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Doc. 8804
26 September 2000
OECD and the world economy
Report
Committee on Economic Affairs and Development
Rapporteur: Mr Karoly Lotz, Hungary, Liberal, Democratic and Reformers’ Group
I. Draft resolution
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 Assembly’s Committee on Economic Affairs and Development and the contributions from various other committees of the Enlarged Assembly. The enlarged Assembly in this context reiterates its earlier wish that it would welcome a written response from the OECD to this Resolution.
2. The Enlarged Assembly notes with satisfaction the bright outlook for the world economy, including in the OECD area, which is expected to grow at 4% in 2000 and 3% in 2001. It also welcomes the resumed growth in world trade, which, after a slower rise of 5.7% in 1999, is projected to increase by over 10% in 2000 and over 8% in 2001 - indicating greater international economic integration and the maintenance of WTO-inspired open trade (World Trade Organization).
3. In another welcome development, unemployment in the OECD area continues to fall, from 6.6% in 1999 to a projected 6.3% in 2000 and 6.1% in 2001. Inflation is, notwithstanding, being held at bay - rising from 2.5% in 1999 to a projected 2.8% in 2000 and 2.5% in 2001. However, there is a danger of rising oil prices stoking inflation. OECD member countries in this situation need to avoid any over-heating of their economies, by maintaining interest rates at the required levels and by pursuing structural reform in all areas.
4. The Enlarged Assembly in this context expresses its support of the OECD’s project to promote regulatory reform in member countries, notably through country studies highlighting successes for emulation by others. It asks the Organisation eventually to extend the project to all its members, emphasising not only the smoother functioning of markets but also wider concerns such as social fairness, public health, safety and the environment. It also welcomes the comprehensive labour and product market reforms pursued by several OECD member countries in accordance with the recommendations in the OECD Jobs Strategy.
5. The Enlarged Assembly is concerned by the social effects of globalisation and considers that it would be vital today to examine the mechanisms of economic liberalism carefully and perform a comprehensive assessment of the social effects of globalisation in its present form. It would be advisable to lay down new common rules and to improve co-ordination of international commercial and financial bodies’ strategies so as not to further weaken economic and social institutions in the countries worst affected by poverty.
6. The Enlarged Assembly views with concern the recent weakening of the euro vis-à-vis the dollar and other currencies. This trend points to the need for more co-ordinated economic management and economic policies among EMU participating countries and others, for the pursuit of budgetary and fiscal discipline. The Enlarged Assembly in this context welcomes the pledge in favour of orderly exchange rates between the major currencies given at the G-7 meeting in Prague in September 2000.
7. With the US economy growing at a strong pace for the ninth consecutive year - at a projected 4.9% in 2000 and with only a mild slowdown to 3% foreseen for 2001, other industrialised countries, notably Europe and Japan, are called upon to play the role of locomotives for the world economy. The Enlarged Assembly in this context welcomes the recent signs of economic recovery in Japan and hopes that it can continue, aided by greater consumer confidence, an appropriate monetary policy and fiscal structural reform, and the further opening of the economy to foreign trade and investment.
8. The Enlarged Assembly notes with satisfaction the solid growth - around 5% - in several more recent OECD members such as Hungary, Poland and Mexico, and the spectacular recovery of Korea, where growth is projected at 8.5% in 2000 and 6% in 2001. The Enlarged Assembly sees these new centres of dynamism as having benefited in a major way from OECD membership, as contributing to a more multi-polar world economy, and as serving as examples to countries around them.
9. The Enlarged Assembly welcomes Slovakia’s imminent entry as the OECD’s 30th member country. It also recognises the economic progress reached by other countries aspiring to OECD membership – in particular the Baltic states of Estonia, Latvia and Lithuania and hopes they, too, will also be accepted within the near future.
10. Noting Russia’s relative, although still fragile, economic recovery since its financial crisis in 1998, the Enlarged Assembly asks the OECD to intensify its assistance to that country, in particular as concerns its continued path toward a more complete democracy, reform of its tax system, bankruptcy legislation, banking system, its fight against economic crime and corruption. It is concerned by the slow transformation from an economy excessively dependent on raw materials to one more oriented toward advanced products and services.
11. The new information and communications industries (ICTs) - often referred to as the ‘new economy’ - are increasingly recognised as being a major factor behind the sustained and remarkable growth in the United States and many other countries, notably in their enhancing market transparency, competition and productivity. OECD countries should do whatever is in their power to facilitate the development of these industries, nationally and in international co-operation. Policies must go beyond ICTs proper so as to include the reorganisation of industries and markets and their opening to competition; expanded investment in human capital via education and labour markets; the encouragement of entrepreneurship; research; and the rapid diffusion of innovations through international cooperation.
12. The Enlarged Assembly invites the OECD to carry out a special study - if possible in co-operation with the Enlarged Assembly’s Committee on Economic Affairs and Development and other interested committees - on the nature and impact of the ‘new economy’ of information and communications industries on the overall economy, individual markets and society - including in the social, cultural and educational fields and as concerns distribution of income and technological gains at national and international level.
13. The OECD is to be commended on its significant contribution to the Stability Pact for South-Eastern Europe, in particular through its so-called Investment Compact aiming to improve the investment climate in the region, and through its Anti-Corruption Initiative undertaken in co-operation with the Council of Europe. At this critical juncture in the region’s recovery process, it is important that donor countries should maintain their long-term commitment to the Pact and that the recipient countries should work genuinely together. It is also vital to ensure speedy clearing of the Danube and the repair of bridges and other infrastructure in the region following the Kosovo conflict, and to reconcile a participation of the Federal Republic of Yugoslavia in The Pact with an evolution in that country toward democracy.
14. The OECD’s contribution to the WTO process is of special importance following the failure of the WTO Seattle Summit of December 1999, notably by promoting its members’ economic performance and market openness and by forging a consensus among member countries on negotiation areas subsequently raised in the WTO. The Enlarged Assembly welcomes the prospect of China’s early entry into the WTO following preliminary agreement by the United States and the European Union. Finally, it salutes the preparedness of the WTO’s Director General for closer parliamentary involvement in the WTO process - for instance through a ‘Standing Body’ of parliamentary representatives - and suggests for this purpose the establishment of an enlarged assembly along the lines of that on “OECD and the World Economy”.
15. A growing number of countries are implementing comprehensive tax reforms, in particular through the introduction of new environmental taxes with a parallel reduction of existing ones. The Enlarged Assembly expresses its wish to promote a reinforcement of the link between fiscal and environmental policies.
16. The Enlarged Assembly shares the opinion of the OECD that the trade provisions contained in the Multilateral Environment Agreements (MEAs) are essential for carrying out environmentally sound projects. Therefore, it urges all its member States to comply with the strict measures contained in the MEAs and in the Basel Convention on Transboundary Movements of Hazardous Wastes in order to avoid unlawful trade practices which could hamper the multilateral trade system.
17. The Enlarged Assembly invites the OECD to support the position of the Council of Europe and the European Union regarding the WTO negotiations to preserve diversity in cultural and audio-visual services in the upcoming round of liberalisation of the different service sectors. It also invites the OECD to support the Council of Europe proposal for an International Charter on Cultural Diversity and to take an active part in the international dialogue on the preparation of this fundamental instrument.
18. The Enlarged Assembly asks the OECD to intensify its work on the public health, environmental, social and economic impact of genetically modified food. While such food could increase yields and help reduce the use of pesticides and other inputs, it could also present as yet unknown hazards to man and nature. Great circumspection is therefore required. It is essential that solutions such as proper labelling and indication of origin be found. The OECD should continue to play an effective role in international policy dialogue on food safety, engaging all stakeholders including NGOs of both developed and developing countries.
19. Finally, the Enlarged Assembly welcomes the entry into force of the OECD’s Convention on Combating Bribery of Foreign Public Officials, so far ratified by twenty-three OECD and Council of Europe member states. It calls on all remaining countries to follow suit as soon as possible and asks the OECD to extend the convention also to cover the private sector, or to prepare a new convention to this effect.
I. Explanatory Memorandum
Contents
I INTRODUCTION
II THE GENERAL WORLD ECONOMIC SITUATION
A generally favourable outlook
But concerns remain:
- Slower Japanese growth
- Current account imbalances
- A US “soft landing”?
- A surge in oil prices
- Risk of global overheating?
III THE 'NEW ECONOMY'
The era of knowledge
E-commerce in commodities
Market correction in sight?
Consequences for society
IV THE WORLD AFTER SEATTLE
Reasons for the Summit failure
WTO: engine or vehicle?
V WHAT ARE WE DOING TO OUR FOOD?
