[Documents/Docheader.htm]

The OECD and the world economy

Doc. 10254
5 October 2004

Report
Committee on Economic Affairs and Development
Rapporteur: Mr Abdülkadir Ates, Turkey, Socialist Group


I.          Draft Resolution [Link to the adopted text]

1.         The Enlarged Parliamentary Assembly, composed of Delegations of OECD and Council of Europe member states, has examined the recent activities of the OECD as they relate to the world economy, in the light of the report prepared by the Enlarged Assembly’s Committee on Economic Affairs and Development and the contributions from various other committees.

2.         The Enlarged Assembly welcomes the resumption of healthy economic growth in large parts of the OECD area and more generally worldwide - aided by strong economic performance in the United States, Japan, China, South-East Asia and several countries in central and eastern Europe, including Russia. 

3.         It counts on this recovery to assist higher growth also in the major economies in the eurozone, where hesitation among consumers and investors still hampers a resolute pick-up of activities and where insufficient structural reform - leading to a liberalisation of the economy and increased competition - continues to limit the potential for growth. It is vital for the European Union area, and for the wider Europe, to do more to favour innovation and entrepreneurship in line with the European Union’s 2000 Lisbon Agenda - such as by radically cutting red tape for start-up companies and by transforming the European Patent Office into a truly pan-European organisation with wider competences and more streamlined procedures than at present.

4.         The Enlarged Assembly is concerned, however, at the prospect of an approaching overheating of the US economy and the consequent need for that country to reduce its budget deficit and raise its policy-setting interest rate, currently at a historical low.  Conversely, thought should be given to the need for a lower interest rate in the eurozone, capable of accelerating growth there. It would also be of great importance for the world economy if the United States succeeded in gradually reducing its extremely high current account deficit and in reorienting its economy in a more dynamic direction, especially as regards investments abroad, based on higher savings in American society.

5.         Regarding Japan, in addition to the fact that the ratio of fiscal deficit to gross domestic product continues to be the highest in the OECD area, the Enlarged Assembly takes a strong interest in the fact that the country’s present economic activities are excessively dependent on the unprecedented ultra-easy-money policy and exports to such countries as the United States and China. Regarding China, the Enlarged Assembly recognises that there is much room for improvement in view of the fact that the extreme regional imbalances and wealth disparities in the domestic economy are expanding and the country’s buoyant exports are dependent on a national currency value that is detached from the market

6.         The increasingly wide differences in the OECD area is another cause for concern as these may lead to trade imbalances, tensions between diverging currencies and calls for protectionist measures.  The OECD has a vital role in ensuring a constant exchange of experiences among and beyond its membership, in order to permit a more even and sustained pace of economic development to take place worldwide.

7.         The Enlarged Assembly notes that the present recovery has been largely “policy-induced”, via exceptionally expansionary macro-economic policies as expressed in low interest rates, tax cuts and deficit spending.  Given the difficult debt situation of several OECD member countries and their upcoming pension commitments to ageing populations, a return to balanced and if possible surplus budgets is becoming urgent.  This holds not least for those countries in the eurozone which are at risk of breaking the rules of the EMU Stability and Growth Pact, since continued violations would not only weaken cohesion among EMU members but also affect the confidence in the currency itself.

8.         The current high oil prices could easily derail the economic recovery under way. The Enlarged Assembly counts on OPEC and other oil-producing countries to raise production to levels necessary to avoid this.  It at the same time recognises the manifold reasons for the current situation, including rapidly rising worldwide demand, wasteful use of oil,  insufficient refining capacity in part due to neglected investment, price speculation, terrorist acts against oil installations and the various problems in Iraq, Saudi Arabia, Russia and Nigeria.  New emphasis must in this situation be placed on policies needed for sustainable development, as detailed in the Enlarged Assembly’s Resolution 1350 (2003) on “The OECD and the World Economy”.  The Enlarged Assembly in this context welcomes the OECD’s recent decision to continue its work in the area of sustainable development, following the successful completion of its three-year project in this field.

9.         Continued recovery also depends vitally on a successful conclusion of the ongoing WTO negotiations on a Doha Development Agenda.  The Enlarged Assembly calls on all sides to build, in a spirit of compromise, on the experiences gained from the inconclusive Cancun Summit of 2003 and asks OECD member countries in particular to show the necessary openness as regards a reduction in the subsidies they pay to their agriculture sector, and to the eventual elimination of export subsidies and other trade distorting subsidies.

10.        The Enlarged Assembly welcomes the OECD’s recent agreement on a revised version of its Principles of Corporate Governance, not least in view of recent corporate scandals.  The observance of the Principles is vital to lasting and socially responsible economic development.  The Enlarged Assembly urges all OECD member countries to give maximum publicity to the Principles at home and in international fora and where necessary to adapt their legislation to conform with them. 

11         The Enlarged Assembly marks its disappointment at the failure of OECD countries to meet commitments entered into as part of the organisation’s 2001 Environmental Strategy, as well as in meeting the provisions of the Kyoto Protocol, even though that treaty has not yet entered into force. From fishery to forestry, from vehicular transport to pollution, most OECD countries are proceeding along an unsustainable path. The Enlarged Assembly calls on OECD member countries to make greater use of economic and fiscal measures for meeting environmental goals and to start preparations already now for a “post–Kyoto process”, rendered necessary by increasingly apparent inability of the Kyoto Protocol to halt climate change. Also, the Enlarged Assembly encourages OECD member countries, when considering the future energy problem, to take the initiative in further promoting the shift to a recycling-oriented society, to strengthen technological development relating to new energy sources as represented by nuclear fusion energy, and to explore the potential of renewable energy so as to make sustainable development and environmental preservation compatible.  In this way they will set an example also for non-OECD countries whose behaviour is influenced by the actions of the more wealthy countries of the world community.

