8% this year, before
resuming growth of 4.0% in 2010. Despite sharp decelerations in
the last quarter of 2008 and first quarter of 2009, by mid-year
industrial production was expanding and retail sales were particularly
resilient. Domestic demand was poised to gather momentum in the
second semester.
3.2. Asia
18. The speed of decline in demand from the United States
and in world trade generally has had a severe impact in the world’s
second largest economy, Japan, where
GDP is likely to decline by some -6.8% this year, and deflation
has returned. A collapse of -34% in Japanese exports has been exacerbated
by a strong (25%) rise in the value of the yen; and as corporate
profitability declined, stock prices halved. Business confidence plummeted
causing a major cutback in investment plans. However, there are
signs that the trade-induced contraction is close to the end, thanks
not least to fiscal stimulus. Nevertheless, recovery is likely to
be slow and there is uncertainty on the policy that will be implemented
by the newly elected government.
19. By 2010, unemployment is expected to reach 5.7%, and deflation
will remain unchanged at -1.4%; private consumption will remain
weak as the decline in wages that began last year accelerates. The
four government fiscal stimulus packages introduced since August
2008, amounting to 4% of GDP, will help to soften the length and
depth of the recession, taking growth into positive territory from
the second half of 2009, although at a rate under 1% through 2010.
Performance could be more positive if overseas markets were to recover
sharply.
20. Although the OECD supports the fiscal stimulus packages already
introduced, it suggests that there is little scope for additional
measures, with Japan’s budget deficit set to increase from 3% of
GDP in 2007 to about 10% in 2010 and the debt ratio projected to
approach 200% in that year, the highest ever recorded in the OECD area.
In the OECD’s view, the government should focus on fiscal consolidation
as the economy stabilises, maintaining the commitment to a primary
budget surplus, and should pursue pro-growth tax and social insurance
reforms, accompanied by structural reforms, especially in the service
sector, in order to improve living standards in the context of a
shrinking working-age population. Meanwhile, the Bank of Japan should keep
interest rates close to zero and maintain measures to increase liquidity
until underlying inflation is firmly positive.
21. Korea, whose economy
is highly-geared toward exports, suffered a -5.1% GDP fall in the
last quarter of 2008 compared to the previous quarter, and exports
declined at an annualised rate of -31% at the end of the year. However,
this decline was reduced by half in the first quarter of 2009, thanks
in part to a depreciation of the won, but has by no means been reversed
since. Nevertheless, it appears that the economy has bottomed out,
with overall reported growth of 0.1% in the first quarter and 2.3%
in the second, as fiscal stimulus took effect. Unemployment rose
from 3.2% in the fourth quarter of 2008 to 4% in June 2009, and
the consumer price index dropped from 5.9% in August 2008 to 1.9%
in June 2009 over the previous year’s figures. The key to continued
recovery will be the resumption of export growth, not least to China.
Combined with the ongoing fiscal stimulus, this is projected to
increase output growth to about 4.5% by late 2010.
22. China’s output growth
slowed throughout 2008, and GDP growth fell back to 9% from 13%
in 2007. This year 7.7% is expected. With private consumption and
investment reacting positively to the stronger economic situation
expected to result from monetary and fiscal stimulus and improvement
in the global trade environment, growth next year is projected at
9.3%. Significant stimulus has been applied, including an investment
plan valued at 5.6% of GDP over 2009-2010, parts of which relate
to projects already in the pipeline such as reconstruction following
the 2008 earthquake. About one-third (1.6% of GDP) will be financed
through the central government’s 2009 budget. The total increase
in central and local government spending attributable to stimulus
spending this year is estimated at 2.6% of GDP. In addition, value
added tax rebates on exports and investment have been raised, at
a cost of 0.9% of GDP, although this will be partly offset by the
introduction of a 20% tax on petroleum products. An increasing number
of indicators suggest the recovery is already underway in China,
though risks remain, in particular that of deterioration in the
quality of bank loans if expansion of lending continues unabated
to fuel increasing investment spending and consumption.
23. Growth in India, which
had approached 10% in 2006, is likely to be around 6% this year
and 7.2% in 2010. Although the rate of decline in exports has eased,
lower overseas demand will continue to offset rising domestic consumption.
The government introduced a new stimulus package at the beginning
of 2009, following sizeable increases in public spending in 2008.
The result is a total public sector deficit estimated at -11% of GDP
in 2009. The OECD sees the deterioration in the fiscal position
as reducing the scope for further discretionary fiscal policy action.
The OECD sees a need for tighter fiscal discipline, a speeding up
of structural reform and increased sales of public assets. Although
interest rates have been eased, allowing the stock market to stabilise,
the OECD sees further room for monetary easing. It also warns against
the growing use of protectionist measures.
3.3. Europe
24. In June the OECD projected that the euro area economy would contract
by -4.8% this year and pick up only gradually in 2010, as financial
markets improve and the full effects of stimulus policy are felt.
Inflation is expected to remain low, at about 0.7%, compared to
0.5% this year and 3.3% in 2008. From 7.5% in 2008, unemployment
is projected to jump to 10% this year and 12% in 2010.
25. Europe’s manufacturing powerhouse, Germany,
is expected to suffer a fall of -18.9% in exports this year; GDP
will decline by -6.1%, and will barely grow next year, as unemployment
reaches 12%. This will mirror unemployment in the euro area generally,
which will rocket from 7.5% last year to 12% in 2010. The outlook has
slightly improved since June. Figures released by Eurostat at the
end of July showed a slightly lower than expected increase in unemployment
although a greater than expected fall in inflation. European figures
also showed that the contraction in manufacturing and services had
slowed markedly. Business confidence increased and the euro rose
against the US dollar. Signs of stabilisation and recovery were
strongest in Germany, reflecting better export prospects.
26. Member states have so far introduced measures equal to more
than 1% of GDP in 2009, and rather less next year. Additional stimulus
is coming from the automatic stabilisers (eg. unemployment benefit)
which are relatively large in the euro area, as well as from measures
to support the financial sector. The OECD warns that fiscal deficits
and debt ratios are rising rapidly. The euro area budget deficit
is projected to rise to 5.5% of GDP in 2009 and 7% in 2010. All
member states need to make credible plans for fiscal sustainability
and to end stimulus measures once recovery is deemed sufficiently
robust. Nevertheless, additional fiscal stimulus measures could
still be undertaken if necessary by those countries which have budgetary
scope. In addition, given the disinflationary trend, the European
Central Bank (ECB) is recommended to use quickly their remaining
scope for cutting interest rates, and to introduce quantitative
easing policies. Around Europe, stimulus activity varies widely.
Germany has undertaken support equivalent to over 3.75% of GDP in
2009-2010. The OECD also underlines that, to protect its medium-term
growth prospects, the European Union as a whole must safeguard its
internal market, and liberal external trade and investment regimes.
27. Having fallen by -1% in 2008, GDP growth in
Italy is expected to decrease by
-5.2% in 2009, with minimal growth forecast for 2010, according
to the OECD. Italy has been particularly hard hit by the contraction
in world trade, with a projected fall in exports of -20.9% in 2009,
and this together with deteriorating financial conditions, despite
a relatively healthy banking system, has considerably reduced investment.
Given its weak underlying fiscal position, Italy has refrained from
additional discretionary fiscal spending while stimulating domestic demand,
notably private consumption, within the framework of the existing
budget. Unemployment benefit has been extended and support has been
increased for low-income families. The OECD points out that economic performance
can be enhanced over the long term by both macroeconomic and structural
policy reforms.
