Consolidating the recovery
Spring is finally in the air for most OECD countries, as the signs of recovery start to multiply. The recession has been long and hard, so this is reassuring news. But while the worst of the crisis may be behind us, the recovery remains fragile, and there are still many policy challenges to address.
Indeed, this could prove to be the trickiest phase of the recovery yet, as several OECD countries consider unwinding the exceptional emergency measures introduced to save their economies from collapse. Central banks have already started reining in their “unconventional” measures and assessing their interest-rate policies. Now, with fiscal deficits and public debt ballooning towards unsustainable levels, governments are also moving into action. Policy room is limited, and all OECD governments face a series of delicate balancing acts and tough choices which a lasting recovery depends on. Their exit strategies must be conducted boldly, with clearly announced plans to reassure markets. At the same time, care is needed to avoid withdrawing stimulus measures too hastily, as that could plunge economies back into recession. Though the pace of fiscal consolidation will vary from country to country, the programmes must be as pro-growth, green and socially equitable as possible. Moreover, domestic imperatives must be measured against wider global concerns.
The OECD will continue to support policymakers in facing these challenges, by providing fresh insights and pertinent advice on the kind of short-term actions that can address the crisis while spurring long-term growth. Take government spending, for instance. Here, public support for underperforming sectors should be cut to remove distortions in competition, while privileging strong and efficient spending in vital areas such as education, healthcare and infrastructure. There should be no let up in labour market activation and training policies either, particularly as long-term unemployment has risen sharply in many countries. However, phasing out subsidised work-sharing schemes used to avoid unnecessary layoffs during the crisis would free up precious resources and support productivity.
As for tax increases, these should be focused on consumption and property, which are least harmful to long-term growth, with more emphasis on green taxes, both to provide exchequer revenue and encourage environmentally-friendly activities.
Not that every measure introduced in the crisis should be withdrawn; some of the more focused tax credits and direct grants for R&D can give a jolt to innovation, for example. This is particularly important for knowledge-based economies in which combinations of new technologies and new ways of doing business will increasingly drive productivity, employment and competiveness.
For economies to recover fully, we also need to ensure that the financial system is healthy and plays an effective role in supporting investment. Improving financial market regulation is a particularly critical area for action. Quite simply, finance, which is the life-blood of our economies, is still not flowing normally. Fortunately, reforms are getting under way, targeting accounting, corporate governance, the capital base of banks, risk frameworks and capital adequacy through a leverage ratio and capital buffers. Tighter prudential rules would certainly cultivate a stronger sense of responsibility in financial markets and can, at the same time, strengthen competition.
But will they be enough to prevent a crisis from happening again? Can they safeguard savings against excessive risktaking, as well as reduce the contagion and counterparty risk that were hallmarks of this crisis? The OECD believes there is a need to go further and supports proposals for separating certain activities usually associated with investment banking from commercial banking. This is important, because banks’ losses from risk-taking in capital markets can arise quite independently of the leverage they undertake.
Urgent multilateral action is also needed for the global recovery to gain strength. Consider trade, which has firmed up this year, thanks largely to the fact that protectionism has been kept at bay. Governments understand that more trade, not less, will help support demand and create jobs. Trade is also vital for development, especially as aid budgets are stretched. This gives renewed urgency to the Doha trade round. However, more effort is needed to increase aid too, to fight poverty and disease, as well as building institutional capacity in areas such as law and taxation. Sure enough, official development assistance will reach record levels this year, but there will be a shortfall of some US$21 billion compared with the pledges donors made at the Gleneagles G8 summit five years ago. Honouring these pledges is vital, particularly as we move to address climate change and food security.
As I wrote in these pages a year ago, governments must not be distracted by signs of recovery, but rather must remain vigorous in their policy actions while looking after the longer term. This message remains true now, as we build towards the 2010 annual Ministerial Council Meeting and Forum in May. Participants will have an excellent opportunity to take stock and ensure they have the right policies in place both to address the legacy of the crisis–unemployment, high deficits, lower potential output, etc.–and to build a robust, sustainable recovery.
©OECD Observer No 278 March 2010
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