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FORUM 2006
Table of Contents
Speakers at Forum 2006 2
22 MAY 2006 Opening session: Balancing globalisation 4A weighty subjet
Revitalising European growth 23Backing the winners
Information technology – the next phase 25Digital minds
Cities and globalisation 27City sense
KEYNOTE ADDRESSES
Balancing globalisation 30Kostas Karamanlis, Prime Minister, Greece
Structural reforms in Europe 33Jean-Claude Trichet, President,European Central Bank
Financial market liberalisation 37Stanley Fischer, Governor, Bank of Israel
Fulfilling the promise of South Eastern Europe 41Europe’s Eastern promise
Energy and the economy 43Warming up or cooling down?
Investment for development 45Promising returns
Financial education 47Asset tests
Structural adjustment and social cohesion 49Beyond safety nets
Creating jobs in the 21st century 51When protection works
23 MAY 2006
Access to education 55A question of quality
Innovation and economic growth 57Ideas that prosper
Financial markets and growth 59Tools and rules for capital
China: governing for development 61A new age?
Wisdom and governance 63Is wisdom economically viable?
Doha Development Agenda 64Keeping Doha alive
Regional integration and developmentin the Middle East 67Oiling the wheels of reform
FORUM 2006
Speakers
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• Iordanis Aivazis, CFOHellenic TelecommunicationsOrganization, Greece
• Liz Alderman, Business Editor,International Herald Tribune
• George Alogoskoufis,Minister of Economy andFinance, Greece
• Ingrid Antonijevic, Ministerof Economy, Developmentand Reconstruction, Chile
• John Bangs, AssistantSecretary, Education and EqualOpportunities, National Unionof Teachers, United Kingdom
• Philippe Bénédic,Resident Director General,Asian Development Bank
• Jagdish Bhagwati, Professorof Economics, ColumbiaUniversity, United States
• Luca de Biase, InformationTechnology and Science Editor,Il Sole 24 Ore, Italy
• Lorenzo Bini Smaghi,Member of the ExecutiveBoard, European Central Bank
• Christian de Boisredon,Founder, Reporters of Hope,France
• Dominique de Boisseson,Chairman and CEO, ChinaInvestment Co. Ltd., Alcatel
• Jocelyne Bourgon,Ambassador, Delegationof Canada to the OECD
• Chris W. Brooks, Director,Public Affairs andCommunications, OECD
• Ying Chen, Deputy Director-General, China EnterpriseConfederation
• Efthymios N. Christodoulou,Chairman, Hellenic Petroleum,Greece
• Gheorghe Copos,Deputy Prime Minister,Romania
• Jean-Philippe Cotis,Chief Economist, OECD
• Françoise Crouïgneau,Chief International Editor,Les Echos, France
• Dimitrios Daskalopoulos,Chairman, Federationof Greek Industries
• Patrick De Smedt, Chairman,Microsoft Europe, Middle Eastand Africa
• Padma Desai, Director, Centerfor Transitional Economies,Columbia University, UnitedStates
• Ali Dogramaci, Rector, BilkentUniversity, Turkey
• Dara Duguay, Director,Financial Education Program,Citigroup, United States
• David Eades, Presenter,BBC World
• Luis Eduardo Escobar,Senior Advisor,Ministry of Finance, Chile
• Gonzalo Fanjul Suárez,Head of Research,Intermón Oxfam, Spain
• David Feickert, Consultantin Industrial Relations,Ergonomics and Energy,United Kingdom
• Stanley Fischer, Governor,Bank of Israel
• Lionel Fontagné, Director,Centre d’études prospectives etd’informations internationales,France
• Rainer Geiger, DeputyDirector, Financial andEnterprise Affairs, OECD
• Karien van Gennip, Ministerfor Foreign Trade, Netherlands
• Gerlando Genuardi,Vice President,European Investment Bank
• Kenneth V. Georgetti,President, Canadian LabourCongress
• Phil Goff, Minister for Trade,New Zealand
• Angel Gurría, Secretary-General Designate, OECD
• Georges Haddad, Director,Division of Higher Education,UNESCO
• Duck-soo Han,Deputy Prime Minister,Minister of Financeand Economy, Korea
• Michael Harcourt, Chair,Prime Minister’s ExternalAdvisory Committee on Citiesand Communities, Canada
• John P. Hearn, Vice President,University of Sydney, Australia
• Jennifer A. Hillman,Commissioner, United StatesInternational TradeCommission
• Margaret Hollinger, ParisBureau Chief, Financial Times
Speakers
FORUM 2006
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• Bernard Hugonnier,Deputy Director, Education,OECD
• Vernon Johnson, SeniorVice President, EducationalDevelopment, WhitneyInternational UniversitySystem, United States
• Donald J. Johnston,Secretary-General, OECD
• Kostas Karamanlis,Prime Minister, Greece
• Inge Kaul, Special PolicyAdviser, Office of DevelopmentStudies, UNDP
• Dina Kawar, Ambassador,Jordanian Embassy to France
• Fukunari Kimura, Professor,Faculty of Economics,Keio University, Japan
• Mukhisa Kituyi, Ministerof Trade and Industry, Kenya
• David Knapp, Senior Editor,Energy Intelligence Group,United States
• William G. Knight,Commissioner, FinancialConsumer Agency of Canada
• Chen-en Ko, President,Chung-Hua Institute forEconomic Research,Chinese Taipei
• Bassma Kodmani, Director,Arab Reform Initiative
• Anne O. Krueger,First Deputy ManagingDirector, IMF
• Ulysses Kyriacopoulos,Former Chairman,Federation of Greek Industries
• Huguette Labelle, Chair,Transparency International
• Pascal Lamy, Director-General,World Trade Organization
• Paula Lehtomäki, Ministerfor Foreign Trade andDevelopment, Finland
• Ana Isabel Leiva Diez,State Secretary of TerritorialCo-operation, Ministry ofPublic Administration, Spain
• Sheri Xiaoyi Liao, President,Global Village of Beijing, China
• Johannes F. Linn, WolfensohnInitiative Executive Director,The Brookings Institution,United States
• Marc Litzler, Deputy CEO,Calyon
• Giorgio Magistrelli,Secretary-General, EuropeanChamber of Commercein China
• Philippe Manière,Director-General,Institut Montaigne, France
• John P. Martin, Director,Employment, Labour andSocial Affairs, OECD
• Francis Mathieu, President,Club e-reflexion, France
• Elliot E. Maxwell, Chairman,eMaxwell and Associates,United States
• Hamish McRae,Associate Editor,The Independent,United Kingdom
• Arnoud de Meyer, DeputyDean, INSEAD, France
• John Monks, GeneralSecretary, European TradeUnion Confederation
• Michael Mozur, DeputySpecial Co-ordinator, StabilityPact for South Eastern Europe
• Nicholas Nanopoulos, CEO,Eurobank EFG, Greece
• Basile J. Neiadas, CEO,OPAP SA, Greece
• Thomas C. Nelson,Chief Operating Officer,AARP, United States
• Marc Odendall, Co-Founder,Saint-Honoré Micro-Finance,France
• Didier Pourquery, EditorialDirector, Metro, France
• Samuel Rouvillois,Philosopher, Club e-reflexion,France
• Alberto Ruiz-Gallardón,Mayor, City of Madrid, Spain
• Yazid Sabeg, Presidentof Board of Directors, CSCommunication & Systèmes,France
• Güven Sak, Director,Economic Policy ResearchInstitute, Turkey
• José de Sales Marques,President, Instituteof European Studies, Macau
• Yasuhisa Shiozaki,Senior Vice Ministerfor Foreign Affairs, Japan
• Yves-Thibault de Silguy,Senior Executive VicePresident of InternationalRelations, SUEZ
• Alison Smale,Managing Editor,International Herald Tribune
• Néstor Stancanelli,Deputy Secretary, InternationalEconomic Negotiations,Argentina
• John J. Sweeney, President,American Federationof Labor-Congress of IndustrialOrganizations
• Rachid Talbi El Alami,Minister-Delegate to the PrimeMinister, Morocco
• John Thornhill, Editor,European Edition,Financial Times
• El Sayed Torky, Advisorto the Minister’s Officefor International Relations,Ministry of Investment, Egypt
• Jean-Claude Trichet,President,European Central Bank
• Mark Vaile,Deputy Prime Minister,Minister for Trade, Australia
• Jean-Marc Vittori, EditorialWriter, Les Echos, France
• Vivienne Walt, Reporter, Time,United States
• Michael P. Wareing, CEO,KPMG International
• Grey Fairfield Warner, SeniorVice President for LatinAmerica, Merck & Co. Inc.
• Lord Alan Watson ofRichmond, Chairman Europe,Burson-Marsteller
• Wusheng Zhang, President,Tianjin Academy ofEducational Science, China
FORUM 2006
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Opening session: Balancing globalisation
• MODERATOR: DAVID EADES,PRESENTER, BBC WORLD
• GEORGE ALOGOSKOUFIS,MINISTER OF ECONOMYAND FINANCE, GREECE
• DUCK-SOO HAN, DEPUTY PRIMEMINISTER AND MINISTER OFFINANCE AND ECONOMY, KOREA
• JOCELYNE BOURGON, AMBASSADOR,DELEGATION OF CANADATO THE OECD
• DONALD J. JOHNSTON,SECRETARY-GENERAL, OECD
“You cannot find a bigger, morecomplex and all-encompassingsubject than that of balancing
globalisation”, said David Eades in hisopening remarks. There are no simpleanswers to the challenges it poses either.In a light-hearted observation, he suggesteda clue might be found in Douglas Adams’novel The Hitchhiker’s Guide to the Galaxy,where the indecipherable answer toLife, the Universe and Everything was foundto be the number 42. Despite the complexityand vastness of the topic, David Eades hadno doubt that globalisation is essentiallya positive force, but lamented that it hasbecome a “dirty word”, and suggested thatit is the responsibility of everyone to pushits beneficial aspects.
George Alogoskoufis made an openingaddress to the Forum, a condensed versionof which is set out below.
There are some who perceive globaleconomic integration as a threat, especiallyas regards socially sensitive issues such asjob security and unemployment. They
argue that the integration into the globaleconomy of low-wage emerging marketeconomies will lead to ever-increasingpressures on OECD countries, which inturn will have to undergo painful structuraladjustment at home. As emerging marketeconomies take a bigger share of worldmarkets for goods and services, the brunt ofcompetitive pressures is on labour-intensivesectors. One effect is the outsourcing ofjobs to emerging market economies.
And there are others who perceive globaleconomic integration as an opportunity fora more prosperous world. They argue thatthe positive effects of globalisation by farexceed the risks. Companies are able to staycompetitive by improving productivity andexpanding their activities. Consumersbenefit from cheap labour-intensive goodsfrom emerging economies. And as a result,overall, globalisation does not necessarilylead to lower real wages in OECDcountries. Indeed, it can contribute tomaintaining, or even increasing, thepurchasing power of people in OECDcountries. So the argument goes.
In both cases, however, global economicintegration is a challenge. A challenge that,if carefully balanced, can provide thecitizens of this world with more wealth,more opportunities and a more promisingfuture. Indeed, balancing globalisation is asine qua non condition for a better future forall of us. We can all observe the greatimbalances that prevail in our world –among them fiscal, current account, andlabour-market imbalances. Some of themare clearly not sustainable and will have tobe addressed in an effective manner as soonas possible. The large external deficits ofsome countries, combined with thesurpluses of their trade partners and of theoil-producing countries, can poseconsiderable risks to global economicstability. So, it is crucial that we dosomething about them.
Consequently, it is essential to implementpolicies that aim at increasing the growthpotential of our economies and fightingunemployment and social exclusion in aframework of sustainable development.Focusing on sustainable fiscal discipline,
A weighty subject
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a more business-friendly environment,the promotion of research and developmentand innovation, the modernisation oflabour markets, and the enhancementof social cohesion is vital for the long-termoutlook.
Most of us live in knowledge-basedeconomies. Knowledge embodied inintellectual assets is becoming crucial forfirms’ and countries’ economic performanceand growth. We have to ensure that theirbeneficial effects are spread throughout thewhole world economy, by safeguarding thebalance between legal control and diffusionof knowledge at the same time.
Another topic that is of great interest to allof us is the rise in oil prices, which makesthe issue of increased security of energysupply combined with environmentalsustainability even more urgent to discussand to resolve.
Regarding trade and the Doha DevelopmentAgenda (DDA) negotiations, we mustensure that they will be concludedsuccessfully by the end of the year. Abalanced and viable outcome in DDA ispossible, providing prosperity to the globaleconomy, but mainly to the less developedcountries. Financial markets havedeveloped into a crucial factor for globaleconomic performance. Their functiondiffers significantly across countries in viewof size, structure, competition, andregulatory frameworks. We need toenhance effective competition, abolishexisting barriers and safeguard protectionof investors at the same time.
All these issues comprise a major challengefor the future course of the global economy.At all times, our aim should be to help thepublic understand and accept the necessarypolicy improvements. This requirespolitical courage, commitment and theinternational coordination of policies. Thisis no time for complacency. We have to actin a steadfast manner in order to make thisworld a more prosperous place for itscitizens.
In this context, the OECD itself has animportant role to play. Our efforts to tackleproblems and find viable solutions with thelargest possible social consensus can lead
to even better results if we use the expertiseof well-respected institutions such as theOECD. This may mean that theOrganisation should both widen its scopeand enhance its working relations withother countries around the world over thenext years.
I am confident that in this year’s Forum, theexchange of views and the flow of ideas willlead to a synthesis that will ultimately helpus reach our target.
Extracts from Duck-soo Han’s openingaddress are presented below.
We all know that we are living in an eraof explosive trade expansion. Just as
individuals can be better off trading witheach other, the international trade ofgoods and services brings gains inefficiency for participating countries.But we do not stop here in integratingthe world and enhancing efficiency. Notonly the products themselves, but alsothe production factors are moving acrossnational borders. Capital is now, morethan ever, moving freely across countriesto seek best returns. Even workers areprepared to choose a country where theycan best show their own talent. Thesetrends seem irreversible, regardlessof the wishes of each individual nation.
We are all aware that active participationin globalisation has brought remarkablegrowth in China since the 1980s, and inIndia more recently. This simply means thatover 40% of the world’s population is beingsaved from poverty. Ireland has gracefullytransformed itself from a small, forgottencountry in Europe to a rich, advancedcountry through foreign direct investment.
Vietnam’s rapid development via economicliberalisation and FDI also deserves ourattention. One might ask the question:“Does globalisation promise prosperityeverywhere”? My answer is yes, with theextent of prosperity depending on theinternal adaptability of the nation. Moreimportantly, I have yet to come acrosseconomic success without market
George Alogoskoufis
Donald J. Johnston and Angel Gurría
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liberalisation. A research result that Irecently came across stated that the averagegrowth rate of actively open economieswas five times higher than that of closedeconomies.
Although history has repeatedly proved thatglobalisation brings economic prosperitywith better opportunities, many people stillresist and even fear it. This is primarilybecause the enhancement of efficiencyresulting from globalisation is broughtabout by intensified competition amongcountries, firms and workers. Thisintensified competition operates as a factorthat deepens the disparity between nationsand individuals. In this sense, disparitymight be an inevitable result of increasedefficiency.
Nonetheless, if we fail to contain it atacceptable levels, a number of countrieswill continue to resist the trend ofglobalisation, putting the noble cause forthe “better welfare of humankind” at peril.And those nations that opt for maintainingclosed economies will lose out onopportunities to save their citizens frompoverty, eventually finding it even moredifficult to promote social integration.
Despite these concerns, I am confident thatthe benefits of globalisation outweigh thepossible costs. As a representative of Korea,I dare to say that no Korean would want togo back to the economic conditions of a
1960s Korea. Our choice, then, should beclear. We had better actively participate inglobalisation, rather than attempting toresist it.
At the same time, we must make every effortto minimise the cost of globalisation, whilemaximising its benefit. The labour market,for instance, needs to become more flexiblein order to reap the benefits of globalisation.This, however, must be accompanied byefforts to promote the employability of
workers and to minimise the victims ofstructural adjustment. Social safety netsshould also be strengthened to protect thoseleft behind and enhance social cohesion.
In the case of capital markets, cross-bordertransactions should become moreliberalised so as to facilitate globalisation.Here again, prudential regulations andadequate monitoring must be in place so asto prevent any possible magnification ofeconomic instability. We have learned fromthe Asian crisis that financial liberalisationwithout prudential regulations is potentiallydamaging.
Perhaps the best evidence of Korea’s fullcommitment to opening was our responseto the financial crisis that broke out in1997. In spite of heightened criticism ofliberalisation, we decided to further openour capital market, while substantiallystrengthening prudential regulations thistime. And we overcame the crisis moresuccessfully than any other crisis countries.Currently, the Korean government ismaking great efforts to establish moreFree Trade Agreements with manycountries including the US. Giventhe reliable track record of the Koreangovernment regarding liberalisation,I expect the results to be successful.
While opening and liberalising the economy,we have never forgotten the importance of
Jocelyne Bourgon and David Eades
David Eades, George Alogoskoufis and Duck-soo Han
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policies to protect those left behind.The portion dedicated to social supportin our GDP has continued to increase.In particular, the Korean governmentsubstantially strengthened the social safetynet in response to the crisis. Also, Koreais actively participating in the internationalcommunity’s commitment to reduce inter-nation disparity. Recognising that ODA wastruly an important stepping stone for Koreato overcome poverty and leap to the nextlevel, we aim to double our OfficialDevelopment Assistance (ODA) by 2009.
