OECD: Reform Failure Could Sink Growth

By Anthony Fensom

February 24, 2014

G20 finance ministers pledge to boost global growth by 2 percent or more over the next five years. 

The world economy could sink into a “low-growth trap” if policymakers fail to bite the bullet on reform, the OECD has warned. The message came amid a new pledge by the Group of Twenty (G20) to boost global growth by at least 2 percent above normal over the next five years.

Launching the Paris-based organization’s “Going for Growth” report at Friday’s G20 finance ministers meeting in Sydney, Australia, OECD Secretary General Angel Gurria said only ambitious reforms could tackle rising unemployment and inequality.

“Signs of a broad-based recovery are becoming more tangible, but governments of advanced and emerging economies now face the risk of falling into a low-growth trap,” Gurria said at a launch event in the harbor city.

“Slowing productivity growth and persistently high unemployment in many advanced economies cry out for further reforms. The vulnerability of many emerging-market economies to the ongoing tightening of monetary policy and the cooling of the commodity boom serves as a reminder that the case for structural reforms is also strong there,” he added.

Despite praising the reform efforts of countries in the southern eurozone, including Greece and Italy, the report pointed to the need for further action amid concern of a “structural downshift” in growth rates compared to before the global financial crisis (GFC).

“Many emerging economies have yet to launch comprehensive structural reform agendas, and should implement wider efforts to improve education, address physical and legal infrastructure bottlenecks and bring more workers into formal sector employment,” the report said, pointing to Mexico as a standout for its reform efforts.

Among the 34-nation OECD, countries facing rapid population ageing, including Japan and South Korea, were urged to speed up integration of women workers into their labor markets, while both advanced and emerging economies should “boost competition across their economies.”

Reform Tasks for Asia

The OECD’s report contained specific recommendations for its larger members including in Asia, which could help strengthen the hand of reformists.

For Japan, the report said priorities for the world’s third-biggest economy comprised “boosting competition in service sectors, bringing more women into employment and reducing duality in the labor market between regular and non-regular workers”. Other tasks included easing barriers in the services sector; expanding social security coverage and training for “non-regular workers”; shifting the tax burden from direct to indirect taxes; and reducing agricultural protection.

However, the OECD noted progress by Prime Minister Shinzo Abe’s administration in joining the Trans-Pacific Partnership and engaging in trade agreements, such as with the European Union; hiking the consumption tax; reducing waiting lists at public childcare centers; and extending public pensions to non-regular workers from 2016, a measure that would also help reduce income inequalities.

Neighboring South Korea was praised for achieving “robust economic growth relative to other OECD countries” since the GFC, along with recent reforms including the 2012 free trade agreement (FTA) with the United States and social security measures, such as the expansion of childhood education subsidies and increased job training for non-regular workers.

Nevertheless, the OECD said South Korea’s growth prospects were “burdened by high levels of household debt and, in the medium term, rapid population ageing”. Similar to Japan, Asia’s third-largest economy was urged to boost competition in the services sector and promote greater female participation in the workforce, with a previous OECD report indicating equal employment could add a percentage point to growth each year.

Among other developed economies, Australia was urged to boost investment in “infrastructure and knowledge-based capital” as well as raise labor force participation to ensure recent solid economic performance continued following the cooling of the mining boom. For neighboring New Zealand, the challenge included addressing a “high variance in educational outcomes, which reflects a substantial underachievement by some population groups”.

Emerging Asia was not ignored, with Indonesia urged to enhance productivity growth through “a wide range of structural reforms to address infrastructure bottlenecks, widespread informality, shortages of skilled labor and high barriers to competition”. Measures such as providing better access to high-quality education were encouraged to help achieve its goal of becoming one of the world’s 10 largest economies by 2025.

Similarly, Indian policymakers were also given a reform agenda that included addressing “infrastructure shortfalls, pervasive state control in business activities, and unequal access to quality education” as well as reforming “overly stringent labor regulations”.

Australia: Target $2 Trillion

Australian Treasurer Joe Hockey hailed a commitment by the G20 finance ministers and central bank governors at the Sydney conference to “grow our collective GDP by more than 2 percent above the current trajectory over the next five years…[generating] an extra $2 trillion in global economic activity and tens of millions of additional jobs.”

Hockey said in a statement that each country would deliver a “comprehensive growth strategy” to meet its commitment as part of November’s G20 summit in Brisbane.

“There is no room for complacency. Each country will play a significant part in achieving our common target,” he said, citing the need for “concrete actions across the G20 to boost investment, trade, competition and employment opportunities, as well as getting our macroeconomic fundamentals right.”

The G20’s commitment to a specific target was cited as a victory for Australia as the 2014 host of the grouping, despite reports that Germany and India considered such a concept “outdated.”

The difficulty of making targets was admitted by the OECD itself in an earlier study, in which it noted a comprehensive failure by economists to forecast the GFC as well as over-predicting the strength of the recovery – a “groupthink” also suffered by forecasters at the International Monetary Fund and other major institutions. As an example, the report noted the OECD forecast in May 2010 that the U.S. economy would expand by 3.2 percent in 2011, compared to the actual 1.7 percent increase – a major miss for policymakers.

Nevertheless, U.S. Treasury Secretary Jack Lew described the G20’s new commitment to a tangible target as a “significant” development, compared to previous talk fests.

“As we look across the world, we see a global economic recovery but one in which activity remains weak and global demand is still deficient,” Lew was quoted as saying by the Sydney Morning Herald.

“That’s why the decision in Sydney to focus on growth strategies is so significant.”

Talk may be cheap, but policymakers have at least been handed a clear target to present to their respective governments. For the OECD and the G20, the clock has already started ticking.