12.        While globalisation is bringing many benefits to the world - as manifested for instance in the rise of new economies and steadily rising incomes for millions of people – it is also now producing increasingly unacceptable income differences between and within countries.  For any lasting worldwide development - accompanied by social solidarity and environmental protection - to succeed, the many obstacles which at present prevent liberalization of world trade must be eliminated. The Enlarged Assembly urges the OECD to develop – in a forum which should also include numerous non-member countries with which it co-operates – policies and programmes which ensure that globalisation can benefit more countries and world citizens, in the interest of international peace, stability and solidarity. In this regard, the Enlarged Assembly recognises the importance of the adoption of ‘A Strategy for Enlargement and Outreach’ at the OECD, welcomes the OECD’s activities under its Development Cluster, and encourages their further development.

13.        The Enlarged Assembly notes the importance of Intellectual Property Rights in the World Economy. The 21st century, in which the Internet is highly developed, is said to lead to a global community where “all are creators; all are users”. Reforms of Intellectual Property systems to cope with the rapid development of digitization and networking will surely lead the world economy to sustainable growth by prioritizing the interests of current right owners such as artists and creators as well as those of users and consumers including potential artists and creators in the future. For this sake, the suppliers of cultural and technological assets and their users should take initiatives together for the above-mentioned reforms to realize mutual respect and reliance, including those in international contexts, paying due attention to the risk that any reform may be used as a tool for unfair control over the market by specific industries.

14.        The Enlarged Assembly wishes to underline the particular importance of culture to sustainable development.  The economic significance and employment potential of the cultural sector and cultural activities are growing steadily.  Above all, however, culture embodies the values that form the very personality of a society.  The OECD therefore has a duty to participate in discussion on reconciling the economic potential of the cultural sector with the specific role of culture and with the concern to preserve the diversity of the cultural content and artistic expression that individuals and societies contribute to it.  Such discussions would establish the necessary link between the negotiations on the liberalisation of world trade and the work of the European Union, Council of Europe and UNESCO in supporting cultural diversity.

15.        The Enlarged Assembly, having served as the OECD’s Parliamentary forum since 1962, has seen the organisation’s membership grow steadily to reach the present thirty. In welcoming the adoption by the 2004 OECD Ministerial Council of the OECD reform package, including a strategy for enlargement, the Enlarged Assembly encourages the organisation to find innovative ways of reconciling size with efficiency, not least in studying the experiences gained by organisations with many member countries, including the 46 member state Council of Europe.

16.        The Enlarged Assembly recognises clearly that international conflicts and the proliferation of terrorism are serious threats for the international community and civil life and at the same time are major obstacles to the economic development of the world. The eradication of international conflicts and terrorism is essential for the development of the world economy and the happiness of humankind. The Enlarged Assembly asks OECD member countries and the international community as a whole to move forward with countermeasures so that the various complex problems that exist in the background of international conflicts and terrorism can be settled by peaceful means and as quickly as possible.

II.         Explanatory Memorandum by Mr Ates, Rapporteur

Contents

I.          INTRODUCTION AND BACKGROUND

II.         WORLD ECONOMIC SITUATION AND PROSPECTS

            A firm recovery
            A slower but steady return to growth in the eurozone
           
The need for budgetary prudence
           
A tight oil market
            Inflation still at bay but unemployment down only slowly
            Resumed world trade holds promises for Doha
           
Uneven growth as a source for tensions
            Agricultural reform

III.        NEW OECD CORPORATE GOVERNANCE PRINCIPLES

IV.        THE OECD AND GLOBALISATION

V.         OECD REFORM AND ENLARGEMENT

VI.        CONCLUDING COMMENT

I.          INTRODUCTION AND BACKGROUND

1.         The debate of the Enlarged Parliamentary Assembly on “The OECD and the World Economy” will be held in October 2004. This draft report is based on the Rapporteur’s visit to the OECD in April 2004 and was first revised in the light of a very fruitful discussion held at the meeting of the Committee on Economic Affairs and Development in Sofia, Bulgaria, in May 2004, and subsequently adopted ‘provisionally’ at the Committee’s meeting at OECD headquarters in Paris in June. ‘Provisional’ here signifies that the report may be sent out to national delegations in the Enlarged Assembly in this form, prior to formal adoption at the Enlarged Economic Committee’s and Enlarged Assembly’s meetings in Strasbourg in October 2004. The report takes into account the conclusions of the OECD Ministerial Meeting held in May 2004 and the revised prospects for the OECD area contained in the June 2004 OECD Economic Outlook.

2.         In the realisation that not all aspects of the world economy, nor the full panoply of OECD activities can, or indeed should, be covered in a report of this nature presented for the benefit of the Enlarged Assembly, the Rapporteur has chosen to concentrate on a few areas which to him seem particularly important at the present time: the current economic situation and prospects for the near and medium future, including an increasingly tight energy situation; corporate governance; and, lastly, the issue of globalisation and where that process is likely to lead the world.