Biotechnology and society
Popular concern versus industry interests
VI ATTACKING THE ROOTS OF UNEMPLOYMENT:
ASSESSING THE ADHERENCE TO THE OECD'S JOB STRATEGY
Unemployment's many reasons
Success and other stories
Concern for the vulnerable
VII PROGRESS OF REGULATORY REFORM IN THE OECD AREA
VIII PRIVATISATION CONTINUES UNABATED
IX COMBATING BRIBERY
X CONCLUDING REMARKS: OECD AND THE FUTURE
OECD membership and outreach: Slovakia as the 30th member
Stability Pact in south-eastern Europe
Global understanding in a global economy
I INTRODUCTION
1. The debate of the Enlarged Parliamentary Assembly1 on "OECD and the World Economy" - is scheduled to be held on 27 September 2000. The present report is based on the Rapporteur's discussions with the Secretary General, Mr Donald Johnston, and his senior staff in January 2000. It was presented in a first version for the meeting of the Committee on Economic Affairs and Development of the Parliamentary Assembly of the Council of Europe held at OECD headquarters in Paris on 31 March 2000. The present revised version takes into account the further discussion held with Mr Johnston on that occasion as well as the meeting of the OECD Ministerial Council meeting in June. A preliminary draft Resolution was provisionally adopted by the Committee at its meeting at the end of June in Strasbourg, for dispatch to delegations over the summer. At its meeting on 26 September, the Enlarged Committee on Economic Affairs and Development adopted the draft Resolution appearing in the present report.
2. The Rapporteur thanks Mr Johnston and his colleagues for the valuable comments they have given him and the Committee. Finally, he is grateful to his colleagues on the Enlarged Economic Committee and the Enlarged Assembly for their many constructive contributions.
3. In conformity with established practice, the report will focus on a limited number of themes - regrettably but unavoidably to the exclusion of many others also worthy of our attention, many of which will no doubt be raised in the contributions just referred to. The themes to be covered are:
- The General World Economic Situation
- The "New Economy", with special regard to the effects of globalisation
- The World after Seattle
- What are we doing to our food?
- Attacking the roots of unemployment: assessing the adherence to the OECD’s Job Strategy
- Progress of regulatory reform in the OECD area
- Combating bribery
- The OECD and the future.
Particular attention will be paid to the rapidly evolving general economic situation in the OECD area and the rest of the world. This part of the report will perhaps even more than others have to be updated in the course of the summer, so as to be fully up to date by the time of the September debate.
II THE GENERAL WORLD ECONOMIC SITUATION
A generally favourable outlook
4. In its "Economic Outlook" of June 2000, the OECD calls the outlook for world and OECD-wide economic growth “brighter than they have been for some time”. Thus, growth in the OECD area is estimated to reach 4% in 2000 (after 3% in 1999), the fastest pace in a decade – before slowing to 3% in 2001. These projections, it should be noted, represent a remarkable upward revision compared with the projections published in December 1999 in OECD Economic Outlook No. 66. The OECD explains this turn toward the more optimistic by referring to the continued strength of the US economy (to which we shall return in greater detail later); a better outlook for the European Union area; and a stronger than expected resumption of growth in wide parts of south-east Asia and South America.
5. A welcome reduction in unemployment is underway in the OECD area. It has come down from 6.9% in 1998, to 6.6% in 1999, with a projected rate of 6.3% for 2000 and 6.1% in 2001 (implying a fall in the number of unemployed of over 2 million). This also holds for OECD-Europe. The jobless rate in the 11 EU countries forming part of the euro-zone is projected to fall from 10.1% in 1999 to 9.2% in 2000 and to 8.5% in 2001, mainly owing to economic growth. For the entire European Union, which also include Great Britain and other low unemployment countries, the OECD forecasts a joblessness rate of 8.5% in 2000 and 7.9% in 2001. While more labour and market reforms are generally needed in OECD-Europe, the organisation particularly commends countries such as Britain, Spain, Denmark, The Netherlands and Portugal on having carried out many reforms in recent times seen as responsible for bringing the level of structural unemployment down.
6. The OECD is heartened by continued low inflation in key countries, although what it calls a “modest upward drift” will become apparent in many countries. It is expected to rise from 2.5% in 1999 to 2.8% in 2000, before again slowing to 2.5% in 2001. This is on condition, however, that the strong rise in world oil prices observed over the summer and autumn of 2000 does not cause a “spill over into ‘core’ inflation”. Again on the positive side, the OECD sees an earlier and sharper recovery than expected in most of what it calls the Dynamic Asian Economies, while in South America, expansions appear to have become better established than seemed likely a year ago” Finally, growth in world trade in 2000 is expected almost to double at 10.4% from 5.7% in 1999, and to remain at a continued high level of 8.3% in 2001.
7. In the European Union, the OECD sees a strengthening of economic activity, accelerated growth and markedly reduced unemployment. The OECD commends the comprehensive labour and product market reforms undertaken in many European Union countries. At the same time it points out that progress in this field has been uneven across countries and that much remains to be done in some. So far, inflation in Euroland has been subdued, but with the economic expansion underway and with oil prices high, inflation can be expected to accelerate unless countered by higher interest rates, especially as oil has to be paid for with a weaker euro (at the moment of writing standing at around US$ 0.85).
8. This could force the European Central Bank to raise its present benchmark refinancing rate even higher, especially if the US Federal Reserve were to do the same from its present 6.5%. The ECB has raised its rate successively from 2.5% in November 1999 to the present 4.50%, following an increase of 50 basis points in early June, and a further rise of 25 basis points in August 2000. The European Central Bank, the OECD believes, may have to raise the central interest rate even further. However, that could pose a problem for more slowly growing Euroland countries such as Germany and Italy. Meanwhile, the US Federal Reserve interest rate now stands at 6.5%, or 2% higher than the ECB rate, while the British Central Bank interest rate at 6% is 1.50% higher than that of the ECB. In order to contain inflation, the US Federal Funds rate is expected to reach a level at 7% or above by the end of 2001. Indeed, the OECD says that “federal rates may have to rise to above 7% by next August to ensure a soft landing”. The art and difficulty of adjusting interest rates upwards will lie, now as always, in cooling the economy without killing it.
9. In February 2000, the OECD published an analysis of the first year of the European single currency, entitled "EMU One Year On". In spite of the considerable loss of value of the euro vis-à-vis the dollar since its launch in January 1999, the study considers the first year as overall successful. Thus, the first year saw an economic recovery benefiting consumers, bringing added employment and furthering the integration of national labour markets in Euroland. At the same time, the OECD report says it detects a certain "Maastricht fatigue", in particular in the continuation of strict financial policies and structural reform. These areas, however, are particularly important in view of the rapid ageing of the populations, while real consolidation of public budgets is necessary if the current good times should worsen.
10. The OECD draws unfavourable comparisons between Euroland and the United States as regards unemployment, employment rates and the recent shortening of working time undertaken in some EMU countries. However, this should, in the Rapporteur’s view, not obscure the considerable efforts of structural reform and fiscal belt-tightening now characterising many Euroland economies, which are also drawing together in order to halt any further weakening of the euro.
11. The erosion of the euro’s value (both vis-à-vis the dollar and the yen) accelerated in late summer 2000. The currency at the time of writing (mid-September 2000) stood at 0.85 to the dollar, a 27% drop in value since its launch in January 1999. At the same time, the price of oil rose dramatically – to around US$ 35 per barrel by mid-September – reflecting several circumstances: high world demand and low stocks; reduced production in OPEC countries; and oligopolistic – some would say cartel-like – behaviour by major oil companies.
12. High oil prices - exacerbated by the ‘weak euro/strong dollar’ relationship making dollar-denominated oil even more expensive - and high taxes on petrol sales to the European public combined to provoke widespread blockades by truckers, farmers and other professions of oil refineries, first in France and then in several other countries such as Spain, Belgium, the United Kingdom and Germany. The blockades could only be lifted after some governments made significant concessions to the protesters and others held out the prospect of future measures to assist vulnerable groups. The protests reflected widespread popular resentment over not only high oil prices, but also high petrol taxes, sometimes amounting to 70% of the sales price.
13. The high oil prices can be expected to come down considerably after the northern hemisphere winter of 2001 (especially if it is mild), that is, after stocks have replenished and warmer weather reduces heating bills. However, every further drop in the euro’s value against the dollar means a correspondingly higher oil price. For this and many other reasons, it is essential that the euro regain terrain, by continued structural reform in ‘euroland’ countries and better coordination of national policies.
14. In the eleven nation Euro zone, a growth rate of 3.5% is foreseen for 2000, slowing only moderately to 2.3% in 2001. In France, where reduced unemployment is considered largely as resulting from strong growth, the OECD sees signs of greater flexibility in the labour market, notwithstanding - though some will say as the result of - the newly introduced 35-hour work week. France at present enjoys a "virtuous cycle of GDP growth, job creation and a fall in unemployment", with growth rising from an estimated 2.9% in 1999 to a projected 3.7% in 2000. Germany, the biggest economy in Europe, is believed to have grown by a more moderate 1.5% in 1999, with growth of 3% foreseen for both 2000 and 2001.