ODA to Africa, in particular, will be tripledin line with President Roh Moo-hyun’s“African Initiative” announced earlierthis year. We are also transferring ourtechnology and sharing informationand knowledge to assist economicgrowth of lower income countries.
Here, I would like to remind you that“trade” can be more effective than “aid”in stimulating economic growth anddevelopment, as is suggested in thediscussion of “Aid for Trade” in theinternational community. In line with this, I would like to highlight the importance ofa timely and successful conclusion of theDoha Round negotiations. Therefore, weshould play more proactive and leadingroles in the negotiation process of theRound for our common benefit.
Jocelyne Bourgon’s introductory remarksare reported below.
This seventh edition of the OECD Forumis addressing the theme of balancingglobalisation – balance among regions,balance among people, balance betweendeveloped and developing countries.What is balance? Balance is about thedemocratisation of globalisation, and I wouldargue we still have some distance to go.
A second aspect in our search for balanceis about managing shared risks. Therefore,the search for balance must address therisks associated to emerging imbalances.Managing and reducing risk is a collectiveresponsibility. Resolving imbalancesmeans achieving a better global balancebetween savings, investments andconsumption, and no one is mightyenough to do it alone, no country,no international organisation, no groupof countries. And no one is small enoughnot to be able to make a contribution.But the longer we wait, the more we allowglobal imbalances to grow and the greaterthe risk, the risk of interruptingadjustment and the risk of inflictinguseless pain around the world, on allcitizens. We are, now, benefiting fromfavourable conditions. It is a timeconducive for actions; it is a timeconducive for coordinated actions.
A third aspect for our search for balanceis also about a balanced policy agenda.All domestic policies are internationalpolicies and all policies are economicpolicies, whether we are talking abouthealth, immigration, environment,agriculture or water management. Allnational policies are international policies,and all policies contribute to the economy.So a balanced policy agenda at theinternational level is one which achievesmeasurable progress, year after year,increasing productivity and reducing
Opening panel press conference
George Alogoskoufis, Kostas Karamanlis, outgoing Secretary-General Donald J. Johnston andSecretary-General Designate Angel Gurría
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disparity, increasing efficiency and creatingequity, increasing freedom in the marketplace and creating solidarity. It is not achoice between a standard of living andquality of life. It is both a high standardof living and quality of life.
A fourth aspect related to our search forbalance is also about a balanced approachbetween market, state and civil society.If we have learned anything in the past25 years, it should be that we need botha well-performing market economy anda well-performing society. And to achievethat we need market, state, and civil societycontributing to the fullest. The market isthe most efficient way of allocating scarceresources. The state is the most efficientway of creating common public good, andcivil society is the most efficient way ofcreating shared value and a shared senseof community.
Donald J. Johnston offered the followingobservations.
First of all, why do we have an OECD Forum?Back in the late 1990s, just beforeI arrived at the OECD, the Organisationembarked upon a negotiation of amultilateral agreement on investment(MAI). This seemed a very logical thing todo. Someone had suggested: “Why do wenot put some order in the internationalinvestment climate as we are trying to dowith trade”? Well, many of you here willremember that negotiations wereabandoned. I believe governmentsresponded in part to the demands of civilsociety, which did not see the MAI as reallycontributing to balancing globalisation.
I put this failure down to a lack ofcommunication. We have learned a lotsince then, and when ministers met in thewake of the MAI, they encouraged theOECD to engage in a more active dialoguewith all stakeholders, especially civilsociety. And one outcome was the creationof the OECD Forum.
The OECD Forum began in the year 2000,bringing out the stakeholders that are wellrepresented here today. We have business,we have industry, we have academia, wehave NGOs, we have politicians, we havebureaucrats, senior officials, and this is theideal environment for the OECD to have avery important dialogue with all of these
stakeholders. That is also the reason whywe hold it in conjunction with the annualMinisterial Council Meeting. I would say ithas been a great success, I think it hasmoved forward very well and I believe itwill continue to do so.
But what is the real challenge here? Wehave seen the immense benefits ofglobalisation. We have heard about thisfrom our speakers. They are measurableand we have measured them at the OECD.
Then, in the words of our moderator,“Why is globalisation a dirty word?”I suppose, for many, this is because they do not feel that they have seen the benefits.Some of those benefits have been invisibleto them. One example I would point outis the driving down of consumer prices due to cheap imports from China and otherparts of the world. The consumers do notnecessarily see those benefits the way theysee other benefits. And this is a seriouscommunication problem. The Minister ofFinance of Korea has pointed out that theyhave adopted policies to try and meet thatchallenge, and, I must say, we all should beextremely proud of the performanceof Korea in the aftermath of the crisisof 1997.
I think of balancing globalisation as walkinga tightrope, and picture the government asthe walker, holding a balancing pole, and oneside becomes increasingly weighed down bythe immense wealth that is being generated
in the country. But the other side is out ofbalance because those benefits are not beingtransferred adequately. So the balance is lost.I do not know how many of you have walkeda tightrope – I do not think I have for someyears – but I know that, if the pole is notbalanced, you are in serious difficulty. Youcannot move forward and I think thatis a challenge to be faced by many of ourcountries. Globally, it is very clear that wehave not achieved that balance, and thatis why we are so intent upon achievingthe conclusion of the Doha DevelopmentAgenda, and also on achieving theMillennium Development Goals.
How do we get governments to transferthese benefits? What steps do they have totake to make sure those benefits aretransferred from the obviously hugebeneficial results of globalisation on the onehand, to social cohesion on the other? Thattakes us into a debate which I am sure wewill have here. These challenges cannot befaced by politicians alone, and that is whythe OECD Forum is important. It has to bedone in a dialogue between government,the political decision-makers, seniorofficials, business, industry and civil society.And of course, we have the added benefit ofhaving some very senior people from theacademic community with us. And I thinkthat is the only way that we will be able toachieve the necessary structural reform inorder to bring balance back, both nationallyand internationally, and that is why thisForum is extremely important. ■
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22 May
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Revitalising European growth
Backingthe winners
• MODERATOR : DAVID EADES,PRESENTER, BBC WORLD
• JEAN-PHILIPPE COTIS,CHIEF ECONOMIST, OECD
• JOHN MONKS, GENERAL SECRETARY,EUROPEAN TRADE UNIONCONFEDERATION
• NICHOLAS NANOPOULOS, CEO,EUROBANK EFG, GREECE
• MICHAEL P. WAREING, CEO,KPMG INTERNATIONAL
The issue of revitalising economicgrowth in Europe is a complex onefor which all speakers on this panel
agreed there is no panacea.
The target date for completion of theLisbon Agenda, the EU’s stated aim ofraising Europe to being the world’s mostcompetitive, knowledge-based economyby 2010, is rapidly approaching, and thereis a broad consensus that progress to datehas been disappointing. In terms ofproductivity, the euro area has been losingground to the US over the past 15 years,and there have been few signs of thissituation changing, at least as far as thelarger EU economies are concerned. Butthe lead speakers suggested a number ofways in which governments could improveperformance.
Michael P. Wareing noted that competingwith the rapidly-expanding, low labour-cost economies such as China and Indiawas obviously a challenge, but pointed outthat there were some bright spots inEurope’s current economic position.
Enlargement is so far proving a success.New member states are achieving rapidrates of economic growth, boosted by awell-educated and highly motivatedworkforce.
Economic growth and productivityperformance in the Scandinavian countrieshas also been comparatively strong inrecent years, in part because of their solidrecords in terms of R&D spending andtheir prominence in information,communications and technology-relatedsectors. The problem of Europeansluggishness lies with the larger, moremoribund economies. Michael P. Wareingsuggested that economic performance inthese countries could be improved bynurturing entrepreneurship andencouraging new businesses, rather than byprotecting old ones. In some industries,such as financial services, Europeangovernments could channel more supporttowards “winners”.
Nicholas Nanopoulos observed thatEurope fails at what the US does best,
which is to shift employment away frommature industries and into new dynamicones, without producing highunemployment. Although there are anumber of ways of improving Europe’sability to follow suit, Nicholas Nanopouloshighlighted three: restructuring the overlybureaucratic and unproductive publicsector, which crowds out the private sector;improving labour market flexibility,
Nicholas Nanopoulos
FORUM 2006
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including decentralised wage bargaining;and introducing reforms in product andservice markets in order to stimulate greatercompetition.
Jean-Philippe Cotis asserted thatgovernment policies, such as those thatdiscourage employment of older people orplace limits on working hours, stifleEuropean growth. He also noted that toolittle has been done to encourage innovationand research in many European countries,and that funding for tertiary education inthese countries is often inadequate.Spending on tertiary education in theUS and Nordic economies is, for example,twice the level that it is in the biggerEuropean economies. He argued that more
should be done to create a more business-friendly environment, reducing red tapeand other administrative burdens. The mostimportant reforms, he said, are those thatboost competition in the services industries,given that these account for the majorityof European employment and output.
Taking a different track, John Monksargued that the now-familiar calls for greaterflexibility, particularly with respect to labourmarket reforms, are seen by employees ascode words for lower job security and otherpotential threats to worker livelihood.The anxieties these threats generate havecontributed to a mistrust of Europeanprojects, such as enlargement and theEuropean constitution. This has in turn
led to an increase in savings which hasundermined growth in demand andeconomic activity. Savings rates in some ofthe larger economies have risen to unusuallyhigh levels in recent years. This lack of trusthas also compounded the political difficultyof enacting further-reaching and beneficialreforms.
The debate over the future direction ofeconomic policy is often portrayed as astraight choice between the US marketmodel and the continental Europeanapproach, or roughly stated, betweenthe market and the state. But the successof the Nordic economies in combining hightaxes and generous welfare systems withsolid growth, strong public finances andDavid Eades and Jean-Philippe Cotis
John Monks
Michael P. Wareing
moderate unemployment suggests that theproblem is more complex. For John Monks,Europe should be looking north, ratherthan west, for inspiration.
Discussions with the audience focusedon the role of institutions and the EU’srole in helping to unblock growth. Oneparticipant wondered if institutions inEurope, which had started out more asfacilitators of progress, were now seenby a wider public as part of theproblem. Asked where funds to expandR&D and education would come from,Michael P. Wareing suggested that EUfunds could focus less on infrastructureand more on investing in knowledge.Jean-Philippe Cotis echoed theimportance of R&D and emphasisedthe need of policies to encourageprivate sector involvement as well. ■
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Arnoud de Meyer and Rachid Talbi El Alami
Information technology – the next phase
Digital minds
• MODERATOR : LUCA DE BIASE,INFORMATION TECHNOLOGY ANDSCIENCE EDITOR, IL SOLE 24 ORE,ITALY
• PATRICK DE SMEDT, CHAIRMAN,MICROSOFT EUROPE, MIDDLE EASTAND AFRICA
• ELLIOT E. MAXWELL, CHAIRMAN,EMAXWELL AND ASSOCIATES,UNITED STATES
• ARNOUD DE MEYER, DEPUTY DEAN,INSEAD, FRANCE
• RACHID TALBI EL ALAMI,MINISTER-DELEGATE TO THE PRIMEMINISTER, MOROCCO
Participants in this session werereminded that Bill Gates oncefamously predicted that “640
kilobytes (memory) should be enough foranybody”. Of course, that limit has beenpassed over many times since, and today,storage is measured in terms of millionbytes, or gigabytes. The future ofinformation technology may be difficultto predict but panellists agreed, the paceof change will be exponential.
Luca de Biase animated a wide-rangingdiscussion on the challenges facing a worldcharacterised by exponential increases inmemory, capacity and computing speed.What are the implications for ordinaryusers and businesses as information andcommunications technology seesaws itsway between “open” and “restricted”content? And are developing countriesstarting to bridge the digital divide or isbroadband creating a wider gulf than ever?
One point the panel agreed on is that thefuture is coming faster than we think.Information that is today available forfingertip access will soon literally start
“following people around”. Rather thanopening up an e-mail box packed withhundreds of items every morning,Arnoud de Meyer foresees the day whenwe are continuously connected to ourinformation sources and databases.He calls this “tacit connection”, and says itwill revolutionise the way we live and workten years from now.
Access to anything, anytime, anywhere, iscoming soon, he says, and the devices thatwill bring us there are destined to maketoday’s mobile phones and Blackberrieslook like tools of the Stone Age. And theinformation flow will be in both directions– the idea of having sensor devices insideour bodies, for example, monitoring ourhealth and updating our medical files
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instantaneously, is not far off. “The problemhere of course is avoiding informationoverload.”
Pervasive technology also encouragesknowledge sharing, but that also leadsto easier pirating of ideas and intellectualcapital. Elliot E. Maxwell described thenext phase of IT development as one whereopportunities for openness will expand.Networks are, by nature, a sharedtechnology, he said. “Most products,services, or processes are neithercompletely open nor completely closed,but they exist somewhere on a scale ofopenness”, he said. At one end of thespectrum, for example, are softwareor applications that are highly restrictedand thus the least shared. Then comeproprietary software which is sharedunder certain circumstances. Then comesopen source, with databases that operateinteractively, like Wikipedia. The freestplatform is the Internet.
Finding the right balance between the“open” and “closed” systems of the past willbe one of the main challenges of the yearsahead, Elliot E. Maxwell said. This appliesto both access to information andintellectual property. “Before, intellectualproperty rights holders would obtain valueby controlling access to their works, butnow, they can also obtain value byencouraging others to contribute to it”,he said. But participating in a world ofpervasive computing also carries securityrisks, notably for personal data. He sayshowever that privacy can still be protectedin this world, because data collection willbe decentralised and ever-changing, thusallowing for anonymity.
Patrick De Smedt began by sharing hischairman’s prediction that technologyinnovation will enable business to changemore in the next ten years than in the pasttwenty. He then brought up whathe sees as a new trend in society – userempowerment. “Consumers, especiallythe 16-27 year-old age group, are no longersatisfied with products that are offered tothem by companies off the shelf. Instead,they want to have a part in the creativeprocess”, he said. Patrick De Smedt saidthat information technology is increasinglygiving consumers control to define
the products that they want. “The producerno longer decides”, he said.
The trend lies in XML-based web services,through which there will be a highdegree of integration between usersand those offering products and services,Patrick De Smedt explained. As forbridging the divide with developingcountries, he said that partnerships whichbring together the private and publicsectors are required to stimulate andencourage innovation and ensureincreasing access to technology, education,skills training and to incorporate thedeveloping world. Microsoft aims tocontinue to increase access to IT inemerging markets, and the company andits many partners are currently workingon new business models to achieve this.
Rachid Talbi El Alami countered thatgovernments in developing countries werewilling to implement intellectual propertylaws, but that product pricing had to keep instep with people’s ability to pay. Otherwise,individuals would be driven in the wrongdirection and lose respect for intellectualproperty laws. The minister reminded thefloor that access was not everything, that incountries with high illiteracy rates, forinstance his own, the real prospects forparticipating in the information worldremained low. “We are not yet using IT toshare or contribute to the universal body ofknowledge out there – for us, the digitaldivide is widening every day, in all aspects.”
Much work remains to be done inMorocco, he said, just to implement thebasic conditions needed for an informationsociety. Progress will come from the topdown. “We would like to take some stepsforward in development”, he said, butadded another observation: that it wasmore difficult to participate in the shared oropen information society when the brain-drain in Morocco was so crippling. Half ofthe engineers trained each year in Moroccoleave the country, Rachid Talbi El Alami said.
In short, the panel concluded thattechnology has great potential to help spurgrowth, but is only part of the solution.Without broader efforts in areas likeeducation and investment, the digital worldwill continue to be marked by imbalances. ■
Luca de Biase and Patrick De Smedt
Elliot E. Maxwell
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Cities and globalisationCity sense
• MODERATOR: CHRIS W. BROOKS,DIRECTOR, PUBLIC AFFAIRS ANDCOMMUNICATIONS, OECD
• MICHAEL HARCOURT, CHAIR, PRIMEMINISTER’S EXTERNAL ADVISORYCOMMITTEE ON CITIES ANDCOMMUNITIES, CANADA
• ALBERTO RUIZ-GALLARDÓN, MAYOR,CITY OF MADRID, SPAIN
• YAZID SABEG, PRESIDENT OF BOARDOF DIRECTORS, CS COMMUNICATION& SYSTÈMES, FRANCE
Cities are economic drivers at theheart of globalisation. They areincreasingly interconnected and in
direct competition with each other.Policymakers should look more closely attheir potential, since boosting theircompetitiveness and liveability would bringwider benefits.
“The 21st century will be the century ofthe city, but this fact has not yet been fullyappreciated” said Michael Harcourt,crystallising the thinking underlying thisdiscussion about cities and globalisation.“We used to talk about countries competingagainst each other for economic prosperityand betterment, but now cities mustcompete with each other, not justdomestically, but with other cities aroundthe world”, he added.
Alberto Ruiz-Gallardón said, stressing asimilar point, that “Europe’s major citieshave become the leading forces in poweringdevelopment in the countries to which they belong. Success and failure at nationallevel is now determined by the successesand failures of the cities.” However, it was a tough battle, and rather like the Queen of Hearts in Alice in Wonderland, citieshad to run simply to maintain their currentpositions.
These movements are positive indevelopment terms, but they are also
generating new and rising tensions.For instance, Alberto Ruiz-Gallardónhighlighted stresses resulting fromimmigration, the pressing need tomodernise city infrastructures, and the lackof appropriate finance to meet thechallenges. Madrid had welcomed morethan 100,000 immigrants over the lastthree years, and some 17% of the capital’spopulation was now of immigrant origin.