28. In France, stimulus
measures amounting to 1.3% of GDP have been put in place, focusing
on investment in infrastructure and liquidity support for small
and medium-sized firms. Moreover, further measures including tax
concessions should moderate the contraction in domestic demand.
In March the OECD predicted the economy would shrink by about -3%
this year, recovering only slowly to 0.2% in 2010, but output in
the second quarter of 2009 rose by 0.3%, according to provisional
figures released by the French INSEE, and in September the OECD
revised its forecast for 2009 upwards to -2.1%. With the government
deficit already set to reach around 8% next year, a clear medium-term
plan to return to fiscal sustainability is called for. On structural
reform, the OECD believes that one priority must be to increase
the employment rate, forecast to rise from 7.4% in 2008 to 9.7%
in 2009 and 11.2% in 2010. A second priority is to increase the
competitivity of firms in order to halt a continuing erosion of
market share in world trade.
29. Nowhere in the Euro area are the employment effects of the
crisis more visible than in Spain,
where the unemployment rate is projected at 18.1% for 2009, rising
to 19.6% in 2010. Young unqualified workers are particularly affected,
with the rate exceeding 33% in April 2009. With output expected
to fall by 4.25% in 2009 and a further 1% in 2010, the government
is implementing budgetary stimulus equivalent to about 2% of GDP this
year, including a programme to boost investment spending by local
governments, abolition of the wealth tax and accelerated payment
of tax credits. The general government’s budget balance is expected
to reach 9.5% of GDP in 2010, when most central government measures
designed to stimulate the economy are likely to be withdrawn.
30. The United Kingdom is
experiencing severe recession, with output projected to decline
by 4.3% in 2009 and recover only sluggishly in 2010. In the second
quarter of 2009, GDP fell by 0.8%, giving a year on year figure
of 5.6%. The sterling depreciation has not been sufficient to offset
the decline in demand for exports. Unemployment is expected to rise
to 9.7% in 2010, while wage growth and inflation are falling. With
its policy rate at near zero, the Bank of England has undertaken
quantitative easing, which should help cushion the recession, although
its scope remains uncertain. The pressure on government finances
is very acute. For while net debt levels were only 2.7% in 2007,
the structural balance has been deteriorating for some time, and
with the demands of economic stimulus (around 1.6% of GDP in 2009),
and support for the financial industry, the deficit is set to reach
12.8% this year and 14% next year. The government’s room for manoeuvre
in responding to future shocks is therefore limited, and the OECD
calls for it to “continue to develop its fiscal consolidation plans,
within a strong and credible medium-term fiscal framework”. The
OECD believes that financial conditions are still unfavourable,
and that although they have improved in 2009, “economic recovery
will require restoration of the financial system and the supply
of credit.” There is also considerable uncertainty surrounding recovery
of the housing market.
31. In Hungary real GDP
contracted by an annualised 7.2% in the fourth quarter of 2008 and
9.6% in the first quarter of 2009. Monetary policy however has remained
tight in the face of loss of confidence in the forint, specifically
related to the large foreign currency loans held by households and
the recession in the euro area export market. The situation has
been improved by the provision of $25.5 billion in loans from the
World Bank, IMF and European Union, but a painful process of fiscal
consolidation is in prospect. Unemployment is projected to reach
11.7% in 2010. The OECD considers that the main downside risk to
recovery “is that the parliamentary elections scheduled for 2010
lead to excessive public expenditures, triggering a confidence crisis”.
32. The collapse of its three main banks in October 2008 deepened
the contraction of domestic demand already under way in Iceland. Consumers slashed spending,
residential and business investment as well as imports fell drastically,
credit dried up, unemployment shot up as well as consumer price
inflation in the face of the collapse of the currency. Iceland entered
into a $2.1 billion loan agreement with the IMF with a view to stabilising
the exchange rate, restoring normal activity and returning public
finances to a sustainable path. Exchange controls on capital account
transactions were imposed and the official policy interest rate
was raised to 18%, subsequently reduced to 12%. The OECD considers
that restoring the smooth functioning of the banking system is the
top priority. On 20 July the Icelandic Finance Ministry announced
a plan to recapitalise all three of the banks, all of which had
been nationalised.
33. The economy in Russia,
which had slowed to 5.6% growth last year, will see contraction
of -6.8% this year, undermined by a collapse in oil prices and massive
capital outflows, leading to a 30% cumulative depreciation of the
rouble and tighter monetary policy. The government meanwhile introduced
fiscal stimulus measures amounting to about 3.5% of GDP (but only
approved by the Duma in April 2009) which will support demand through
the rest of the year. These included some tax cuts and increase
benefits to address the social impact of the crisis, but expenditure
was mostly geared to support for firms, which may hamper competition and
efficiency, in the OECD’s view. Commodity prices have rebounded
and capital outflows were reversed in the second quarter of 2009
for the first time in a year, raising the probability of a resumption
of growth. However, banks have curtailed lending and the banking
sector remains fragile. Seeking to restore banking confidence, the
government introduced a recapitalisation plan totalling $4.8 billion
in 2009 and $10 billion in 2010. The fiscal balance has moved from
a 4.8% surplus to a -6% deficit. The OECD suggests that the fiscal
stimulus measures should be implemented quickly, in particular for
social protection and active labour market policies. Further resort
to protectionist measures should be avoided, not least in the context
of Russia’s prospects for joining the World Trade Organization.
34. Ukraine is heavily dependent on foreign
credit, and its main export is steel. In the summer of 2008, as credit
markets froze and commodity prices plunged, its currency lost 40%
of its value and banking confidence collapsed. By early 2009, GDP
was falling by an annual equivalent of 25%, while the greater part
of a stabilisation loan had been frozen by the IMF, due to domestic
political disagreements. With the loan now restored, a start has
been made on financial restructuring, and consumer confidence is
showing small signs of recovery. There has also been a recovery
in steel production, helped by the lower exchange rate. On 3 August 2009,
the European Commission announced that the European Bank for Reconstruction
and Development (EBRD), the European Investment Bank (EIB) and the
World Bank had agreed to lend Ukraine about $1.7 billion to pay
its gas bills to Russia and to modernise its natural gas transit
system.
3.4. Problems of middle
income economies
35. Six Council of Europe member states (Albania, Armenia,
Azerbaijan, Georgia, Moldova and Ukraine) fall into the category
of Lower Middle Income Economies (LMIE) defined by the World Bank
as those whose 2008 Gross National Income per
capita was between $976 and $3855, while eleven (Bosnia
and Herzegovina, Latvia, Lithuania, Montenegro, Poland, Romania,
Russia, Serbia, the Former Yugoslav Republic of Macedonia and Turkey)
belong to the category of Upper Middle Income Economies (UMIE),
with per capita GNI between $3856
and $11905. Of the non-European countries mentioned so far, China
and India are in the first category, Brazil and Mexico in the second.
Mexico, Poland and Turkey are already member states of the OECD,
an organisation usually thought of as made up of the high income
advanced industrial countries, while Chile, an upper middle income
economy, and Russia are on the path to membership, and Brazil. China,
India, Indonesia and South Africa, all middle income countries,
enjoy an “enhanced engagement” relationship with the OECD.
36. The impact of the global crisis has been particularly severe
on the middle income countries, many of which had recently been
showing strong growth, although Asian middle income economies have
now rebounded strongly and are likely to emerge from the crisis
earlier than OECD countries. One key problem has been an imbalance
in the degree of exposure to international currency markets. In
many countries of Eastern Europe, for example, budget and balance
of payments deficits were financed to a large extent by contracting external
debt, especially private foreign currency loans. This has made these
countries more vulnerable to capital outflows and reductions in
foreign direct investment. The middle income countries may thus
be more vulnerable to the effects of the global recession on their
exports. They may need more advice on the lessons to be learned
from previous crises, for example placing too much emphasis on exports
and not enough on domestic demand. Nor should it be forgotten that
these countries represent models for the future trajectory of developing
countries.
