For despite signs of recovery earlier in 2014, the global economy remains stuck in the “repair shop”. In the OECD’s latest Interim Economic Outlook growth forecasts for 2014 and 2015 were revised down for the largest G20 countries–by nearly a quarter of a percentage point compared to our April forecasts. Six years afterthe start of the crisis, the output gap remains substantial–this is unprecedented, reflecting stubbornly weak demand. Two key cylinders of the global growth engine, trade and investment, remain particularly sluggish and are still not back to their pre-crisis levels. In the euro area, credit continues to shrink, creating a drag on demand. Furthermore, the recovery faces various headwinds, including geopolitical risks.
Such tepid growth means that addressing the jobs gap will be a huge challenge: over 100 million people are unemployed in G20 countries. Particularly worrying is the very high level of youth and long-term unemployment in many countries. Rising unemployment also contributed to the intensification of income inequality experienced during the crisis. Meanwhile, informality remains a drag on labour productivity in emerging economies.
With fiscal and monetary policy room very limited, structural reforms are the only way forward to address these crisis legacies, particularly their “scarring” impact as reflected in lower potential growth.
The OECD’s long-term growth scenarios emphatically warn that without structural reforms, growth will slow across the board until the middle of the century. G20 leaders have no choice: they must develop and implement an ambitious and feasible structural reform agenda.
That means doing all they can to eliminate structural bottlenecks to investment, competition, trade and jobs, as the Australian G20 presidency has rightly emphasised. This would also help unlock private investment, including in infrastructure, a priority of the Australian presidency.
To get unemployment down and boost inclusive growth, governments must invest in people’s skills, push activation programmes and equip people for the world of work. They must make labour markets more adaptable, affordable and productive for employers, and more dynamic and rewarding for employees.
Moreover, in a challenging demographic context, policymakers must clear away barriers to enable more people to join the workforce, particularly women. The Australian G20 presidency’s 25X25 target to reduce the gender gap in employment by 25% by 2025 would add some 126 million women to the G20’s workforce, boosting real GDP by between 1.2% and 1.6% over the period.
Reforms for boosting competition in product markets, facilitating trade and enhancing the efficiency of trade-enabling services are also essential.
These policy requirements are, by and large, captured in the 1,000 reform commitments from the National Growth Strategies submitted by G20 members. The OECD and the International Monetary Fund (IMF) were asked by the G20 to assess the impact of those strategies and whether their commitment can deliver an additional 2% growth by 2018. We also helped identify priorities that can yield the best results for each country. Our verdict is two-pronged: yes, the strategies can work, but implementation and leadership will be key.
Our progress on global tax matters shows how important leadership is. As US President Barack Obama remarked: “The work on tax is the G20 at its best.” Everyone understands that fairness and transparency in tax are fundamental for a thriving, trustworthy and inclusive economy. Major firms, for instance, should not be able to use the blind spots of the global economy to avoid paying taxes by gaming tax legislations and shifting their profits to low-tax jurisdictions. Governments will gradually stop these practices, thanks to the OECD/G20 Base Erosion and Profit Shifting (BEPS) project.
In September the OECD presented G20 finance ministers with the first package of measures agreed under BEPS, including country-by-country reporting by multinational enterprises, guidance for revising transfer pricing in the area of intangibles and a framework for taxation in the digital economy.
The G20 has enjoyed major advances in fighting tax evasion and non- co-operative jurisdictions as well. G20 finance ministers promptly endorsed the common global standard for the automatic exchange of information that we presented in September. Already more than 60 countries, including developing ones, have committed to implementing the Global Standard, and 45 countries have agreed to start implementation as early as 2017.
These measures are paying off: in five years, some €37 billion has been identified from voluntary disclosure programmes targeting offshore evasion involving just 24 countries. More is expected. This rapid progress shows what can be achieved when political leadership, close co-operation and technical excellence join forces for a common good.
The Australian G20 presidency must be commended for setting an ambitious agenda and I urge successor presidencies to maintain momentum. In today’s uncertain world, the G20 can provide the leadership needed to make the right choice to end the crisis and help forge better policies for better lives.
© OECD Observer No 300, Q3 2014