15. Growth is also satisfactory in EU countries outside Euroland. The OECD points to a vigorous increase in economic activity in the United Kingdom after a brief slowdown in early 1999. By early 2000, UK unemployment had fallen to less than 6% and growth for the year should be around 3%. Even though inflation - at 2.5% - is well under control, the Bank of England has repeatedly increased the basic interest rate to its present 6% in order to check inflation.
16. Among the more recent OECD members in central Europe, the Czech Republic, Hungary and Poland, the picture varies somewhat. The Czech Republic has gone through a difficult period, enduring a 2.3% contraction of its economy in 1998 and a further 0.2% reduction in 1999. However, with ongoing restructuring among firms and banks, the OECD projects a 1.4% growth in 2000, increasing to 2.3% in 2001. In neighbouring Hungary and Poland the situation is more upbeat, with the economies in question expected to grow by around 5% in 2000 and 2001. (As for the transition process in central and eastern Europe as a whole, the OECD stresses both that it is far from over in many countries and that the picture varies widely between regions and countries.)
17. Canada's economy continues to expand at a healthy pace of over 4%, supported by strong domestic demand and continuing US growth. Mexico's growth is likewise projected at between 4.5% and 5% in 2000 and 2001 - figures that may well have to be revised upwards should oil prices continue to firm. Australia's economy, which grew by over 5% in 1998, slowed to a more moderate 4.4% in 1999 and a projected 3.9% this year. It will of course also be very much dependent on economic developments in the surrounding Asian region, whose strong recovery is expected to continue. New Zealand's growth resumed to a healthy 3.9% in 1999 (following a 0.6% contraction in 1998), with an even stronger growth rate of 4.2% projected for 2000.
18. The OECD sees “clear signs of improved economic activity” in Japan. The Japanese economy now appears to be “on the path of a cyclical recovery”, with growth in 2000 expected to reach some 3% before slowing to around 1.5% in 2001. (However, Japanese growth projections are rendered somewhat less reliable by what the OECD calls “conflicting statistics”, which “blur the reading of economic activity during the second half of 1999”. The Rapporteur hopes that these difficulties of interpretation can be sorted out, given the capital importance of possessing accurate statistics on the world’s second largest economy.)
19. The OECD calls the performance of Korea’s economy “excellent by nearly every indicator in 1999 and early 2000”. There has been “significant progress” achieved in rehabilitating the financial sector and improving the balance sheets of the corporate sector. Growth in 1999 stood at almost 11%, expected to slow only moderately to a still impressive 8.5% in 2000. The OECD sees the “effective implementation of recent structural reforms” as key to sustaining future growth.
20. Finally, economic growth in Russia “continues to show signs of recovery and industrial expansion, with the latter up by 10% in 1999 over an admittedly particularly weak 1998”. Recovery has been helped by rising oil and gas prices and rising demand also for other key exports. These should help Russia temporarily but will be of little use unless they are accompanied by structural reforms long advocated by the OECD and more recently heralded by President Putin. Meanwhile, the rouble has firmed somewhat, at around 25 roubles per dollar. This has helped bring inflation under some control, to 'only' around 20% per annum.
21. However, in a country study on Russia published in March 2000, the OECD points to the fragile nature of the Russian recovery. Reforms in the tax system, bankruptcy legislation and the banking sector are particularly urgent, according to the study. Barter in a still largely ‘demonetised’ society is still far too important for an aspiring economy such as Russia’s – as is the country’s strong dependency on raw materials, especially oil and gas, and comparatively unsophisticated manufacturers. If the responses in the wake of the 1998 financial crisis were of an emergency nature, those now required, says the report, are of a more strategic and fundamental character. The Committee, in provisionally adopting the attached draft resolution, also pointed to the need for Russia to underpin its economic development by continued evolution of its democracy.
But concerns remain :
- Slower Japanese growth
22. However, OECD representatives in their talks with the Rapporteur also raised a number of concerns. The first has to do with the risk that any considerable appreciation of the yen might derail any Japanese recovery, upon which so many other countries in that region - and indeed the world economy - very much depend. Although that recovery has firmed since the first version of this report (in March 2000), much will depend on future growth in private consumption, on further progress on corporate restructuring, and on a continued accommodative monetary policy.
23. The latter is all the more important as the interest rate in Japan has come down to virtually zero per cent. It must be hoped that this will be enough to further raise business investment or consumer spending. The same holds for the government's principal answer of deficit spending. Many bridges and roads have been built, without much to show for them in the way of economic revival. Further deficit spending is rendered more difficult by Japan's high ratio of debt to gross domestic product. It now stands at over 130%, the highest of any major economy. It can only be hoped that the record $800 billion budget for the fiscal year starting in April 2000 will finally do the trick, as the OECD now seems to believe.
24. The OECD cautions against any radical changes in Japanese macro-economic policy, partly out of fear that ongoing structural reform might be abandoned if confidence on the part of business and the public were not to strengthen further. The OECD recommends that the Bank of Japan “maintain an easy monetary stance”, while urging speedy implementation of planned structural reform, a greater opening of the economy to domestic and foreign competition, and the formulation of a medium-term policy framework.
- Current account imbalances
25. Another source of concern to the OECD are large current account imbalances resulting from the "unbalanced pattern of growth" between the major OECD regions. The US current account deficit is a particular worry. In 1999 it rose to the record amount of $340 billion for goods and services, with a $444 billion deficit projected for 2000. While such massive US buying from abroad has certainly helped the world economy, the question must be asked whether, and if so for how long, it can continue.
26. The general sentiment in the OECD seems to be, however, that it may still be able to do so for a fairly long time to come. The reasoning is that it is rather natural for a country to import so much more than it exports if it grows so much faster economically than much of the rest of the world. Growth in the United States, at 4.2% in 1999, is projected at 4.9% in 2000 and 3% in 2001.
- A US “soft landing”?
27. Last year's OECD report (Doc. 8465, Rapporteur: Mr Townend) discussed in great detail the components of what it termed the US economy's "perpetual motion machine", surmising that perhaps the US "is, after all, on another economic planet from the rest of the world". Close to a year later, the US "bubble" - lo and behold! - still holds and we are indeed left to contemplate whether it is a "bubble" at all. At the time of writing, the US boom is in its 112th month, having broken the record of that which lasted from February 1960 to December 1969. Since March 1999, American households have increased their net wealth by 67%, or over $34 billion, while the 1960's boom saw 'only' a 42% or $10.3 billion rise in wealth. Nor can it be argued that the poor have been left behind. The 20% of Americans with the lowest incomes have seen their wealth grow by 2.7% yearly, while the rise in the uppermost income quintile was a slightly lesser 2.4%.
28. What surprises us is the robust nature and the durability of this continued US growth. Just as the business cycle was expected to reach its natural end, another investment boom started, adding further fuel to growth. Productivity gains have, similarly, not abated but on the contrary increased and this has been accompanied by a similarly uncharacteristic decrease in inflation. Furthermore, while the 1960's decade-long boom was largely driven by increased defence expenditure owing to the Vietnam War and by major investments for the Johnson administration's "Great Society", today government expenditure grows at a modest 3%, while the government budget surplus for 2000 is expected to reach $210 billion, or 2.2% of GDP!
29. Meanwhile, the US stock exchange is characterised by a continuing wide gap between still relatively strong technology shares on the one hand, and those for more ‘traditional’ industries on the other. Even though the former have come down considerably since their March 2000 highs, they have certainly not collapsed, as some observers feared.2 Whether there is still "irrational exuberance" in the market, in the words of Federal Reserve Chairman Alan Greenspan, remains to be seen. However, Mr Greenspan seems determined to keep the Fed interest rate at a level permitting the economy to make a "soft landing" as and when a turn for the worse may eventually come. The OECD calls for “an orderly reduction in demand growth to prevent overheating and avoid the need for a much sharper tightening of policy”.
30. Given the underlying strength of the US economy and the resulting wider scope for the US government to counter any economic downturn, it appears that any end to current US growth may not be 'the end of the world'. To the extent that the United States today is reaping the benefits of many years of supply-oriented economic and taxation policies leading to remarkable price stability, the country is likely to remain for quite some time yet the dominant economy among the industrialised countries and an economic engine for the rest of the world.