37. Most of the middle income economies that are Council of Europe
member states are countries of operations of the EBRD. However,
since non-European middle income countries, as well as developing countries,
also come within the remit of the OECD, it could well intensify
its coverage of European middle income economies in its analyses
and recommendations.
4. Core areas of OECD
activity
4.1. The OECD’s response
to the crisis and beyond: for a stronger, cleaner, and
fairer world economy
38. When the leaders of the G20 gathered in November
2008 and in April this year, the outlook for the world economy was
particularly bleak. The OECD credits the agreements and declarations
issued at these summits with helping to begin the process of restoring
confidence, and it supports the G20 pledges to restore confidence,
growth and jobs, to strengthen the financial system, promote global
trade and investment and to reject protectionism, so building an
inclusive and sustainable recovery for all. Indeed the OECD has
been closely involved in framing the response to the crisis and
helping to shape the global economy that emerges from it, not only
at the various meetings of the G20 but also at its own Ministerial
Council Meeting held in Paris on 24-25 June 2009 and at the G8 held
in Italy in July. The OECD is continuing to work on challenges to transform
the current policy-driven recovery into self-sustained growth, with
its Strategic Response presently focussing on six pillars: (i) Short
term assessment and exit strategies, (ii) Long term growth (including
fiscal sustainability and assessment of stimulus packages, innovation,
SMEs and green growth), (iii) Employment and social issues, (iv)
Market openness, (v) Finance, competition and governance, and (vi)
Development issues. These are also key priorities expected to be
at the centre of G20 Leaders’ discussions in which the OECD has
been invited to take part.
39. The OECD believes that reforms need to ensure that such a
crisis cannot recur, but without stifling the ability of markets
to raise, allocate and measure the success of capital, on which
so much of recent world prosperity has depended. It believes that
emergency measures taken so far should be kept under review so as to
monitor their contribution to stabilisation and a balanced, sustainable
recovery. The distorting potential of government-sponsored enterprises
and guarantees should also be monitored and adjusted as necessary
so as not to impede the recovery of markets. Past financial crisis
have indeed told us that recoveries were delayed when competition
enforcement was relaxed. The OECD sees several overall priority
areas for governments and regulatory bodies.
- To bring the lingering financial crisis to an end, restoring
market confidence and enabling bank lending. This is likely to mean
removing toxic assets and promoting bank recapitalisation, even,
if necessary, via temporary nationalisation.
- For those countries that can prudently do so, to continue
monetary and fiscal stimulus as long as the recovery has not taken
hold.
- Avoid disguised protectionism in the form of support and
subsidy to domestic enterprises.
- Once recovery is secured, authorities will need to act
swiftly and decisively to reverse many of the emergency measures
that have been taken.
40. In December 2008, the OECD launched its
Strategic
Response to the Financial and Economic Crisis, which
was fed into the G20’s work. This has been revised since and a detailed
report on this strategy was presented to the OECD Ministerial Council
Meeting in June. Here are some of the key points from the report synthesis:
41. The OECD acknowledges that “the response to the crisis has
been impressive for its magnitude, intensity and degree of global
co-ordination”. The crisis “has also confirmed the need to involve
all major players in global economic governance. However, these
are only the first steps of a process towards a more sustainable
global economy. More needs to be doneand
the emphasis must shift to a medium- to long-term perspective. The
global economy must move from a policy driven recovery to self sustained
growth. Just as important is the need to tackle the consequences
of rising unemployment which could yet turn the economic crisis
into a major social crisis.”
42. The OECD believes that “once the recession is over, the global
economy should not go back to business as usual, as past practices
have proven to be unsustainable. Governments must already begin
to address the issue of how to exit from the exceptional measures
they have taken, on several fronts, to face the crisis. To do so,
they will have to ask not only how or when to exit, but also towards
what to exit.” The OECD sees the post-crisis global economy in terms
of growth that is:
Stronger…
43. There should be “better regulation of financial markets,
a healthy balance between markets and government, and policies to
promote more innovative long-term growth in a more balanced global
economy. Global imbalances should not be allowed to widen as in
the past. Addressing them requires looking at both a macroeconomic
and a structural dimension. Excess investment over savings in some
countries also reflects excessive debt issuance. And, excessive
savings in others reflect a high degree of risk aversion due to
the lack of adequate social protection. A sustainable growth environment
requires addressing these underlying factors in the global distribution
of saving and investment. This in turn requires structural and medium
term policy action in addition to macroeconomic adjustment to be
undertaken in a co-ordinated framework.”
Cleaner…
44. “The crisis offers the opportunity to put the global
economy onto a low carbon growth path, in line with ongoing efforts
to mitigate climate change. Governments should seek out “win-win”
opportunities that are good for both economic recovery and for the
environment. Growth going forward should also be smart and more knowledge-intensive.
To be sustainable and equitable, it must also be supported by a
transparent environment with strong co-ordinated initiatives to
fight corruption, tax evasion, bank secrecy, and promote more transparency
and a level playing field in investment.”
And fairer…
45. There should be “more effective trade, investment,
and development policies, strong social frameworks and a common
global governance structure based on co-operation between developed
emerging and developing countries with more opportunity and less
inequality. Open markets remain a fundamental principle of well-functioning
economies. The dramatic, generalised and very rapid fall in trade,
if not reversed, undermines the activity of dynamic firms that operate
in the tradable sectors, where productivity growth is higher, with
potentially disruptive consequences on the global value chains.
Open markets remain a key driver of growth as well as of innovation
diffusion. Protectionism would be a very serious mistake. The poor
and the most exposed to the risk of exclusion should not be left
out. Growth must be socially sustainable and based on increasing
employment. Unemployment breeds poverty and curtails long term growth.
Social pressure caused by rising unemployment could exacerbate protectionist
pressures.”
Finance, competition and governance:
priorities for reform and strategies to phase out emergency measures
46. The OECD says that in order to restore public confidence
in financial markets incentives should be put in place to encourage
a prudent balance between risk and the search for returnin banks and other financial institutions.
Allowing for variations between countries, urgent strategic priorities
for policy reforms include streamlining the regulatory framework,
emphasising prudential and business conduct rules and strengthening incentives
for their enforcement; stressing the integrity and transparency
of markets, including disclosure and protection against fraud; reforming
capital regulations to ensure much more capital at risk (and less
leverage) in the system than in the past; avoiding impediments to
international investment flows; strengthening governance of financial
institutions and ensuring accountability to owners and creditors
with capital at risk, and, once the crisis has passed, allowing
people with capital at risk, including large creditors, to lose
money when they make mistakes; strengthening understanding of how
tax policies affect the soundness of financial markets; and improving
education and consumer protection programmes.
47. The OECD rightly points out that, while stabilizing the economic
and financial situation will take time, once this occurs governments
should begin the process of exit from the unusual support measurestaken in tackling the crisis.
As recovery will be fragile, it should not be jeopardised by a precipitous
withdrawal of support measures. Getting the exit process right will
be more important than speed, the OECD says. Again, clear guiding
principles should be established early on. For example, the time-line
for exit (including a full sell down in government voting shares)
should be conditional in part on progress with regulatory reforms
such as those mentioned above. Level competitive playing fields
should be re-established and support eventually withdrawn. Viable
firms restored to health should be expected to operate on a competitive
basis in the market place. Support should not be withdrawn precipitously
but should be priced on an increasingly realistic basis. As adequate
pools of equity capital become available, state-owned or controlled
financial firms should be privatised. The bad assets and associated
collateral that remains in governments’ hands should be managed with
a view toward recovering as much for the taxpayer as is feasible
over the medium term. Public confidence in private pension systems
and their financial soundness should be reinforced.
