Parliamentary Assembly session : 23 – 27 September 2002 

Statement by Richard E. Hecklinger, Deputy Secretary General of the OECD

25 September 2002

I. INTRODUCTION

President Schieder, Ladies and Gentlemen,

- It is a great pleasure to appear before you to discuss work of the OECD to address the economic and social challenges facing our countries.

- First, please let me convey the deep regret of OECD Secretary-General Donald Johnston, who is unavoidably engaged elsewhere today, but joins me in expressing the highest regard for the work of the Parliamentary Assembly, and the importance of today’s discussions.

- In his stead, I would like to share with you a brief overview of the OECD’s current assessment of the world economy, as well as to outline some of the work undertaken by our organisation which may be relevant to issues of concern to all of you.

II. THE WORLD ECONOMY – REVIEW AND OUTLOOK

- When Secretary-General Johnston appeared before you last year, the world was still reeling from the horrific terrorist attacks in the United States. We were all grieving the numerous victims of these events and wondering what the consequences might be for our economies, our societies and our fellow citizens.

- At that time, it was impossible to foresee with accuracy the impact upon the global economy. Some observers adopted a very negative outlook and most forecasters revised downward their short-term projections.

- In fact, the direct effects of the terrorist attacks proved to be much less severe than feared. The US economy rebounded strongly during the first quarter of this year, as consumer confidence bounced back more rapidly than everybody had expected and companies stopped reducing their inventories. It is a credit to the resilience of the international economic system that it weathered the shock as well as it did. We should pay tribute to the swift and pragmatic response of our policymakers in the wake of this crisis. By their actions, they have helped contain the damage, avoid contagion and set the stage for the rebound.

- A lot can be learnt from this episode and, at the request of its members, the OECD analysed the impact of the terrorist attacks on the economy as well as on trade flows in a study on “The Economic Consequences of Terrorism” issued in February this year. This study noted the rapid recovery from the attacks, but also pointed out that the long-term negative implications should not be under-estimated. In the new, more uncertain environment, it has become more difficult and more costly to get insurance coverage for certain types of risks. International transportation has become subject to stricter security requirements, which can be costly and time consuming. The increase in military spending and "home-security" outlays are also an additional burden for our societies.

- Overall, despite the early rebound, there remains a high degree of uncertainty. Economic prospects have been clouded by the fall in stock markets, the disclosure of disputable accounting and corporate governance practices and the deflation of the technology bubble, as well as concern about possible future terrorist attacks and military action in Iraq. But cyclical economic factors are probably playing an even more important role. Whatever the cause, we are going through a period of some economic turbulence and, if anything, the economic outlook for the OECD area is somewhat less positive now than it was earlier in the year.

- There are no grounds, however, to succumb to pessimism. While the uncertainty is significant, there are also several reasons to be optimistic. Let me give a few examples of "good news" concerning our economic prospects. First, in several of our member countries, productivity growth has remained strong during the downturn. A few years ago, during the technology-driven boom, it was not clear whether the increase in productivity growth was a temporary phenomenon or a lasting one. It is now well established, and we believe that faster productivity growth is here to stay. Indeed, in the United States, labour productivity growth of at least 2 per cent per year seems sustainable. This means that over the long term growth will be faster, which will help deal with a number of financial problems. Another example of good news is that economic policy is now supportive of growth in almost all of our members. Monetary conditions are accommodative almost everywhere, and a strong impulse from fiscal policy is being provided. Hence, there is hope that the recovery will eventually unfold and that a “double-dip” will be avoided.

- This is particularly true in the United States, where growth this year should be only slightly weaker than the 2½ per cent foreseen in the Spring. The rebound there has been driven by inventory adjustments and by the effects of low interest rates on household consumption. With the support of monetary and fiscal policy and the consolidation of corporate balance sheets, business fixed investment should eventually recover and provide an additional engine to the recovery. There are of course a number of clouds on the horizon, including the size of the current account deficit, but barring unforeseen events the conditions for faster activity and job creation should produce positive results in the near future.