31. As can be seen, the picture varies considerably among OECD member countries. On the whole, however, the OECD is relatively optimistic about the near to medium future. It warns, however, against any complacency. Stronger unexpected budgetary revenue, it admonishes, should not cause countries to slacken in their reform efforts or to relax fiscal policies overly. Countries need further fiscal consolidation in order to permit automatic stabilisers to operate symmetrically over the entire business cycle. This was something that countries could not do in early 1990's because of their particularly high overall debt burdens at the time. In other words, for the OECD, Keynes is still very much alive and needed in order to protect against any hard times ahead.
- A surge in oil prices
32. By mid-February 2000, the price of oil surged passed the $30-a-barrel mark, up from about $10-barrel at the end of 1998. After a brief reduction down to around $25 in April (following an OPEC pledge to raise output), it had reached the $35 level by mid-September, notwithstanding OPEC’s agreement in September to increase daily production by 800,000 barrels.
33. Three factors are seen as having driven the push in oil prices: the major upturn in the world economy, low oil inventories and a deliberate reduction in supply by OPEC countries of about 7% since March 1999. True, oil does not hold the same sway over the world economy that it did during the oil crises of the 1970's. Then it accounted for nearly 9% of every dollar of US GDP, while now the figure is only 3%. We now, on the whole, drive smaller and more fuel-efficient cars (even though increasingly massive four-wheel drives have driven up petrol consumption). We insulate our buildings better and have moved our economies toward services and information, both of which tend to use less energy than traditional industry. However, high (dollar-denominated) oil prices will have an inflationary effect, especially in OECD countries with weak currencies.3
34. The longer-term implications of the rise in oil prices seemed to worry the OECD Secretary General in our talks, especially against the prospect that fossil fuels may run out in fifty years or so. It will oblige us, he felt, to give much more urgent thought to other sources of energy, not excluding nuclear. Thus, it was asked, are we wise in shutting down nuclear stations considered safe? Should we not instead try to extend their life span? How are we doing on new sources of energy?
Risk of global overheating?
35. Amidst its optimistic projections for various aspects of the OECD and world economy, the Organisation nevertheless sees “the major new risk to the outlook” as being that “the increasingly rapid global expansion gathers too much pace …. If monetary authorities in this situation underestimate the global strength of demand and are somewhat slow to respond, the result could be higher inflation in most countries and a substantially more pronounced cycle [of boom and bust].”
III THE 'NEW ECONOMY'
The era of knowledge
36. The Rapporteur's talks with OECD officials naturally came to deal also with what is increasingly known in economic parlance as the "new economy". Although it is a result of, and has contributed to, such phenomena as globalisation, structural reform and deregulation – but also international agreements on standards - its main vehicle is the dramatically increasing facility of electronic, computer-based communication. Its result is an ever greater role for knowledge in the world economy. It is based on the Internet, whose potential will increase even further in the years to come, along with the general introduction of much higher, so-called "bandwidth", transmission capacity.
37. Basically, the new Internet-based economy signifies a drastic overcoming of various market imperfections. In the 'old economy' that we may now be leaving at least in part, these imperfections placed severe limits on growth and tended to exacerbate fluctuations in the business cycle. Customers and producers of goods and services had highly imperfect knowledge about 'the market' - a circumstances which of course does not alter the fact that 'perfect knowledge' remains utopian for us humans, given the fact that our intellect has its well-known limits. This is not denying, however, that the ‘old economy’ factors and relationships remain important in shaping growth trends everywhere.
38. Generally speaking, however, today's market knowledge is being vastly extended thanks to the 'new economy'. Thus, for instance, stocks can be kept to a minimum, as producers know instantly how many items or units of a service are being sold, and as market trends can be immediately extrapolated from sales. With minimum stocks - or in some cases none, such as in 'just-in-time' delivery where they are all on the way to consumers - there will be much less pronounced ups and downs in production. By contrast, in the 'old economy' excessive stock build-ups were a major factor behind recessions, as stock accumulation during the recovery phase of the economic cycle led to overheating and stock build-downs during recessions exacerbated unemployment.
39. Furthermore, the 'new economy' permits much more direct contact between the product or service provider on the one hand, and the buyer on the other. The intermediary, the middleman, is rendered increasingly superfluous, as Internet shopping grows and e-commerce takes off. The OECD, it should be recalled, has long been at the forefront in exploring the world-wide impact of e-commerce.
40. The OECD June 2000 Economic Outlook calls the ‘new economy’ – or information and communications industries (ICTs) – “a major driver of labour productivity growth, particularly in the United States and some other countries”. ICTs “have the capacity to increase countries’ potential output significantly, especially if associated with reorganisations of firms, industries and markets”. Structural reform, in other words.
41. ICT benefits do not come automatically, however. Education and labour markets will have to expand investment in human capital and allocate labour more swiftly according to the rapidly changing needs of the economy. Financial markets will likewise have to allocate savings to high return activities. Entrepreneurship will have to be encouraged, together with open and competitive markets that strengthen the diffusion of innovation. The OECD Ministerial Council in June, 2000, for its part “recognised the serious concerns felt by many at the economic and technological changes underway, and the importance of addressing these concerns locally, nationally and internationally”.
42. The Internet economy could also benefit developing countries in a major way, according to the OECD. While problems remain in much of the developing world - such as a lack of equipment and costly telephone services - the countries concerned could use e-mail, e-commerce and other Internet services to diagnose diseases through digital photography sent for analysis across the world, etc. And as prices for equipment and use come down and technology improves, 'late starters' will be able to catch up more easily. For instance, countries like China, India and Indonesia have been able to 'leapfrog' directly into digital equipment. The same is likely to happen with the previously mentioned "broadband" facility.
E-commerce in commodities
43. Commodities are increasingly traded worldwide through e-commerce. The likes of the already existing 'MetalSite.com', 'Steel.com' or 'E-Chemicals.com' will in due course form the connecting points between buyers and sellers. A company such as Enron has set up an on-line market place, through which companies all over the world can buy and sell coal, electricity, plastics, natural gas, pulp, paper and oil. Soon the company hopes to add "bandwidth" as such to is repertory. It is to be traded between sellers with spare bandwidth capacity and buyers that need it - the whole process concluded in seconds. In May 2000, fourteen of the world’s largest mining and metal companies announced the creation, by the end of the year of a single internet site expected to cut costs by up to 7%. A month earlier, fourteen leading oil and gas companies joined forces in a similar way.
44. Some observers estimate that major Internet exchange companies such as those mentioned will mediate between 30-40% of industrial e-commerce already by 2004. They will shape the rules, standards and technology by which a host of goods and services will be bought, sold, bartered or auctioned across the world. Again, thanks to greater knowledge on the part of all market participants, the efficiency of the world economy will be greatly enhanced.
45. Finally, the Internet economy makes for a much more transparent and competitive market, thereby holding inflation to a minimum. The same dampening effect on inflation results from the previously mentioned reduction in stocks and the disappearance of the intermediary between buyer and seller. This notwithstanding, some serious concerns remain, such as the security for the consumer against fraud and the like, and the protection of systems.
46. This, then, helps at least partly to explain why the world's number one Internet economy, the United States, can enjoy, at least temporarily, growth rates of close to 6% without any serious inflation, with near full employment and with a budget surplus! It also helps explain the previously referred to dichotomy in the US stock market - where the shares of 'new economy' companies at least until recently soared to unknown heights while those of 'old economy' companies languishes.
Market correction in sight?
47. There will of course come the day when some sort of substantial downward 'correction' will take place, whether linked or not to a downturn in the US economy. However, even if many of the myriad of new companies now being established were to falter, the underlying, major improvements in the functioning of the world economy are there for all to see. We could therefore, in the Rapporteur’s view, be at the dawn of an unparalleled economic boom in the world economy that could last for decades. One OECD text puts it in these words: "A confluence of forces - particularly the transition to a knowledge society, the emergence of a global economy and the pursuit of environmental sustainability - could come together to propel a huge improvement in wealth-creating capacity and well-being worldwide".
48. This being said, there are, worryingly enough, a number of parallels between, on the one hand, the present Internet stock fascination; and, on the other, both the 1929 stock market boom preceding the Great Depression and the 1989 share boom in Japan that led to that country's long and difficult come-back since.
49. The boom in Japan, it will be remembered, began with rising land prices, which pushed up the shares of companies owning that land. Like the Internet boom, where new share issues now provide the funds needed to boost additional share issues, Japan's boom soon began to feed on itself. As speculators rushed in to buy more land, land prices went up even further, in turn boosting share prices. Banks added to the frenzy by accepting land at inflated prices as collateral for lending more funds, to be used for even more speculative investments.
50. The same is essentially happening with the Internet boom. True, there is now the credible claim that overall productivity is increasing, as the Rapporteur has sought to demonstrate. The question is only whether improved productivity per se engenders greater profits. It is time, then, to at least question our earlier reasoning about the effects of reduced market imperfections. The reason is that, under the more perfect competition and information provided by the Internet, markets improve and profits tend to fall to zero. As companies realise this they try to buy up each other to create the semi-monopolies they hope will guarantee future profits. Greater indebtedness and operating losses would follow.