II.         WORLD ECONOMIC SITUATION AND PROSPECTS

A firm recovery

3.         The Rapporteur is able to bring more favourable forecasts in reporting to the Enlarged Assembly economic prospects for the world than were his predecessors over the past two years; for the OECD sees global economic activity as picking up firmly. Thus, OECD-wide growth is foreseen at 3.4% in 2004 and at 3.3% in 2005.  Inflation for the area is expected at a relatively moderate 1.7% in 2004 and 1.6% for 2005.  As a result of the higher growth, unemployment is expected to fall from the 7.1% registered in 2003 to 6.9% in 2004 and 6.7% in 2005. 

4.         The United States is forecast to grow by 4.7% in 2004 and 3.7% in 2005.  While this is of course welcome news, there is also the fear that it will be so strong as to lead to overheating. The remedies suggested are a reduction of the country’s budget deficit and a rise in the Federal Reserve’s policy-setting interest rate. The latter, which stands at an historical near-low of 1% since the mid-2003, is believed capable of stoking inflationary pressure and of creating a bubble in financial markets.   The OECD feels it will have to rise to 4% in order to reach a “neutral level”.  Whether this will be done in the politically sensitive period of an election year is, however, uncertain. (Indeed, the world enjoys its lowest interest rates since the mid 1950’s and the world economic growth is further helped by combined tax cuts in the OECD area amounting to 1.7 trillion dollars.)

5.         Japan, following several years of slow or even negative growth, is forecast to grow by 3% in 2004 and 2.8% in 2005, in part due to an acceleration of business investment, exports and domestic consumption, but also due to ongoing reform of the country’s long-ailing banking sector and persistent efforts to reduce the budget deficit and the high national debt.

6.         Japanese growth is helped by that of China, expected at 8.3% in 2004. Indeed, China accounted for about a quarter of the growth in world trade in 2003.The OECD also sees risks in the current overheating in the Chinese economy, where the pegging of the yuan to the US dollar is seen as a contributing factor, in that China thereby loses control over its own currency.

7.         The OECD foresees growth to pick up markedly in countries like Mexico and Switzerland. The same holds for the four EU accession countries that are also members of the OECD: the Czech Republic, Hungary, Poland and the SlovakRepublic, as well as in Australia, Korea, Norway and Sweden. Growth is expected at about 5% in the Rapporteur’s home country, Turkey, and 3% in New Zealand.

8.         In its March 2004 report on Trends in Financial Markets, the OECD sees a confirmation in the trend toward economic recovery. Thus, stock markets in the United States are back to the 1990s average. Against this background, the Organisation does not exclude a rise in short-term interest rates already in 2004, first in the United States and then in the eurozone, whereas an immediate rise in Japan is less likely. The dollar is expected to come under further pressure as a result of the US current account deficit, which requires financing by the rest of the world of up toward $ 50 billion a month. So far, however, the world has been more than willing to supply this sum, in part due to deliberate currency support for the dollar by countries like Japan and China.

9          Geopolitical tensions can be said to be less pronounced than in the spring of 2003, at the time of the invasion of Iraq by coalition forces. However, the serious attacks on these forces in more recent times have brought renewed tension to the international arena, as has the seeming impasse over the resolution of the Israeli-Palestinian conflict.

A slower but steady return to growth in the eurozone

10.        The eurozone is pulled along by the strong growth in the rest of the world economy, but its growth is expected to be lower – at 1.6% in 2004 and 2.4% in 2005.  The reasons are both slow spending by consumers who prefer to save rather than consume out of fear for their own and their countries’ economic future.  The OECD against this background recommends the opposite course to that which it gives to the US - namely a lowering of the policy-setting interest rate.  This could bring new life to the economy and thereby permit governments to improve their finances.  It should be recalled that the European Central Bank has kept its benchmark refinancing rate at 2% since the middle of 2003, that is, at twice the level of the US Federal Reserve.   This difference has helped the euro to rise by about 25% against the dollar over the past two years, making imports, including those of dollar-nominated oil, more affordable.  By the same token, however, eurozone exports have become more expensive overseas, even though these, too, have risen as a result of overall world growth.

11.        The OECD singles out Germany and Italy as the weak spots in the eurozone, with the situation in France as marginally better without being rosy.  In Germany, unemployment remains stubbornly high as a result of what the OECD considers too rigid hiring and firing rules.  This saps consumer confidence and prompts people to save rather than spend.  Indeed, German consumer spending, which accounts for over half of the country’s gross domestic product, has not increased since the beginning of 2003.  In Italy, where growth in 2004 is forecast at 0.9% and that in 2005 at 1.9%, the situation is almost the opposite.  Here, consumption has remained relatively healthy, while exports have lost in competitiveness as a result of a higher inflation due to rising public spending. 

12.        One reason why the euro area may be slow in picking up activity is that the “retransmission” of monetary policy is slower there than it is in either the UK or the US. In other words, in the latter two countries, many home owners quickly refinance their loans when interest rates are low and engage in spending with their thus liberated funds. They are also in a position to borrow more against the collateral of higher property values. In most countries in the euro area this practice is, however, relatively rare. The time lag between interest rate changes and changes in consumer spending is therefore much longer and less pronounced than it is in the US and the UK.

13.        Against this background it is all the more important for the major economies in the euro area – such as Germany, France and Italy  - to enhance their potential growth rate via structural reform - essentially a liberalisation of the economy and an increase in competition – also in view of their rapidly ageing populations.It is also vital for the European Union area, and for the wider Europe, to do more to favour innovation and entrepreneurship in line with the EU’s 2000 Lisbon Agenda - such as by radically cutting red tape for start-up companies and by transforming the European Patent Office into a truly pan-European organization with wider competences and more streamlined procedures than at present, along the model of the United States. An OECD study showed that start-up costs in the OECD area were the highest in Italy, France and Germany, precisely the three countries that are now in the greatest economic difficulties.