At the same time, Yazid Sabeg suggestedthat “our largest cities have becomeessential actors in the globalised worldeconomy”. Activity has become
concentrated on large centres clusteredaround the main urban population zones,and these now monopolise much ofadvanced nations’ human, material andcultural resources.
“Globalisation brings a mix of effects thatvaries from place to place, even within thesame city. Ignoring these effects reducescapacity to create further opportunities”,reckoned Michael Harcourt. “There isgrowing evidence that we can help fashionbetter, sustainable outcomes by promotinggovernance mechanisms that areappropriate for these new times.”
Luca de Biase and Patrick De Smedt
Elliot E. Maxwell
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In particular, Michael Harcourt suggestedthat “place matters” and that “resourcesand responsibilities should be devolvedto the level of government at which theycan operate most effectively”. Moreover,the ability to compete globally was vitallyaffected by the choices made at local levelin welcoming and settling immigrantworkers, attracting human talent,addressing urban planning and integratinglabour markets, he added.
By way of example, Yazid Sabeg citedthe massive investments – some600 billion euros – that had been made inurban renewal in France over the last thirtyyears, and the further 30 billion euros thatwere to be invested over the next seven years.Yet these efforts had not prevented unrestand disaffection in the poorest sectionsof the population. Past planning policiesthat had fostered segregation and socialimmobility among immigrant populations,and the frequent failure, even today, ofgovernment to talk with local peoplehad much to answer for in this respect,Yazid Sabeg believed. Ghettoes werenow a reality in major OECD cities, heacknowledged, and policies were neededto address this.
Alberto Ruiz-Gallardón agreed with asuggestion from the floor that increasedcontacts and co-operation between citieswelcoming immigrants and the newcomers’countries of origin could play a positive
role in assisting the process of integration.“In addition, we already have manycontacts and exchanges with other cities inEurope confronting similar issues to ourown”, he said. At the same time heemphasised the fact that “running a city isnot just a matter for the local council andpoliticians”. Other participants includingrepresentatives of civil society and businessneeded to be closely involved.
“This approach involves risks forpoliticians, who have tended in the pastto avoid this type of involvement, but inMadrid we are committed to making itwork”, Alberto Ruiz-Gallardón continued.In addition, he stressed the importancefor politicians to reconcile the need forinforming and consulting the public beforedecisions were taken with their duty to playa leadership role and to decide andimplement policies.
Moreover, with regard to financing cityprojects, Alberto Ruiz-Gallardón explainedthat “we are not looking for more fundsand subsidies from central government.What we want is a specific local tax-raisingpower that will encourage city authoritiesto exercise their powers responsibly.”
At the same time, there was a huge rangeof projects requiring investment. “I willnot speak of priorities, but I would saythat there are three things that are ofparticular importance – education,education and education,” the mayor said.
Chris W. Brooks emphasised theimportance of governance as a key driver inmaking cities competitive. He noted thatnowadays “cities were being recognised asassets and not just considered as expenses”.In this context he went on to stress theimportance of fostering the environmentalsustainability of the modern city.
Michael Harcourt indicated that the wayin which central governments consideredcity issues was beginning to change forthe better. For instance, in Canada a newgovernment department had been createdfor Transportation, Infrastructure andCommunities. “Being given responsibilityfor local authorities has not traditionallybeen considered one of the plum jobs ingovernment”, Michael Harcourt added,but this was changing with the risingimportance of cities as players on theglobal scene. This new importance couldbring about a new way of thinking, too. ■
Alberto Ruiz-Gallardón
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Balancing globalisationKostas Karamanlis, Prime Minister, Greece
It is a great pleasure and honour for me toaddress the OECD Forum, a reputable andwell established institution advancingpublic dialogue and mutual understanding.
Our focus this year is on how best tobalance the negative and positive effects ofglobalisation. Our common objectives arethe achievement of benefits, their long-termsustainability and their equal distribution toall countries. So that citizens enjoy higherincomes and improved living standards. Sothat the right to employment and socialprotection is secured. So that the gapbetween the rich and the poor is graduallybridged.
For centuries now, populations of differentbackgrounds and cultures gradually becameinvolved in more extensive and complicatedeconomic relations. After all, the true originsof migration, trade and economic co-operation date back to ancient times. Inspite of several intervals of internationalconflicts and protectionist policies, theunprecedented pace of global integration weobserve today is more of a historic patternthan a circumstantial drift.
In the last 20 years, the pace ofinternational economic integrationaccelerated sharply. Major economicand political events such as the historicre-unification of Europe, the outward-oriented policies in East Asia, China’ssweeping economic reforms and the steadygrowth of India, together with thetremendous progress in technology andinnovation and the digital revolution, madeit possible to shorten distances and widenopportunities.
In this respect, globalisation is not onlyabout trade and financial flows. It alsorefers to the movement of people andknowledge, to wide co-operation andsharing of best practices, to mutualexchange of information and support.
Globalisation has unleashed unprecedentedpowers of growth in many parts of the
world. But at the same time, it has createdcauses for concern with respect to jobinsecurity, social exclusion, wideningimbalances, terrorism, security of energysupply and the environment.Unsurprisingly, not everybody viewsglobalisation as beneficial. Some regard itwith suspicion; others view it as just beinginevitable. Notwithstanding how weperceive it, globalisation remains both anopportunity and a challenge, an advancingreality affecting more and more citizensacross the world.
Our experience so far has shown that theopportunities of global integration are notseized without effort. The power ofglobalisation needs to be harnessed andcarefully directed to our benefit. The speedand extent of change is enormous. Ourpolicies need to be focused and proactive.International co-operation towardscommon targets is required.
Some countries have become integratedinto the global economy more quickly and
efficiently than others by adapting,restructuring and changing accordingly. Asa result, they observe faster growth, higherincome and welfare. As Darwin has noted,“it is not the strongest of the species thatsurvive, nor the most intelligent, but theones most responsive to change”. Asuccessful example is provided by theimpressive developments in SoutheasternEurope, a region, known for its troubledpast which has embraced a promisingfuture by adapting and integrating.
Greece, being the only EU member in theregion, is actively encouraging regional co-operation in many fields such as transport,entrepreneurship, trade, tourism andenergy. Through concerted action, theregion is developing into an internationalenergy hub improving its developmentpotential and strengthening its globalpresence.
Conversely, countries which do not succeedin reforming appropriately or in improvingtheir competitiveness face difficulties
Moderator Donald J. Johnston, Kostas Karamanlis and George Alogoskoufis
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enjoying the benefits of global integration.Indeed, market forces, extending beyondnational borders, promote efficiency andgive easier access to capital flows, newtechnology and cheaper products. But theydo not always ensure fair distribution.
Trade imbalances accumulate and fiscalaccounts are over-stretched. Coupled withincreasing demographic pressures, suchimbalances indicate mounting difficulties inmaintaining sustainable public finances.
Furthermore, as advanced economiesmature, they become more service-oriented, thus shifting towards high-skilledjobs. As a result, low-skilled jobs arethreatened and unemployment builds up.These global imbalances certainly lead tomounting insecurities. Especially, whentaking into account further spilloverconsequences such as social exclusion anda deteriorating environment.
Soaring energy prices and a turbulentenergy market create another source ofconcern. However, such uncertaintiesshould neither reverse the process norindicate a shift to inward-oriented policiesof the past.
On the contrary, they should serve as awake-up call for governments to embracepolicy changes, implement the necessaryreforms and coordinate procedures in aneffort to build competitive economies andstrong, inclusive societies.
The main focus should be on:Macroeconomic stability – budgetary consolidation remains a challenge in manycountries. Healthy public finances arecrucial in order to secure efficient allocationof resources, long-term sustainability andsocial security for all citizens.Structural market reforms – promotingopenness and competitiveness isimperative. Opening up product marketsand reducing entry barriers; modernisinglabour markets by improving supply anddemand; securing smooth financial marketsby appropriate regulation; and reducingredtape are essential priorities.
Countries need to increase the pace ofstructural reforms (and that is the course ofaction we currently implement in Greece)in order to integrate into the globalbusiness environment and seize theopportunities that free trade and openmarkets generate. Especially in terms ofcreating more and better jobs. Nevertheless,for growth to be sustainable, the globalcommunity must increase awareness onenvironmental issues.
Protecting the environment shouldconstitute the milestone of globalisationrather than be seen as an obstacle togrowth. In this respect, efforts at nationallevel should concentrate on reducing oildependency and promoting the use ofrenewable resources. Common initiatives,such as the Kyoto protocol, should beimplemented and further reinforced.
The progress in innovation andtechnological advances has beenundeniable. But most of the research and itsoutcomes remain concentrated in a fewpioneering countries.
We need to coordinate our efforts to globalizeR&D and spread the gains of innovation. Inthis rapidly changing environment, lifelonglearning is necessary. Modern educationand training are decisive in increasingemployment, reducing social exclusion andlimiting inequalities. Through a commonplatform, countries should promote researchand innovation and modernise education soas to develop knowledge-based societies andadaptable labour forces.
A prominent example of such coordinationefforts is the case of the European Union.Member states have set common targets inorder to increase competitiveness andenhance the role of the Union in the globaleconomy. The review of the Lisbon Strategyin 2005 launched a new partnership forgrowth and jobs, and stressed theimportance of broadening the ownership ofreforms. Old structural weaknesses areaddressed in a concerted and mutuallyreinforcing way. Multilateral co-operation isessential.
Reform implementation remains a difficulttask. Economic and political conditionsplay a crucial role. Often costs of reformsare immediately visible and concentrate onspecific groups, whilst benefits are mostlymedium- and long-term and diffusedacross society. As a result, resistance toreform has been strong internationally.
Kostas Karamanlis
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Angel Gurría, Kostas Karamanlis, Donald J. Johnston and George Alogoskoufis
To respond, governments need to proceedin thoroughly explaining the problems,clarifying the alternative solutions, jointlyagreeing on courses of action, enhancingcommitment and coalition building,achieving the largest possible political andeconomic consensus.
We need to embrace society in every step ofthe process. Increase the awareness ofcitizens about the nature and extent of thereal problems, the consequences of inertiaand the benefits of reforms.
This is what the European Partnership forGrowth and Jobs is about:• a partnership of societies; • a partnership between governments
and citizens;• a partnership within and between
countries.
In our search for balanced globalintegration we should not underestimatethe importance of international institutions.They have the opportunity and the capacityto play a stabilising role, ensuring that allcountries, especially the poorer ones,receive guidance and support. They canensure that the global communitycoordinates its efforts in reducinginequalities, promoting sustainable growth,
containing the risks of globalisation andincreasing the benefits for all.
An important global problem, in need ofa collective approach, is fighting povertyand securing decent living standards forevery man, woman and child. The OECDand other international institutions,have an important role to play. In 2000,through the Millennium Declaration,the leaders of the world establishedthe Millennium Development Goalsand adopted the Monterrey Consensus.
Last year, during the UN General Assembly,the global community reaffirmed andreinforced these ambitious but,nevertheless, attainable objectives.Certainly, more has to be done. But onlythrough such commitments can we hope totackle issues like global pandemics, extremepoverty and hunger.
In an era of enormous changes, our aim is toassist our countries to address these problemsand challenges – to provide the opportunityfor reaping the benefits of these changes in abalanced way by always combining the needfor economic efficiency with the need forsocial cohesion and security.Our concern is to enhance global co-operation with respect to diversity, but also
with respect to universally accepted values.Reaching a common understanding andagreement is imperative for realising thebenefits of the new era. Throughout ourcommon course, three unifying goals canguide our code of conduct: “Peace,international co-operation and economicprosperity”.
The OECD Forum brings togetherrepresentatives from the political, economicand social spectrum. Thus, it provides thegrounds for such an understanding and co-operation. This year’s topics are of utmostimportance. Discussing and advancingissues such as global imbalances, diffusingthe benefits of innovation and technology,creating more and better jobs, achievingreform support, integrating the emergingeconomic powers into the world economyand reducing extreme poverty, take us onestep closer to attaining the benefits of globalintegration.
Ladies and Gentlemen, the process ofglobalisation can be balanced. It is up to usto adapt, adjust and widen the political andsocial momentum for change. It is also upto the international organisations to fosterand coordinate reform policies, to helprestoring imbalances and to supportdeveloping countries. The choice is ours.The challenges are many. But the benefitslie ahead, for us to capture. I am lookingforward to a constructive dialogue. ■
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Structural reforms in EuropeJean-Claude Trichet, President, European Central Bank*
It is a pleasure for me to be here at theOECD Forum to share with you my viewson structural reforms in Europe. I amparticularly honoured to take part in thisForum given the leading role played by theOECD in shaping global discussions oneconomic, financial and, especially,structural issues which are the topics of myintervention today. I wish also to pay mytribute to the outgoing Secretary-GeneralDonald Johnston for his outstandingleadership and, if he permits me to saythat, for his deep friendship. Let me alsowelcome the new Secretary-GeneralAngel Gurría for whom I have esteemand confidence for the past 25 years.
Over the last years, the euro area witnesseda slight improvement in the utilisation oflabour. Remarkably, employment growthshowed resilience to the economicslowdown at the beginning of this decade.However, the employment rate in the euroarea remains low by internationalstandards. Furthermore, since the launchin 2000 of the Lisbon Strategy, the annualgrowth rate for the euro area has averaged1.8% per year (compared to 2.8% inthe US), thus remaining behind its maincompetitor. When comparing the euroarea’s economic performance to the US,there is evidence of increasing disparitiesin growth.
The main explanatory factor behind thesedevelopments is the diverging trend inhourly labour productivity growth betweenthe euro area and the US. Over a period of20 years, we have been the witnesses of avery significant structural change across theAtlantic. From the 1980s to the first yearsof the 21st century, the growth of labourproductivity per hour has been multipliedby more than two in the US, while it hasbeen divided by two in Europe. Overall,the relative position of the US and of Europehas changed by a factor of four to thedetriment of Europe.
It seems to be relatively easy to understandwhy the US has improved its own
productivity. Technological progress in theIT productive sector in particular hascontributed significantly. But even moreimportant has been the effect onproductivity of the diffusion of IT and ofinnovation in general in all the sectors of theUS economy, particularly the services sector,with a substantial impact on retail businessand on the financial services sector.
On this side of the Atlantic, one canunderstand why we did not observe thesame jump in labour productivity. On theone hand, the share of IT production inGDP is significantly lower and, on the otherhand, the absence of sufficient flexibility inthe economy does not permit benefitingfrom the rapid diffusion of innovation ingeneral, and of IT in particular, in the othersectors of the economy.
But there is a second paradox in the case ofEurope, or perhaps more than a paradox, aconundrum. Why is it that, not only didwe not improve our productivity when theUS did – around the mid eighties – but weobserved, on the contrary, a very
significant diminishing of our productivity?This phenomenon seems to me only halfunderstood through traditionalexplanations: the impact of specificpolicies, launched in several Europeancountries, aiming at drawing back to worka significant number of previouslyunemployed, unskilled workers witha low level of productivity; and a degreeof under-investment hampering the stockof capital allocated to each employee.The other half seems to be explainedby a significant diminishing of total factorproductivity, which is extremely surprisingbecause it occurs precisely at the momentof powerful historical surge in scienceand technology.
There we are at the heart of theconundrum. The conjecture I wouldpropose is that, under certaincircumstances, in a period of very rapidtechnological and structural change, themore an economy is inflexible, the more itresists these changes, to the extent that farfrom taking advantage of the acceleration inprogress in technology, its total factor
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productivity growth diminishes relativeto the period preceding the surge oftechnology. In other words, it seems thatthere is not only an opportunity cost forbeing inflexible in a period of very rapidtechnological change (i.e. not seizing thenew opportunities offered by theacceleration of changes) but also a “directcost”, coming perhaps – and there lies theconjecture – from the fact that under thestress of accelerating changes, the economybecomes even more inflexible and hostile totechnological progress than in more“normal times”.
The evolution of the total factorproductivity growth in Europe seems toconfirm that phenomenon. From anaverage level of 1.3% in the 1980s, itdiminished to an annual average of 1.1%during the 1990s and 0.7% between2000 and 2004. These observations arecalling urgently for structural reforms,in particular all the reforms that wouldaugment the flexibility of all markets –labour, goods and services and financial –in the euro area economy.
Understanding the reasons for thesedevelopments is very important. As alsostressed by the OECD, the lack of sufficientstructural reform in Europe is a major causeof the gap in economic growth betweenEurope and the US.
The euro area economy is facing a numberof important challenges, including rapidtechnological change, ageing populationsand accelerating globalisation. Moreover,
the long-term sustainability of publicfinances in the euro area should beimproved by pursuing pension as well ashealth care reforms. These challenges willrequire major efforts to increase theadjustment capacity of the euro area ingeneral, and of workers in particular.The adverse consequences arising froman ageing population could only be solvedby an extension of the working lifeand/or substantial inward migration.Other challenges, such as globalisationand increased competition, are alsoaccompanied by increased opportunities:globalisation provides incentives for firmsand workers to excel in what they do bestwhile outsourcing some goods and servicesat lower costs on a global scale, providingconsumers with substantial benefits.I should like to highlight some of the keypriorities for reform in four main areas:namely, getting people into work,increasing competition, unlocking businesspotential and supporting an innovativeenvironment.
Well-functioning labour markets areextremely important in fostering higheconomic growth. Benefit systems that aretoo generous discourage job search, earlyretirement schemes encourage earlywithdrawal from the labour market, andmarginal tax rates that are too highdiscourage labour market entry and have adownward effect on the average hoursworked.