51. The market itself cannot be expected to provide any soft landing, even though by mid-2000 the relative fall in many new technology shares reflected a sobering in market sentiment. Irrationality can continue to feed on irrationality for a long time. Only sufficiently high interest rates can achieve sufficient cooling, as the US Fed is now trying to do. It is for this reason that we must continue both to be vigilant against any 'irrational exuberance', in Mr Greenspan's words, and to do what we can to prevent interest rates from rising unduly.
Consequences for society
52. The OECD is now busy trying to figure out the parameters of the "new economy". Questions are being asked about what its driving forces are, how these may inter-react, how long a "new economy" economic cycle can be expected to last, and what the relationship may be between growth at company level and that of society as a whole. At the same time the OECD is pointing to new bottle-necks in that very "new economy". They include comparatively mundane aspects such as limits to the capacity of delivery systems (one of the main beneficiaries of e-commerce); strains on customs clearance during physical delivery of e-traded goods across borders; the growing urgency to break up state monopolies increasingly unfit for the new environment; how to treat e-commerce from the VAT point of view; and whether, with increased e-commerce, the capacity of central banks to steer the economy via the setting of interest rates can be maintained.
53. The Rapporteur heard a most interesting report from two members of the Economic Committee - its present Chairperson Mrs Degn and its former Chairman Mr Davis - following their participation in the OECD's Conference "21st Century Social Dynamics: Towards the Creative Society", held within the framework of its series of conferences "Expo 2000 OECD Forum for the Future". And in concluding this section, the Rapporteur wishes to quote a paragraph about the knowledge economy given in the background paper for that conference:
54. "The knowledge economy", the paper says, "can be considered a more complex place to produce, consume and live than yesterday's industrial society. First, as the number of distinct products, producers and consumers increases, the knowledge economy introduces more variety. Second, in addition to this quantitative diversity, there is a wider range of qualitative relationships. Workers are no longer passive cogs in a Taylorist factory. Consumers are no longer couch potatoes accepting uniform products thrust their way…Company managers must contend with new strategic challenges as old products and methods of production rooted in the industrial era can now be outflanked more quickly and from previously unlikely sources. Governments are withdrawing from cradle-to-grave intervention in people's choices. Relationships in the knowledge society take on a new and broader set of qualities than in hierarchical systems of the past. Buyers, employers, initiators of production and citizens can - and often must - force new types of relationships, many of which are outside familiar legal and cultural frameworks. This brings a greater degree of freedom but it also creates uncertainty."
IV. THE WORLD AFTER SEATTLE
Reasons for the Summit failure
55. The OECD may have looked forward with greater apprehension than most to the WTO Summit in Seattle in December 1999 - with the notable exception perhaps of the WTO itself. After all, the OECD had lived through the collapse, in late 1998, of its own negotiations for a Multilateral Agreement on Investments (MAI), an experience it is not likely to want to live through again any time soon. If the MAI negotiations could fail with only 29 comparatively homogeneous OECD member countries involved, how much more difficult would it not be to reach an - in many ways much more ambitious - settlement among the 135 members of the WTO?
56. The OECD tried to assist Seattle, both by trying to make sure that countries were in better economic shape to face the hoped-for new Round, and by working over certain negotiation areas with a view to possibly forging an OECD-wide consensus to take along to the Summit. More generally, the OECD seeks to strengthen the constituency for liberal, rules-based trade, not just among its own members. It did so with a certain well-underpinned credo, which holds that protectionism in the end impoverishes almost everyone; that economies with open trade and investment policies grow faster than closed economies; and that economic growth in general leads also to a reduction in poverty and to improved core labour standards. OECD Ministers in May 1999 therefore pleaded with member countries to "continue to settle trade disputes in accordance with WTO rules", drawing attention to the "responsibility resting on governments in this regard". This includes implementation of WTO Commitments. All to often agreements are signed but not lived up to in the real world - whether by developed or developing countries. Their June 2000 communiqué said they were “determined to work towards the launch as soon as possible of an ambitious, balanced and broad-based WTO round of multilateral negotiations reflecting the needs and aspirations of all WTO members”.
57. So why did the Seattle Summit fail? What will be the immediate and long-term consequences of the failure? And what can be done to keep world trade and investment proceeding apace with the development of the world economy? One reason for the set-back was that the two major trade groupings - the United States and the European Union - were in fundamental disagreement over the width and contents of the negotiations. Whereas the EU, much of the rest of Europe and perhaps also Japan wanted as wide-ranging a Round as possible, the United States wished it to focus above all on agriculture and services. Meanwhile, developing and emerging economies observed the US-EU dispute with a certain indifference, instead wishing the Round to concentrate on trade barriers in areas vital to them such as textiles, shoes and agricultural commodities. The question must therefore be asked: With such divergences in evidence, was Seattle sufficiently well prepared to have a chance to succeed? And if it was not, why was it held at all?
WTO: engine or vehicle?
58. Once the Summit started, non-governmental organisations joined the fray. Some were financed by labour union traditionally opposed to any radical opening of their domestic markets. Others - whose degree of representativeness was not always clear - had come to the city to defend the supposed interests of developing countries, the environment, consumers or the socially disadvantaged. All these NGOs wanted the WTO to concentrate more on areas such as these, rather than on any continued liberalisation of trade or any strengthening of the multilateral trade order. They saw and see the WTO as the driving force behind globalisation and the increasing domination of major companies.
59. However, the way this Rapporteur sees it is that the WTO is merely the multilateral answer to the globalisation process. It simply tries to steer trade in goods and services as well as international investment in a more orderly direction. It does so through multilateral rules in order to ensure that 'right can predominate over might' in world trade, and through gradual market liberalisation via reductions of tariffs and the dismantling of non-tariff barriers to trade. The remarkable thing is that, so far, it has been relatively successful in so doing. Protectionism has been held at bay and trade disputes have been referred to various WTO dispute settlement where discussions have been surprisingly civilised. More lately, China has won US and EU approval for entry into the WTO – a circumstance which the Rapporteur believes will have major and positive consequences for the world economy.
60. There can be said to have been "three Seattles" present at the Summit: those who want to slow down the world so that they can get off it (NGOs); those who want to slow it down so that they can get on it (developing countries); and those who want to speed it up so that they can stay ahead in it (major companies, especially in high technology). It can only be hoped that all these parties will soon find a way to trade arguments rather than invectives.
61. Perhaps the WTO is a victim of its own success. Precisely because it succeeds in what it was established to do, some member countries now appear to be trying to loosen the multilateral set of rules in order to increase their own room for manoeuvre.
62. The question is not whether we need more environmental protection or higher labour or social standards in the world - we emphatically do - but whether the WTO can be counted on to deliver them. At the 1994 Marrakech Summit establishing the WTO, it was decided to entrust the labour standards to the International Labour Organisation. Little came of this, however, even though most WTO countries also belong to the ILO. The risk is that, by trying to add too many additional topics, the already encumbered WTO negotiation process may collapse.
63. The Rapporteur comes from a country, Hungary, which ever since the beginning of its transition process has opted for as open an economy as possible. Throughout the difficulties that Hungarians have had to endure during this process, they have been constantly aware that protectionism on the whole helps only vested interests while at the same time impoverishing consumers.4 OECD studies have concluded that the complete elimination of industrial tariffs alone would increase world income by 3% over the next ten years, with developing countries the first to benefit. Even though such projections are difficult to prove, they illustrate the danger inherent for both richer and poorer countries in any "stillstand" or retreat as regards liberalisation. While it is true, as one OECD interlocutor said, that international markets took the tumultuous events and the summit failure in Seattle in stride, they might not have thought about the need to prepare rules today for the world economy of tomorrow.
64. The chief worry of the OECD's Secretary General, Mr Donald Johnston, was at any rate the fate of the poorer countries in the world, and how to get them on board the ever faster-moving train that is the world economy. But also the dialogue with NGOs has become a priority for the OECD - a natural enough insight following the collapse of the MAI talks (which failed also due to vocal NGO opposition). He now holds regular meetings with a host of NGOs, including major ones such as Greenpeace, in order to exchange experiences in fields such as environment protection, where the OECD is doing pioneer work that can also in due course benefit the WTO. Meanwhile, the OECD's Development Assistance Committee (DAC) continues its work in order to render development assistance more effective, thus permitting developing countries to meet a specific set of development goals by the year 2015. 5
65. If we momentarily leave the strict OECD framework, the WTO in the wake of Seattle places new emphasis on a closer consultation with parliamentary instances. Indeed, already at the Summit the proposal was made for a "Standing Body" of parliamentary representatives mirroring the WTO membership, whose role would be to assist the Organisation by bringing it closer to citizens. Following this proposal a delegation from the Parliamentary Assembly of the Council of Europe6, including the Rapporteur, went to Geneva in March, 2000, for talks with WTO Director General Mike Moore.