The need for budgetary prudence

14.        The OECD sees the current global recovery as having been largely “policy-induced”, that is brought about by “exceptionally expansionary” macro-economic policies in place since 2001, especially in the United States. Short-term interest rates have been brought down aggressively, public spending has increased and substantial tax cuts have been introduced. Also in the euro area have short term interest rates been very low, or at zero per cent in real terms when one takes into account inflation.

15.        There is concern over the dependence of the global recovery on the American economy, especially since the above-mentioned US fiscal and current account deficits are considered by the OECD to be “unsustainable”. The fear is that sooner or later this will cause the dollar to fall even more significantly and rapidly than over the last two years, and that it will lead to a strong increase in long-term interest rates, with the latter spilling over into other world regions. The OECD therefore recommends that fiscal and monetary stimuli now be withdrawn in favour of more “neutral” policies. Especially in countries with large accumulated fiscal deficits care must be taken to consolidate financing early on, with planning done over the medium-term rather than from one year to the next. Structural reform efforts are also called for, especially in the larger eurozone economies, whose potential growth the OECD sees as being limited to around a mere 2% annually, as compared to around 4% annual growth potential within reach for a more liberalized economy such as the United States.

A tight oil market

16.        The impact on the world economy of currently high oil prices formed a major theme during the Rapporteur’s talks with the OECD.The current high growth rate in the world economy has led to the most rapid increase in worldwide demand for oil since the late 1980’s, says the International Energy Agency (IEA).  Daily demand in 2004 will reach 80 million barrels and the trend is positively upwards over the medium and long-term, especially given the growing prosperity - and hence growing vehicle traffic and industrial energy needs – of China, India and the emerging economies in South-East Asia.

17.        Oilat the time of writing (early June) stands at close to over $40 a barrel.In the eyes of the IEA, which monitors the oil and other energy markets on behalf of the OECD, the present high oil prices are “contributing to stubbornly high levels of unemployment and exacerbating budget deficit problems in many OECD and other oil importing countries”.  It also sees them as having caused higher inflation and lower economic growth over the past few years.  This holds especially for the OECD area, which in 2003 imported more than half of its oil needs at a cost of over 260 billion dollars – 20% above the 2001 total.

18.        OECD studies suggest that a sustained increase in oil prices from $25 to $35 a barrel subtracts 0.4% from the gross domestic product of the OECD countries in the first and second year of their being in place, while inflation is pushed up by 0.5%.  A $10 rise in oil prices takes away at least 0.5% from world GDP.  The eurozone countries are amongst the most vulnerable, since they are highly dependent on oil imports, while the US suffers the least due to its higher domestic production.  A country like Japan falls in between, as it imports much oil but has reached a high degree of efficiency in its use of energy.  Developing countries fare worst of all, since their economies are more dependent on imported oil and at the same time are more energy intensive, also because they use energy less efficiently. 

19.        By June 2004, the OPEC oil price had risen above $40, the highest stand since the 1991 Gulf War.  Even though the impact on the world economy is less pronounced than at that time, ordinary consumers, whom we politicians expect to revive the OECD and the world economy through increased spending, feel it the most via a reduction in their disposable income. 

20.        A number of reasons explain the present energy squeeze.  Firstly, Iraqi oil production may have resumed almost to its pre-invasion level, but remains below its long-term potential.  Secondly, recent terrorist attacks on oil installations in Saudi Arabia have increased market uncertainty as to future supplies from that country, which accounts for about 10% of world production and holds the largest reserves.  Thirdly, OPEC decided in April 2004 to reduce its overall output by 1 million to 23.5 million barrels per day. Although this was corrected in early June by a reverse decision to increase it again by 2.5 million barrels by late summer, markets were not much calmed since even this was considered insufficient to satisfy demand.  Fourthly, Chinese imports of oil have risen dramatically in recent years, by 10% in 2003 and probably even more in 2004.  Fifthly, world refining capacity has reached its limits due to insufficient infrastructure investment in years past and the long lead time in building new installations. Finally, market speculation in oil futures play a role and drive peak notations higher than they otherwise would have been, adding to the overall market frenzy. 

Inflation still at bay but unemployment down only slowly

21.        Inflation will remain relatively modest, at 1.7% for the OECD area. The core consumer price inflation in the United States stands at around 1.7% and is forecast to stay at approximately that level for some time to come. Deflation in Japan appears finally to ease, to less than - 2%, which still of course leaves some way to go before the country reaches stable prices.

22.        In the euro area, there is downward pressure on prices caused by joblessness, fear of consuming out of fear of future unemployment, and by the fact that many national economies are working below potential.  However, the drought of 2003 pushed up food prices and more recently rises in the price of oil, to which we shall return below, have driven up the cost of petrol, so that inflation for 2004 is forecast at 1.7%. (Generally speaking, actual inflation in the euro area over the past three years has consistently overshot predicted inflation, by around 0.3%. In Germany the difference is almost 0.5%. The comparatively higher actual inflation makes it more difficult for the European Central Bank to undertake the cut in its policy setting interest rate, as called for by many.)

23.        Unemployment continues to be a concern. Whereas in the OECD area as a whole it stands at around 7% in 2004, it varies between around 6% for the United States and 8.5% for the euro area (and even more, of course between individual countries). It is expected to come down rather strongly in the United States, but more slowly in the euro area due to lower growth there and to what economists call ‘labour hording’, that is, a tendency for companies suffering a downturn not to trim their workforce quickly and therefore to expand it more slowly in an upturn.