To increase labour utilisation and getpeople into work, necessary labour supplyside measures include the reform of tax andbenefit systems to address these problemsand increase incentives to work. Measuresaimed at reconciling motherhood withprofessional life, such as the provisionof child-care, may raise participation rates.Furthermore, the use of flexible formsof work such as part-time and temporarywork may also provide further workingincentives.
High unemployment rates in the euroarea, and in particular high youthunemployment rates, clearly suggestthe need to spur labour demand. In thiscontext, there is a need to promote wageflexibility and to address labour marketrigidities. Furthermore, adjustments to the
level of employment protection legislationare needed where they impede the hiring ofyounger and older workers in particular.
Increasing competition and establishingefficient and well-functioning productmarkets is another prerequisite for highermedium- to long-term growth. A lack ofcompetition harms productivity trends bylimiting production efficiency and byreducing the incentive to innovate.Moreover, increased competition isgenerally associated with a lower price levelbrought about by a reduction in the mark-ups of firms.
More competition in EU service markets isrequired. The euro area should step upmeasures to boost services marketcompetition in order to increase economicefficiency and economies of scale. Thiswould support a higher level and growthrate of labour productivity in the servicessector and promote a more dynamiceconomy. A higher level of competition inthe services sector would tend to supportmore efficient and flexible services markets,facilitate adjustment processes and increasethe resilience of the euro area to economicshocks.
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changes in the service sectors, a field inwhich the Nordic EU countries haveperformed particularly well.
If euro area countries now summon uptheir strength and ambitiously pushforward with structural reform, this willsupport and broaden the improvement ineconomic activity in the euro area. This iswhy the ECB has always encouraged theimplementation of structural reform withinthe Lisbon Strategy. Five years later,progress has been made in some areas – asalso indicated by an increase in the euroarea employment rate. Still, all in all, thereforms have not been far-reaching enough.
Against this background, the mid-termreview of the Lisbon Strategy in 2005 ledto a relaunch of the process by shifting thestrategy’s focus more strongly on growth andemployment. As an outcome of this process,all EU countries have prepared so-calledNational Reform Programmes that outlinestructural reform steps for the years2005-2008. These measures are designedto, among other things, enhance thesustainability and quality of public finances,promote flexible labour and product markets,support a favourable business environment,and ensure a fully operational EU internalmarket, including the markets for energy and
Of crucial importance in this strategy arethe efforts to improve the labour force’slevel of education and expertise. Theimpact of education on growth may berelated to innovation, as well as theadoption of new technologies. Additionally,better education and training help toreduce mismatches in the labour marketand allow for a smoother reallocation ofworkers between sectors and firms.Furthermore, we need more high qualityscientists and researchers. In the EU wehave about 5.3 scientists and researchersper 1,000 workers, which compares tothe US figure of 9 per 1,000.
In addition, ICT investment, which is anindicator of the diffusion of innovation,represented 6% of GDP in the US over theperiod 2000-2004 compared to only 3% inthe euro area. ICT diffusion appears to beparticularly relevant in the services sectorgiven the higher potential for employmentcreation in that sector combined with theevidence that there is no apparent trade-offin the medium term between labourproductivity and employment growth at thelevel of the sector as a whole. As a result,the key issue for the larger euro areacountries is how to increase their futurecapacity to promote the diffusion ofinnovation and, in particular, technological
In this context, an internal market forservices and the adoption of the ServicesDirective would constitute an importantstep forward. It would remove barriers tocross-border provision of services and makeit easier to set up services businesses inother member states.
In the EU, some progress has alreadybeen made in improving the functioningof product markets. For example,several network industries, liketelecommunications and air transport, arenow fully or largely open to competition.And the reforms do pay off. The remarkablelabour productivity growth performance insome network industries in Europe over thelast ten years provides a perfect example ofthe positive impact on labour productivitygrowth of easing regulations and fosteringcompetition.
The third prerequisite for higher growthin the euro area is the unlocking ofbusiness potential by creating anentrepreneurial-friendly economicenvironment. This includes lowering costsimposed by public sector administrationsfor existing firms and business start-ups.In March 2006, the European Councilcalled for the establishment of “one stop”arrangements in each member whichwould allow the setting up of a companyin one week by end 2007. Today it takeson average 27 days to set up a newbusiness in the euro area comparedto 5 days in the US.
To fully exploit productivity potential,the labour and product market reformsjust mentioned need to be accompaniedby policies that help to diffuse innovationand technological change. This includes,inter alia, measures to support innovationby higher investment in research anddevelopment (R&D). In 2004, roughly1.9% of euro area GDP was spent on R&Dcompared to 2.8% in the US. Europe hasset itself the target of achieving a shareof 3% of GDP by 2010. Analyses madeby the European Commission show thatif the effects of the increased knowledgeinvestment foreseen within theLisbon Strategy were added in, theincrease in annual EU potential outputgrowth could reach up to three quartersof a percentage point.
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services. Applying comprehensive structuralreforms is of particular importance for theeuro area countries, in order to increase wageand price flexibility and the resilience toshocks, facilitate structural adjustment, raisepotential output growth and job creation,and reduce price pressures, therebyfacilitating the task of the single monetarypolicy.
Also the ECB’s monetary policy has a role toplay in supporting the implementation ofstructural reforms. A credible monetarypolicy aimed at maintaining price stabilityin the medium term contributes to a stableeconomic environment. In a stablemacroeconomic context, it is not onlyeasier to single out where reforms are
needed, but the benefits of reforms are alsomade more visible, thus supporting theiracceptance.
In turn, structural reforms can also haveimportant consequences for thetransmission of a monetary policy which iscommitted to price stability. In more rigideconomies interest-rate changes aretransmitted to prices after a longer delayand structural impediments can prevent theeconomic efficiency gains sought throughthe stability-oriented objective of monetarypolicy from being fully realised.
To conclude, the European Union isundergoing an important process ofreforms of its socio-economic model
so as to adapt it to future challenges.The economic strategy is on the right track;there is a consensus on the appropriateobjectives and agreement on the rightinstitutional setting to be set in place.The next decisive step is to now acceleratethe putting into practice of these plans.
The earlier this happens, the earliereconomic activity, employment andinnovation in Europe can be lifted toa higher level and standard. I trust thatthis acceleration of reforms will not only bein the interest of Europeans, but eventuallyin the interest of the whole global economyas an economically stronger Europe willalso raise our contribution to economicprosperity elsewhere in the world. ■
Angel Gurría, Stanley Fischer, Michel Camdessus and Jean-Claude Trichet take a break from the debates.
* Extracts from the keynote speech.
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Financial market liberalisationStanley Fischer, Governor, Bank of Israel*
The first great era of financial globalisationstarted with the invention of the telegraph.If you look at when rates of return indifferent financial markets began to movetogether, it was when the telegraph wasinvented and thereafter, within minutes,interest rates and prices in differentfinancial centres were essentially tightlylinked. Now, in the 21st century, we havecut the minutes down to microseconds,but the critical change took place150 years ago.
We are living, in this second age of financialglobalisation, in a world of far greaterfinancial sophistication than ever before,particularly the explosion of financialinstruments based on derivatives. We arealso living in an age of far wider and greateraccess to information and more rapidcommunications and transportation.This acceleration and widening potentiallyadds to the efficiency of the system, butalso leads many to fear that the system ismore vulnerable to accidents than it everwas before.
Among the industrialised countries,financial sector liberalisation is seen as adesirable goal. The fundamental economiccase for free capital movements is the sameas the case for free trade. So why did thelegacy of controls from the 1930s and fromWorld War II take a very long time todisappear? In part because of the inertiathat comes from having lived for a longtime in a particular environment – withcontrols – and thinking that any changein the system would be destabilising. TheOECD played a major role in promotingcapital account liberalisation among theindustrialised countries. It was alsounderstood within the European commonmarket, and later the EU, that capitalmobility was essential to economicintegration. There has been a morequestioning attitude to capital accountliberalisation among emerging-market anddeveloping countries. These countries alsoemerged from World War II with extensivecontrols.
in the OECD for an agreement on foreigndirect investment, for a code on foreigndirect investment, fell by the wayside.
With an extra ten years of perspective,how should we evaluate the capital accountcrises of the 1990s? First, almost everycrisis of the 1990s involved a de facto orde jure pegged exchange rate.
I believe that the move to flexible exchangerates has made more of a difference to theinternational financial system than anyother change. That change takes away amajor risk factor. By flexible exchange ratesI do not mean only freely floating rates,exchange rate systems in which the centralbank does not intervene. What I mean is asystem in which, if the pressure rises, thecountry can allow the exchange rate toadjust without changing the entire basis ofeconomic policy. So managed floating comeswithin this definition – provided that thecurrency is indeed allowed to be flexible.
Now let me return to the question of whycapital account liberalisation is desirable.
Despite the underlying concerns about thepotential dangers of international capitalflows, a growing momentum developedduring the middle 1990s to promote theliberalisation of capital flows. Shortly beforethe Asian crisis, the G7, following aUK initiative, introduced a proposal toamend the articles of the IMF to make thepromotion of capital account liberalisationone of the goals of the IMF.
As the capital account amendment initiativegathered strength, IMF Managing DirectorCamdessus and I emphasised that whatwe were supporting was not immediateliberalisation of the capital account, butrather orderly capital account liberalisation.However, while we were busy emphasisingorderly capital account liberalisation, theAsian crisis intervened, and the crisiscountries, and others, blamed the crises onaberrant and excessively powerful capitalflows – and particularly on hedge funds.
So there was no capital account amendmentof the IMF Articles of Agreement. Anddriven by similar fears, the proposal
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There is a very simple text book story aboutthe intertemporal allocation of resources,which says that some countries want to savemore, some countries have betterinvestment opportunities, and capital needsto flow between them so that those whohave a relative desire for saving can savemore, and the capital gets allocated to whereits rate of return is highest. This is the basicstory, though no-one expected that theintertemporal allocation would end up withmost of the capital inflows going to therichest of the major countries, namely theUnited States.
A second reason is that financial sectorliberalisation is a way of increasing financialsector competition and improving thequality of the financial system by allowingforeign competition. This is something I seedaily. The Israeli economy benefits both byallowing our financial firms to competeinternationally and by allowing foreignfirms to supply services to Israelicompanies. The foreign companies havebetter technology or had better technology.They know how to do things – financialsector engineering – that the locals do not,and if you allow that competition, yourcompanies benefit.
There is a third reason that financial sectorliberalisation is a good thing: it changes the
outlook of domestic companies, and leadsthem to think globally. I will expand on thispoint in a while, drawing on Israeliexperience.
A country that wants to integrate into thecapital markets needs to ensure that itsmacroeconomic and domestic financialsystems are sufficiently strong to dealwith the possible strains that liberalisationmight create. The first element in themacroeconomic framework is the fiscalsituation, which needs to be sustainable,and preferably robust.
On the monetary policy side, the exchangerate regime is a key issue. If the exchangerate is flexible, then the goals of monetarypolicy need to be defined. Increasingly,countries are adopting a system of flexibleinflation targeting in which the governmentdefines a target range for inflation, and thecentral bank’s job is to hold the rate withinthat range. But the goal needs to beinterpreted flexibly, which is to say that ifthe economy is hit by shocks, the inflationrate may for a time be permitted to stayoutside the target range while the centralbank tries to bring it back gradually towithin the range.
Beyond the macroeconomic framework, itis necessary to create a reasonably stable
banking and financial system and that takesa lot of work. And beyond that, a countryneeds to liberalise gradually, not all at once.In terms of the type of capital flow, theprinciples of liberalisation are: 1) toliberalise inflows before or simultaneouslywith outflows; 2) to liberalise long-termcapital flows before short-term flows; and3) to liberalise foreign direct investmentbefore portfolio investment.
In terms of which sectors to liberalise: first,the business sector; second, individuals;and third, the financial sector.
This is simply a set of principles, but it isnot based on deep theory. Rather it is basedon what seems to have worked.
Let me add two points. One is that it isimportant to liberalise outflows as well asinflows. As a result of the liberalisation ofthe capital account and the rapid growth ofthe economy, and the very successful high-tech sector in Israel, we have large capitalinflows, about half of that foreign directinvestment, the remainder portfolioinvestment. If we were not permittingoutflows, there would be great pressure onthe exchange rate, because we are alsorunning a current account surplus.
But Israel also liberalised capital outflows.In 2005, outflows amounted to about 9%of GDP, roughly equal to the inflows. At thestart of this process, the pension funds, themutual funds, and Israeli households’investments were entirely domestic. That isnot natural in a small economy. As a resultof the liberalisation of outflows, webasically do not have net pressure on theexchange rate from capital flows.
The second point I would like to makeis one that I had not appreciated untilrecently. I had not realised that when youliberalise the capital account, especially in asmall economy, you change the philosophyof almost everyone in the economy. Beforethe liberalisation, people thought locally.By regional standards, we have a reasonablylarge economy, with a GDP of about125 billion US$. By global standards, this isa very small economy, whose GDP is about1% of EU GDP, and about 1% of US GDP.As soon as the capital accounts opened,business began to think globally –
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businesses looking for investors began tothink globally, their marketing becamemore actively global, and domestic saversbegan to think globally. To my mind, thischange transformed the approach ofbusiness in a wholly positive direction. In brief, as a result of a successfulliberalisation, people begin to understandthat the world is their stage and not just thelocal economy.
Let me turn now to address briefly twoother issues of current concern: thepotential dangers associated with theproliferation of derivative instruments;and global imbalances.
The proliferation and profusion offinancial instruments naturally gives riseto concerns about potential risks to theinternational financial system. Thenominal (face) value of derivativeinstruments amounts to multiples ofglobal GDP. Based on this massive number,it is easy to tell stories about how afinancial crisis can occur, as a chain ofinterlocking derivative contracts unravelsdue to a failure to settle one contract,which is hedging another contract, whichin turn is a hedge to something else. Thisappears to be consistent with examplesfrom chaos theory in which a butterflyflapping its wings somewhere in Africa cancreate a typhoon in China.
At the same time, the proliferation ofderivative instruments has made it possibleto separate risks from their original contextand to shift them to those most willing tobear them. It is for this reason that manyregard the development of financialinstruments as making the financial systemmore robust and more efficient.
How should we think about the risks?Scenarios involving the unravelling of achain of derivative transactions are morefrightening than realistic, because there arenetting arrangements among mostinstitutions, which mean it should generallybe possible to offset obligations that havenot been settled.
The other concern is that the risks that arepassed on through derivative contracts maybe inappropriately placed and notadequately recognised. For instance, when
banks securitise or hedge a risk, the riskmigrates to other places, frequently it isbelieved to insurance companies. Theconcern is that the risks move from peoplewho understand them to those who do not.There is another possibility, which is thatthe risks may be moving from places whichare forced to mark-to-market, to placeswhich are not forced to mark-to-market –because many participants in financialmarkets prefer to retain the capacity tosmooth their revenues and profits.
Those risks are out there, and we cannotignore them, but we should also considerthat we have been living in the world ofderivative instruments for some time, andthat we do have experience with them.
The second issue causing major concern atpresent is that of global imbalances. Manybelieve that the international financialsystem has permitted imbalances in theUS current account that simply would nothave been possible before, and that arebound to end badly. Here, too, it is easy totell a dismaying story, in which people rushout of the dollar, US stock prices decline,US interest rates rise, the US economyslows or even goes into recession, andthe global economy follows.
This is clearly possible. But there are manyother possibilities including a decline in the
dollar that may be relatively rapid but thatdoes not have a massive impact on outputbecause the system adjusts to it. Now, of course, if an economy adjustswithout a collapse, it adjusts more slowly.It may well be that the US current accountwill take longer to change than we think.Further, the adjustment need not be from acurrent account deficit of over 6% of GDPto 0%; rather the adjustment could be to asustainable level around 2.5% – 3% of GDP.Indeed the current account of the US hasalready taken longer to change than wethought it would. The dollar very likelywill depreciate, but it is not going tohappen steadily, rather it will take the formof movements around a trend that is hardto discern from day to day and month tomonth. As my former Citigroup colleagueBob Rubin says, “Markets go up andmarkets go down”, and that will apply tothe dollar too.
If I can put this issue in slightly differentwords, we are frequently told that weshould realise that we are like the famousstory of people falling out of a high buildingand being asked by somebody as they goby, “How are you doing?”, and they say,“Fine so far!” There is another possibility:that we are living in a new world with muchdeeper financial systems, much moresophisticated financial instruments, muchbetter information flows, that is more
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resilient than the world we lived in and thatwe do not yet understand – that is, the issuemay not be how far we have got to fall tillthe inevitable collapse occurs, but ratherthat we do not yet understand the groundon which we are standing today. We cannot know for sure in which ofthese situations we find ourselves, but
the situation may not be as drastic as manybelieve. In any case, the role of economistsis to keep pushing for policy changes thatwill resolve this situation favourably,and we all know what those policies are.And I am very happy to see that the IMFis now taking a lead in promoting actionto implement those policies.
The title of this conference is“Balancing Globalisation”. That is a goodtitle. An even better one might have been“Benefiting from Globalisation”. ■
* Extracts from the keynote speech.