- In Europe, the current economic situation is less promising. In the first half of this year, growth has been barely above 1 per cent in annual terms and unemployment has started to increase again. Growth will certainly fall short of the 1½ per cent projected in the Spring. With domestic demand flat, exports have been the main source of growth in the Euro area. But given the Euro appreciation in recent months and the outlook for lower US import growth, a substantial strengthening of domestic demand is needed to ensure a satisfactory growth performance. However, low consumer confidence seems to preclude a recovery in domestic demand in the near future. What Europe needs in our view is to regain confidence in its economic future. For this, ambitious structural reforms will be needed. The programme agreed at the Lisbon Summit provides a clear agenda in this respect. Decisive implementation will be needed.

- In Japan, the short-term prospect remains difficult. Positive growth has only recently returned; this is entirely due to the record expansion of exports during the first half of 2002. In addition, Japan continues to suffer from deflation. There are significant problems with respect to the state of public finances as well as the health of the banking system. On the other hand, recent decisions by the government to move ahead with structural reforms bode well for the future. As in Europe, the recovery will depend on the resolve of the government to embrace an ambitious programme of structural policies to foster enterprise dynamism and open markets.

III. CORPORATE GOVERNANCE

- Another significant development in the past year was the exposure of serious shortcomings in the area of corporate governance. While these shortcomings are certainly having an effect on equity markets and on the economy as a whole, we should not exaggerate their impact.

- I am confident that the US and other countries will sort out the problems and that investors will soon regain their confidence in the integrity of markets. Democracies often need crises to force them to implement necessary reforms. What we have now is yet another opportunity born of crisis – in other words, an opportunity to review and, where necessary, refashion the regulatory and ethical environment in which our companies operate and to ensure that the laws, regulations and standards we have are adequately enforced.

- The OECD has a significant role to play in this process. Our Principles of Corporate Governance have become a world standard, forming the basis for corporate governance policies in countries from Europe to Asia to Latin America. The active outreach programme of the OECD has been instrumental in this process.

- As some of you may know, we are now launching a process of review of the Principles to see where they should be adjusted or strengthened. This is part of a more general effort by international bodies, both government and private sector, to improve the standards under which companies operate. The Financial Stability Forum is playing a very helpful role in the coordination of such efforts.

- These Principles are but one of the OECD’s programmes to improve corporate practices. Our Guidelines for Multinational Enterprises, the OECD anti-bribery Convention, and our work on beneficial ownership are further examples. All were developed through cooperation among governments, business, labour and non-governmental organisations. The role of our partners – BIAC (Business and Industry Advisory Council) and TUAC (Trade Union Advisory Council) have been of critical importance to our work in these areas.

IV. PROMOTING DEVELOPMENT

- The response to terrorism, the need to strengthen the economic recovery in the OECD area, and the challenge to strengthen corporate governance were not the only major issues of this year

- Over the past fifty years we have succeeded in rebuilding Europe and Japan, in establishing strong, resilient democracies and market economies in OECD countries, and in overcoming oppressive and destructive ideologies. The OECD and the Council of Europe played a major part in this achievement.

- But our challenge for this decade and indeed for this new century is to ensure that nations and people who have not benefited adequately from the great political and economic progress of the last half of the previous century, do so.

- It is largely in response to this challenge that the international community held three major gatherings over the past year -- in Doha, Monterrey and Johannesburg. While some criticise the results, I believe they helped to identify the goals and the means by which developing and transition countries can improve significantly the standard of living of their citizens. The statements of Monterrey and Johannesburg emphasized up front that the primary responsibility for economic development rests with these countries themselves – for without sound effective policies and integrity in governance, little can be accomplished. This is not to downplay the duties that fall properly on the shoulders of the developed countries and international organisations. We have the responsibility to help these countries develop the capacities to govern well, take full advantage of the global flows of trade and investment, and provide opportunities and a better quality of life for their people. This means more effective use of development assistance. It means capacity building programmes by governments and the private sector. And it means promoting investment and trade -- and particularly opening our markets further to the exports of developing countries.

- This is a demanding agenda for all countries and for all organisations. But we must pursue it, and do so urgently.

