Delivered 10-October- 2017
It is an honor to speak about the need to make globalization work for everyone. We are actually at a context where there is a strong backlash against international economic integration, giving rise to protectionism trends, isolationism and populism.
This is the result of a growth model that did not deliver for all, and where those that were left behind are calling for something better.
The global economic context over the past ten years explains a lot of this trends, that resulted in Brexit among others, and that is also fuelling independentism movements such as the one we are seeing in Spain.
There is a paradox as this is happening when the outlook of the global economy starts to look better. there has been a gradual return to growth, with a broad based recovery. Global GDP growth is projected to increase to around 3.5% in 2017 and 3.7% in 2018 from 3% in 2016.
Trade is also picking up, with world trade growth predicted to be 2.4% this year, up from a weak 1.3% last year. Business and consumer confidence have strengthened. The momentum in the global tech cycle has increased, as firms upgrade their capital stock and switch to new technologies that could support future productivity growth.
The US and the EU are projected to grow both by 2.1% this year, up from 1.5% and 1.8% respectively last year. G20 countries as a collective are expected to grow by 3.7% this year and 3.8% in 2018, up from 3.2% last year.
However this growth remains precarious, and many global downside risks remain. For example, there is a significant lack in investment to sustain momentum. The recovery of business investment and trade still remains weaker than needed to sustain healthy productivity growth or to recover the output lost.
Wage growth has also been disappointing, keeping inflation at low levels. Productivity growth continues to be weak in advanced economies and has slowed in many emerging market economies. And high debt public and private debt, particularly in emerging economies is a sign of concern.
Demographic trends will add to this economic woe, as they change the face of society in many countries. Already in 2015, Japan was the demographically oldest OECD country with 47 individuals aged 65 and over for 100 persons of working age, compared to an OECD average of 28. And this ageing process is projected to accelerate.
By 2075 old age dependency ratios in China (66), Korea (79) and Japan (76) will all be above the OECD average (58).
But more than anything, 10 years of strong social and economic impact of the crisis is hard to overcome. Indeed, the increased inequalities of income, wealth and opportunities are still creating a difficult environment that is reflected in shaky political outcomes. This has lead to the greatest casualty that is trust.
Looking at the UK’s economy specifically, the picture is mixed. The OECD has projected slowing growth, with 1.6% projected in 2017 and 1% in 2018, down from 1.8% last year. There has been an easing of consumption and investment growth, and although the unemployment rate here has fallen to below 4.5%, weak productivity and real wage growth remain.
Although household disposable income has been growing slightly since 2014, due to improvements in real wage growth until recently and increases in the minimum wage, income inequality in the UK is above the OECD average. Also, labour productivity has remained largely flat.
Although there are these signs of recovery in the OECD area, the great impact of the crisis, and This economic hardship created many casualties, but chief among them has been trust. Trust between different groups of people, and trust in institutions has plunged to record lows, with public belief in governments in the OECD standing at just 42% in 2016 – it is even lower in the UK at 41%.
This has now spilled over into the social realm, provoking the rejection of global interconnectedness, trade, migration and technological progress.
We saw this in the recent UK referendum. Indeed, the UK has some of the largest regional disparities among OECD countries, especially when it comes to employment, where South East England ranks in the top 15% of OECD regions and North East England in the bottom half. In terms of labour productivity, Greater London is 56% more productive than the country average. And disposable household income in Greater London is 63% higher than in the North East of England. This correlates with regions’ voting for or against the EU, from which we could infer for or against globalisation.
So it is no wonder that people have voted for outcomes that surprised the pollsters, politicians and international organisations; people are angry about stagnation in their economic and social well-being.
Globalisation hasn’t worked for the vast majority of people. The benefits have not been fairly shared out across different income groups, and international elites have categorically failed to deal with this.
Since its inception in 2012, the Inclusive Growth Initiative I lead at the OECD has charted how those at the top have systematically pulled away from the rest of society.
In terms of income, the top 10% have captured the bulk of the gains from growth in recent years Tax data indicate that the richest 10% in OECD countries owning around half of all household assets, whilst the bottom 40% owns barely 3%. At the very top of the distribution, the top 1% holds a staggering 19% of total wealth!
On top, this has an economic cost. OECD work shows how the rise in inequality knocked 6 to 10 percentage points of GDP growth between 1990 and 2010 across a range of OECD countries including the UK, Mexico, Finland, Italy, and the US, by causing the bottom 40% to underinvest in their human capital.[i] Actually, I was happy to listen to Guy Rider who said that when the OECD framed the inequality debate as a growth debate the conversation changed.
And I don’t need to tell you that rises in migration flows to OECD countries have exacerbated things – last year 5 million people migrated permanently to OECD countries.
So it is wrong to blame people for voting this way, for being annoyed or for rejecting globalisation and retreating to protect national interests. It is not them, but us – the policy makers, the experts, the politicians – who failed to read the situation as it was.
We were too stuck to our outdated growth models, and in focusing on growth of GDP above everything else. We got confused by pursuing open trade and investment as an end, and not as a mean to improve the well being of people.
The OECD’s primary mission is to promote better policies for better lives. To do this, we need to change the growth model and focus on people’s outcomes.
In order to address the current situation, we can’t attempt to “fix”: globalisation as some are saying. We need to break from the past.