Snapshots from OECD Forum 2006
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Fulfilling the promise of South Eastern EuropeEurope’s Easternpromise
• MODERATOR: ALISON SMALE,MANAGING EDITOR,INTERNATIONAL HERALD TRIBUNE
• GHEORGHE COPOS, DEPUTY PRIMEMINISTER, ROMANIA
• DIMITRIOS DASKALOPOULOS,CHAIRMAN, FEDERATION OF GREEKINDUSTRIES
• RAINER GEIGER, OECD CO-CHAIR,SOUTH EAST EUROPEAN INVESTMENTCOMPACT
• GERLANDO GENUARDI,VICE PRESIDENT, EUROPEANINVESTMENT BANK
• MICHAEL MOZUR, DEPUTY SPECIALCO-ORDINATOR, STABILITY PACT FORSOUTH EASTERN EUROPE
European Union member states carrya particular responsibility for movingforward on South Eastern Europe’s
regional co-operation and development,panellists discussing this complex regionalpicture agreed. Discussants also emphasisedthe importance of maintaining stabilityto underpin the continued progress inthe less advanced countries which are notyet in the position of Romania or Bulgaria;both are looking forward to joining theEU in early 2007.
Alison Smale welcomed theOECD Forum’s initiative to addressthis region which, she said, had been longignored by such events. She pointed outthat this panel was particularly timelygiven that it coincided with Montenegro’svote of independence from Serbia.
Gheorghe Copos expressed his country’sappreciation of OECD support in relationto the EU negotiations. He linked thesedevelopments to Romania’s heightenedattraction to foreign investors who invested
5.5 billion euros in 2005, and are expectedto surpass that sum in 2006. Romaniahad also introduced more generous fiscallegislation, intensified anti-corruptionpolicies, accelerated privatisation andstreamlined public procurementprocedures.
Describing himself as both an optimist anda realist, Michael Mozur said the Athens’agreement had also produced an accord toinvest some 25 billion US$ over the comingtwo decades to meet energy demand. Theregion’s new stability pact covered 90% ofall trade, while public policies on a rangeof areas such as labour markets, anti-corruption measures and factorsinfluencing public attitudes, were bringingin more positive public reactions.
Michael Mozur also believed that theprivate sector, while still cautious andsceptical, is willing to invest in SouthEastern Europe. However, he cautioned,this will require credible implementationof the right policies on all fronts.
Gerlando Genuardi discerned a clear shiftin thinking in the region, and foresaw thatthe Balkans would be a key part of thefuture map of Europe’s economy. TheEuropean Investment Bank channelled itsmajor supportive effort through regionalinvestment, and urged that more be done inpromoting research and development. Healso stressed the importance of supportingsmall and medium-size enterprises as keyelements in efforts to strengthen theemerging private sector. Finally, heemphasised the need to stay the course inthis region, which had followed a difficultroad to arrive where it is now.
Dimitrios Daskalopoulos said thatGreece’s traditional ties made it a naturalconduit for modernisation in South EasternEurope. There had been difficult, evendangerous, moments but successes weremore numerous than failures. Total absenceof any open market mentality, a bloatedbureaucracy, often riddled with corruption,and a legal and legislative vacuum, weredifficult obstacles. “But the willingness to
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change is there and this makes one feelvalidly optimistic about the future ofSouth Eastern Europe”, he added, in ajudgement echoed by others in the panel.
“Change in the region over the last 15 yearshas been nothing short of monumental.”With Bulgaria and Romania nearly ready toenter the EU, and with Turkey embarkedon the road to Brussels, it is only a matterof time before Albania and the state-heirs ofYugoslavia also find themselves on the pathto European integration. “When thishappens”, said Dimitrios Daskalopoulos,“the Balkans may then perhaps overcometheir Sarajevo legacy – as the powder-kegof Europe; a legacy which came very closeto resurging in the mid to late 1990s.”He noted that trade and economic tieshave proved to be the main catalystfor modernisation, and today businessopportunities abound.
Rainer Geiger pointed out that theInvestment Compact set up in the OECDhad proved to be a success. The Compact,which aims to promote national reformsand help develop regional integration bybuilding networks in various policy areas,had increased investment and improved theinvestment environment. It has boostedgrowth and improved stability, sustainabledevelopment and regional integration. Rainer Geiger, Gerlando Genuardi and Michael Mozur
Alison Smale
The Investment Compact, he said, wasalso a success for the OECD as it is nowconsidered a model for other regionalco-operation programmes.
“The key to this success may be found inthe integration of several elements.” These
included national reforms with time-boundtargets, the establishment of regionalnetworks to exchange best practices, theuse of public/private sector partnershipsand mobilisation of political support. Yetthis success did not mean the job had beencompleted, he warned. Challengesremained, including the need for continuedcapacity building.
In response to a range of questionsfrom the floor, Alison Smale invitedpanellists to sum up their reactions.Gheorghe Copos, listed the legislativechanges that his government had introducedin response to the need for change.Dimitrios Daskalopoulos cited the spreadof business acumen which had broughtnew challenges to the marketplace,while Gerlando Genuardi said that theinvestment environment, including forimplementation, had greatly improved.Michael Mozur looked forward to theday when the reality of the regionalco-operation in the Stability Pact wouldbe comparable to the spirit shown inthe Nordic Council, which he felt wasan admirable example of internationalco-operation. ■
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Energy and the economy
Warming up orcooling down?
• MODERATOR: DIDIER POURQUERY,EDITORIAL DIRECTOR, METRO, FRANCE
• PHILIPPE BÉNÉDIC, RESIDENT DIRECTORGENERAL, ASIAN DEVELOPMENTBANK
• EFTHYMIOS N. CHRISTODOULOU,CHAIRMAN, HELLENIC PETROLEUM,GREECE
• PADMA DESAI, DIRECTOR, CENTERFOR TRANSITIONAL ECONOMIES,COLUMBIA UNIVERSITY, UNITED STATES
• DAVID FEICKERT, CONSULTANTIN INDUSTRIAL RELATIONS,ERGONOMICS AND ENERGY,UNITED KINGDOM
• DAVID KNAPP, SENIOR EDITOR,ENERGY INTELLIGENCE GROUP,UNITED STATES
Didier Pourquery introduced this“broad and hot” topic by describingthe drivers behind recent energy
price increases, notably new demandfrom China and India. He then puttwo questions to the panel. Although theeffect on underlying economic growthseemed benign to date, what are the riskslooking forward, particularly if prices risestill further? What policies are requiredto improve energy efficiency and tapalternative energy sources?
David Knapp provided a succinctsummary of the characteristics of theenergy market and how economic, financialand political forces interact to drive themarket. He highlighted apparent economicparadoxes of oil: it is highly fungible, yetheterogeneous; demand is geographicallydiverse but supply is highly concentrated;oil projects are long-term, but financialmarkets react short-term. He said that weare now in a “seller’s market”, for only thefourth time in history. However, on the
three previous occasions, in the 1920s,1940s and 1970s, the causes were supply-based. This is an unusual demand-ledphenomenon for which “there is no supplyfix”. This, David Knapp suspected, willmake it last longer.
David Knapp then noted the growingimpact of oil derivatives trading onfinancial markets which he described as“a very big tail wagging the dog”. Thismoves trillions of dollars, making it farlarger than the market for the actualproduct. David Knapp estimated that about20 US$ to 25 US$ of the current oil pricereflects the market’s anticipation of futuredemand from China.
Philippe Bénédic pointed out that thereis no “one size fits all” response to high oilprices in Asia. This is largely due to thecoexistence of both oil importers andexporters in the region. Overall, however,the region is a net oil importer, and risingprices are a threat to the economic welfare
of a region that is still home to two-thirdsof the world’s poor.
Despite relatively low consumption perhead, energy demand in Asia rose by 230%between 1973 and 2003 and the regionnow consumes 25% of total world supply.Average world consumption growthover the same period was 75%.
Didier Pourquery
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“This trend is neither economically norenvironmentally sustainable”, he said.Sustainable development will depend onthree main factors: reliability of supply,energy efficiency, and diversification intoalternative energy sources. He cited theexample of China, where “GDP is expectedto quadruple by 2020. But becausecommercial energy supply will only doublein that time, energy intensity will need tohalve in the next 15 years”.
Padma Desai made three key points. Sheagreed that extra demand is being drivenmainly by Asia, but said that the declineof European gas fields should not beoverlooked. She also contended that mostenergy suppliers still exercise monopolypower and there is no guarantee that theywill play by market rules. And finally,energy, she said “is largely about politics”.
Padma Desai threw light on a number of thefundamental political forces at work in themarket. Europe worries about Russia beinga reliable long-term supplier, but Russia alsofrets about Europe being a reliable long-term customer. Russia does not want to belike “a cocoa supplier to Switzerland, whichthen makes fancy and expensive chocolate”.It wants a share in the added value.“The recent gas deal between Germanyand Russia, involving a swap of assets, isthe way to go.” Turning to India and China,Padma Desai spoke of the success of “equityoil” strategies, particularly in Africa. Inreturn for stakes in their energy resources,China has been investing in African schoolsystems, cement factories and rail networks.This is something “incomprehensible”for western oil companies.
David Feickert talked about the geographicalshifts now occurring in global fossil fuelreserves, and the growing concentration ofsupplies in four regions: Latin America,Russia, parts of Africa, and the Middle East.There is only one solution that guaranteesthe security of supply, he said, “a negotiatedmultilateral agreement”. He agreed that we arein a seller’s market and that prices are set toremain high. He asked whether marketscan solve the dilemmas posed by high pricesand responded with a categorical “no”.“In the short-run, markets are magnificent; inthe long-run, they cannot think strategicallyor plan. There must be political guidanceand creative regulation.”
Seeking to temper concerns aboutthe recent run-up in oil prices,Efthymios N. Christodoulou pointed
out that there are at least 40 yearsof known reserves. Moreover, “oil is notthe commodity it used to be … it is nowa financial asset, like a stock or a bond,and its price experiences similar volatilityfor this reason. Perhaps the price today hasas much to do with this as with oil supplyand politics”. There has also been a changein the nature of supply agreements, withproducers seeking security of demandin order to avoid the bad experiences ofthe 1980s.
Efthymios N. Christodoulou also insistedthat, in the final analysis, high oil pricesmay not be all that bad. “At these prices,we will see more investment in alternativeenergy sources and demand will besustained at rational levels. If, at the sametime, rules and regulations concerning oilprofits are established, these could be usedto resolve some of the world’s problems.”
Participants asked about the future ofliquefied natural gas (LNG) and biodieselenergy. Both David Knapp and DavidFeickert agreed that LNG will expandsubstantially, and will probably be tradedlike oil, but did not believe it would solveproblems of natural gas supply and its dependence on physical pipelines. The panellists also agreed that investmentin alternative energies, such as biodieseland clean coal technology, is essential, and that higher prices create the incentivesto innovate. ■
Efthymios N. Christodoulou and Padma Desaï
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Investment for developmentPromisingreturns
• MODERATOR: LUIS EDUARDO ESCOBAR,SENIOR ADVISOR,MINISTRY OF FINANCE, CHILE
• GONZALO FANJUL SUÁREZ, HEAD OFRESEARCH, INTERMÓN OXFAM, SPAIN
• FUKUNARI KIMURA, PROFESSOR,FACULTY OF ECONOMICS,KEIO UNIVERSITY, JAPAN
• CHEN-EN KO, PRESIDENT, CHUNG-HUAINSTITUTE FOR ECONOMICRESEARCH, CHINESE TAIPEI
• ULYSSES KYRIACOPOULOS,FORMER CHAIRMAN,FEDERATION OF GREEK INDUSTRIES
• GIORGIO MAGISTRELLI, SECRETARY-GENERAL, EUROPEAN CHAMBEROF COMMERCE IN CHINA
Though investment has proven to be apowerful catalyst for innovation,sustainable growth and poverty
reduction, it continues to fall short ofdevelopment needs in non-OECD regions.This session probed the many facets of howinvestment promotes economicdevelopment.
Luis Eduardo Escobar cautioned againstoveremphasising foreign direct investment(FDI) as a solution to economic problems.Most investment (about 80% on average) isdomestic, and policy makers must learn toput their own houses in order first. Afterall, an environment that is not conducive todomestic investment is hardly likely toattract foreign investment.
Gonzalo Fanjul Suárez focused on thecurrent World Trade Organization (WTO)trade talks. A country’s trade policy isconsidered to be a possible asset inattracting investment because it influencesboth domestic and foreign investment and isimportant for any development strategy.
Trade can either substitute or complementinvestment. Trade can also draw attention toresources and markets that can highlightinvestment opportunities. So unsurprisingly,greater trade correlates with greaterinvestment flows.
Gonzalo Fanjul Suárez expressed hisdisappointment at the way investment wasdealt with in the early years of the WTO.Government proposals then focused ondiscouraging national governments fromimposing any conditions on investors.Oxfam would have preferred to see a morebalanced approach preventing the misuse ofregulation and a greater opening of markets.
Fukunari Kimura provided someprovocative insights into the internationalproduction and distribution networks offirms. His analysis suggests that firmswhich engage in export activity or foreigninvestment are highly productive. Lessproductive firms remain focused ondomestic activity. There is no one policyinstrument that alone will boost inwardinvestment. That means encouraging highstandards in terms of transparency ingovernment policy, procedural fairness,openness and corporate responsibility.
Giorgio Magistrelli provided a descriptionof China’s implementation of its WTO
commitments and the challengesremaining. The Chinese government hasstrengthened its protection of intellectualproperty rights (IPR) which is essential forpromoting investment. But most foreigncompanies agree that the implementationof China’s present IPR system is inadequate.Further, Chinese companies are themselvesbecoming more aware of the dangers andthreats of excessive counterfeiting – themajority of civil litigation in trademarkinfringement cases (above 90%) arebetween Chinese companies.
Ulysses Kyriacopoulos
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Ulysses Kyriacopoulos made a numberof propositions for improving the climatefor investment and entrepreneurialopportunities in developing countries.He suggested, in particular, that reducinggovernment bureaucracy and its highcompliance costs would free up resourceswhich could then be put to better use.He also spoke of the importance of lifelonglearning for future development andgrowth. Interestingly, he suggested thatsetting tough conditions to protect theenvironment could indirectly act as apowerful engine of growth.
Chen-en Ko described the investmentexperiences of small- and medium-sized
enterprises (SMEs) from Chinese Taipei.He argued that FDI is not confined to largemultinational enterprises (MNEs).Although most government policies focuson attracting MNEs, he argued that smallinternational firms are characterised byan entrepreneurial spirit that can inspirelocal businesses. The government ofChinese Taipei, he said, “has built onthe country’s entrepreneurial cultureby developing support systems such asfinancing, training and consultingfacilities, even social programmes, so thatSMEs may flourish. They then build theircapacity in an environment of marketcompetition.” Consequent investments bythese SMEs in neighbouring countries,
Ying Chen and Giorgio Magistrelli
prompted by higher costs in ChineseTaipei, have brought this entrepreneurialknow-how to developing economies.This has been a critical componentof FDI in southeast Asia by enterprisesfrom Chinese Taipei.
The OECD’s own Policy Framework forInvestment attracted attention andcomment. The Framework is intendedas a checklist of issues for considerationby interested governments engaged indomestic reform, regional co-operationor international policy dialogue that wishesto create an environment attractive forinvestment. The investment could bedomestic and foreign, while a good
environment can enhance benefits forsociety more broadly.
A participant from the floor commentedthat the presentations were of littlerelevance to African countries mired ingovernment debt and strife. This prompteda reply from another participant thatinvestment policy can work in places likeAfrica as long as it is accompanied by“consumer” policies, such as theKimberley Process, a joint government,international diamond industry and civilsociety initiative to stem the flow of“conflict diamonds” illicitly sold tofinance wars. ■
Gonzalo Fanjul Suárez
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Financial educationAsset tests
• MODERATOR: MARGARET HOLLINGER,PARIS BUREAU CHIEF,FINANCIAL TIMES
• LORENZO BINI SMAGHI, MEMBEROF THE EXECUTIVE BOARD,EUROPEAN CENTRAL BANK
• DARA DUGUAY, DIRECTOR,FINANCIAL EDUCATION PROGRAM,CITIGROUP, UNITED STATES
• DONALD J. JOHNSTON,SECRETARY-GENERAL, OECD
• WILLIAM G. KNIGHT, COMMISSIONER,FINANCIAL CONSUMER AGENCYOF CANADA
Ageing populations, dwindlingpension plans, and increasingfinancial opportunities available
through investment are creating a worldwhere both the need and incentive forpeople to invest are on the upswing.Margaret Hollinger put it succinctly at theoutset of the panel discussion on financialeducation: “We are all asked to take onmore financial responsibility today, butmost people are sent out into the worldwithout the basic tools.” Educatingindividuals to be responsible investors,aware of the risk levels they confront inmodern life is thus a serious responsibilityfor governments, and an obligation forfinancial institutions, which hope tomaintain credibility with a new generationof investors. How then, should people begiven the tools to best manage their lives,finances, and retirements?
The consensus was that both the publicand private sectors should be involved.Dara Duguay said that financial educationshould begin at a very young age, “assoon as kids start to ask their parents formoney”. As the former head of a US non-profit group, the Jumpstart coalition – anorganisation of state agencies, banks, andNGOs – Dara Duguay was shocked to findthat an early poll by the organisation
showed that graduating US high schoolstudents failed on the basics when it cameto knowing the ins and outs of theirfinances. Jumpstart drew up the idea of“financial literacy” to make this type ofeducation a priority in the United States.The group gives money to NGOs thatincorporate financial literacy into theireducation programmes by educatingchildren about money and investments.
Some of the group’s best practices includespending money to educate teachers aboutinvesting and drawing up interactivematerial to educate children about the stockmarket. On a global scale, Dara Duguaysays that Citigroup finds collaboration withNGOs important, especially in its micro-credit efforts. “No one entity is big enoughto tackle financial illiteracy on its own; it isa global problem”, she said.