- Much of what the OECD does falls squarely within this agenda. We are no longer just an organisation of developed countries. We are a body with a global reach, and our work includes countries and economies from all regions of the world.

- I’ll give you an example. Last week I opened a meeting of our Global Forum on Taxation. Upon entering the room -- our largest room where we hold our ministerial meetings each year -- I saw representatives of seventy countries and economies around the table -- from central and eastern Europe, Asia, the Middle East, Africa and Latin America. These were responsible officials charged with handling their countries’ tax policies. After I finished my pleasantries, they got down to business, working in plenary session on case studies in international taxation, focusing on transfer pricing  -- one of the important issues they must confront. They then split up into workshops. There were no politics – no ideological controversies. These are people who understand the need for a tax policy that will enable their countries to attract trade and investment, to promote economic growth and enable their governments to provide essential services. This is real capacity building – and it works both ways, for the OECD members were also learning much from their non-Member counterparts.

- This is but one example of a much larger phenomenon in the OECD. We have similar programmes -- global, regional and bilateral -- in fields such as agriculture, competition policy, international investment, knowledge economy, sustainable development, trade, agriculture and public and corporate governance. Wherever possible we co-ordinate with the World Bank, regional development banks, and IMF among other organisations in pursuing this work. At a Global Forum on Competition policy – another building block for a modern economy - a Deputy Minister from Russia told me how the OECD had helped his government develop a far-reaching competition law and hold seminars to train judges and officials. We provide similar assistance to China and South Africa among others. We have developed a “tool kit” for trade policy makers from developing countries and are working with the WTO to ensure successful implementation of the Doha agenda. We have tax training centres in Moscow, Beijing, Ankara and Seoul among other places. I attended a regional forum on anti-bribery in Istanbul for the countries of Southeast Europe and Central Asia. And in Vienna I witnessed the signature of a major statement by ministers of Southeast Europe on policies to encourage investment. This was an outcome of the investment compact of the Stability Pact, for which the OECD and Austria serve as co-chairs.

- So this is the new OECD. We still focus on the problems of our members – and we have plenty – from how to manage health care and pension systems in our ageing societies to how to improve our educational systems. Our members are nowhere near finishing their structural reform policies and one of the most popular of OECD programmes is our country reviews on regulatory reform. We still have to help each other to improve the functioning of our governments, as well as determine how we should utilise and manage new technologies.

- But we cannot concentrate just on ourselves, because the welfare of our own citizens depends, to an increasing degree, upon what happens elsewhere in the world. This is certainly true for trade and investment, for environment, for energy and many other areas. And it is the responsibility of the OECD not just to reach out to developing and transition countries. It is our responsibility as well to help our own members adopt policies that will promote economic, environmental and social progress throughout the world. We call this “policy coherence”. What does it mean? It means we must ask ourselves, for example, how much longer we can sustain policies that provide significant amounts of government support for certain sectors of our economies when this deprives developing countries of needed markets. It is politically difficult for us to tell our farmers, textile and steel workers, among others, that we can no longer protect them from the world market place. But we will have to do so if we are to give poorer economies the opportunity to develop.

V. CO-OPERATION BETWEEN OECD AND COUNCIL OF EUROPE

- Before concluding, I would just like to say a few words about the co-operation between the Council of Europe and the OECD. We have a lot of common interests, and one of the most promising is in the area of good governance.

- We have produced a joint convention on Mutual Administration Assistance in Tax Matters, which can help in the fight against international tax fraud and evasion and in tracing illegal movements of capital. The Council of Europe and OECD jointly serve as the secretariat for the Stability Pact Anti-Corruption Initiative for South Eastern Europe. The OECD is an observer of the Council’s Group of States Against Corruption (GRECO) and the Secretariat of GRECO and the OECD’s Anti-Corruption Unit work very closely together.

- We also work together in areas such as territorial development, agriculture, migration and trade and we are now exploring additional areas of co-operation.

- In that regard, I would just like to say again how much a pleasure and an honour it is to be with you today. Our organisations have a lot in common and our co-operation can benefit all of us. I would now be pleased to answer your questions.