66. On this occasion, the Chairman of the Sub-Committee concerned, Mr Leers, assured Mr Moore that "the Council of Europe's Parliamentary Assembly stands ready to play its part at paneuropean level to serve as a parliamentary forum for the WTO, why not alongside others from other parts of the world". Mr Moore replied that "the issues before the WTO are so crucial that all parts of society must be involved. I warmly welcome this and any other parliamentary initiative to narrow the gap between policy-makers and citizens as regards the future of the world trading system. I look forward to an opportunity to address the Assembly on these issues."
67. The Rapporteur, like his Parliamentary Assembly colleagues on the delegation, was very impressed by Mr Moore's determination to have the world overcome the 'post-Seattle blues' as soon as possible, bridge their differences and agree on a balanced agenda for progress. And he mentions it here so that the Enlarged Assembly may reflect further on how this willingness on both the parliamentary and the WTO side for closer dialogue may best be realised. A successful WTO is in the best interest of the OECD and vice versa.
V. WHAT ARE WE DOING TO OUR FOOD?
Biotechnology and society
68. One of the issues that drove protesters to Seattle - and one which sowed discord at the Summit proper - was the future of genetically modified food and other aspects of food safety, such as the use of hormones in meat production. Public resistance to genetically modified foods in particular has become pronounced in Europe and has spread to many other countries around the world, including that foremost in research, marketing and exports of such foods: the United States.
69. It was therefore not surprising that the May 1999 OECD Ministerial Council should recognise that "biotechnology offers great opportunities but also represents significant challenges and has given rise to public debate on its implications". It stressed the "importance of safeguarding human health and the environment, while enabling people to enjoy the benefits that flow from advances in biotechnology. Scientific research is essential to the process." OECD Ministers asked the OECD to "continue to examine the various dimensions of the issue". In June 2000 the OECD Ministerial Council called food safety a “fundamental objective for all governments” and “affirmed [its] commitment to a science-based and ruled-based approach”.
70. A specialised Ministerial OECD committee last summer called for "approaches to policy design that involve greater interaction between the various stakeholders, without sacrificing the basic principles of scientific validation" - a formulation which well reflects especially the widely differing US and European positions. Similarly, the committee on the one hand underlined that "appropriate regulatory reform could unleash innovative capacity by encouraging innovative behaviour and the diffusion of knowledge". On the other hand, it recognised that "new regulatory frameworks need to take account of social and environmental objectives, promote diversity of technological choices and command public understanding and confidence". The subject was also taken up by the G-8 Heads of State and Government meeting at Cologne in June 1999. They asked the OECD to "undertake a study of the implications of biotechnology and other aspects of food safety".
71. The above has given rise to many new initiatives within the OECD. A 'Task Force for the Safety of Novel Foods and Feeds' held its first meting in September 1999, with participants also from outside the OECD area. Co-operation has started with a host of international organisations, prominent among them the World Health Organisation. It is to focus on "safety in biotechnology" and include such aspects as biotechnology's impact on bio-diversity, the environment and nutrition. Finally, an OECD Conference on the scientific and health aspects of genetically modified foods was held in Edinburgh in early March 2000, addressing questions such as:
- What do we know about the current state of scientific developments in the genetic modification (GM) of foods? What new GM techniques are on the horizon?
- What can be said about the potential effects on health of GM foods? Are health risks more likely with GM compared to conventional foods?
- What is the scientific basis for the regulatory framework involved? How is risk assessed within that framework?
Popular concern versus industry interests
72. The use by the international community of the OECD in this and other fields is an indication not only of the Organisation's potential to resolve disputes between the major trade groupings before they are taken up within the WTO, but also because here is an issue where strong public concern clashes with strong economic interests.
73. What is happening is essentially that the 'transgenics' industry finds itself in something of a crisis after years of rising fortunes. While the area planted with transgenic crops increased by over 20 times over the last four seasons (from 2 million hectares world-wide in 1996 to nearly 40 million hectares in 1999), it is now shrinking fast. American farmers are expected to reduce their use of genetically engineered seeds by as much as 25% in 2000 in reaction to spreading public resistance. Stock prices for agricultural biotech companies are falling, as are exports of transgenic crops.
74. A growing number of food manufacturers and grocery chains in Europe and elsewhere are taking products containing transgenics off their shelves. American export of soya beans to the European Union has plummeted from 11 million tons in 1998 to only 6 million tons last year. Similarly, American corn shipped to Europe dropped from 2 million tons to a mere 137,000 tons over the same period. Many OECD members - including Japan, Korea, Australia, Mexico and various EU countries - are preparing laws requiring mandatory labelling of food products containing transgenic ingredients.
75. Some major food companies have announced that they will no longer use transgenic ingredients in their products for the European and soon, presumably, other markets, too. American food manufacturers have said they will do so even on the domestic market. Driving this sudden change of heart is that particularly US phenomenon of class action suits. Inadequate testing of gene-altered seeds could make companies and farmers alike vulnerable to massive liability from damage caused by 'genetic drift' - that is, the spreading of biologically modified pollens - or other undesirable effects on the environment.
76. For all these reasons - human health, a sane environment, public fear, world trade, the feeling of the world's growing millions and many more - it is vital that the OECD should, together with others, arrive at answers to the many questions raised regarding biotechnology and food safety. A Canadian study7 concludes: “… As the European debate is gradually introduced into North America and as new animal-based genetically modified products become available, regulators and policy makers face a number of challenges. Not only must they find ways of giving consumers the latest scientific information, but they must also address more ethical questions dealing, for instance, with labelling and the introduction of transgenic animals into the food chain”. In conclusion, this is clearly an area that the Enlarged Assembly will have to follow closely, and one where this report may have to be updated in the months to come.
VI. ATTACKING THE ROOTS OF UNEMPLOYMENT: ASSESSING THE ADHERENCE TO THE OECD'S JOBS STRATEGY
Unemployment's many reasons
77. The Enlarged Assembly has taken up, and encouraged, the OECD's Jobs Strategy ever since its inception in 1994. The Jobs Strategy, it should be remembered, signifies a wide-ranging balanced set of policies to enhance employment growth, reduce unemployment and increase prosperity. It is tailored on a country-by-country basis to take account of the institutional, social and cultural characteristics in each member country.8
78. The Rapporteur also took up the OECD's progress on its Jobs Strategy. As a former Minister in his native Hungary, he has participated actively in the strenuous struggle of one country - and a transition country at that - against the scourge of unemployment. (Hungary's unemployment rate has come down steadily by about 1% per year since 1993, or from 12 per cent then to a projected 6.9 per cent in 2000).
79. Although unemployment has come down in the OECD area as a whole, it still varies widely. Thus, a 1999 figure of 4.2% in 1999 for the US contrasts with a European Union rate of 9.4 - with the latter including a Spanish high of 15.8% and a Luxembourg low of 2.9%.
Success and other stories
80. Following an interim report in 1997 on the follow-up at national level to the Jobs Strategy, a further report on progress in individual countries was published in 1999 under the title "Implementing the OECD Jobs Strategy: Assessing Performance and Policy".
81. The new study draws many interesting conclusions, of which only a few can be mentioned here. One is that lower unemployment (and higher employment) rates can be observed in countries that have taken substantial steps in line with the Jobs Strategy. Another is that the Strategy has to be applied comprehensively and durably in order to bring significant improvements to the labour market. Furthermore, similar progress has been reached by countries choosing different paths, reflecting the unique institutional, cultural and social characteristics of each. Finally, the OECD talks of important "synergies" between structural reform and good macroeconomic polices.
82. The OECD singles out the Netherlands and Ireland as countries having achieved the most significant improvements in labour market conditions in recent times. Praise also goes to the United Kingdom, Denmark and New Zealand - more recently joined by Australia, Canada and Spain. Norway and Portugal are commended on their maintenance of favourable labour market conditions, while the United States is flattered with having "improved an already good performance". Other countries, such as Japan, Austria, Iceland and Switzerland, on the other hand, are said to have experienced some deterioration in their labour markets, while still enjoying conditions above the OECD average.
83. Finland and Sweden are commended on having bounced back from a very difficult employment situation in the early 1990s. Finally, Germany, France and Italy may have lowered their unemployment rates more recently but are considered now to "have significantly higher actual and estimated structural unemployment rates compared with 1990". In other words, the lowering of unemployment in these countries is seen as resulting essentially from the upward trend in their economic cycle rather than from any fundamental reform in line with the Jobs Strategy.