Lorenzo Bini Smaghi argued that financialeducation is important for central banksbecause it carries a macroeconomic impact.“Household financial assets have increasedby 20% over the last 20 years – banksshould start considering households asmini-financial institutions”, he said. Thismeans educating borrowers and investorsabout the risks involved. With thedeepening of financial markets,Lorenzo Bini Smaghi said, should comeadded responsibility on the side of the
banks because many groups in society“are ill-prepared” and end up taking morefinancial risks than they are aware of. Ashouseholds take on riskier, more aggressiveinvestments, financial institutions shouldbe more demanding by encouraging agreater level of understanding amongindividuals of how financial markets work.
From a regulator’s viewpoint,William G. Knight said that governmentsmust stop assuming that citizens alreadyhave the necessary investment knowledge.Regulators have a responsibility to informcitizens as well as protect them, becausegovernments cannot be expected to
Lorenzo Bini Smaghi and Dara Duguay
William G. Knight
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intervene with compensation for peoplewho have made poor investmentdecisions. “In my opinion, we have arelatively comfortable social safety net inCanada, but when it comes to financialliteracy, people are on their own. Whatwe need is a financial education safetynet based on lifelong learning to preventabuse”, he said. Beyond just encouragingbanks to adopt fundamental practicessuch as using plain language to describe
health education. Societies in OECDcountries will be taking on increasedindividual financial responsibility, he said,and effects will be felt in the widereconomy. He described how young peoplein Korea three years earlier had run up somuch credit card debt that it led to asomething of a crisis in the macroeconomy. The question, Donald J. Johnstonbelieved, is not whether educatingcitizens financially should take place, butwhich approach. “We need to find amiddle ground between financialeducation and a broader economiceducation to avoid situations like the onein the United States – where peoplewatched their house prices go up, andthen mortgaged them. We do not knowexactly why they mortgaged, but it wasprobably to consume.”
One participant from the floor pointed outthat consumers were not the only ones inneed of financial education. Some financialprofessionals, notably the issuers of savingsschemes and products, also need educatingin how to become more responsible, forinstance. The general view was that improvingfinancial education may well be a step onthe way to a more balanced globalisation,as long as the aim was to improve theunderlying welfare of consumers, and notjust boost investments into bank products. ■
financial products, governments can armcitizens with the knowledge necessaryto make confident decisions. His solution:“a forum for discussion like this panelat the OECD”.
Donald J. Johnston pointed to a parallelwith healthcare. Health spending is one ofthe top budgetary concerns of OECDcountries, and he proposed tacklingfinancial education in a similar vein to
Dara Duguay and Donald J. Johnston
Between sessions
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Structural adjustment and social cohesionBeyond safety nets
• MODERATOR: LORD ALAN WATSONOF RICHMOND, CHAIRMAN EUROPE,BURSON-MARSTELLER
• IORDANIS AIVAZIS,CHIEF FINANCIAL OFFICER,HELLENIC TELECOMMUNICATIONSORGANIZATION, GREECE
• JAGDISH BHAGWATI, PROFESSOR OFECONOMICS, COLUMBIA UNIVERSITY,UNITED STATES
• ANA ISABEL LEIVA DIEZ, STATESECRETARY OF TERRITORIALCO-OPERATION, MINISTRY OFPUBLIC ADMINISTRATION, SPAIN
• PHILIPPE MANIÈRE, DIRECTOR-GENERAL,INSTITUT MONTAIGNE, FRANCE
L ord Alan Watson of Richmondopened the discussion by noting thatglobalisation was a complex issue
with diverse effects on migration,employment and even world sport. He saidthat there is a tendency to think of theeffects of globalisation as principallyconcerning industrial work forces inEurope suddenly having to compete withlow-cost production in China and in India.This, he asserted, is far too limited a view.As an example, he pointed to thepotential consolidation of European andNorth American equity markets. This, hesaid, is “a perfect example of the impact ofglobalisation, and the response will involvestructural change and job loss – even atthe top of the capitalist pyramid”.
Lord Watson then said that, by consequence,the topic of this panel was also very broadin nature. Certainly the short sessioncould never hope to settle such an all-encompassing question as that ofglobalisation and structural adjustment,but he challenged the panellists to makean attempt.
Jagdish Bhagwati focused his initialcomments on the implications ofglobalisation for developing countries.
In his view, the argument that globalisationand economic liberalisation have led toincreased inequality and political unrest,and should somehow be resisted, issuperficial. Unrest in many countries iscaused by the absence of an effectivelyfunctioning democracy that can channeldiscontent, and the lack of effective safetynets to minimise the social risks.
Economic reforms have delivered strongergrowth and reduced poverty to the benefitof many. But reforms have led to a rise inrelative inequality and disaffection amongsizeable groups that feel they have notbenefited from increasing prosperity. Safetynets can help minimise the risk ofdisplacement and encourage politicians topress ahead with reforms that they mightotherwise be reluctant to make.
Ana Isabel Leiva Diez noted thatglobalisation produces socialtransformations that are difficult to dealwith for both developed and developingcountries, but that it also createsopportunities. Globalisation should be apositive force boosting exports and growth,provided that steps are put in place toensure that the benefits are distributedfairly, that natural resources are not over
utilised, that policies are responsible andsustainable and that countries co-operatein order to ensure better outcomes.
Philippe Manière raised another challenge:that of how to convince a sceptical publicthat structural reforms are necessary.Ironically, this can be much harder to doin developed countries than in developing
Lord Alan Watson
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ones, and he cited recent streetdisturbances in France’s city suburbs as anexample. Rich countries can afford tomaintain ultimately unsustainable policiesfor a longer period by, for example,borrowing externally. In addition, richcountry citizens generally have more tolose, so are less willing to risk losing it.That is, wealth itself becomes a barrier tochange. For the general public to acceptthat change is necessary, it must first firmlybelieve that the current situation is bad andmust be improved.
For Philippe Manière, change needs atrigger, some unforeseen event for people todemand change. Again looking to Francefor an example, he pointed out that thereare cultural barriers to implementingreforms, particularly if they appear to bebased on the so-called Anglo-Saxon modelof liberalised markets with labour flexibilityand limited state support on the social side.Low economic growth may reduce socialmobility but it also entrenches resistance tochange. France’s intellectual and politicalelite fans this resistance, he asserted.
Can radical change, assuming it is needed,ever be implemented while minimising thesocial costs? Iordanis Aivazis believes
there is a way. His formerly state-ownedmonopoly underwent a process of partialprivatisation from 1996. Deregulation ofthe telecoms market made deep staff cutsinevitable. But employment protectionafforded to the state employees meant anynormal redundancies were out of thequestion. The company engaged inprotracted, and ultimately successful,negotiations with the unions over avoluntary programme of early retirementcovering over a third of staff. Co-operationand mutual understanding saved the day.
Questions and comments from the floorwere varied. One participant proposed asystem of graduated tariffs on imports intodeveloped countries based on the exporter’sranking on a number of social andenvironmental criteria. The proposalenvisaged that any proceeds be returnedto developing countries in the formof “environmental” investment.Jagdish Bhagwati responded by pointingout that it was the developed economiesthat caused much of the currentenvironmental damage. He then asked
whether it is fair to impose additional tariffson developing countries in the nameof the environment. In his view, these kindsof proposals are thinly disguised attemptsto protect developed country markets.
The discussion then moved to immigration.One participant believed that migrationfrom Senegal, caused by weak economicconditions there, was partly the fault ofeconomic reforms imposed by multilateralorganisations in the 1980s. Jagdish Bhagwatiresponded that migration is a responseto both push and pull factors, reflectingdisparities in living standards betweendeveloped and developing countries.Referring to the debate about controllingMexican immigration to the United States,Jagdish Bhagwati warned that even a wallbetween countries would be scaled as longas there was the “pull of higher livingstandards”. In any case, demographicchanges, particularly those caused byageing populations, mean that manydeveloped economies will have to importlabour in order to maintain livingstandards. ■
Jagdish Bhagwati and Ana Isabel Leiva Diez
Iordanis Aivazis
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Creating jobs in the 21st century
When protectionworks
• MODERATOR: LIONEL FONTAGNÉ,DIRECTOR, CENTRE D’ÉTUDESPROSPECTIVES ET D’INFORMATIONSINTERNATIONALES, FRANCE
• ANNE O. KRUEGER,FIRST DEPUTY MANAGING DIRECTOR,INTERNATIONAL MONETARY FUND
• JOHN P. MARTIN, DIRECTOR,EMPLOYMENT, LABOUR AND SOCIALAFFAIRS, OECD
• BASILE J. NEIADAS, CEO,OPAP SA, GREECE
• THOMAS C. NELSON,CHIEF OPERATING OFFICER,AARP, UNITED STATES
• JOHN J. SWEENEY, PRESIDENT,AMERICAN FEDERATION OFLABOR–CONGRESS OF INDUSTRIALORGANIZATIONS
Globalisation, ageing populations, shiftsin the patterns of manufacturingand rapid change, including
technological advances, have beenrevolutionising the world of work andthrowing out old employment certainties.“On the global stage, China has becomea manufacturing giant, India is emergingas a major services supplier, and Brazilis making great strides in agriculturalproduction,” commented Lionel Fontagné.Given this daunting situation, what policiesmight encourage more job creation overthe coming years?
Anne O. Krueger said that researchshowed that most loss of jobs in developedcountries like the United States was causedby internal factors, such as technologicalchange, rather than outsourcing andcompetition from low cost countries.“Industrialised countries have much higherlevels of productivity than businesses inpoorer countries do. Accordingly, they can
afford to pay workers much higher wages,”Anne O. Krueger explained.
She added that huge labour marketinefficiencies had now arisen in manydeveloping countries that had introducedvery tight employment regulations. One ofthe main effects of this was to force peopleto work in the informal economy since fewemployers could afford the costs involvedin formal sector employment.
On the other hand, according toJohn J. Sweeney, “measures are needed
to balance the effects of globalisation,otherwise gaps will widen between richand poor, and between capital and labour”.He pointed to the effects that the entry intothe global trading system of countries,such as China, India and Russia have hadon world labour markets. This arrival onlabour markets of some 1.4 billion extraworkers “effectively doubled the existingnumber of workers around the world, andexercised downward pressure on wageseverywhere”.
“We need the right sorts of rules sothat there is a race to the top and notto the bottom in terms of employmentconditions”, John J. Sweeney began.He pointed to China where “there is noprotection of workers’ rights”, and suggestedthat if it is good for business to protectintellectual property rights, similar benefitsshould flow from ensuring protection forworkers. He added that there should bea focus on “creation of high quality jobswith an emphasis on innovation in whichemployers would be willing to pay highwages to attract the necessary skills”.
Lionel Fontagné and Anne O. Krueger
John J. Sweeney
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Basile J. Neiadas commented that over thenext 20 years half the world’s professions ascurrently constituted may disappear. “Thesame will happen in corporations. Manypositions will cease to exist and others willchange”, Basile J. Neiadas said. He proposedthat tomorrow’s “good jobs” would beknowledge-based and connected to IT.“Environment, advanced productionmethods and human resources managementare also key growth areas”, he said.
Basile J. Neiadas then cited a recent studyon employment which claims that “theknowledge available to people todayrepresents only 5% of the knowledge thatwill be available in 2020”. Employmentpolicy must therefore adjust to new fast-changing conditions and “offer stability andmuch-needed confidence to the public”.Policy should “be a catalyst for change,leading to a better quality of life”.
Thomas C. Nelson noted that manypeople were extending their working liveswell into what had once been considered“retirement age”. A number of factors werecontributing to this trend such aspopulation ageing in industrialisedcountries and people’s rising anxieties aboutfinancial security in old age. Ageingsocieties “create both challenges andopportunities”. He suggested that if
obstacles such as stereotyped attitudes andregulatory difficulties could be overcome,economies might benefit from retaining theskills and experience of older workers.
John P. Martin highlighted some keylessons learned from the OECD’s work onjob creation strategies. He suggested that if
John P. Martin, Basile J. Neiadas and Thomas C. Nelson
Basile J. Neiadas and Thomas O. Nelson
the right mix of policies were applied,“labour market flexibility could bereconciled with reasonable social protectionof workers. For example, carefullymonitoring efforts by unemployed peopleto obtain a new job can provide one usefulincentive”. John P. Martin also statedthat efforts to expand product marketcompetition and to introduce lifelonglearning, combined with macroeconomicpolicies that fostered stability, were essentialelements for stimulating job creation.“Schooling systems in many OECDcountries are not currently serving studentsvery well in this regard, and more attentionneeds to be paid to training workers”,he suggested.
Comments from the floor asserted thatlabour market flexibility on its own couldnot guarantee creation of good quality jobs.For instance, one participant pointed outthat Spain had carried out labour marketreforms over recent years, yet in many casesworkers’ conditions had not improved. Athird of Spanish jobs were of a precariousnature, the participant said. In this context,John J. Sweeney emphasised theimportance of collective bargaining anda democratic approach to the right ofworkers to decide whether or not to joina trade union. ■
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Access to educationA question of quality
• MODERATOR: ALI DOGRAMACI,RECTOR, BILKENT UNIVERSITY, TURKEY
• JOHN BANGS, ASSISTANT SECRETARY,EDUCATION AND EQUALOPPORTUNITIES, NATIONAL UNIONOF TEACHERS, UNITED KINGDOM
• GEORGES HADDAD, DIRECTOR,DIVISION OF HIGHER EDUCATION,UNESCO
• BERNARD HUGONNIER,DEPUTY DIRECTOR, DIRECTORATEFOR EDUCATION, OECD
• VERNON JOHNSON, SENIOR VICEPRESIDENT, EDUCATIONALDEVELOPMENT, WHITNEYINTERNATIONAL UNIVERSITY SYSTEM,UNITED STATES
• DINA KAWAR, AMBASSADOR,JORDANIAN EMBASSY TO FRANCE
• WUSHENG ZHANG, PRESIDENT,TIANJIN ACADEMY OF EDUCATIONALSCIENCE, CHINA
“Today, when it comes toeducation, the question is nolonger whether or not entire
societies should have access, but what kindof education they should have access to”,said Ali Dogramaci in his opening remarksto this panel on access to education.
Teacher training is one of the best waysto improve the quality of education,panellists agreed. When it comes toimplementing improvements in teachingquality, governments should not considerteachers’ unions as defensive organisationshostile to change, but rather bodies to becourted as partners because of theirenormous capacity to implementimprovements. As a representative of sucha union, John Bangs insisted that teachersare likely to accept initiatives intended toimprove students’ performance, especiallyif they are based on the principle of equity. John Bangs said that the OECD’s record on
international education assessment is highlyrespected by teachers for just this reason.Promoting diversity is one of the elementshe considered essential to schoolingsystems today. But diversity in the teachingfaculty cannot come at the cost of drainingtalent away from developing countries.“In the Commonwealth,” John Bangs said,“we brokered an agreement betweencountries to prevent the richer countriesfrom poaching much-needed teachersfrom developing members.”
Georges Haddad brought up one ofthe fundamental questions in today’seducation debate. “Is education a publicgood or a commercial good?”, he asked,“and if it is, to some extent, a commercialgood, just how far does the public portionextend? To the primary level? To thesecondary level?” Georges Haddad saidthat any approach to improving educationon a global level requires a mixedapproach, one that is adapted to thespecific political, economic, and culturalsituation of a given country. He considerededucation as a fundamental right, andcited former EU Commission president,Jacques Delors, who proposed the idea ofan “education credit” as everyone’sfundamental birthright.
Georges Haddad
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But education alone does not guaranteesuccess in life. Georges Haddad said that inthe years ahead, governments will bechallenged to focus their attention not onlyon producing students who succeed interms of educational criteria, but also interms of personal achievement. The abilityto accompany students from education tothe first steps in a successful working lifeshould be the goal of all serious educationalsystems.
Vernon Johnson agreed, but argued that thistask was often undervalued by somegovernments for ideological reasons.Education is treated as a question ofefficiency; the global challenge is to educate avast population at a reasonable price.Another limiting factor in many countries isthat education systems are too poorly alignedwith changing labour market demands.
A proponent of results-based teacherassessments, Vernon Johnsonrecommended improving educationsystems from two angles: adaptingeducation budgets to emphasise the specificdemands of the labour market in specificcountries, and training and instructingteachers to use scientifically provenmethods. Bad teachers can seriously reducea student’s chance of success, and educationsystems must take this into account.He said that teachers should use proveneffective methods only; anything elseshould be seen as malpractice. Teacher
assessments must be linked to the resultsof their students, and methods must beapplied consistently. However, curriculumand schedules should still be able to adaptto different needs.
In Jordan, some of the successes over thepast 20 years can be used as an exampleby other countries. “We are a poor countrywith few natural resources, so we haveemphasised our human resources”, saidDina Kawar. Since primary educationbecame mandatory, 99% of children nowattend school, and pre-school will soonbecome part of this mandatory education.Furthermore, women have beenestablishing themselves in the professions,although they still only make up 12%of the active workforce.
Georges Haddad and Vernon Johnson
Vernon Johnson, John Bangs and Dina Kawar
Dina Kawar said that after the years ofemphasising the medical profession inJordan, the government now wants toconcentrate on the knowledge economy.“We, too, plan to focus on success, by bothupgrading the quality of our curriculumand increasing vocation trainingprogrammes.” Decentralising education isimportant. She said she is always impressedwhen she visits computer education centresin the desert, which even nomadic Bedouinattend.