Public governance challenges
48. The nature of the current financial and economic
crisis highlights on a global scale the unique role of government
in serving the public interest and directs renewed attention towards
the institutions, policies and tools that help governments deliver
what citizens and businesses need and expect. With government revenues falling
due to the economic downturn and public expenditures rising given
greater public investment, there is less money available for other
government spending. This often impacts the national and sub-national
capacity to provide public goods and services. Meanwhile, higher
unemployment levels and scarce job opportunities increase demand
for a variety of public services, including unemployment welfare
benefits, labour adjustment programmes, education (e.g. retraining
and skills improvements), health care, etc. As a result, attention
is turning to the role of the public sector and the value for money
it offers. The quality, flexibility and effectiveness of the public
governance systems within a country are central to how rapidly and
satisfactorily administrations can move to implement necessary changes
or advance reform programmes in order to meet such needs. However,
through work undertaken for the OECD’s Government
at a Glance it has become increasingly evidentthat countries struggle with this
issue.
49. While the main cause of the current financial and economic
crisis was the failure of the financial markets, regulatory gaps,
and lack of transparency coupled with poor levels of integrity also
played a part. Governance issues is not a phenomenon solely driven
by the current crisis and many OECD countries have advanced work in
developing and revising their governance institutions, frameworks
or tools as part of broad reform and changed agendas. Thus, the
fallout of the current economic crisis has largely acted to shine
a spotlight on aspects of governance or governmental institutions
where further changes may be needed, or where additional consideration
may be required on how best to give real effect to reform efforts.
The OECD’s Public Governance Reviews,
while still at an early stage, have demonstrated the links between
strategic planning, institutional arrangements, tools, and capacity
to ensure the smooth functioning of a country’s public governance frameworks
(institutions, public management, public administration) and sustainability
of public administrations. These comprehensive reviews help countries
assess how their institutional frameworks and governance arrangements
are performing from an international comparative perspective, in
terms of: their ability to deliver on government objectives, in
particular from a whole-of-government perspective; and their preparedness
to meet current and future challenges.
50. A clean recovery needs to proactively promote a level playing
field and fair competition in government contracting. In addressing
these issues enhanced transparency, good management, accountability
and control throughout the entire procurement cycle—from the definition
of needs to bidding, contract management and payment—is crucial.
Actions taken today will have a lasting impact as public funds are
used to renew public infrastructure and invest in new technologies
in the future. To restore and maintain confidence, governments are
expected to prove their accountability for every cent of taxpayers’
money spent as part of the stimulus packages. The OECD Principles
for Enhancing Integrity in Public Procurement, approved in the form
of a Recommendation in October 2008, provides a policy instrument
to guide governments in preventing waste, fraud and corruption in
public procurement. In 2011, OECD countries will report on progress
made in implementing this Recommendation.
Maintaining open trade and investment
51. The OECD warns that although governments have largely
resisted protectionist pressures so far, the dangers of trade and
investment protectionism call for continued vigilance,. Many governments
have adopted measures to earmark public investment and subsidies
for specific sectors. Under some programmes, they attach conditions
that may discourage either trade, particularly imports, or investment
flows. If such measures are not carefully designed, there is a risk
of a drift toward discriminatory policies that could prejudice a
return to sustainable growth.
52. Trade agreements and OECD investment instruments allow governments
a certain flexibility when responding to crises. However, they also
require that such measures should not unduly damage other countries’
interests.
53. Meanwhile, multilateral trade negotiations remain stalled.
The OECD urges countries to strengthen their efforts to conclude
the Doha Development Agenda in 2009 not only for the benefit of
the developing world but also for the systemic health of the global
economy.
54. As far as preserving freedom of investment is concerned, the
challenge is for governments to use their crisis response powers
to address economic and social problems while minimising barriers
to inward and outward foreign investment.
Aligning stimulus measures with
long term growth
55. The OECD emphasises that governments’ macroeconomic
and structural policies should be consistent with three broad objectives:
supporting high potential growth, avoiding unsustainable payment
imbalances, and ensuring fiscal sustainability. The timing and composition
of fiscal stimulus measures should be alignedwith these objectives.
56. The OECD reminds us that the need for additional discretionary
fiscal stimulus varies across countries because automatic stabilizers
(e.g. unemployment benefit) operate more powerfully in some economies.
In this context, the biggest constraint on introducing additional
fiscal stimulus is the reaction of financial markets to greater
government borrowing needs.
57. The OECD makes a number of recommendations on stimulus packages.
First,
crisis measures should not be allowed to undermine competition.
Secondly, action should be co-ordinated in order to allow it to generate
a larger overall output effect than if any country acted alone.
Thirdly, the OECD again underlines that many of the emergency measures
taken could pose a threat to long-term growth and sustainability
if not properly unwound. Measures should be temporary and the least
distortive possible, with a clear and credible plan for phasing
them out (exit strategies) as recovery takes hold. Fourth, governments
should announce a clear commitment to long term fiscal sustainability
in order to strengthen the credibility of the medium term fiscal framework.
Fifth, credible fiscal consolidation plans may require tax reforms,
including the broadening of tax bases and better tax compliance
to ensure sustainable revenues. Indeed, as economies emerge from recession,
it is likely to be necessary to raise additional revenues, and permanent
cuts in expenditure will have to be implemented. Two further important
OECD policy recommendations are the need to focus on “double-dividend”
measures (which can at the same time support the economy in the
short-term and boost potential output in the long-term); and the
necessity to improve spending efficiency.
Tax measures
58. In the OECD’s view, growth-oriented tax reformsshould usually involve shifting
revenue from corporate and personal income taxation or social security
contributions to consumption and property taxes, including housing
taxation. However, any tax policy would need to take account of
its impact on income distribution, given that the poor should have
particular consideration during an economic recession. Tax cuts
that benefit workers with modest incomes can improve living standards
by increasing their disposable income and giving them a greater
incentive to work.
Labour, social and education
measures
59. The OECD believes that subsidy schemes designed to
expand labour demand should be temporary and well targeted, while
early retirement options should be avoided. Countries with weak
unemployment benefit systems may wish to consider extending their
coverage and the maximum length of their benefit schemes during
the recession. Expanding effective active labour market programmes
would be important to maintain the activation stance. But it may
be difficult to match the rise in job seekers with greater resources
for public employment services, not least because it takes time
to recruit and train good case managers. Thus, there may be opportunities
for co-operation between public and private employment agencies
to provide a range of contracted-out activation services.
60. Macro-economic responses by governments are vital, but action
is also needed at the local level to tackle job losses and return
economies to prosperity. Strategic thinking is required locally
to provide foundations for the creation of sustainable employment
which provides opportunities for progression and accessibility.
There should be a better integration between labour market policy,
training and economic development. Public programmes must be made
sufficiently flexible so that they can be targeted to relevant groups
and adapted to local conditions. Stronger emphasis is required on
building local intelligence to inform policy implementation.
61. There should also be support for education and training that
enables the transition to new jobs and emerging opportunities, as
well as policies to help young people in their transition from school
to work. Migrants should be fully integrated into the labour market
components of stimulus packages. In this regard, the OECD Labour
and Employment Ministerial Conference of 28-29 September 2009 represents
a key opportunity to discuss how labour market and social policies
can best help workers and low-income households weather the storm
of the current jobs crisis.