Concern for the vulnerable
84. The OECD feels considerable concern over the poor employment prospects and low quality of available jobs for certain workers at the margin of the labour market. They include young people, women, older workers and those with low skills. As a remedy, the organisation suggests general policies aimed at improving overall labour market conditions and actions targeted toward these groups.
85. Furthermore, the Organisation is not in favour of earlier retirement and lower labour force participation by older workers as means to bring unemployment down. On the contrary, it says that “policies to encourage early retirement in order to open jobs for younger workers tend to be ineffective and short-sighted”.9 While such policies benefit older workers in sectors in decline, the OECD finds little evidence that they can significantly lower the rate of unemployment. Over the longer term, it argues, public finances will suffer and the labour supply shrink, jeopardising growth and incomes. Since OECD populations are rapidly ageing, the OECD foresees that policies towards older workers will at any rate have to be changed so as to keep them longer in the work force. The OECD goes on to deplore that little progress has been made in bringing households headed by lone parents - generally single mothers - out of precariously low living standards or excessive dependency on social transfers.
86. All in all the Jobs Strategy - as well as some countries' remarkable success in reducing unemployment and lifting employment - show that there is nothing inevitable about joblessness. Countries that embrace open trade and investment regimes with other countries, liberalise and reform their economies, go in for educational systems that favour insertion into new sectors such as the previously mentioned "new economy" do much better than countries that follow opposite paths. The Rapporteur looks forward to the forthcoming discussions between the Economic Committee and the OECD on this vital subject.
VII. PROGRESS OF REGULATORY REFORM IN THE OECD AREA
87. In its multi-year project to promote regulatory reform in OECD member countries, the Organisation has already completed its reviews of developments in Japan, Mexico, the Netherlands and the United States. A second round of reviews - covering Denmark, Hungary, Korea and Spain is expected to be finished this year. The Rapporteur hopes and expects that the review process can eventually be expanded to all member countries. The OECD Ministerial Council in June 2000 agreed, stating that “further progress on regulatory reform is necessary in member countries”; and calling the country reviews a “valuable contribution to promoting good regulatory practices”.
88. In order to accommodate different priorities of the different countries reviewed, a relatively broad and multi-disciplinary agenda has been adopted for moving the regulatory reform process forward. It aims to identify good regulatory reform practices wherever they are found and to hold them up for possible emulation in other participating countries. The emphasis is placed on 'regulatory quality' that improves the functioning of markets, while also taking into account wider concerns such as social fairness, public health, safety and the environment. In other words, the OECD holds that there must be both an economic efficiency and a social equity side to regulatory reform.
89. OECD regulatory reform efforts in the central European OECD countries focus on the further consolidation of democracy, improved functioning of the market economy, an efficient and responsive public administration and a smoother integration into the European Union in preparation for membership. Broad-based regulatory reforms founded on market principles will, it is hoped, enable the OECD transition countries to compete even more fully in Europe. Large potential gains are seen in many sectors of the economy in these countries. The Rapporteur's own country, Hungary, was the first in this group to undergo the review process. The study confirmed that balanced and comprehensive regulatory reform has indeed made a major contribution to sustained growth and good governance, while giving greater protection to consumers and citizens in a more cost-efficient manner. The OECD report concludes that Hungary’s economic and social problems do not differ from those of mainstream OECD countries. It also emphasises that Hungary’s economic and institutional structure is ready to function within the EU as a member state.
VIII. PRIVATISATION CONTINUES UNABATED
90. The OECD expects the high rate of privatisation of publicly owned economic activities in member countries - started in earnest in the 1990s - to continue unabated. However, the Organisation sees considerable differences between OECD countries, and worries especially about a slow-down in the process in a number of non-OECD countries.
91. The OECD indicates that $ 600 billion worth of privatisations have been undertaken in the 29 OECD member countries since 1990. This represents 2.7% of these countries’ combined GDP In addition, the speed has increased considerably since the early 1990s. World-wide income from privatisations in 1999 reached $145 billion, a sum surpassed only in 1997.
92. However, the OECD sees a slowing down of the process outside the OECD area, especially in Latin America. On the other hand, in Asia and especially in Japan and the Republic of Korea, the speed has increased since the 1998 financial crisis.
93. Within the OECD, privatisation is pursued with particular vigour by the countries in the EMU. The Stability and Growth Pact appears to play a significant role here, with its strict limit on budget deficits. However, also the opening of markets demanded by the EU plays a role, as does the requirements of globalisation. In Italy, for example, the average government income from privatisations since 1993 amounts to around $90 billion. Privatisation has also been rapid in France, also under the current left-of-centre government coalition. Among the more recent OECD members, Poland and Hungary have pursued a highly successful privatisation process. The United States, on the other hand, has only limited income from privatisations, as the process there has been largely completed.
94. Telecommunications is the primary sector concerned, followed by energy. Finally, the OECD expects ‘private-public partnerships’ to become more frequent in the future. Here, private companies build or finance, and subsequently use for a limited time, various infrastructure projects, with the government remaining the owner. Also privatisations at regional level will play a more important role in the future, not least as a way for regional authorities to improve their finances.
IX. COMBATING BRIBERY
95. In last year's report, the Enlarged Assembly welcomed the signing and ratification by many countries of the Convention on Combating Bribery of Foreign Public Officials and said it expected all OECD and Council of Europe member states rapidly to sign and ratify this treaty. If at that time 15 countries had ratified the Convention, by now the number stands at 21.10 It entered into force on 15 February, 1999. Under OECD auspices, a rigorous process of multilateral surveillance has begun, to monitor compliance with the Convention. The OECD Secretary General, in this context, expressed the wish that either the existing Convention be extended to cover also the private sector or that a new Convention be established toward this end. As matters now stand, he rightly pointed out, the Convention covers bribe taken by, say, an official of a state-owned airline, for example, whereas it does not apply to a representative of a privatised airline committing the same offence.
X. CONCLUDING REMARKS: OECD AND THE FUTURE
OECD membership and outreach: Slovakia as the 30th member
96. After its membership has remained unchanged at 29 since 1996, the OECD at the time of writing is preparing for the imminent entry of the Slovak Republic as the organisation's 30th member. The Rapporteur warmly welcomes Slovakia’s membership.
97. Argentina has announced an interest in joining, but no formal negotiations have been started. Brazil's interest in the OECD has grown considerably in recent times (although it has not formally asked for membership), with the country now forming part of the OECD's Development Centre. Also the Baltic countries may join in due course, even though here it may be that EU membership will precede that of the OECD.11
98. Co-operation with Russia continues, in pursuance of the 1994 OECD-Russia Declaration of Co-operation. The same holds for co-operation with China. It will take on added importance as and when that country joins the WTO. Countries like India and Indonesia also work on various OECD projects, as do the so-called Dynamic Emerging Non-Member economies (DENMs) such as Malaysia - in particular through the OECD's Emerging Market Economy Forum which is open to over a dozen other countries.
Stability Pact for south-eastern Europe
99. The OECD will also have much to do in the coming years in connection with the implementation of the Stability Pact for south-eastern Europe. The Pact , it will be recalled, started in the summer of 1999 and involves 29 countries. It builds on two notions. The first is that the problems of the SEE region cannot be solved in a fragmented and isolated manner and that a genuinely comprehensive, regional approach is necessary. The second is that, while the presence of, and assistance from, the international community are important factors, nothing can replace the firm political determination of the countries of the region to overcome their differences and build the future together.
100. The OECD is particularly active in implementing a Compact for Reform, Investment, Integrity and Growth that builds on firm commitments by countries in the region to improve their investment environment, including transparent rules for domestic and foreign investors. It also plays a major role (together with the Council of Europe) in an Anti-Corruption Initiative that forms part of an overall effort to fight corruption and other fraudulent and criminal activities in the region. The Anti-corruption Initiative is an important element in the overall strategy for recovery, growth, democratisation and stability in the countries concerned. It disseminates information on assistance programmes within the Anti-Corruption Initiative framework to a number of countries in the region.12
101. The OECD is relatively optimistic as regards the progress achieved so far, at least in its assigned fields. It pointed to improved co-ordination between the various countries and institutions involved, ascribing some of the success to the Internet. The Rapporteur detected, however, a certain concern among his interlocutors as regards the actual commitment - financial and other - by participating states in seeing the Stability Pact through to a successful conclusion. Speeches, one noted, is one thing, deeds another.
102. In reply to the Rapporteur's question whether the countries in the region manifested the same degree of co-operation among themselves, the OECD observed that it was to some extent overshadowed by each country's desire for closer bilateral relations with the EU. However, it was pointed out, since the EU is focusing on economic reform as a condition for membership, or closer links as the case may be, efforts to satisfy the EU can also be expected to benefit economic links between the countries.
