OECD Ministerial Meeting
02 June 2016
It is a great pleasure to be here and be afforded to provide some comments to the important discussion that has taken place. As the discussion has been rich, as well as shown important convergence in views, I will limit myself to make some remarks about the topic from a more global perspective.
Indeed, many of you have professed to the rising challenges of inclusiveness and of divergences in productivity domestically. This is certainly true. What is also true is that exactly the same thing is happening globally. And this particular aspect, and what to do about it, I hope to add to your debate.
My main messages of what I think needs to be done can be summarized in three "Rs":
1) REINGNITE GLOBAL TRADE AND INVESTMENT GROWTH:
To fully appreciate the power - and importance - of trade and investment, just look to our recent past. International trade and investment has had a formidable expansion:
Trade as a percentage of world's GDP went from 9.4 per cent in 1970 to 24.4 per cent in 2014. Today's world GDP is highly influenced by international trade.
Exports from developing countries now account for half the world's total.
Even the least developed countries (LDCs), have seen an almost fivefold increase in merchandise exports.
As a result, many developing countries are catching up with richer nations: but far from all, or even the majority of developing countries. For the poorest countries among us, their inclusiveness in global trade and investment remains elusive.
And this should be a matter of serious concern. If poverty is to be eliminated by 2030, as set out by the Sustainable Development Goals (SDGs), the poorest countries will need to beat China's best growth rates for the next 15 years.
And they will have to do so in a far less favourable global economic environment.
As we have heard, global trade growth remains sluggish. In fact, if the current pace of tepid trade growth continues for the next few years, this decade will have had the slowest growth rate of trade since WWII. Add to that the slump in commodity prices, rising debt levels, growing balance of payment problems, slow-down in emerging economies, volatile capital markets, just to name a few. All of this undermines fragile economic growth in already vulnerable developing countries. And, frankly, even among those poorer nations that are showing growth, a big question-mark remains: is this fuelled by consumption, rather than increased production and productivity.
So, we have to reignite global trade; for the sake of all countries -poor, middle or rich countries. Trade and investment is a source of income and opportunities and it is essential for the implementation of Agenda 2030.
2) REALISE THE UNTAPPED POTENTIAL:
Of course, we all agree on the basic principle of "do no harm". And there are a lot of remaining barriers out there, including new measures imposed after the financial crisis, that warrant to be dismantled. But we must also look for the low hanging fruits and initiatives that can add most value to trade growth. Let me be concrete and give a few examples:
Average world tariffs are around 5 per cent ad valorem, but average trade costs are about 10 per cent.
In Africa the average customs transaction involves 20-30 different parties, 40 documents, 200 data elements (30 of which are repeated at least 30 times) and the re-keying of 60-70% of all data at least once.
According to a study from 2009 for every $1 spent on trade facilitation in Aid for Trade, the country's trade volume grows by $6.37 per year.
If Internet was an economy, it would be the 5th largest in the world. And the fastest growing.
B2C e-commerce has been estimated to 1.5 trillion USD, while B2B e-commerce amounts to staggering 15 trillion USD. In recent years, e-commerce has grown four times faster than GDP. This has created opportunities that were once thought impossible.
We need all to become much better in exploiting the full potential of e-commerce to promote economic growth, but also to address the significant divides that remain. While more than 70% of the UK already buys things online, the equivalent share in countries like Mexico and South Africa is below 5%. In most other developing countries, the shares are even lower.
Significant barriers remain in the areas of transport, logistics, legal frameworks, payment systems, skills, and awareness.
Services are the "grease" that keeps the engine of an economy moving. As such, services are key drivers of productivity.
Regardless of an economy development level -- whether commodity-dependent or manufacturing-based -- services play a critical role.
In Africa the growth in services has been promising, at more than twice the average global rate between 2009 and 2012. Basically, the much claimed "Africa rising" is a services phenomenon.
The services sector now accounts for 32 per cent of total employment on the continent.
Though Africa remains a marginal player in global services trade, with an export share of merely 2.2 per cent (US$271 billion in 2012), the sector represents a vital source of export revenue and future growth. For example, most of the countries that have managed to graduate from LDC status, or are in the process of doing so, have done it on the back of tourism services.
But, frankly, this growth was not thanks to governments, but rather DESPITE the measures and actions that governments have in place. So imagine what the right policies could offer in terms of prospect.