Pensions
62. In view of their vulnerability, pensions could be
part of economic stimulus packages. The OECD recommends that governments
should strengthen safety nets to prevent increased old-age poverty,
that there could be different investment portfolios and shift to
riskier assets near retirement in private (defined-contribution)
plans, while longer periods could be allowed for employer (defined-benefit)
pension funds to recover.
63. The OECD reminds governments that they should not resort to
early retirement or disability schemes in an attempt to stem the
increase in unemployment. On the contrary, some countries propose
to raise the pension age to help pension-scheme finances.
Infrastructure investment
64. According to OECD, most economic stimulus packages
focus on improving the national infrastructure, mostly through public
works. Such infrastructure includes roads, railways, public transport,
airports, water and sanitation, child-care facilities, schools and
universities, hospitals, energy networks and security, and broadband
communication infrastructure. Infrastructure projects should consider
taking account of such principles as the following:
- Projects should be advanced
enough in planning to be implemented quickly and effectively in
a period of crisis. Priority should be given to modern projects
with the most potential to raise the efficiency of energy and resource
use, and which support long-term environmental sustainability.
- Investment in high speed broadband communication networks
should be accompanied by regulatory frameworks which support open
access and competition in the market. Such investment should also
aim at stimulating the use of ICT to secure economic and social
benefits such as training and job searching.
- Spending should mobilise idle resources, especially vulnerable
groups at greater risk of falling into the unemployment trap such
as relatively unskilled young people, women and older workers.
Green growth
65. One of the OECD’s main messages for ending the crisis
is that of “green growth”, which was the object of a special declaration
adopted by OECD Ministers on 25 June.
The essence of this message is that economic growth and environmental
goals, e.g. reducing greenhouse gas emissions, can and should go
hand-in-hand. Thus there are opportunities for mutually reinforcing
policies in pursuit of both objectives in the long-term. For example:
(i) green tax reform (shifting the tax base away from labour and
capital towards pollutants or polluting activities) and auctioned
pollution permits that generate revenues - they are good for the environment
and also contribute towards the goal of fiscal sustainability; (ii)
reforming or removing inefficient policies, especially subsidies
to fossil fuel production and consumption - with the added benefits
of removing inefficiency in resource allocation in the economy,
pushing the green agenda and saving governments and tax payers money;
and (iii) removing barriers (e.g. market and information failure)
to greater energy and transport efficiency.
66. In addition, many of the “green” investments in infrastructure
in the stimulus packages are directed towards increasing public
investments in energy efficiency of buildings, public transport,
renewable energy networks, more efficient water treatment supply
and sanitation, as well as infrastructure to prevent flooding, and
other environmental risks and degradation. These can contribute
to increased environmental quality, and seize the opportunity of
the crisis to spur public infrastructure investment to contribute
a low carbon economy. Meanwhile, some elements in stimulus packages,
such as new road building and auto-scrapping programmes, might be
carefully assessed for their potentially negative environmental
impacts.
Promoting innovation
67. The OECD, which is developing an Innovation Strategy
for the 21st Century,
points
out that the crisis has already had a negative impact on innovation
through its effects on investment, finance, trade, entrepreneurship
and employment.
R&D expenditure by businesses as well as patent applications
have moved in parallel with GDP, slowing considerably during the
economic downturns of the early 1990s and early 2000s.
68. Innovation, says the OECD, is one of the keys to coming out
of the recession and putting countries back on a path to sustainable
growth. Many governments have incorporated measures to strengthen
innovation in their stimulus packages, and could also take further
action to improve their long-term potential for innovation.
69. The crisis has highlighted widely acknowledged market failures
in the financing of innovation. Such investment is now considered
even more risky than before and some of the longer term investment
in new technologies has been particularly affected. Moreover, stimulus
measures offer an opportunity to put available resources for innovation
(notably skilled labour) to good use.
70. In supporting private investment in innovation, the OECD warns
that care should be taken to ensure that government spending provides
good value for money; the less promising innovation projects are
typically abandoned first by the private sector and the OECD sees
no reason to revive these with public money. The OECD advises that
policies in this context could include focusing public support on
research and innovation most affected by the crisis; better use
of public-private partnerships; encouraging investment in research infrastructure,
which can contribute both to stimulating demand in the short term
and supply in the longer term; and using open and competitive public
procurement to support R&D, especially where it contributes
to solving social challenges.
71. Governments also need to focus on medium to long-term actions
to strengthen innovation. As discussed in the OECD’s Interim Report
on the Innovation Strategy, a broad range of policy reforms will
be needed in OECD countries to respond to the changing nature of
the innovation process and strengthen innovation performance to
foster sustainable growth and address key global challenges.
Entrepreneurship and industrial
renewal
72. The OECD also advises that in changing their approaches
to innovation, governments should also consider how best to support
risk-taking, such as investment in innovative start-up companies.
Regulatory reform of financial markets to address the financial
crisis could look at the role of venture capital markets and the
securitisation of innovation-related assets (e.g. intellectual
property) which are key sources of financing for many innovative
start-ups. Moreover, new business opportunities and the reallocation
of resources from declining activities towards emerging opportunities
are vital to recovery. The OECD points out that governments will
need to avoid locking-in old economic structures and business models.
Governments can prepare for the next phase of innovation-led productivity
growth by encouraging the entry and expansion of new businesses
or the exit or re-orientation of existing businesses facing difficulties.
SMEs are playing an increasing role in R&D, chiefly at the local
level. More attention needs to be devoted to identifying and fomenting
entrepreneurship skills linked to innovation processes.
SME and Entrepreneurship Financing
73. The OECD points out that access to financing continues
to be one of the most significant challenges for the creation, survival
and growth of Small and Medium-sized Enterprises.
The problem has been strongly exacerbated
by the financial and economic crisis.
74. The OECD therefore advances a number of policy recommendations
designed to tackle long-standing deficiencies in the SME financial
environment by, for example, strengthening their relationships with
banks, improving their access to micro-finance, improving SMEs’
and entrepreneurs’ information and competencies in the field of
finance; improving knowledge of the situation of SMEs and entrepreneurs’
financing; exploring ways to facilitate the establishment of “business
angel networks” which may greatly enhance information and capital flows;
increasing entrepreneurs and SMEs’ involvement in relevant finance-related
policies and programmes from the outset to ensure that their perspectives
and needs are well understood and taken into account.
4.2. Countering tax
evasion and corruption
75. As was pointed out by OECD officials during the meeting
of the PACE Committee on Economic Affairs and Development on 19
June 2009, although tax havens were not the cause of the financial
crisis, their effect is to divert tax revenue from the governments
of the countries where the income or savings arises. In an effort to
protect public finances and financial systems, the G20 Summit in
London on 2 April 2009 agreed to transparency and exchange of information,
and to "take action against non-co-operative jurisdictions". The OECD
defines a tax haven in terms of specific criteria as follows:
“Four key factors are used to determine
whether a jurisdiction is a tax haven. The first is that the jurisdiction
imposes no or only nominal taxes. The no or nominal tax criterion
is not sufficient, by itself, to result in characterisation as a
tax haven. The OECD recognises that every jurisdiction has a right
to determine whether to impose direct taxes and, if so, to determine
the appropriate tax rate. An analysis of the other key factors
is needed for a jurisdiction to be considered a tax haven. The
three other factors to be considered are:
- Whether there is a lack of transparency
- Whether there are laws or administrative practices that
prevent the effective exchange of information for tax purposes with
other governments on taxpayers benefiting from the no or nominal taxation.
- Whether there is an absence of a requirement that the
activity be substantial.
“Transparency ensures that there is an open and consistent
application of tax laws among similarly situated taxpayers and that
information needed by tax authorities to determine a taxpayer’s
correct tax liability is available (e.g., accounting records and
underlying documentation).
