Towards a sustainable, more equitable, recovery

A welcome sense of cautious optimism is building around the preparations for the G20 summit in Saint Petersburg in September, setting the tone for policymakers to take a renewed interest in coordinating their national action agendas to address pressing global challenges.

Economic recovery may at last be starting to take hold, even though we are still dealing with the aftermath of the worst crisis of the century. Decisive leadership and targeted policy action are now urgently needed to reactivate employment and tackle the social consequences of the crisis.

The situation is not without risks. Advanced economies, including the US, Japan and several EU countries, are showing encouraging signs of recovery; however, major emerging economies are showing signs of vulnerability. This should come as no surprise: weak demand in advanced economies was bound to affect emerging markets and, in the process, remind us that we are all part of the same global economy.

The urgency now is for advanced economies to transform the pickup in activity into a lasting economic recovery, undertaking comprehensive reforms. No doubt, a brighter economic outlook will ease the strain on public finances and help chip away at the historically high unemployment. But such is the legacy of the crisis–some 93 million people out of work in G20 countries, a third of them long-term unemployed–that our action must be unrelenting.

For their part, emerging markets need to stimulate domestic demand and step up the pace of reform, while developing the national consensus and institutional arrangements necessary to address poverty and inequality. Above all, governments need to reassure anxious citizens, through open and transparent policies, that the social gains of the last decade will not be lost, and that the lessons of the crisis will not be forgotten.

The Russian Federation has made “restoring growth” the focal point of its G20 presidency. This means more growth through investment; growth through trade; and growth through a better policy framework, including on taxation. But it also means a more inclusive growth.

Most G20 countries face widening inequalities. In 2007-10 the average market-income inequality across the OECD area increased by 1.4 percentage points. We need to address these disparities with employment strategies, labour activation policies and support for the most vulnerable, while securing a sustainable recovery. Given how the crisis has weakened the social fabric, growth without equity is simply not an option.

The OECD has worked alongside other international organisations in support of the G20 to propose evidence-based strategies that help policymakers move discussions forward on several fronts. Let me highlight five areas where decisive action would help make the recovery sustainable and more equitable.

First are policies to promote inclusiveness. This means improving skills, opportunities, access to jobs and labour mobility. It means making the tax and welfare systems fairer and more work-friendly. It calls for investing more profit in people’s well-being, and less in excessive bonuses and distorted pay structures.

Second, improve support for the most vulnerable–youth, women, low-skilled workers, long-term unemployed and ethnic minorities in particular–and help them find decent jobs. There are a wealth of examples to show how this can be done, using the likes of tax incentives, special contracts and apprenticeships, which are detailed in our reports to the G20. Initiatives in emerging economies show how basic social measures can help, such as the Child Support Grant in South Africa, and China’s Employment Promotion Law.

Third, we must complete banking system reforms to boost lending and restore confidence. More remains to be done to strengthen financial sector regulation, to address contagion and too-big-to-fail risks, to improve the structure of the banking system through the separation of investment from retail banking, and to reduce the risks of default from derivatives trading. Given its relevance to achieve broader policy goals, long-term investment must also be nurtured as part of a sustainable recovery. Toward this end, and responding to the Russian G20 presidency request, we developed the first G20/OECD High-Level Principles of Long-Term Investment.

Fourth, countries must use trade to harness the knowledge, skills and technologies that sustainable growth requires. The world economy is changing, and so must traditional foreign investment and trade policies. Our work with the WTO and UNCTAD shows how trade patterns have evolved, resulting in “global value chains” which link developing, emerging-market and advanced economies together in complex multilayered production processes. By looking at trade flows from a value-added perspective, we can expose the folly of protectionism and show how, by blocking imports, countries also hurt their exports. At Saint Petersburg, the OECD will present a first report on the challenges and opportunities that trade in value-added offers for development and jobs. We need to understand how countries can move up these value chains and adjust their development policies accordingly.

Fifth, we must update our tax systems so that they are able to operate in today’s global digital age. Tax revenue is vital for public action. Profit-shifting and aggressive tax planning by global corporations– even if legal under current rules–have eroded national tax bases in several G20 countries. In July 2013 the OECD launched a comprehensive and ambitious Action Plan to respond to this challenge, aimed at revisiting the rules, standards and transparency framework applied to international taxation. In Saint Petersburg, G20 leaders will comment on this plan and review progress on automatic exchange of information on tax matters as we move toward a new, more ambitious, single international standard. The OECD has led on this front and provided the basis for meaningful outcomes, starting with the work of the Global Forum on Tax Transparency, which we should use as a building block for further efforts.

In 2008 many of us found solace in the ancient wisdom that a crisis was too valuable to waste. But so it is today with economic recovery! We must work together and not waste this opportunity to get it right for the sake of a better future. We are looking forward to meaningful outcomes from the G20 Saint Petersburg summit.

www.oecdobserver.org/angelgurria

www.oecd.org/secretarygeneral

www.oecd.org/g20

©OECD Observer No 295 Q2 2013




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