Regional integrationThere is also huge untapped potential in regional trade and regional market integration, especially in Africa and Latin America.
In Africa, around 14% of total trade is traded regionally. Add informal trade and it gets to around 25%. And in Latin America, intra-regional trade is around 25%. Compare that to East Asia with above 50% of intra-regional trade.
This matters. Regional value-chains tend to be stepping stones for global value-chains. For example, the value-addition in African products traded between countries on the continent is higher than in the products that Africa exports to EU, US or China. Also, regional integration is a good way to get proper scale economies, thereby ensuring much more productive companies that are better at weathering international competition.
But strong regional trade growth, as Africa and Latin America need, presupposes regional integration. This presupposes proper connectivity of peoples, capital, business and markets. And, for that, we need to, much more seriously, reduce regulatory divergences and tackle trade cost on those two continents.
InvestmentThere is a close nexus between trade and investment. FDI can build productive capacity and pave the way for new export niches. FDI is also the key driver of regional and global value chains. So we need to make sure that FDI keeps flowing.
The good news is that FDI recovery has been unexpectedly strong. Preliminary figures show that global FDI in 2015 reached 1.7 trillion, an increase of 36% with respect to 2014. This is the highest level since the global economic and financial crisis of 2008-2009.
But much of the rise in FDI flows came from company restructuring, NOT green field investment or new investments in production. Also, FDI flows are expected to decline in 2016, reflecting the fragility of the global economy, volatility of global financial markets, weak aggregate demand and a significant deceleration in some large emerging market economies.
We need to make sure FDI flows do not falter. They are vital for inclusiveness:
FDI today represents 40 per cent of external financing, making it an important potential source of financing for development.
And there is an annual investment gap of USD 2.5 trillion dollars that separates us from the achievement of the SDGs.
My final "R" is as follows: 3) REBALANCING
Trade and investment can be a silver bullet for prosperity, but it is not - certainly not automatically - a silver bullet for inclusiveness or environmental sustainability. In short, trade needs complementary policies. This is well known. Yet, far too little attention has been given to these accompanying policies. This has to change. Lip service will no longer do. We have to take the accompanying policies far more seriously.
To be concrete:
We need to pay more emphasis to the policies required to maximise positive effects of trade and investment, and ensure that all in our societies get access to these benefit. This requires greater attention to, inter alia, competition policy, consumer protection, skills development and good governance.
We need to acknowledge and more effectively handle the negative effects - indeed, abuses - of increasingly global trade and investment, such as illicit financial flows, profit shifting and tax avoidance, illicit trade and trade in sub-standard products, export processing zones as vehicles for relaxation of taxes, labour rights and environmental protection, etc. We need to better guide markets to societally favourable outcomes, through tougher reporting requirements on companies; and
We need to compensate those in our societies that are negatively affected by increased openness through social protection schemes, retraining and labour market policies: Complementary policies are needed to ensure that the groups that are negatively affected by trade are compensated and helped to get back into the productive sectors.
This is an area of opportunity; the scope to do more is vast. Let me give you an example from one of the nations that trade the most, the USA1:
The Trade Adjustment Assistance (TAA) program has a budget of about $664 million-- roughly 0.004 per cent of gross domestic product.
Or in other words, one dollar of every $25,000 in income generated by the United States goes to help people who have been hurt by globalization.
These people do not receive the cash directly; these people have to hope that the program - which offers retooling, retraining, and relocation, among other services - will aid their transition to new jobs.
Finally, we need to take head-on the negative discourse around globalization.
There are voices of discontent that talk about trade as the problem, not as the solution. These voices enjoy the comfort of an opinion that has not been confronted to the facts. We need to set the facts straight: Trade has been historically an essential element in the development of the North, and also in the more recent emergence of the south; as such, trade has played an important role in the process of lifting hundreds of millions out of poverty - around the world.
Trade has been, and continues to be, a critical source of income and opportunity. And it is fundamentally pro-poor: A recent study estimated that median income earners in the US would lose 29% of their purchasing power if the country was closed to trade, whereas the poorest segment of the population, who spend proportionately more on goods that are traded, would lose as much as 62% of their purchasing power. If you wanted one solid proof of why we all need trade, and why the poorest among us need it the most, this is it.
1 Foreign Policy, Economics has failed America, by Daniel Altman
