(At the occasion of OECD’s 50th Anniversary and Austria’s 50th year of OECD membership I delivered the following remarks at a conference organised by the Austrian Federal Chancellory on July 11, in Vienna.)
During the past 50 years, OECD has followed a decidedly (neo-)liberal direction in its economic policy advice, in spite of the fact that it has adjusted flexibly to new challenges, like its recent occupation with large emerging countries, and the many activities outside the economic policy field. OECD sees itself as an important think tank for orthodox Western economic policy advice. It has recently been charged by the G-20 (the possibly emerging, if already slightly fading governance structure for the world economy) with important task, thus could assume a wider role, if…..
OECD’s economic policy paradigm has been singularly supply-side oriented. “Structural” reform is seen as the growth panacea. During the most recent crisis OECD has moved crisis strategies, demand-boosting programs and exit strategies into the center of its proposals, and thus had its “15 minutes of Keynesianism” (copyright Andy Warhol). But since then it has reverted to its “structural reform” paradigm. During a recent presentation of its flagship publication “2011 Going for Growth” in Budapest, Secretary General A. Gurria said: “Structural reforms are needed in order to turn the present policy-driven recovery into self-sustained growth”. The Paris economists have too quickly gone back to their trodden paths. They seem to have once more forgotten that the economy consists of supply and demand, that government activity is not bad per se, that “markets” are by no means all-knowing and self-correcting.
Good Economic Policy Requires More than Structural Reform
I think that OECD’s paradigm has two major flaws.
The first one ignores the lesson from the crisis insofar as it does not reflect the weaknesses of this finance-driven model. Global imbalances, increasing income inequality between and within countries, an self-serving and uncontrolled financial sector, the shifting of the risks generated by its activities to public and private households – all these elements have no place in “Going for Growth”. On the contrary, the report speaks in favour of reforms of the financial markets, in order to enhance the “sophistication and depth of financial markets in emerging economies” – as if this sophistication had not caused the largest crisis since WWII. Emerging countries luckily and by design escaped most of this crisis, even if they felt their effects as a result of falling demand, the absence of external financial flows and also the effects of rich countries’ strategies to combat the crisis, especially the quantitative easing – which again flooded their countries with return-seeking cheap money.
In my assessment, OECD economists (and those of their member countries whose task it is to guide the secretariat) see the crisis as a one-time glitch, after whose repair “business as usual” is in order. This shows a complete lack of analysis, inhowfar OECD’s own prescriptions might have contributed to the crisis, and whether in the light of the new globalized economy it would not be appropriate to re-evaluate OECD’s business model. The recent occupation with emerging countries could be a starting point to consider non-orthodox thinking outside the box. After all, the crisis started and was caused by Western countries, not by emerging ones.
We do know that emerging countries in many respects went their own way and have become more and more allergic against imposed “good advice” about how to run an economy. They have, among others, shielded their economies by re-introducing capital controls of various kinds, they have thus increased their own monetary policy effectiveness, they have engaged in (OECD-shunned) industrial policy, and they have used their governments frequently in ways which characterized intervention in OECD countries during the first 25 years of OECD’s existence, but have since gotten a bad name. OECD should and could learn from that that economic policy advice needs to be multi-directional, adapted to social, historical, geographic contexts – instead of “one size fits all” considerations.
The second flaw is OECD’s unfettered growth fetishism. The failing of the Doha Round, of climate change negotiations, the nuclear disaster in Japan, the social “revolutions” in the Mediterranean area, but also mass demonstrations against austerity programs in the rich countries, all these show that maximization of GDP for many citizens bring more risks and reductions in their wellbeing. It does seem that finally the 1972 “Limits to Growth” ideas of Forrester-Meadows hit home. The destructive effects of economic growth in terms of climate change, scarcity of water, destruction of the natural environment, scarcity of resources, the increases in physical and mental illnesses have become much more than “externalities”, i.e. side-effects, of growth, but rather systemic. The impressive empirical study “The Spirit Level” (2010) by Wilkinson/Picket gives evidence that once a per-capita income of around 30.000 $ is reached, “happiness” or wellbeing does not increase any more with growth and that a large number of social and health indicators increases – and is negatively correlated to income inequality. While it was possible during earlier phases to ignore these “negative systemic effects”, they have become real threats to mankind’s further existence. In addition, they are even more unevenly distributed than income, such that the poor not only have little income, they also suffer inordinately from water scarcity, illness, environmental degradation and climate change. Should policy not attempt to combat these severe problems than promote further growth?.
During the past years, OECD has studies health systems, pension systems, education systems – a valuable contribution. But these are not seen primarily as constituent for citizens’ welfare, but rather as building blocks for further growth. Sectoral policy advice is geared towards generating more growth. The problems of increasing income inequality are not being addressed. Wages are seen primarily as a cost factor, not as the most important component of demand, and so on, and so forth.
This reductionist viewpoints are not adequate any longer – and they ignore the natural and social limits to growth. Thus, sustainability would need to be put into the center of OECD’s policy advice.
OECD is not the only multilateral institution clinging to its business model. But, to give an example, there are others. IMF an institution very heavily criticized by critical analysts and especially emerging and developing countries, has conducted an intense evaluation of its role contributing to the crisis. As a result, it has changed its policy advice, has allowed capital controls, has given a new assessment to the role of the state. Its former MD has stated that the age of the (neo-liberal) “Washington Consensus” is over, that the risks of financial globalisation for the contagion of society need to be taken into account. As a result, the IMF has emerged during and after the crisis stronger than before (notwithstanding the highly scandalous activities of its former MD).
If OECD wants to strengthen its position as global economic policy adviser, it will also need to re-evaluate its role and abandon its reductionist policy advice. If it can reveal itself as a “learning institution”, it can play an important role during the next 50 years. I sincerely hope for that. OECD’s new strategy paper for the next 50 years proposes all these right things: given its past history, I remain very doubtful that they will come true. But hope remains: It will be up to the 34 members of OECD to steer the OECD Secretariat into this direction.