What problems are facing the OECD today?
The global crisis, the financial crisis and now the employment crisis of advanced economies, all affect the members of the OECD. We must help these countries to overcome the economic challenges they are facing. This is a very daunting task, in particular because of the strength of regulations, and weak confidence.
As noted in the OECD’s 50th Anniversary Vision Statement, dramatic changes in the international economic arena have created a new set of challenges for emerging markets. In light of this different economic environment, has the OECD revised its domestic policy prescriptions for various developing nations?
The OECD is an organization that has been helping countries reform their economies since World War II. We believe in open markets, but also in effective government. I don’t think this paradigm will change. We will continue to promote a dynamic agenda of structural reform, in the context of the G20 discussions (covering advanced and developing countries), because this is where we see the highest growth potential – in areas such as health care, labor markets, and pension systems. In the case of developing countries, there is an additional step that must be taken, because government institutions need to improve their own performance—or, at least, redefine the institutional settings in which policies can be more effectively developed. In that respect, we continue to emphasize the objectives we have upheld for many years: improve your human capital base and the effectiveness of government actions, and reduce the pressures that economic activity places on the environment.
This same report also highlights women as important beneficiaries of targeted policies to improve education, increase employment, and encourage entrepreneurship. What sorts of tools can the OECD provide to promote opportunities specifically for women?
The OECD is primarily an economic organization, so the way to address women’s issues is to think about them as one essential additional source of growth and development. That is smart economics. I believe economies that are not able to incorporate women are really missing out on a significant contribution to economic growth and development. So, what the OECD is trying to do is explore women’s empowerment and women’s inclusion in education and employment. The engagement of women in the economy is more complicated than it seems because the action required challenges the ways in which labor markets are organized. Women face clear trade-offs between families and jobs.
A third avenue, along with employment and education, is entrepreneurship. We have evidence that women, when provided financial support and counseling services, really can achieve important outcomes. But, there are still barriers and obstacles in all these areas. Next year, we will launch a Gender Strategy for countries to address these issues, recommending specific policy tool kits that include the development of family-friendly policies, increased support for girls in the math and sciences, and greater financial inclusion. It’s a very hands-on initiative, and I hope we will contribute significantly to the debate.
One of the most contentious issues in the United States of the upcoming presidential election is tax code reform. How does OECD research weigh into the debate on US tax policy? What sorts of reforms would OECD analysts recommend, particularly with regard to job-creation?
Advice is very different for different countries. The United States, we believe, has one of the most complex tax systems in the world because there are many different tax rates, “loopholes,” and subsidies. So, my first recommendation would be to simplify the system: make it easier both to understand and to pay taxes. A second recommendation we have been considering is “federalism”: set a consistent sales tax rate throughout the country. This could significantly reduce transaction costs among the states and provide more certainty for entrepreneurs. But, in the end, it has to do more with overall economic reform. It is unclear whether having a flat tax is a good or bad idea. Its simplicity is certainly appreciated, but how far does it go to create a fair and equal system? We will be launching an inequality report in December whose conclusions are interesting, showing that inequality has in fact grown in advanced countries, even before the crisis. The redistributive capacities of tax systems in advanced economies have been decreasing. This probably has to do with the wealth accumulation at the top of the income pyramid and the present tax structure, regarding, for example, financial services and other “for profit” activities. The goal for future tax reform will be to return more of the benefits, especially to low-skilled workers.
What would you say are the main causes of the Eurozone financial crisis?
The interconnectedness of the whole financial system is a major factor. When the crisis erupted in 2008, the Eurozone believed it was, for a large part, a mortgage crisis of the United States and did not realize how much risk and how many toxic assets the Eurozone itself held. Banks everywhere were hit. The bank balance sheet crisis then turned into a sovereign debt crisis as a result of the actions taken, in the form of fiscal stimulus, to address it. The decisions regarding the Greek sovereign debt were considered insufficient to calm down markets and avoid contagion.
The package that was announced on October 26, therefore, attempted to address five things: the leveraging of Eurozone resources, banks capitalization, the sustainability of Greek debt, sovereign debt tensions in other Eurozone countries, and the overall governance of the Eurozone. But once again, the lack of specific details of the package caused negative reactions in the market and this loss of confidence is now threatening the whole Eurozone region.
Nonetheless, I have to say that I am confident that the Eurozone will come out of this stronger. I think that Europe is an incredible construction, idea, and ambition. It is true that it takes time; getting the consensus of a large group of countries is not an easy task. But, they are really ahead of many of the cooperation frameworks we see across the world. I trust they will survive and come out of this very difficult situation even stronger.
Adjustments in Eurozone countries in response to economic and fiscal crises take the form of nominal wage reductions, severe cuts in public spending, large public capital transfers from outside, or labor migration to non-crisis countries. Therefore, some say that the present crisis was inevitable. Would you agree?
No, I think it was more closely linked to unchecked fiscal policies. I am not sure I agree that European countries cannot default. I think they should have a chance to adjust in that way. Because the fate of Greece is inextricably linked with Europe, the problem became intractable. If Greece had defaulted many months ago and restructured its debt, I do not think it would have had the incredible impact that we are seeing.
Did any of the OECD’s macro-tracking and research outputs provide an early warning of the crisis, or was it a surprise to the organization as well?
The problem was that the numbers coming from the EU statistical office were wrong. Concerning the state of financial markets, there were lots of raised voices in committees that were worried by the overexpansion of credit without collateral and the packaging of risks. But, it was impossible to address them at the time because several countries refused to, trusting instead that markets and risk diversification would always correct themselves. Yes, we could have probably taken a more proactive or determinate stance, but we are not a think-tank or university; we are an organization that tries to forge consensus around certain topics among 34 member countries. International regulations, of course, go only as far as our member countries permit. The OECD was diligently tracking and monitoring the situation. So, I think we did well in general because we were raising the red flags even when countries were resisting.
The organization has been criticized in the past for maintaining limited membership. But since the spring of 2007 various non-member countries have been offered the opportunity of “enhanced engagement” with the OECD. What policies, standards, and characteristics does the organization consider in evaluating a country’s potential to graduate from this level of engagement to full-fledged membership? And, do you think that inclusion of highly populous, emerging economic powers like China and India is in the near future for the OECD?
Indeed we believe, along with the G20 and many other institutions, that the global economy needs the participation of all the global players, and they include China, India, Brazil, Indonesia, and South Africa. The OECD itself is a group of countries that have a high regard for standards, rules, and regulations on a set of issues that our members are bound by. The accession process is a review of how much a country that is seeking membership abides by OECD standards. We have done that last year for Chile and for Israel, and they have adhered to anti-bribery conventions, proper rights, and embezzlement reports. The developing countries you mentioned are not interested at this point in OECD membership, so we are not talking about these issues yet. We are talking instead about how to enhance collaboration and get countries at least comfortable with international standards. So, it is now a dialogue, a way to get closer and for them to understand the OECD better. If they do eventually consider joining, the very same kind of review will apply because our members are very serious about that.
Interview conducted by Winston Gee, Senior Editor