Assessment systems are crucial forimproving standards, as is harmonisingquality ratings. China has been using sucha programme since 1994. Wusheng Zhangnoted that 8,500 institutes specialising inskill assessment have since been set uparound China, covering 2,000 differenttypes of jobs. “By the end of 2002, morethan 5 million people had passed throughthe system, which has five different levelsand focuses on three sectors: the foodindustry, manufacturing, and socialservices.” China has also co-operatedon a bilateral basis with Germany, theUnited Kingdom, Korea, Japan and Canadain order to better develop its vocationaltraining system.
Bernard Hugonnier summed things upby pointing out the panel’s main point ofconsensus: access to education is notenough, quality also counts. Successfuleducation consists of access and involvesgiving everyone the chances required toobtain good results at every level ofeducation. This, Bernard Hugonnier said,sums up the principle of equity. ■
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Innovation and economic growthIdeas that prosper
• MODERATOR: JEAN-MARC VITTORI,EDITORIAL WRITER, LES ECHOS,FRANCE
• JOHN P. HEARN, VICE PRESIDENT,UNIVERSITY OF SYDNEY, AUSTRALIA
• HAMISH MCRAE, ASSOCIATE EDITOR,THE INDEPENDENT,UNITED KINGDOM
• KARIEN VAN GENNIP, MINISTERFOR FOREIGN TRADE, NETHERLANDS
• GREY FAIRFIELD WARNER,SENIOR VICE PRESIDENT FOR LATINAMERICA, MERCK & CO. INC.
“We still do not know muchabout innovation” saidJean-Marc Vittori in his
opening remarks to the panel, “and we areunsure about its exact relationship withR&D investment”. What we do know isthat the leading innovators tend to enjoyboth strong growth in productivity andprosperity. How will globalisation affectthis, asks Jean-Marc Vittori, and how cancountries protect their innovation andproduction in this new global arena?
“No single innovation can sustain economicgrowth”, remarked Grey Fairfield Warner,“but no economy can compete and growwithout innovation”. Furthermore, he said,innovation must be translated intoeconomic development that delivers onthe promise of prosperity for all peopleand not just the relative few.
Bringing a corporate perspective to thedebate, and one from the highly-innovativepharmaceuticals sector, he stressed theimportance of economic clusters in theinnovation process, such as those inSan Diego, Atlanta, Pittsburgh and theso-called “Research Triangle” in theRaleigh/Durham area of North Carolina.
Clusters provide three essential insights:first, that innovation and developmentoccur at the regional and local level, notnational level; second, most successfulclusters have the best institutions ofcollaboration between the private sector,government and research universities; andthird, regions that do not depend upon lowwages and tax incentives to compete, butinstead on innovation, have the best trackrecord of creating growth and prosperity.However, clusters cannot exist withoutcertain pre-conditions. These includethe rule of law and respect for intellectualproperty, an efficient and science-basedregulatory system, open markets andinvestment in health, educationinfrastructure, innovation and research.
John P. Hearn used the analogy of oneof his country’s national symbols, thekangaroo, to stress that countries must stayfast and adaptive if they are to prosper intoday’s world. From its privileged positionin one the most dynamic regions in theworld, Asia-Pacific, and in a countrywith strong network links with theUnited Kingdom and United States,Australia has, says John P. Hearn, madeR&D a priority: “there are many niche
areas to exploit and, as the French say, vivela différence”. But the key to innovation andsuccess in the future, he stresses, is “cleverpeople” who understand society. And whilecalls for more focus in hard sciences areunderstandable, John P. Hearn insists thata good broad humanities background is
Jean-Marc Vittori, John P. Hearn and Hamish McRae
Grey Fairfield Warner
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also essential for the uptake and applicationof innovation. “We need to create flexiblepeople.”
Hamish McRae picked up on the phrase“clever people” and suggested that thenature of innovation is now undergoing afundamental change. “Old innovation”, saidHamish McRae, tended to be the product ofcollaboration between firms anduniversities – so-called “centres oflearning”. The main challenge then washow to get ideas out into the marketplace.Now, running in parallel with thisestablished innovation path, is “newinnovation”. The trouble is that we do notalways know where it is going to springfrom. Hamish McRae cited two examples:Google, which is a case of high-techinnovation and the product of “clevermathematicians”; and pre-paid mobilephone cards, a low-tech innovation thatemerged unexpectedly in Italy but has hada huge global economic impact. Many keyinnovations in the future will come fromthe self-employed, and many fromdeveloping countries, not the OECDor the G7.
In many respects, the key to innovation hasbecome simpler – “clever people” – butdeveloping innovation policies has becomemore complex. The question nationalpolicy makers must ask themselves,concluded Hamish McRae, is “how do webecome a magnet for talent ?”
Karien van Gennip recalled that at lastyear’s Forum she had defendedglobalisation as a force of good. Now
she wanted to stress that the full benefitsof globalisation would be forthcoming onlyif countries played by the rules. She arguedthat the way for governments to mitigateany negative effects of globalisation is notto subsidise loss-making industries, butto create more flexible labour markets.Education was key too: “it is not lifelongjobs but lifelong learning that will createprosperity.”
For Karien van Gennip, innovation andglobalisation are two sides of the same coin:“they depend on and stimulate each other… but on one condition: if we all play bythe rules.” Above all, this means respectingintellectual property rights, but accordingto the minister, it also entails combatingchild labour and eliminating protectionismand artificial market barriers.Karien van Gennip was categorical on thispoint: “Businesses will not innovate if thereis no guarantee that their R&D will beprotected.”
A lively debate ensued among the panellistsin response to several pointed questionsfrom the audience. On the role of basicresearch versus market-led innovation,Hamish McRae stressed that
“old innovation” would not disappear,and would continue to play a fundamentalrole alongside “new innovation”. However,he warned that Europe would still haveto improve the “catastrophic” state of itsuniversity system. John P. Hearn addedthat innovation comes from increasinglyunpredictable sources, and cited theexample of important recent micro-bacterial advances derived from the milkof wallabies.
Discussions on effectiveness and fairness ofprotecting intellectual property rights weremore divisive. Some panellists insisted that,without strong protection, businesseswould simply stop innovating. Others, suchas Hamish McRae, wondered if we are notmoving to a world “where stealing isnormal”. There is a shift in power todeveloping countries, and for him, it is notclear whether intellectual property rightswill really be able to be enforced in thefuture. However, Karien van Gennippointed out that many complaints aboutintellectual piracy are now coming fromChinese firms about other Chinese firms,and suggested that domestic pressurewould eventually lead to enforcementof IPR there. ■Hamish McRae
Karien Van Gennip
23 May
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Financial markets and growthTools and rulesfor capital
• MODERATOR: JOHN THORNHILL,EDITOR, EUROPEAN EDITION,FINANCIAL TIMES
• KENNETH V. GEORGETTI, PRESIDENT,CANADIAN LABOUR CONGRESS
• INGE KAUL, SPECIAL POLICY ADVISER, OFFICEOF DEVELOPMENT STUDIES, UNDP
• HUGUETTE LABELLE, CHAIR,TRANSPARENCY INTERNATIONAL
• MARC LITZLER, DEPUTY CEO,CALYON
Financial markets are important fordevelopment, but they need to bebalanced by oversight and good
regulation. These opening remarks byJohn Thornhill set the tone for the discussion.Volatility in many equity markets around theworld, as well as increased public attentionon a range of areas from pensions to corporatefraud, made this a particularly timely session.
Marc Litzler highlighted the role ofinternational market operators in managingfinancial imbalances. Over the past twoyears the rapid growth in exports from Asiahas helped keep overall prices down inOECD countries. This in turn has helpedkeep long-term interest rates down, despiterising short-term rates. Moreover, therecycling of Asian current account surpluseshas provided the capital to finance theUS savings imbalance that fuelled itssubstantial current account deficit. Thisfurther helped to keep long-term interestrates low. The fact that these imbalancesdid not cause more severe economicproblems was largely due to the importantintermediary role of international financialmarkets, Marc Litzler argued.
Financial markets have always acted asintermediaries, said Mark Litzler, bringing
together people with surplus capital andthose with a need for capital or otherdiffering interests. But this process hasincreasingly graduated from domesticmarkets governed largely by nationalrules, to an international arena. Thatmeans more sophisticated products andmore complex arrangements, he said.This increased sophistication of financialmarkets has added greater flexibility,adding to the ability of the financialsystem to self-correct after unanticipateddisturbances or shocks.
Huguette Labelle agreed that financialmarkets could promote growth, butinsisted that people should be concernednot just with growth itself, but with theextent to which growth is equitable, andbenefits those in developing as well asdeveloped countries. The World Bankestimates that around 1 trillion US$is spent each year on bribes, and thata comparable amount of money islaundered. Most of this money mustpass through the financial system,Huguette Labelle believed, meaning thatinstitutions are in a strong position topolice these financial flows and to preventsuch corruption from becoming a barrierto equitable growth.
There has been some progress to date viaconventions sponsored by the OECD, theInternational Monetary Fund (IMF) andother bodies aimed at tightening controlson corruption and allowing internationalefforts to recoup funds shifted offshoreillegally. But more could be done,Huguette Labelle continued, saying thatthe market itself is not self-correcting inthis regard, and requires some assistance.The trouble is, as she put it, “when theinvisible hand wreaks havoc, it is difficultto find an invisible wrist to slap”. Thereis therefore a need for new or moresophisticated regulation. Voluntarycompliance and improved corporatecitizenship of the type the OECDencourages are positive steps, she said,but in the end it is strong and intelligentregulation that is required.
Inge Kaul echoed the view that well-developed and adequately regulatedfinancial markets can make a positivecontribution to growth, but emphasised thegrowing importance of risk management.The demand for less volatile, morebalanced globalisation has encouraged asearch for innovative risk managementinstruments, some of which are gearedtowards assisting developing countries.
John Thornhill and Marc Litzler
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One group of such instruments, dubbed“macro securities” by Inge Kaul, wouldinclude the likes of sovereign governmentbonds indexed to GDP or the price of adeveloping country’s major export. Otherinnovative instruments include securitiesbacked by promises to deliver foreign aid.Some OECD governments are comingtogether to jointly back issuance of debt tofinance investment in development-relatedactivities. Under these arrangements,participating governments are heldaccountable by the financial markets formaking good on commitments to provideforeign aid in the future.
Kenneth V. Georgetti was less upbeat. Heargued that market performance should bemeasured against its impact on theeconomy as a whole, particularly in view
of the increasing weight of financial firmsin the economy. While on the plus side,financial markets have helped to stimulateinvestment, there have also been a numberof “bubbles” that have been followed bycrashes. In his view, markets do notrationally allocate capital to their mostefficient uses, not least because of “short-termism” and a “herd” mentality amongfinancial operators who simply followedthe market up or down.
Moreover, the increased use of stockoptions in executive pay packages hassignificantly raised the share of corporateprofits going to senior managers,leaving less for investment and wages,Kenneth V. Georgetti observed. Wideningincome inequality has been partly the resultof market pressure to maximise short-term
profits, and mergers and acquisitionsactivity has too often been geared towardsboosting profits at the expense of long-termperformance. He believed that regulatorychanges and tax measures are required,aimed at stimulating long-termshareholding and promoting the welfare ofworkers. Properly managed pension funds,for example, could exert pressure oncompanies to look after workers’ interestsand discourage short-termism.
Prompted by a comment from the floorregarding a new code aimed at eliminatingcorrupt practices related to export creditagreements, John Thornhill asked whethersome areas of financial markets werecurrently escaping oversight, and whatmeasures needed to be taken to make thesystem flexible enough to cover changingcircumstances. Marc Litzler responded thatoversight was already an obligation for thebanks in developed countries, and thatcorruption-monitoring practices were alreadyvery resilient. Kenneth V. Georgetti warnedthat there is a need for greater shareholderscrutiny, and saw a role for institutions suchas the OECD in harmonising regulations.
Summing up the session, John Thornhillnoted that regulation of financial marketactivity is extremely important, and that theconsistency of regulation was a key factor.Using an analogy provided by an old fencinginstructor of his, he likened regulation toholding a bird in your hand: loose enough toavoid crushing the bird, but tight enough toprevent it from flying away. ■
Inge Kaul and Kenneth V. Georgetti
Marc Litzler Huguette Labelle
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China: Governing for developmentA new age?
• MODERATOR: VIVIENNE WALT,REPORTER, TIME, UNITED STATES
• DOMINIQUE DE BOISSESON,CHAIRMAN AND CEO, CHINAINVESTMENT CO. LTD, ALCATEL
• YING CHEN, DEPUTY DIRECTOR-GENERAL, CHINA ENTERPRISECONFEDERATION
• SHERI XIAOYI LIAO, PRESIDENT,GLOBAL VILLAGE OF BEIJING, CHINA
• JOSÉ DE SALES MARQUES, PRESIDENT,INSTITUTE OF EUROPEAN STUDIES,MACAU
• YVES-THIBAULT DE SILGUY, SENIOREXECUTIVE VICE PRESIDENT OFINTERNATIONAL RELATIONS, SUEZ
With China’s age-old civilizationa permanent backdrop to thispolicy debate, painting a clear
picture of the future was never going to beeasy. The European panellists chose to putthe emphasis on joining up the economicnumbers, whereas the Chinese participantswere at ease dealing with the more abstract,yet vital, philosophical issues before them.
The economic data told a dazzling story ofgrowth and output, but failed to provide afull assessment of the governance challengesfaced by perhaps the world’s most dramaticeconomic success story of the 21st century.
Dominique de Boisseson said thatEuropean companies in China were the keydrivers behind surging EU-China traderelations. In 2004, the EU became China’slargest trading partner and China becamethe EU’s second largest.
In December 2005, China entered the fifthand final year of implementation of itsWorld Trade Organization (WTO)commitments. Dominique de Boissesoncommented that if one looks beyond thosecommitments to the practical issues,concerns remain regarding the replacementof trade barriers with more subtle barriers.
He cited China’s own efforts to promotethe protection of intellectual property rights(IPR) and the fact that Chinese companiesare becoming more aware of the dangersand threats of excessive counterfeiting,even by domestic rivals.
Ying Chen seemed confident that thegovernment was moving in the right
direction. She insisted that all societiespursued the goal of building a fair, stableand harmonious society according to theirown model. Chinese culture had developeda number of ideologies about balance,some well known. Over the past threedecades China had made huge strides,but now it was necessary to find a newpoint of balance.
Vivienne Walt, Dominique de Boisseson, Ying Chen and Sheri Xiaoyi Liao
Yves-Thibault de Silguy
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China had chosen socialism as its basicsystem, and a key ideal was that no personwould live in poverty in the country. TheChinese government sought to build aharmonious society and, at the same time,meet new requirements for reform anddevelopment. Such a society, Ying Chensaid, brought democracy and the rule oflaw, equity and justice, compliance andbrotherliness, vitality and energy, stabilityand order and a harmonious coexistencebetween man and nature. Among theconcrete goals in the latest five-year planwas a 20% reduction in energyconsumption, for instance.
Sheri Xiaoyi Liao was more critical aboutthe challenges ahead. Seven of the world’sten most polluted cities were in China, shepointed out; and China was the secondlargest CO2 emitter after the United States.The Chinese government was now aimingto set up a “green partnership” betweengovernment, businesses and NGOs. Thegoal was “harmony among people, societyand nature”, measured by a “green GDP”indicator. A great deal was at stake giventhat 20% of the world’s population lived inChina. This meant that China’s choiceswould be defining for the future ofhumanity as a whole.
Yves-Thibault de Silguy emphasised hiscompany’s role in providing water suppliesfor 11 million Chinese people. He stressedthat policy development involved thesetting up of partnerships with cities andmajor communities. In this respect, one ofSuez’s most successful partnerships hadbeen in existence for 20 years, and stood asa model for this kind of approach.
China, he said, is a type of testingground for the principles of sustainabledevelopment and good governance.Currently, the Chinese population suffersfrom inadequate access to water andenergy supplies. City dwellers are forcedto put up with high levels of air pollution.However, the country has woken up tothe need to address these problems andthe government has set itself strict andambitious targets to improve the situationby 2010. In this respect, foreigncompanies such as Suez bring much morethan investment to countries like China;they bring know-how that can helpachieve such targets.
José de Sales Marques, a former mayorof Macau, said that for 27 years, China hadbeen growing at an annual average rate of9.5%. The country now faced many major
changes. One of the biggest challenges wasthe need each year to absorb 25 millionjob-seekers in order to keep theemployment rate at a stable level. Othermajor challenges included enforcinglegislation, which was often misunderstood,especially by local authorities. Also, aconfusing range of different practicesimposed by different governmentalauthorities brought major difficulties.
José de Sales Marques said the need tounify the internal market should be a majorpriority, and noted that China’s growth andemergence as an economic power wascertainly a challenge for the world as awhole, but it was equally so for the Chinesethemselves. The Chinese needed helptackling such issues, he concluded.
From the floor, participants expressed arange of concerns. These included fears of agrowing gap between winners and losers inChinese society. A journalist enquired aboutchanges in Chinese mentalities and wasassured by the former mayor of Macau thatthe biggest changes were to be observed inpoliticians’ attitudes as they tried to keepup with a rapidly evolving culture. “Theyhave to be adaptable, like surfers, in orderto stay on top”, he said. A Kenyan officialfrom the floor paid tribute to the generosityand appropriateness of Chinese developmentaid, especially for infrastructure projects,contrasting its efficiency with what hecalled less attractive aid offers made byOECD countries. ■
Sheri Xiaoyi Liao
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Wisdom and governance
Is wisdomeconomically viable?