“With regard to exchange of information in tax matters,
the OECD encourages countries to adopt information exchange on an
“upon request” basis. Exchange of information upon request describes
a situation where a competent authority of one country asks the
competent authority of another country for specific information
in connection with a specific tax inquiry, generally under the authority
of a bilateral exchange arrangement between the two countries.
An essential element of exchange of information is the implementation
of appropriate safeguards to ensure adequate protection of taxpayers’
rights and the confidentiality of their tax affairs.
“The no substantial activities criterion was included
in the 1998 Report as a criterion for identifying tax havens because
the lack of such activities suggests that a jurisdiction may be
attempting to attract investment and transactions that are purely
tax driven. In 2001, the OECD’s Committee on Fiscal Affairs agreed
that this criterion would not be used to determine whether a tax
haven was co-operative or unco-operative.”
76. Over recent years, the OECD has led the way in setting, and
finding agreement for, international standards on the exchange of
information for tax purposes. These standards, which were developed
by OECD and non-OECD countries in the context of the OECD’s Global
Forum on Taxation, were endorsed by G20 Finance Ministers in 2004
and by the United Nations Committee of Experts on International
Co-operation in Tax Matters in October 2008. Essentially, they require
exchange of information on request in all tax matters for the enforcement
of domestic law, without regard to bank secrecy. At the same time,
they create safeguards to protect the confidentiality of the information
exchanged.
77. At their Ministerial Council Meeting on 24-25 June 2009, the
Ministers “welcomed the near universal endorsement of the principles
of transparency and effective exchange of information on tax matters
developed by the OECD. We look forward to a strengthening of the
Global Forum on Transparency and Exchange of Information including
the expansion of its membership. We support the establishment of
a robust and comprehensive peer review process within the Global
Forum and the development of a toolbox on defensive measures to
ensure an effective implementation of agreed standards and instruments
on a global basis.”
78. As was emphasised by members of the PACE Committee on Economic
Affairs and Development at their meeting on 19 June, it should be
made quite clear that in the exchange of tax information there should
be respect for normal bank confidentiality – only in cases of tax
evasion and criminal activity could it be lifted.
79. Following the London Summit, according to the OECD’s Secretary-General,
“more was achieved to improve transparency in two or three weeks
than in the last decade”, with tax agreements signed and commitments
made by jurisdictions around the world, including the Cayman Islands,
Costa Rica, Macao, China, the Philippines, Switzerland and Uruguay.
The OECD has been charged with monitoring compliance, and its Secretary-General
has pledged to “watch like a hawk” to ensure that commitments are
followed up with legislative and administrative action. However,
some have questioned the effectiveness of such international tax
agreements, pointing out that they have given rise to very few information
requests because it is so hard to determine the real ownership of
accounts hidden by trust arrangements, for example.
80. Nevertheless, the OECD sees the existence of its comprehensively-designed
international standard as crucial to success in global policy, and
believes that this can be a model for progress on integrity and transparency
in other areas. Accordingly, it is intensifying its work with partner
organisations to identify standards and instruments which can help
to strengthen the global regulatory framework. This is why the OECD
is pleading in favour of the rapid updating of the joint OECD-Council
of Europe Convention on Mutual Administrative Assistance in Tax
Matters (ETS No. 127), and the rapporteur strongly supports this.
81. Tax policy is also increasingly featuring alongside aid issues
– in fact, the OECD has called this the “new frontier” in international
development. The role of tax havens in reducing revenues for developing
countries has come under scrutiny, as efforts to tackle cross-border
tax evasion have gathered pace worldwide. The OECD believes that
donors should support a strengthening of developing countries’ tax
systems and administrations through specially-targeted aid. And
for their part, developing countries need to show that such initiatives
can be effective, by battling tax avoidance and bearing down on
corruption.
82. Last year, the OECD celebrated the tenth anniversary of the
entry into force of its landmark Convention on Combating Bribery
of Foreign Public officials in International Business Transactions.
So far 38 countries, all 30 OECD member countries plus Argentina,
Brazil, Bulgaria, Chile, Estonia, Israel, Slovenia and South Africa, have
joined the Convention, which creates a strong basis for supporting
member countries’ efforts to prevent and repress bribery and corruption
through stringent standards and an effective peer review mechanism.
4.3. Fostering development
assistance
83. Like the rest of the world, developing countries
have been hit by restricted credit markets and curtailed international
investment, falling trade and lower commodity prices, but they even
more vulnerable to the knock-on effects of the global crisis, such
as lower remittance payments from overseas workers and the threat
of local conflict, as competition for resources grows. In previous
years, this report has regularly discussed the work of the OECD’s
Development Assistance Committee (DAC), particularly in the fields
of co-operation, knowledge transfer and the measurement of aid effectiveness.
In its 2009 report, the DAC takes stock of the current situation,
and calls upon the international community to retain its commitment
to fighting poverty and encouraging sustainable development.
84. Overall, in 2008 aid was at the highest levels ever recorded,
in dollar terms. The DAC’s latest figures show an increase of 10%
in real terms in 2008, with an increase of 11% currently projected
over the next two years to 2010. The current outlook suggests that
at least USD 10-15 billion must still be added to current forward
spending plans if donors are to meet their current 2010 commitments
which imply an ODA level of USD 121 (expressed in 2004 dollars).
Some recent signs of a decline in net aid suggest the risk of this
shortfall increasing. To address this, the OECD Secretary-General
has launched an “Aid Pledge”, and received commitments from DAC
members to uphold their aid plans. Moreover, donors are being urged
to advance their forward spending, and with the World Bank and IMF
estimating that the global crisis calls for additional aid provision
of about $25 billion, this is all the more important. With programmed
debt relief set to decline, the report points out that other forms
of aid will need to rise substantially if targets are to be met.
85. Of course, the way aid is given and spent is as critical as
the totals. In September 2008, 130 countries took part in the Third
High Level Forum on Aid Effectiveness in Accra. They launched the
Accra Agenda for Action, whereby donors undertook to make aid more
predictable, while recipients pledged to boost their own financial
and budgetary systems, and improve transparency. Success in these
commitments will be increasingly significant, since the level of
aid channelled directly through the budgets of developing countries is
likely to rise in the next few years.
86. At the same time, donors still need to address the amount
of politically-motivated and “tied” aid they offer, as well as reducing
duplication and waste. Globally, there are now about 225 bilateral
and 242 multilateral agencies, funding over 35,000 activities per
year. Indeed, fragmentation is a major challenge and the more partner
countries that have to deal with a large number of donors that provide
a small share of aid, fragmentation is then significant: the 2009
Development Co-operation Report points out that 32 recipient countries
had to deal with 15 to 23 donors which together represented less
than 10% of the total aid provided to these countries. If aid was
provided more coherently, the transaction costs involved would be
substantially reduced, for both donors and recipients.
87. In other words, as the report points out, effective global
governance is more important than ever in development aid. All parties
need to take responsibility in coordinating and focusing their efforts,
and the report offers five key principles that should be respected
in line with the Paris Declaration on
Aid Effectiveness (2005) and the Accra
Agenda for Action (2008): developing countries should
set their own development strategies, improve their institutions
and tackle corruption; donor countries bring their support into
line with these objectives and use local systems; donor countries
should co-ordinate their action, simplify procedures and share information
to avoid duplication; developing countries and donors should focus
on producing, and measuring, results for the sake of efficiency;
and donors and developing country partners should be mutually accountable
for development results.