Resumed world trade holds promises for Doha

24.        A forecast rise in world trade of 8.6% in 2004 and over 10% in 2005 is heartening, but it is accompanied by a US current account deficit estimated to have reached 5% of GDP in 2003. The weaker dollar is not expected to dent this level in any near future. The current account surpluses in Japan (3%) and other countries in Asia are correspondingly large.

25.        The OECD plays an important role in facilitating the work of the World Trade Organisation, not least in the ongoing Doha Development Agenda.  The Parliamentary Assembly of the Council of Europe is at present preparing a report on ways of ensuring that the Doha Development Agenda can reach a positive outcome (Rapporteur: Mr Sasi), so suffice it here to say that the OECD feels rather confident that this will happen.  The OECD Ministerial Meeting in May 2004 noted that “momentum [for reaching an agreement] has been building” recently, It also called on all sides to “translate political will into concrete decisive actions”, leading to agreement.  The Rapporteur certainly agrees with the Ministers that “there is no substitute for the multilateral trading system, and that positive results of the Doha Development Agenda will help renew and strengthen trust in that system”.  And he is heartened by the recently announced preparedness of both the European Commission and the US administration to substantially reduce agricultural subsidies, especially for exports, as a way to breathe new life into the negotiations.

26.        Growth in Russia in 2004 is forecast at a healthy 7%, even though more recent concerns about the security of property rights have become more pronounced. The OECD holds that continued growth in Russia will very much depend on structural reforms being undertaken in a number of areas such as banking, electricity and the gas sector, and on improving the administration and reinforcing the law.

Uneven growth as a source for tensions.

27.        Unlike 2003, no OECD country is forecast this year to see its economy shrink - a fate which then befell Germany, Switzerland, the Netherlands and Portugal.  However, the growth rates vary so much between countries and regions that the OECD foresees difficulties for them functioning harmoniously together. Some run the risk of too rapid an expansion. Others risk falling into a more permanent trap of low activity and increasing gloom about the future.  This could lead to growing imbalances in trade, tensions between currencies and calls for protectionism, argues the organisation.

28.        At present, the USA is in the lead together with Japan, Russia, China and other countries in Asia, while some major economies in continental OECD Europe are progressing at a much slower rate. Growth in economic activity in the latter region is still very modest, investments are slow in taking hold, and consumers are lacking in confidence. The still strong euro adds to the problems for exports. The OECD sees its assumption that lacking structural reform underlies slow economic growth as being strengthened by the fact that OECD countries such as the United Kingdom and Spain are recovering much more quickly from recent external shocks than countries like Germany, France and Italy.

29.        The OECD in July 2004 published a report[1] confirming not only the eurozone’s lagging behind the US but also showing growing disparities in living conditions within the eurozone itself. For instance, unemployment in the eurozone ranges from 2 to 11 per cent as among different participating countries, while the range between states in the United States is only between 3 and 8 per cent. Income per head in the US is now 30 per cent above that in the eurozone and also here the gap is widening.  The report concludes that “the closer integration that monetary union was seen as bringing has not yet translated into any visible strengthening of trend growth or increased dynamism”. 

30.        The report holds up Ireland as a model for the kind of economic growth that is possible both within the eurozone and in other parts of Europe and the world.  Irish living standards in the 1980s were considerably below the then EU average, while today it is not only well above the eurozone average but has nearly caught up with the per capita income level of the United States.  In the 1990s, the Irish growth rate was on average 5 per cent higher than that of the rest of the eurozone.  The organisation attributes the extraordinary Irish performance to a number of factors: they include a good macroeconomic framework including healthy public finances, a business friendly environment with little bureaucracy and low taxation, a competitive wages and a qualified workforce.

Agricultural reform

31.        Turning to worldwide growth differences, one major way for richer countries to promote growth in developing countries would be to reform their farming sectors in the direction of fewer subsidies and greater market access.  In its report “Agricultural Policies 2004” published in June 2004, the OECD estimates that subsidies to farmers in the OECD area amount to $ 250 billion per year (Producer Subsidies Equivalents or PSEs), corresponding to 32 per cent of their income.  If all transfers are included - that is, also those from the state and consumers - the total is $ 350 billion, with transfers from consumers in the form of higher prices amounting to $ 186 billion and those from tax payers to $ 191 billion.

32.        Various agricultural reforms have reduced the share of the most trade distorting subsidies from over 95 per cent of the total in the 1986-1988 period, to 75% during the period 2001-2003.  However, the OECD sees further efforts as inescapable in order to further reduce distortions, added costs to tax payers and consumers, damage to the environment and disadvantages suffered by more competitive producers, including farmers in developing countries. 

33.        Producer subsidies are the lowest in New Zealand and Australia, corresponding to only 2 and 4 per cent, respectively, of the farming income.  At the other extreme is Switzerland, where the percentage is 74 per cent.  The United States and Canada show relatively low subsidies, amounting to 18 and 21 per cent, respectively, of total farming income, while the European Union figure is 37per cent.  The OECD recognizes that the EU has progressed in reducing distortions but also criticises it for leaving large sectors in the farming economy relatively isolated from world markets by means of continuing high subsidies.  The same criticism is directed against the United States. 