• MODERATOR: FRANCIS MATHIEU,CHAIRMAN, CLUB E-REFLEXION,FRANCE
• CHRISTIAN DE BOISREDON, FOUNDER,REPORTERS OF HOPE, FRANCE
• MARC ODENDALL, CO-FOUNDER, SAINT-HONORÉ MICRO-FINANCE, FRANCE
• SAMUEL ROUVILLOIS, PHILOSOPHER,CLUB E-REFLEXION, FRANCE
“Putting 1% or 2% of your assetsinto microfinance is a goodinvestment”, suggested
Marc Odendall. He should know.Co-founder of Crédit Suisse First BostonFrance, he went on to become GeneralManager of Merrill Lynch Capital MarketsFrance before joining Deutsche MorganGrenfell France and is currently servingon the boards of several humanitarianorganisations. Marc Odendall kicked offthe discussion, “Wisdom and governance”,organised by Club e-reflexion, whichfocused on the theme of microfinance.
Marc Odendall believes that people cannotfind a place in the heart of the economyif a culture of dependency prevails.Saint-Honoré Micro-Finance is a ‘fundsfund’ that invests in 15 to 20 underlyingportfolios, which in turn have stakesin 200 to 300 microfinance banks, andthat enables a giver-receiver relationshipto evolve into a relationship between twocommercial partners, the lender and theborrower. “Whilst microfinance is not amoney-spinner,” he cautions, “the returnsare far from insignificant, contributing todevelopment and allowing lending tocontinue”. He also reiterated that thesystem is reliable: in 98% of cases the loansare in fact paid back.
Christian de Boisredon also agreed thatmicrofinance had many advantages, and
deplored the public’s lack of informationabout this type of initiative. He was amazedthat while “microfinance has been availablefor the last 30 years, most of the publichas only heard about it very recently”.Microfinance is not the only issue that lacksmedia coverage. How many of us haveheard of India’s Doctor V. who managed tocut the cost of treating a cataract from350 US$ to 5 US$ through clever industrialstreamlining? Or of Spirulina, the one-celledalgae of exceptional nutritive value whichsome developing countries are starting togrow? Christian de Boisredon then asked:“Why have our all-powerful media notidentified and reported these positiveinitiatives?” The raison d’être behindReporters of Hope is to offset this deficiencyby spotlighting such initiatives andencouraging the mass media to do likewise.
Samuel Rouvillois endeavoured to“portray these initiatives, which promoteresponsibility and foster relations ofsolidarity, in the light of what transpiresin the world of business”. Our society isundergoing a colossal re-think due to whathe calls “the depression created by the needto consume”. Globalisation is handicappedby its inability to function apart fromcreating needs. These positive initiatives
in themselves are not enough to turn the tidewithout a radical change in attitude towardsthem. We could make do with wanting to“incorporate them into our social model,which is increasingly money-oriented andless and less people-oriented”, but thiswould entail the risk of over-simplification,and ultimately a “neo-colonialist” approach.In his view, “We need to change ourspectacles to understand the reasoningbehind them”.
“What characterises these positiveapproaches is that they foster dignity,solidarity and the existence of truly humannetworks. Our social model relies moreon rational thinking than on people, butrationality does not always rhyme withwisdom. The key to wisdom in matters ofgovernance is vulnerability. Today, we wantto eliminate vulnerability and control all therisks. An individual has no choice but toadapt to the structures imposed, or toremain on the sidelines. Creativity,however, is born of weakness and hardship.Only by taking this into account can wereally foster creativity and thus individualresponsibility and fulfilment”, he said.When it comes down to it, perhaps suchwisdom is in fact the only form of trulysustainable investment. ■
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Doha Development AgendaKeeping Doha alive
• MODERATOR: LIZ ALDERMAN,BUSINESS EDITOR,INTERNATIONAL HERALD TRIBUNE
• INGRID ANTONIJEVIC, MINISTEROF ECONOMY, DEVELOPMENTAND RECONSTRUCTION, CHILE
• PHIL GOFF, MINISTER FOR TRADE,NEW ZEALAND
• JENNIFER A. HILLMAN,COMMISSIONER, UNITED STATESINTERNATIONAL TRADE COMMISSION
• MUKHISA KITUYI, MINISTER OF TRADEAND INDUSTRY, KENYA
• PASCAL LAMY, DIRECTOR-GENERAL,WORLD TRADE ORGANIZATION
• PAULA LEHTOMÄKI, MINISTER FORFOREIGN TRADE AND DEVELOPMENT,FINLAND
• NÉSTOR STANCANELLI, DEPUTYSECRETARY, INTERNATIONALECONOMIC NEGOTIATIONS,ARGENTINA
• MARK VAILE, DEPUTY PRIME MINISTER,MINISTER FOR TRADE, AUSTRALIA
This high-level political paneldiscussed how to clear the way forcompleting the Doha trade talks on
time by the end of 2006.
Liz Alderman launched the discussion byasking: can the Doha Development Agendatalks be saved? Everyone agreed that thestakes are huge, but another question aboutrealism had to be raised: are Doha’s goalstoo ambitious? Liz Alderman asked ifperhaps the “single undertaking” principleswere not too risky, as, under an all-or-nothing approach, failure to make progresson agriculture, for example, would blockprogress in other trade areas as well.
“Why are the talks proving so difficult?”asked Pascal Lamy. “Some say it is becausethere are no business interests involved.Others say the media is problematic, orthey blame the single undertaking
principle, or they point their fingersat the fact that the NGOs do not like it.”But Pascal Lamy insisted that talks weredifficult for other reasons: “they have a highlevel of ambition … they would bringdeeper, larger, and fairer results”, he said,laying out the keywords he would focus on.
Pascal Lamy said that results would bedeeper because of the effective cuts intoglobal tariffs and subsidies in bothmanufacturing and agriculture –60%–70% for tariffs – while subsidieswould be reduced by half of their currentlevels. Results would also be larger, hesaid, because Doha addresses new topics,and negotiations would be breaking newground on areas like trade facilitation andfisheries subsidies, both of which haveenormous impacts on trade. Finally,results from a successful Doha roundwould also be fairer, he said, because newratios would be established betweendeveloped and developing countries,which would mean more flexibility.Pascal Lamy also said that he supportedthe “Aid for Trade” scheme as an essentialway to move forward. Each of the facetsalone could be considered ambitions.And the three put together will require
an enormous amount of political traction.But he asserted that it is feasible.
Kick-starting the Doha round back to lifewill require a major and deliberate effort bynegotiators if world agriculture is to bringbenefits to the developing world, panellistsagreed. Néstor Stancanelli’s observationswere less about future theoretical gainsfrom a successful trade round, which areso often trotted out in these discussions,than about restoring lost ones. He pointedout that in the 1970s, net imports ofagricultural products into the OECDrepresented over 15% of total trade,but this figure has decreased to just over4% in 2004. If import penetration tothe OECD were only to return to the1970 levels, this alone would have a hugelybeneficial impact on developing countries,he said. However, politics was the issue,for while “protectionism and subsidies areresponsible”, he did not see the leadershipfor structural adjustment forthcoming insome key trading partners.
Mark Vaile also spoke frankly. Yes, Dohawas at risk, and yes, it could be saved.“Trade in agriculture is about 50 yearsbehind the trade agenda: there is no longer
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any reason to differentiate agriculture fromgoods and services”, the minister said.“Trade ministers are the biggest optimistsI know”, he said, “and what gives usconfidence now is the very fact that we arestill talking”. As a minister, he felt thatnegotiations must succeed this year, giventhe current trends in politics andprotectionism. “From my experience, theWTO only makes decisions when thepressure is really applied. So we need tokeep the lid on the pressure cooker andkeep the heat turned up over the next fewmonths”, Mark Vaile insisted. To energiseand invoke the needed commitment, hesaid that all parties involved must remindthemselves of the prize: a global GDP boostof 300 billion US$. The gains were gearedin favour of developing countries, but allcountries would be worse off if the WTOtalks failed, he warned. At the same time,every country must realise that concessionsare called for, and that means more marketaccess for the developed countries, too.He pointed to India as an example of acountry taking a lead by making concessionsin services.
Ingrid Antonijevic responded to the viewthat the benefits from Doha for developingcountries, while less in dollar terms, wouldspell an enormous jump ahead for poorersocieties. She still felt that the currentinternational trade system was skewed too
far in favour of wealthy countries. Exportsfrom developing countries continue to faceenormous preventative barriers that blockthe oft-cited comparative advantagesdeveloping countries hold in agriculture,for instance. The burden in a trade dealshould not be placed equally, she said –those countries with the highest barriersshould make the most concessions. Whilethe system needed changing, IngridAntonijevic defended the WTO, sayingthat, as an institution, it remainsunsurpassed for advancing fair trade,
thanks to its voting system that allots eachcountry a single vote.
Mukhisa Kituyi feared that what is nowcalled the Doha round of talks has strayedfrom its original goals, and he called for aredefinition of the aims. “At the end of theday we will have improved a great dealsince 2001; but compare the results withthe original promise of Doha and they arenot very successful”, he said. The talks wereno longer about development, in his view.Progress cannot be made in this contextunless real, concrete measures are taken inOECD countries to give more onagriculture. Mukhisa Kituyi was worriedabout crowding out investment, too, andcited the “deindustrialisation” of Kenya,which has replaced factories withwarehouses packed with imported goods.However, he did want the talks to keep todefined time limits. Deadlines in tradetalks, he said, were also important to keep,as softening them amounts to an endlessbacklogging of issues that some developingcountries see as important.
Even with a successful outcome inDecember, all parties involved in the talksmust realise that there will be winners andlosers. To this effect, Jennifer A. Hillmansaid that mechanisms must be put in placeto assure that the countries which stand tolose – like Bangladesh, which could seeshrinking agriculture and industry sectorsas a result of negotiations – are looked after.Pascal Lamy and Ingrid Antonijevic
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But the list of these countries should bekept short and the aid they receiveincreased. She agreed that ambition shouldbe kept high in the talks, because the moreliberalised the agriculture markets become,the higher the rewards for developingcountries. The full liberalisation scenario,she said, would mean a 90 billion US$increase for them out of the total300 billion US$ gain, whereas a lessambitious scenario would see theirpart of the deal sag to 17 billion US$ outof 100 billion US$.
Jennifer A. Hillman also said that moreefforts should be focused on tradefacilitation. Intra-regional trade inparticular needed to function better,“but it is not advancing in Africa orLatin America”. Products arriving inHamburg can be shipped to Berlin in a day,but heavy customs procedures in someAfrican countries for instance meant thata similar delivery could take months.
Trade liberalisation is not a cure-all,Phil Goff reminded the panel. Goodoutcomes also depend on governmentsmanaging structural adjustment,maintaining social cohesion andsupporting communities and individualswho may face adverse effects. This is notalways easy to do, but Phil Goff saidthat the benefits of good managementof domestic reform had paid off for New Zealand over time – even if it costhim his seat as minister at the time. “In the early 1980s we were one of themost heavily regulated, subsidised andprotected countries in the world,
all of which simply contributed to oureconomic and social decline. By thelate 1980s, we had become one of themost open market economies,” he said.“We know that opening up markets, donethe right way, is positive for countries.Individual countries have benefited fromopen market economies. China and manyEastern European economies offer clearexamples.” Obtaining positive results atthe next round of talks, he said, meanscountries should not lose sight of thebasic reasons why they are negotiating.“Our goal is to provide producers indeveloped and developing countries alikewith new opportunities to trade andprosper and deliver benefits to consumers.”
Paula Lehtomäki defended the rightof every country to maintain domesticagriculture production and insisted that,having undertaken an important recentreform of its Common Agricultural Policy,the EU seemed unenthusiastic aboutcountenancing further reform as partof a Doha trade deal. Nonetheless,Paula Lehtomäki warned of the graveconsequences of a failure to securean agreement in the Doha round, andrecommended that “we should all lookin the mirror, and not demand more thanwe are prepared to give”. She concludedby underlining her government’s strongsupport for the aid-for-trade initiative. ■
Mukhisa KituyiPaula Lehtomäki and Néstor Stancanelli
Néstor Stancanelli and Mark Vaile
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Regional integration and developmentin the Middle EastOiling the wheels of reform
• MODERATOR: GÜVEN SAK,DIRECTOR, ECONOMIC POLICYRESEARCH INSTITUTE, TURKEY
• RAINER GEIGER, DEPUTY DIRECTOR,FINANCIAL AND ENTERPRISE AFFAIRS,OECD
• BASSMA KODMANI, DIRECTOR,ARAB REFORM INITIATIVE
• JOHANNES F. LINN, WOLFENSOHNINITIATIVE EXECUTIVE DIRECTOR,THE BROOKINGS INSTITUTION,UNITED STATES
• YASUHISA SHIOZAKI,SENIOR VICE MINISTER FORFOREIGN AFFAIRS, JAPAN
• EL SAYED TORKY, ADVISORTO THE MINISTER’S OFFICEFOR INTERNATIONAL RELATIONS,MINISTRY OF INVESTMENT, EGYPT
Yasuhisa Shiozaki opened thediscussion with an overview of thegeneral approach being taken under
a joint initiative between the OECD andthe countries of the Middle East andNorth Africa (MENA) to promote regionalintegration and development, a programmestrongly supported by the Japanesegovernment. Yasuhisa Shiozaki notedthat the two wheels of this initiative areencouraging investment and improvingpublic governance.
Investment plays a key role not only inboosting economic activity, but also intransferring new technologies and expertiseto the benefit of the host country. Butgiven the cautious nature of privateinvestors, attracting capital requires legalpredictability, political stability, faircompetition and the availability of adequate
and appropriate human resources. In thisrespect, improving public governance is akey challenge.
Rainer Geiger went on to provide moredetails of the MENA/OECD initiative,noting that the project aims at matchingcapital with investment opportunities,developing the region’s infrastructure andmobilising foreign direct investment (FDI).A parallel initiative for “Good Governancefor Development” aims to achieveimprovements in public governance as amajor element in fostering a positiveclimate for investment. Rainer Geigerstressed the need for transparency andpredictability of national policies, laws,regulations, administrative practices andstatistics affecting foreign and domesticinvestment. Private sector investment hasbeen identified as one of the keys to theeconomic dynamism that many MENAcountries are looking for. In the faceof expanding populations, between80 and 100 million new jobs are likelyto be needed between now and 2020.Growth will need to be considerably higherthan it is today if this is to be achieved.
El Sayed Torky believed that there issignificant scope for higher FDI in theregion. He said that the region has laggedbehind its potential in terms of attractingFDI partly because of a lack of co-operationand co-ordination in the region. Foreigninvestors have now been invited to becomeinvolved in advising on development, astep that should also encourage greater
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confidence in reforms. “The first step tofinding a solution is to recognise that youhave a problem”, El Sayed Torky said.There is a need to change local attitudesamong officials and bureaucrats towardsforeign trade and investment, to create amore welcoming environment. Egypt hasbeen organising workshops, some inconjunction with the OECD, to identifyand outline the reforms that are necessary.It is hoped that this process will beextended to other MENA countries in duecourse.
Güven Sak commented that theMiddle East’s main problem is not resourcesbut rather a lack of organisation andinstitutional efficiency. Under thesecircumstances it might be better to focuson smaller, local initiatives rather thantrying to fix the big issues. In this respect,he highlighted the attempts of theTurkish Union of Chambers of Commerceand Industry (TOBB-BIS) to promotethe use of “business parks as centres ofexcellence” in the region as a means ofgetting around political barriers, includingin the Palestinian territories, and creatingthe necessary groundwork for fastereconomic development.
Güven Sak recalled that Forum 2006 wastitled “Balancing Globalisation” and notedthat the Middle East was an area thatdesperately needed balancing. “While thereis a need for institutional development toachieve this”, he said, “this takes time”. Forthe people of the Middle East, he warned,“there is no time”.
conditions could be useful. Widermembership of institutions such as theWTO and closer affiliation with the EUcould also help.
There followed a flurry of questions fromthe audience. One participant asked howTurkey’s accession to the European Unionmight help regional integration, to whichJohannes F. Linn responded that it couldspur change by providing a powerfulexample of the potential benefits ofintegration. Another participant asked forsuggested approaches to dealing with theproblems caused by concentration ofpolitical and economic power in countriesrichly endowed with natural resources, asthese seem also to suffer from badgovernment. Johannes F. Linn noted thatindeed resource-rich countries have failedto deliver good government more oftenthan other countries. ■
Yasuhisa Shiozaki
El Sayed Torky and Rainer Geiger
Bassma Kodmani
In response, Bassma Kodmani agreedthat this approach of seeking specificlocal solutions to local problems couldbe helpful, and acknowledged that thedialogue on this was promising andmay help to get around the politicalimpasse between Israel and thePalestinian Authority. Political barriersare an obstacle to economic reform in theregion, Bassma Kodmani insisted. In fact,political reform was necessary to alloweconomic reforms, she said, and thequestion was how political reform shouldbe approached in order to unblockdevelopment, and how much progress hasbeen made to date in the MENA countries.
Johannes F. Linn drew on experience inother regions of the world to make anumber of points about the process ofregional integration, a phenomenon whichhas been slow to take hold in the MENAregion. The gains from integration can besubstantial, but the process is morecomplex than simple reform of trade policy.It is often more importantly aboutimproving transport systems, reducingtransport costs and improving a country’sbusiness climate, administrativeeffectiveness and good governance.
Integration on a political level appearsunlikely to proceed rapidly in the MENAregion, Johannes F. Linn felt. Althoughthere are many regional institutions, theytend to be relatively ineffective, withmember countries generally puttingnational considerations ahead of regionalones. But minimising trade and investmentbarriers and ensuring good security
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