So at the OECD we’re trying to do things differently, and take a fresh approach. Our initiative on New Approaches to Economic Challenges is integrating the insights of other disciplines to feed a richer more nuanced policy discussion. And we are glad to see that one of the partners in our NAEC initiative is winning the nobel price today with behavioral economics.
We actually believe that, to arrive to better policy recommendations, we need to break the monopoly of quantitative economics to bring some other sciences that are as useful as this. Sociology, history, psychology, and the good all wisdom and good judgement that we used to rely on.
To address these mounting challenges, we cannot use the same old approaches.
For a start, we need to move away from simplistic models and assumptions, and growth metrics that only cover one dimension (material well being), and not all the aspects that matter for people’s well being, including education, health, employment, but also subjective wellbeing, trust, security, and healthy social networks.
We need to move from treasuring what we measure to measure what we treasure. In our neo classical economic models we used to say that things we cannot measure cannot be handled. We better come with a better answer, as important issues for people like fairness, trust and security have to be delivered independently of how you measure them. We have to listen more to people’s perspectives.
We also need to move away from simplifying and quantitative economic models that heralds equilibrium, representative agents and average outcomes and rely on more reliable analytics, like complexity systems thinking, behavioural economics, and distributional impact. This is what we neglected in the models, and what we got wrong. We need also a better balance on what the State can do, and what the private sector is supposed to drive.
When designing economic policies, we’re advocating putting equity and environmental considerations ex-ante, rather than continuing the “grow first and distribute later” model.
We need policies that help people, regions and firms to fulfil their potential and become granular.
And this will be compounded with the advancement of the digital economy, artificial intelligence and the internet of things. For example, we can no longer afford to have a risk-only approach to welfare. Safety nets are no longer enough.
We need to provide people with capacity enhancing assets that can serve as a launch pad in their lives and with education systems that allow individuals to change courses during the length of their lives.
And according to our Inclusive Growth Agenda, we need to tackle the growth and productivity challenges (as productivity growth has remain flat in almost OECD countries, and the UK not being the exception), with policies that also promote inclusiveness. We call this the inclusiveness-productivity nexus. The idea is to invest in the bottom 40 percent with the aim for them to become more productive and have a more self-fulfilling lives. This includes laggard regions, or groups that accumulates disadvantages.
It also includes creating a business environment that favours competition, innovation, and that prevents a winner takes all approach that is emerging in the platform economy in the digital transformation.
The State has a role to play to ‘crowd in’ financing in young and innovative sectors and in investing in basic R&D that will see positive spill-overs into countless other domains. Policies which support the diffusion of innovation through the economy, ensure a level playing field, enable small companies to access finance, technology and high-quality skills will also be essential.
Indeed, the rapid spread of digital technologies has the potential to profoundly enhance inclusive growth if harnessed correctly.
Access to cheap, reliable broadband and related internet applications can open up access to a whole array of digital goods and services to previously marginalsed groups, and greatly reduce their cost.
Bridging digital divides that persist amongst urban-rural areas and different social groups is vital.
For example, in 2014, only 71.8% of British 65-74 year-olds used the internet in comparison to 98.8% of 16-24 year-olds.
For the UK specifically, priorities to increase inclusive growth might include reducing the gender pay gap, which at 17.1%, is larger than the OECD average (14.3%), although it has narrowed in recent years.
This said, the UK ranks above the OECD average when it comes to women in management positions, women in parliament, and women in leadership in central government.
Elsewhere, the UK needs reform to unleash productivity. In 2014, the youth employment rate in the UK stood close to 50% and exceeded the OECD average by nearly 10 percentage points, but the UK slightly lags behind the rest of the G7 in terms of education and skills.
Reducing labour market mismatches of youth in employment would improve labour efficiency. Policy focus should be placed on supporting requalification and lifelong learning.
More generally, in OECD countries we need targeted policies to support those who have been left behind, helping them to access early childhood education and care services, ensuring the tax system is fair and progressive. Internationally, stronger global tax governance, building on OECD-led initiative like BEPS and AEoI, is also essential to ensuring that every company and individual pay their fair share.
Crucially, we also need to face up to a number of significant cross-border challenges concerning migration as I mentioned, international competition issues, in areas relating to the mobility of tax bases, labour rights and regulatory standards.
The world is highly interconnected with the growth of GVC and cross border investment, so more and more we need global agreements and standards to address these challenges together. We need a rules based global economy, that prevents episodes such as the Rana plaza to occur.
Indeed, we mustn’t shy away from international cooperation and globalisation; the same dynamics that arouse feelings of vulnerability and uncertainty can provide answers to global challenges; for example fighting tax havens or climate change. We have a roadmap with the SDG, but we need to strengthen up our efforts.
There is no question that we have to do away with globalisation, but rather choose the type we want, one that puts people at the centre. And we need to perfect the rules of the game and ensure that globalisation is based on international rules that are respected.
It’s clear that patching things up or partial solutions isn’t going to work, we need to take a hard look at the way we do things. The moment is daunting, and therefore we need bold solutions. And we need to remain humble and learning from each other if we are to succeed. And we need daring, innovative solutions to ensure we can save all that is good about globalisation and we can make it work for everyone.
 OECD (2014), OECD Economic Surveys: United Kingdom, http://dx.doi.org/10.1787/eco_surveys-gbr-2015-en