34.        In a special “Analysis of the CAP Reform” the OECD says that the “decoupling” of subsidies from production now tried by the EU has reduced the earlier distortions in agricultural markets.  However, the OECD also points out that the reforms have led neither to any significant reduction in the absolute level of subsidies, nor has it opened EU markets for non-European agricultural producers to any significant extent.  The OECD also shows that the current subsidies above all favour big farmers.

35.        Finally, in a forward looking report entitled “Agricultural Outlook 2004–2013”, the OECD forecasts that over the next decade world production of cereals, meat, milk and dairy products, sugar and vegetable oils will be higher than demand.  Slower population growth and generally rising incomes will permit better nourishment worldwide, with the greatest improvements expected outside the OECD region, namely in developing countries and emerging economies.

III.        NEW OECD CORPORATE GOVERNANCE PRINCIPLES

36.        It was only natural for the Rapporteur to raise the issue of corporate governance in his talks with the OECD, seeing that the Economic Committee has just finalised a report on the subject which is now awaiting debate in the plenary Assembly.(“Corporate Ethics in Europe”, Doc. 10103; Rapporteur: Mr Brunhart). 

37.        In April 2004 the governments of the thirty OECD member countries approved a revised version of its Principles of Corporate Governance, which were first published in 1999 and have been widely adopted as a benchmark for Corporate Governance in OECD countries and the world at large.  Neither the original nor the revised principles are legally binding, but they are expected to find large resonance internationally to serve as an inspiration for much national and international legislation, especially as they were established in cooperation with the IMF, the World Bank and the so-called Financial Stability Forum, which serves as an international watchdog in this area. 

38.        The revision was undertaken in reaction to recent corporate scandals and following changes in legislation in a number of countries.  The revised Principles are more ambitious than the original ones but do not amount to very detailed or inflexible rules. They rather form a frame of reference which can be easily transformed into national law.  They are meant to assist governments in their efforts to strengthen the legal, institutional and regulatory basis for effective corporate governance and to help companies, investors, stock exchanges and other institutions in fostering corporate governance. 

39.        The OECD stresses that there is no one model for good corporate governance. This being said, the negotiations leading up to the revised principles brought to the fore some common elements in the various existing approaches.  The principles focus on the problems that arise from the separation of ownership and control in companies.  They are not restricted solely to the relationship between shareholders and management, but also address the rights of minority shareholders and employees.

40.        Central to the Principles is the concern for sufficient transparency, the idea being that conflicts of interest can be avoided if all cards are laid on the table for all to see.  Thus, the capital structure should be easily recognizable, the integrity of auditors ensured, and the role of independent auditors strengthened, not least as regards management remuneration.  The five main principles concern the rights of shareholders, their equal treatment, the role of ‘stakeholders’ (important among them employees), the need for maximum transparency and disclosure of information, and the rights and duties of management and company boards.

IV.        THE OECD AND GLOBALISATION

41.        The process of globalisation and the OECD’s role in it figured prominently in the Rapporteur’s talks with the organisation. Globalisation has by now become a household word.  It describes a world where more people and more world regions than ever before are interconnected and dependent on each other, via trade in products, services and through investment. 

42.        Globalisation is an economic and social process which is mainly driven by technological development, especially in the information and communications sector.  It advances via falling costs of transport and communications, the rising amounts of data that can be communicated across the globe, and the liberalising policies that are pursued by most of the world’s governments nationally level and internationally.  While the WTO is generally seen as the main instrument for advancing globalisation, the contribution of the OECD in trying to ensure that it delivers the largest possible benefits for the largest possible share of the world’s population also deserves recognition.

43.        Fundamental to the OECD’s approach is that the world’s richest countries must take the lead in making sure that less wealthy nations can reap the proper rewards of globalisation.  The OECD clearly recognizes both the positive and negative aspects of globalisation.  On the one hand, advances in technology, medicine and other sectors in one country are rapidly becoming available elsewhere.  On the other hand, increased pollution drifts across borders.  Financial turmoil in one national stock market can spill over to others.  Terrorism knows no frontiers, nor does crime or disease. 

44.        Another OECD tenet is that a globalised economy needs globally accepted codes of behaviour.  The organisation provides a forum within which governments through discussion and agreements can tackle the challenges posed by the process.  Increasingly, this cooperation is not restricted to the 30 member states alone, but includes formalized cooperation with 19 non-OECD economies and working relationships with more than 70 economies outside its membership.  Thus, cooperation is proceeding with China, Brazil and above all Russia, for which OECD membership remains the “ultimate goal”, as stated in the OECD 1997 agreement with that country.

45.        It would be too lengthy here to enumerate all the areas in which the OECD undoubtedly contributes to a more orderly, constructive and fair globalisation process: its extensive statistics base assist policy makers around the world in their planning; its twice yearly “Economic Outlook” does the same, together with the organisation’s analytical work in such areas as employment policy, education, agriculture and the environment. 

46.        The OECD’s shift in focus from just its membership to the entire world has indeed been in reaction to globalisation and the changing economic conditions worldwide.  If, at the end of the 1990s, the promise was one of an end to cyclical swings and an unbroken future of non-inflationary prosperity and high employment, we know today that ‘dot.com bubbles’ can burst; that unemployment soar as a result of too slow a reform process; and that budget deficits can rise despite good intentions and international commitments by governments. Swings between currencies and fluctuations in share prices put businesses and investors to severe tests.