88. On 27-28 May 2009, the OECD DAC adopted an Action Plan to
support poor countries trying to cope with the effects of the financial
and economic crisis. Despite progress, notably with the US Administration’s promise
to double its foreign assistance over the next five years, many
donor countries were unlikely to meet their commitments and the
DAC determined that only renewed efforts could bring the collective
performance back onto target. With the Action Plan, DAC members
agreed to help developing countries by reaffirming their existing
ODA commitments, especially with regard to Africa; by helping low-income
countries finance both short and long term priorities; by making
the most effective possible use of aid; by financing international
financial institutions in a timely and predictable manner; and by
tackling the crisis using all policy instruments available, not
just official aid.
89. Last year’s report to the Assembly provided information on
the joint OECD/WTO Aid-for-Trade Initiative, launched in 2005, the
aim of which is to help low-income countries develop the capacity,
whether in terms of policies, institutions or infrastructure, to
exploit the opportunities that the global trading system has to
offer. The second monitoring report on Aid for Trade, published
in July 2009, shows that this initiative has been a success. Thus
aid for trade flows have increased by over 20% in real terms between
2005 and 2007. Total new concessional commitments that fall into
this category reached more than US $25 billion in 2007, and preliminary
data for 2008 were good but it is not yet possible to say whether
this momentum has been maintained in the face of the crisis.
4.4. “Going for growth”:
an update
90. This year’s “Going for Growth” includes special chapters
on infrastructure, taxation, market regulation, and population structure.
As OECD Secretary General Angel Gurria said on launching the publication,
“the report is a critical part of the OECD’s response to the crisis.”
91. One of the main themes is how best to boost labour productivity
and labour use, especially over the long term. Looking in depth
at countries’ performance and policies, the OECD identifies five
structural policy priorities for each one – and for the European
Union as a single economic unit. These priorities may change over
the years, as countries implement reforms and new issues develop.
They mainly relate to labour and product markets, but also to other
areas, notably education, health and innovation, said Mr Gurria..
92. The Secretary General said that “Going for Growth” identifies
policies aimed at increasing labour productivity for all OECD countries
and the European Union. Reforms to strengthen human capital are identified
as a priority for most countries, as are reforms to strengthen competition
in product markets, particularly by reducing entry barriers. Reforms
of agricultural policies are also called for in the United States, the
European Union and Japan, as well as in a few other countries with
particularly high support levels.
93. Policies for increasing labour utilisation are recommended
in nearly all OECD members, he continued. While reforms of tax and
benefit schemes are identified as necessary in most OECD countries
in Europe, reforms of the health care systems are recommended in
the United States and New Zealand. Reforms of labour markets are
also identified as a priority for the European Union, as well as
in Japan, Korea and Turkey.
94. “With the exception of a few specific areas, such as financial
regulation, where there has been major re-thinking,” said Mr Gurria,
“the policy priorities identified in this edition are broadly similar
to those of our previous edition. Indeed, 86% of each OECD country’s
priorities have been retained fully or in part. This is not encouraging,
although these policies sometimes need time to show their impact.
We, the OECD, and our Member countries must do better. Of the 14%
remaining priorities, which actually changed, less than two-thirds were
replaced as a result of reforms undertaken; while the remaining
ones were changed based on a re-consideration of newly available
evidence. Thus, while the results of this exercise reflect modest
reform progress, they clearly imply that much reform work is still
pending.”
95. Former OECD Chief Economist Klaus Schmidt-Hebbel pointed out
that among other things, the study “shows that a significant proportion
of the cross-country difference in employment rates and average productivity
levels, and thus GDP per capita, is accounted for by differences
in population structure, in particular educational attainment. It
re-emphasises the importance of education, especially in the long
run.”
96. The report concludes, said Schmidt-Hebbel, with the very important
message that “the economic crisis facing OECD countries should not
be allowed to slow down structural reforms. Opportunities for reforms
should be exploited to strengthen economic dynamism and living standards.
Under no circumstances should mistakes from previous crises be repeated.
In particular, attempts to cut unemployment by reducing labour supply
would prove as damaging as in the past and leave our societies poorer.
State subsidies to particular industries and firms should be kept
to a minimum. Keeping external markets open and avoiding new protectionism
is key to strengthening prosperity throughout the world.”
97. The rapporteur agrees with Mr Gurria that “If the opportunity
is seized to make lasting reforms that will improve long-term economic
performance, we may look back at this period as one where we repositioned
our economies to achieve stronger, cleaner and fairer growth.”
4.5. The energy and
climate change issue
98. The International Energy Agency (IEA), an institution
that is part of the OECD framework, works to forecast energy needs
and promote rational energy policies. In the rapporteur’s talks
with its officials, she noted, and endorses, the IEA’s call for
massive investment in energy infrastructure to maintain long-term energy
supply, not only in oil and gas but especially in non-fossil fuel
alternatives; for increasing energy efficiency; and for maximising
energy security through diversification of the energy mix.
99. Henceforth the energy issue cannot be dissociated from that
of the environment, and the OECD believes, on the basis of its analyses
of the effects of carbon emissions on climate change in line with
those of the United Nations Intergovernmental Panel on Climate Change
and those of the Nuclear Energy Agency, that “nuclear energy is
the only virtually carbon-free technology with the proven track
record on the scale required” to meet emission targets.
The
recent PACE debate on nuclear energy, and the resulting resolution,
certainly took a cautiously positive view, while emphasising the
heavy responsibilities incumbent on governments pursuing this path.
As the OECD puts it, these include “maintaining continued, effective
safety regulation; ensuring the maintenance of the skills base,
fostering progress on facilities for waste disposal; maintaining
and reinforcing international non-proliferation arrangements; and
providing the regulatory, policy and fiscal stability that investors
require.”
100. The two-year OECD project on the Economics of Climate Change
mitigation confirms that tackling climate change should not be delayed,
and that ambitious action to reduce greenhouse gas (GHG) emissions is
economically rational. The economic crisis provides no room for
complacency. At most, it might slightly reduce global emissions
temporarily, after which an upward trend will resume. Delaying action
on climate change would only necessitate larger cuts later.
101. Ambitious mitigation goals should be achieved through a policy
mix, with an emphasis on price-based instruments. To build support
for action, countries need to use least cost policies to achieve
significant emission cuts. To keep the costs low, the policy mix
should include a strong emphasis on putting a price on GHG emissions,
e.g. through cap-and-trade schemes, to discourage the behaviour
that generates emissions and encourage emitters to seek abatement
options wherever they are cheapest. But no single instrument will
be sufficient to tackle the wide range of sources and sectors emitting
GHGs. Given market and information barriers, price instruments will
need to be complemented by standards (e.g. building codes, electric
appliance standards) and measures to boost innovation and facilitate
the uptake of cleaner technologies.
102. Pricing carbon will lead to additional financing flows for
clean technologies, and can be a critical spur for the deployment
of new technologies. Thus, OECD analysis finds that a carbon price
path consistent with achieving a stabilisation of greenhouse gas
concentrations at a safe level could lead to a four-fold increase
in world energy R&D spending by 2050. At the same time, major
new breakthroughs will be needed to bring down the costs of climate
action over the long-term, and the private sector is unlikely to
invest sufficiently in R&D given the gap between the social
and private expected returns from these investments. As such, government has
an important role to play in supporting R&D, including to reverse
the dramatic trend in declining public energy-related R&D expenditure
that has been occurring in OECD countries since the early-1980s.
4.6. Measuring the progress
of societies
103. Gross domestic product (GDP) came to represent the
standard, almost universally accepted measure of the progress of
societies. But recent years have seen a growing debate about the
need for new measures of progress that complement GDP to include
social and environmental information. Thanks to pioneering work by
the OECD in conjunction with other bodies including the European
Commission and the Council of Europe, this concept is being revised.