Global understanding in a global economy
103. Previous Enlarged Assembly Resolutions have welcomed and supported various overarching, future-oriented studies pursued within the OECD's International Futures Programme. Starting in 1997, the Organisation has organised four major conferences on the theme "Expo 2000: OECD Forum for the Future: People, Nature and Technology: Sustainable Societies in the 21st Century". One of the four conferences in the series has already been described earlier in this report. An OECD Forum 2000 was held in the summer, marking a major step forward in the organisation’s openness toward economies outside its membership and to civil society. Suffice it to say that the OECD is the only intergovernmental institution to pursue this type of broad, futuristic activities - their being of course nourished also by its more down-to-earth economic analysis cited throughout this report.
104. For instance, the OECD told the Economic Committee in March that its shorter-term optimistic projections for the world economy contrast with its longer-term concerns over such phenomena as global warming, water shortages and waste accumulation. These issues must be addressed urgently, within the OECD as in other fora.
105. We need to encourage the OECD to go further on this path, for as the world economy grows more complex the need to understand it across its social, economic, technological and ecological aspects grows more acute. The OECD is a most suitable tool for the world's leading economies to gain such an overall understanding. It is important that we provide it with the financial resources needed to carry out its increasingly important tasks. If the OECD did not exist, we would have to invent it.
Reporting committee: Committee on Economic Affairs and Development
Budgetary implications for the Assembly: none
Reference to committee: Standing mandate
Draft resolution adopted by the Enlarged Committee on Economic Affairs and Development on 26 September 2000 at its meeting with delegations from the Parliaments of Canada, Japan, Korea and Mexico and with representatives of other committees concerned.
Members of the committee: Mrs Degn (Chairperson), Mr Valleix, Mr Elo, Mr Brunhart (Vice-Chairmen), Mrs Akgönenç, Mr Aliko, Mr Arnaud, Mr Attard Montalto, Mr Behrendt, Mr Billing, Mr Blaauw, Mrs Blattmann, Mr Bojars, Mr Bonet Casas, Mr Braun (Alternate: Mr Barsony), Mr Budisa, Mrs Calner, Lord Clinton-Davis (Alternate: Mr Vis), Mr Cunliffe (Alternate: Lord Ponsonby), Mr Cusimano (Alternate: Mr Turini), Mr Eyskens, Mr Frey, Mrs Freyberg, Mr Gryzlov, Mr Gül, Mr Guma, Mr Gusenbauer, Mr Gylys, Mr Haupert, Mrs Hoffmann, Mr Jung, Mr Kacin, Mrs Kestelijn-Sierens, Mr Kirilov, Mr Kittis, Mr Lazarenko (Alternate: Mr Kosakivsky), Mr Leers, Mr Liapis, Mr Lopes Cardona, Mr Lotz, Mr Makachev, Mr Mateju, Mr Mitterrand, Mrs Moynihan-Cronin, Mr Niculescu (Alternate: Mr Baciu), Mr Nikologorsky, Mrs Patarkalishvili, Mr Pereira Coelho (Alternate: Mr Cesário), Mr Popescu, Mr Popovski, Mr Prokes, Mr Puche, Mrs Ragnarsdottir, Mr Riccardi, Mr Rigo (Alternate: Mrs Pozza Tasca), Mr Schmitz, Mrs Squarcialupi, Mrs Stepova (Alternate: Mr Skopal), Mrs Stoyanova, Mr Tallo, Mr Townend, Mr Tsekouras, Mr Vasile, Mr Westenhaler (Alternate: Mr D’Aron), Mr Wielowieyski, Mrs Zapfl-Helbling.
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Canada: Mr Caccia, Senator Bolduc, Mrs Lalonde
Japan: Mr Kamei, Mr Yamaguchi, Mr Konta, Mr Ikeda
Korea: Mr Chung, Mr Park, Mr Lee, Mr Kwack
Mexico: Senator Herrera, Senator Alanis, Mr Goicoechea, Mr Pazos
N.B. The names of those members present at the meeting are printed in italics
Secretaries to the committee: Mr Torbiörn, Mr Mezei and Ms Ramanauskaite
1 The Enlarged Parliamentary Assembly on the activities of the OECD was established in 1992 on the joint initiative of the OECD and the Parliamentary Assembly of the Council of Europe. It involves, on a basis of equality, the parliaments of the 29 member countries of the OECD, as well as those of the 41 member states of the Council of Europe (23 of which are also members of the OECD). From 1962 to up until the year of the reform, 1992, the Parliamentary Assembly of the Council of Europe held annual debates on OECD activities with the participation, in an observer capacity, of parliamentary delegations from non-European OECD member countries. For details, see the Rules of Procedure of the Parliamentary Assembly of the Council of Europe.
2 By early June, the US Nasdaq (technology stocks) index was down around 6% from the start of the year, and around 25% down from its peak value of March 10, 2000.
3 The OECD points to the wide fluctuations in the price of oil over the past few years: from nearly $ 25 in early 1997 to below $ 11 in early 1999, and now a steep increase to around $ 35. A price of around $ 22 per barrel, prevailing in October 1999, would cause an increased bill of about $ 80 billion to oil importing countries, or between one-fourth and one-half percent of GDP. A rise in oil prices serves to increase inflation and lower output in most OECD countries - mitigated only by increased exports to now wealthier oil producing countries. The OECD’s Interlink model foresees only a - 0.2 decrease one year after a $10 oil price increase and around 0.5% higher consumer inflation.
4 A study of the situation in the United States has shown that trade policy measures to protect employees in threatened areas of industry have cost consumers over $400,000 per year for each "saved" job (See for instance "Measuring the Costs of Protection in the United States" by G.C. Hufbauer and K.A. Elliot, Institute for National Economics, Washington, 1994).
5 The goals set by OECD member countries are for developing countries, by the year 2015, to have reduced extreme poverty by half: ensured universal primary education; eliminated gender disparity in education (by 2005); reduced infant and child mortality by two-thirds, reduced maternal mortality by three-fourths; ensured universal access to reproductive health services; developed a national strategy for sustainable development implemented in every country (by 2005); reversed losses of environmental resources; and, finally, to have ensured participatory development, democratisation, good governance and protection of human rights.
6 The Sub-Committee on International Economic Relations of the Committee on Economic Affairs and Development .
7 “Ensuring the Safety of Transgenic Foods: Canada’s approach”. Parliamentary Research Branch Paper prepared for the Canada-Europe Parliamentary Association, February 2000.
8 The OECD Job Strategy has the following components:
1. Set macroeconomic policies that will both encourage growth and, in conjunction with good structural policies, make growth sustainable and non-inflationary
2. Enhance the creation and diffusion of technological know-how by improving frameworks for its development
3. Increase flexibility of working time (both short-term and life-time) voluntarily sought by workers and employers
4. Nurture an entrepreneurial climate by eliminating impediments to, and restrictions on, the creation and expansion of enterprises
5. Make wage and labour costs more flexible by removing restrictions that prevent wages from reflecting local conditions and individual skill levels, in particular of younger workers
6. Reform employment security divisions that inhibit the expansion of employment in the private sector
7. Strengthen the emphasis on active labour market policies and reinforce their effectiveness
8. Improve labour force skills and competences through wide-ranging changes in education and training systems
9. Reform unemployment and related benefit systems - and their interactions with the tax system - such that societies' fundamental equity goals are achieved in ways that impinge far less on the efficient functioning of labour markets.
10. Enhance product market competition so as to reduce monopolistic tendencies and weaken insider-outsider mechanisms, whilst also contributing to a more innovative and dynamic economy.
9 1999 OECD ‘Brochure for Ministers’.
10 Ratified, as of 30 June 2000 by (in order of date of deposition): Iceland, Japan, Germany, Hungary, United States, Finland, the United Kingdom, Canada, Norway, Bulgaria, Korea, Greece, Austria, Mexico, Sweden, Belgium, the Slovak Republic, Australia, Spain, the Czech Republic and Switzerland.
11 In an OECD study published in February 2000, the organisation praises the three Baltic countries of Estonia, Latvia and Lithuania for "impressive progress over a decade of transition". Following a brief halt to fast growth in the wake of the 1998 Russian financial crisis, the Baltic countries are now seen as being on "the track to sustainable growth" even though "the transformation process, even if relatively advanced, is not yet over". The report concludes that the Baltic countries "enjoy advantageous locations and have benefited from significant inflows of foreign direct investments, notably from their Nordic neighbours"; and that "this relationship has proved a useful way to support the Baltics in their progression to European integration". The Rapporteur, with this in mind, hopes that the three Baltic countries, like other countries in central and eastern Europe, will soon be able to join the OECD.
12 The countries covered in this regional dissemination efforts are Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia and Romania. Information is also provided on the situation in Kosovo and Montenegro.