47.        The OECD is active on all these fronts.  Its 2003 study “Sources of Economic Growth in OECD Countries” reviewed the factors that can help or hinder improved prosperity and growth in national economies.  Its report on “ICT and Economic Growth” clarified the links between regulatory environments, investment and information and communications technology on the one hand, and improved productivity on the other.  Its “Jobs Study” tried to have countries share the best ways to reduce unemployment.  Its work on agriculture, especially the international market distortions of farming subsidies, has paved the way for the integration of agriculture into the WTO agenda - now a critical factor in determining the still uncertain outcome of the current Doha Development Agenda negotiations. 

48.        Furthermore, the OECD’s Development Assistance Committee (DAC) coordinates the actions of OECD governments in seeking improved quality and effectiveness of development aid.  Its 1997 “Convention on Combating Bribery of Foreign Public Officials in International Business Transactions” is meant to overcome one of the major obstacles to fair globalisation, namely the distortions and hence lower growth caused by corruption.  The organisation’s Health Project, launched in 2001 to examine the efficiency of national health systems, is meant to facilitate economic growth by making this major source of expenditure of national governments more effective. Other initiatives concern the classification in the labelling of hazardous chemicals, food safety in particular as regards genetically modified crops, and seed certification, ensuring the identity and purity of seeds in international trade.

49.        Last year’s resolution adopted by the Enlarged Assembly on “OECD and the World Economy” was perhaps the most important inter-parliamentary statement ever made on the theme of sustainable development.  For that we have largely to thank that year’s Rapporteur, Mr Charles Caccia of Canada, who brought his personal passion for this subject to bear in his impressive report to the Enlarged Assembly.  The Rapporteur in this context is happy to be able to report that the OECD at its May 2004 Ministerial Meeting decided to pursue this programme, in which it tries to ensure that globalisation and economic development is based on a harmonious interplay between economic development, social solidarity and environmental protection.  This means that continued OECD attention will be given to its Environmental Strategy adopted in 2001, whose objectives include the maintenance of the integrity of ecosystems through efficient management of resources and the decoupling of environmental pressures from economic growth.

50.        More specifically, OECD Ministers endorsed the creation of an Annual Meeting of sustainable development experts (AMSDE) for a two-year period.  The new body is to review ongoing OECD work on sustainable development, improve coordination among different parts of the organisation dealing with sustainable development, and make recommendations on areas where sustainable development can be applied in practice. These include reducing environmentally harmful subsidies, finding economic instruments (such as taxes and ‘tradable permits’) to include sustainable development principles in various economic acitivities, and encourage sustainable use of various resources, such as energy. (For further details the reader is referred to the OECD’s website www.oecd.org/sustainabledevelopment/

51.        It is unfortunate that despite all these efforts, very few OECD countries pay attention to the OECD’s Environmental Strategy and the pursuit of sustainable development goals. From fishery to forestry, from vehicular transport to pollution prevention, most OECD countries are proceeding along an unsustainable path. This pattern, if not corrected by governments, has negative implications for the future of the global economy, given the bad example it sets for non-OECD governments whose behaviour is influenced by the actions of the more wealthy countries of the world community.

52.        One area given major attention in last year’s Enlarged Assembly report was climate change. At a meeting in April 2004 of the Ministers of the Environment of all the OECD member countries plus Russia, China, Brazil, Argentina, Israel, Kazakhstan and Slovenia, it was established that the OECD area as a whole is not living up to the 2001 commitments made in the 2001 Environmental Strategy. More specifically, countries are failing to meet environmental targets for greenhouse gas emissions, air and road transport, agricultural subsidies and the protection of biodiversity. Still, progress has been made in areas such as reducing water and air pollution since the 2001 Agreement. As far as the Kyoto Protocol is concerned, the absolute level of emissions has continued to grow, but at a lower rate than economic growth. The meeting recommended greater use of economic instruments to assist environmental protection, such as fees, taxes, economic incitements and direct payments for environmental services. It also recognized that the Kyoto Protocol cannot be counted on to solve the problem of climate change alone, and that participating countries must therefore already now focus on the “post-Kyoto process” that will start after 2012.

53.        Another important area of OECD interest in the present non-exhaustive list of OECD action related to globalisation is its International Future Programme.  Here, the aim is to identify new world concerns at a very early stage.  Based on his talks with the OECD, the Rapporteur would very much hope that that greater attention can be paid to such new risks as mega-terrorism, new infectious diseases and ways for OECD countries, and the world, to shape their use of various energy sources for long-term sustainable development. 

54.        The Rapporteur has wanted to deal at such length with the subject of globalisation since the process in now accelerating, sometimes absurd results. Thus, the distance between the world’s richest and poorest countries was about 3 to 1 1820, 35 to 1 in 1950, and 72 to 1 in 1992. In 1999, the combined wealth of the world’s 200 richest people hit $ 1 trillion, while the combined income of the 582 million people living in the world’s 43 least developed countries only amounted to $ 146 billion. The gap seems to be widening beyond control and beyond the reasonable, not only between the richest and the poorest countries but also between the richest and poorest social strata in many countries and between regions within countries. 

55.        A new solidarity mechanism is needed, but one which is compatible with the values of individual liberty and the kind of socially responsible market economy which we cherish.  This must be done both in the interest of those increasingly left behind and in the interest of the very rich, who will not be able to enjoy in good conscience, let alone securely, such unimaginable wealth in a world of such differences.