The point is that GDP does not reflect many factors that are important
in people’s lives nor progress towards the sustainability of our
societies that is essential to their survival. There is now a growing
movement to discuss what constitutes progress in society and how
it should be measured. A milestone in the OECD-hosted Global Project
on “Measuring the progress of societies” will be the 3rd OECD World Forum,
to be held in Busan, Korea, on 27-30 October 2009. The PACE Committee
on Economic Affairs and Development hopes to be represented at that
Forum in order to present the report on Wealth,
Welfare and Wellbeing: how to reconcile them in a changing Europe being
prepared by Mr Constantinos Vrettos.
104. The rapporteur believes that the OECD is well suited to such
visionary and in-depth thinking and would encourage the Organisation
to reflect further on such issues as the nature and operation of
today’s market economy and of financial markets, the implications
of government ownership of the means of production, and the nature
of an economic and financial system based on sound and sustainableprinciples.
5. Prospects for OECD
enlargement
105. Tackling the financial and economic crisis has clearly
shown the need for enhanced co-operation and involvement in decision-making
of the widest possible circle of governments affected and able to
contribute to solutions. That is why it is so important that the
OECD launched, already in 2007, accession negotiations with five
countries: Chile, Estonia, Israel, Russia and Slovenia, and a process
of “enhanced engagement” with a view to possible membership with
five others: Brazil, China, India, Indonesia and South Africa. These
countries already take part in many OECD activities, including the
2009 Ministerial Council Meeting, and the purpose is clearly to
“strengthen the Organisation’s relevance as a global hub for economic
dialogue”.
106. The accession process begins with the submission of an initial
memorandum by the candidate country followed by an accession review
conducted by various OECD bodies. These are all well under way with
the exception of Russia, which submitted its memorandum during the
June 2009 Ministerial Council Meeting. In that connection, OECD
officials have warned that trade liberalisation commitments might
be a stumbling block, as they are for Russia’s accession to the
World Trade Organization.
107. The rapporteur would like to emphasise once again, as the
enlarged Assembly pointed out in its resolution on the OECD and
the world economy last year, that full respect for democracy, human
rights and the rule of law, including international law, should
constitute an essential criterion for judging whether a candidate
country should be invited to join the OECD.
6. Concluding remarks
108. In making the case for both addressing today’s systemic
failures and embarking on policies for long-term growth, the OECD
is directly addressing concerns regarding the economic and social
implications of the most severe recession in recent times. Many
questions of ethics and transparency have been raised, and while these
may not be the direct cause of the crisis, they are perceived to
be inextricably linked to it. This year’s G8 presidency is promoting
a worldwide “Legal Standard”, while Chancellor Merkel has proposed
a “Global Charter” for sustainable growth. Both are part of an important
effort to avoid a backlash against open markets, and this deserves
support. As the OECD’s Secretary-General says, “Economically, it
makes sense. Politically, it seems inevitable”.
109. The OECD feels that it can play a crucial role in this. Over
the last 15 years, it has worked with governments and institutions
to develop a comprehensive range of policy rules. Whether legally
binding, in the form of soft law or as policy recommendations, they
provide best practices for designing and carrying out sound policies
and they also offer guidelines for the conduct of global business.
Up till now, they have operated in separate and individual contexts,
but by bringing them together, in a systematic and coherent manner,
and working together with sector-specific partners such as the IMF,
WTO and ILO, such provisions could turn out to be the building blocks
of a new “Global Standard”.
110. Much will be learnt from this crisis, and perhaps few messages
are as eloquent as the need for countries to work together, to everyone’s
advantage. As President Obama joked at the G20 Summit, previous agreements
could be reached by a few major powers “over brandy and cigars”,
but today's trading world is more diverse, more complex and, despite
this crisis, will be increasingly prosperous. This is, then, a moment of
great challenge and opportunity and, as the OECD’s Secretary-General
puts it, “co-operation is what the OECD stands for”.
***
Reporting committee:
Committee on Economic Affairs and Development
Reference to committee: Standing mandate
Draft resolution unanimously
adopted by the Enlarged Committee on 29 September 2009
Members of the committee : Mr
Márton Braun (Chairman), Mr
Robert Walter (Vice-Chairman), Mr Pedro Agramunt
Font de Mora, Mrs Doris Barnett (Vice-Chairperson) (alternate : MrKurt
Bodewig), Mrs Antigoni Papadopoulos (Vice-Chairperson),
MM. Ruhi Açikgöz, Ulrich
Adam, Roberto Antonione, Robert Arrigo, Badea
Virorel Riceard, Mrs Veronika Bellmann, MM. Vidar
Bjørnstad, Luuk Blom (alternate : Mr
Tuur Elzinga), Mrs Maryvonne
Blondin, MM. Fernand Boden,
Patrick Breen (alternate: Mr Frank Fahey), Mr Erol Aslan Cebeci, Lord David
Chidgey (alternate: Mr James Clappison),
MM. Kirtcho Dimitrov, Relu Fenechiu, Guiorgui Gabashvili, Marco Gatti (alternate: Mr Pier
Marino Mularoni), Paolo Giaretta, Francis Grignon, Mrs Arlette Grosskost,
Mrs Azra Hadžiahmetović, Mrs Karin Hakl (alternate: Mr Karl Donabauer), MM. Stanislaw Huskowski, Igor Ivanovski, Čedomir Jovanovič,
Mrs Nataša Jovanović, MM. Antti Kaikkonen, Oskars Kastens, Emmanouil Kefaloyiannis,
Serhiy Klyuev, Albrecht Konečný, Bronislaw Korfanty, Anatoliy Korobeynikov, Ertuğrul Kumcuoğlu, Bob Laxton,
Harald Leibrecht, Mrs AnnaLilliehöök, MM. Arthur Loepfe,
Denis MacShane, Yevhen Marmazov, Jean-Pierre Masseret, Miloš Melčák, José Mendes Bota, Mrs Lilja Mósesdóttir, Mr Alejandro Muñoz Alonso, Mrs Olga Nachtmannová, Mrs Hermine Naghdalyan, Mr Gebhard Negele, Mr Jean-Marc
Nollet, Mrs Miroslawa Nykiel,
Mrs Ganira Pashayeva, Mrs Marija Pejčinović-Burić, MM. Petar Petrov,
Viktor Pleskachevskiy, Mr Jakob Presečnik, Mr
Maximilian Reimann, Mr Andrea Rigoni,
Mrs Teresa Rodríguez Barahona (alternate: Mr
Alejandro AlonsoNúñez), Mrs Maria de Belém Roseira, MM.
Giuseppe Saro (alternate: Mrs Anna MariaCarloni), Hans Christian Schmidt,
Predrag Sekulić, MM. Samad Seyidov, Leonid Slutsky, Serhiy Sobolev, MM. Christophe
Steiner, Vyacheslav Timchenko, Mr Joan Torres Puig, Mrs Arenca
Trashani, Mr Mihai Tudose, Mrs Ester Tuiksoo, MM. Árpád Velez, Mrs Birutė Vėsaitė, MM. Oldřich
Vojíř, Konstantinos Vrettos, Harm Evert Waalkens (alternate: Mr Pieter Omtzigt), Paul Wille, Mrs
Maryam Yazdanfar.
Representative of the Turkish
Cypriot Community: Mr Mehmet Çağlar
Observers:
Japan: Mr Hidetoshi Nishijima,
Mr Youetsu Suzuki
Mexico: Mrs Gurwitz Yeidckol Polevnsky
Secretariat of the committee:
Mr Newman, Ms Ramanauskaite, Mr de Buyer and Mr Pfaadt.