V.         OECD REFORM AND ENLARGEMENT

56.        The OECD Ministerial Meeting held in May 2004 also dealt with the future role and continued enlargement of the organization, which now has 30 member countries. In so doing, it responded to the call made in last year’s Enlarged Assembly Resolution 1350 (2003) on “The OECD and the World Economy”, in which the Assembly recognised its awareness of the “difficult choices facing the OECD as regards the expected enlargement from its present 30-country membership, not least against the background of imminent European Union enlargement and the rapid economic progress made by many other countries around the world. Our Resolution went on to say that “These considerations - ranging from the increasingly challenging task of preserving the Organisation’s consensus principle in reaching decisions, to overall working efficiency with more members, and to the need to preserve a balanced membership as between world regions – need to be tackled urgently.”

57.        The OECD Ministerial statement followed the publication of an “OECD Strategy for Enlargement and Outreach” presented by Japan’s Permanent Representative to the OECD, Ambassador Seiichiro Noboru. As the abstract of the report points out, the world has changed dramatically since, say, the 1970s, when “the OECD all major market economies comprising a vast share of world production and trade”. Today, the report says, “that share is diminishing and long-term projections indicate that this trend should accelerate as the world economy develops and more countries share in the benefits of globalisation … A larger, more inclusive, more diverse OECD will grow in relevance, strength and in its ability to address the international economic agenda.”

58.        At present, sixteen countries have either formally applied for membership or announced an interest in doing so. They include Russia, Chile, Argentina and several of the new members of the European Union which do not yet belong to the OECD. (The Czech Republic, Hungary, Poland and the SlovakRepublic are already members.)[2]

59.        The OECD thus stands before a dilemma. Why should a country that seeks membership and seems to fulfil all criteria be denied entry, on the simple ground that for various historical reasons, such as a dictatorship or a defective economic system perhaps imposed on it from the outside, it did not meet them before? On the other hand, would a still further enlarged membership be able to react quickly enough to the ever rising demands for speedy reaction?

60.        Whatever, the OECD can be expected to be even more selective in the future than it has been in the past.  Among the criteria are likely to be that of “like-mindedness”, that is, essentially, the observance of democracy and the market economy.  But also the size and economic importance of a candidate country could play a role, that is, whether it is a “significant player” and can therefore be expected to be able actively to contribute to the work of the organisation.  A further criterion is likely to be the geographical location of a country in order to preserve equilibrium between world regions. This can be expected to disfavour especially smaller countries in Europe, since non-European OECD member states are reported to be keen to avoid any excessive focus on the concerns of Europe to the exclusion of those of others.  The cooperation with countries not foreseen for early membership is likely to be selective and focussed on key areas. 

61.        The Ministerial Meeting also agreed on a watering down of the consensus principle in favour of majority decision-making in certain organisational and budgetary areas.  In this way, it is hoped, the OECD will gain in flexibility in order to more quickly be able to take on new tasks, and to use its resources more efficiently.

VI.        CONCLUDING COMMENT

62.        The present draft report has only managed to cover a few selected areas, admittedly those which the Rapporteur considers of particular importance in discussing today’s world economic situation and the OECD’s role in it. Following the provisional adoption of the report in Paris and Strasbourg in June 2004, he now looks forward to further comments by members of the Enlarged Assembly in time for our coming together for final adoption and debate in Strasbourg in October 2004.


Reporting  committee: Committee on Economic Affairs and Development

Reference to committee: Standing mandate

Draft resolution adopted by the Enlarged Committee on Economic Affairs and Development on 5 October 2004.

Members of the Committee: Mr Kirilov (Chairman),MrsBurbiene,Mrs Pericleous Papadopoulos, (Vice-Chairpersons), MM. Açikgöz, Adam, Anacoreta Correia, Andov,Assis Miranda, Ates, van Baalen, Berceanu, Bilalov (Alternate: Eltsov), Blanco Garcia, Braun, Brunhart, Budin, Çavusoglu, Cosarciuc, Cosido Gutierrez, Crema, Djupedal, Farkas, Mrs Friöleifsdottir, Gasoliba i Böhm, Ms Griffiths, MM Grignon, Gusenbauer, Ms Hakl, MM. Haupert, Högmark, Jonas, Kacin, Kalanovic, Karapetyan, Klympush, Korobeynikov, Kraus, Kristovskis, Lachnit, Le Guen, Leibrecht, Makhachev (Alternate: Mrs Pirozhnikova), Masseret, Melcak, Mikkelsen, Ms Milicevic, MM. Mimica, Nikolopoulos, Öhman, O’Keeffe, Opmann, Mrs Pintat Rossell, MM. Podgorski, Popa, Pullicino Orlando, Ramoudt, Ramponi, Rattini, Reimann, Rivolta, Lord Russell-Johnston, MM. Rybak, Sasi, Schreiner, Severin, Seyidov (Alternate: Mirzazada), Slutsky, Ms Smith (Alternate: Marshall), MM. Sofiyeva, Stefanov, Tepshi, Timmermans (Alternate: Kox), Todorovic D., Mrs Vadai, MM. Versnick, Vrettos, Walter (Alternate: Baroness Hooper), Wielowieyski, Wikinski, Mrs Zapfl-Helbling, Mr Zhevago.

Korea: MM Eom, Yang

Japan: MM Hori, Masuzoe, Araki, Otsuka, Kawauchi

Mexico: Senator Margain

Head of Secretariat: Mr Torbiörn

Secretaries to the committee: Mr Bertozzi, Ms Ramanauskaite and Ms Kopaçi-Di Michele


[1] OECD Economic Survey – Euro area 2004.

[2] A significant example of the OECD’s outreach is the decision in June 2004 to include China and South Africa as observers on its Fiscal Committee, joining the earlier observers Argentina and Russia.