Economic recovery means planning for the future, says OECD

The report reflected a mix of frustration — many of its policy recommendations were made to member states this time last year — and steely optimism in the face of an economic disaster OECD economists hope will make governments more receptive to their calls for reform.

“The current crisis offers governments the opportunity to combine emergency action with the important structural reforms needed to improve long-term growth and resilience in our economies,” said OECD secretary-general Angel Gurría. With nearly all 30 OECD member countries taking emergency measures to stimulate their economies, Gurría noted that the financial upheaval could give governments a chance to lower trade barriers, shift tax burdens away from workers and invest in infrastructure.

In a marked change from last year's analysis, which recommended that “government policies do not get in the way of productivity and employment,” at the release of this year's report there was little talk of anything but government oversight and reform. “There has obviously been major rethinking” on issues of financial regulation, Gurría told reporters.

OECD chief economist Klaus Schmidt-Hebbel warned against politically motivated protectionist policies that could hamper future growth, saying import barriers in the 1930s helped cause the Great Depression, and early retirement policies in Europe in response to unemployment in the 1970s ultimately lowered living standards.

“Under no circumstances should these mistakes be repeated now,” he said.

Yet even with the global economy grabbing headlines, OECD analysts fear their advice will be dismissed as governments desperate to stave off unemployment and reassure their citizens make financial policy decisions that could worsen the crisis in the long run.

“What you want to avoid is to take decisions today because they look expedient, that will make life very difficult in three years' time or five years' time,” Gurría said, adding that present difficulties should not be used as an excuse to put off the kind of economic soul-searching and policy reform experts agree many developed economies need.

The “Going for Growth” report uses GDP as it's main indicator of economic well being, and while GDP measures the production of goods and services, it does not reflect the effects of production on the welfare of the population. Many economists believe that avoiding climate change and lessening the impact of carbon emissions on generations to come will be costly, increasing welfare but limiting GDP growth.

The OECD report contains only a brief appeal to governments to continue their efforts to reduce greenhouse gas emissions, even if these efforts do nothing to raise GDP. “Staying on the path of avoiding climate change is a very important element of future growth,” Gurría told MediaGlobal, adding that the economic crisis must not be used as an excuse to avoid dealing with environmental issues.

Keeping climate change on the list of priorities will be a challenge, Gurría said. “How do you justify — with a very tough audience these days — how do you justify spending on certain things which are for the next twenty or thirty years, rather than for tomorrow? You have to make a case that the cost of inaction is higher than the cost of the action that you're taking today.”

Climate change reforms may not result in short-term economic gains, but their importance must not be underestimated, Schmidt-Hebbel told MediaGlobal. “If you don't invest now, there's a high degree of certainty that in the very long term, GDP will decline because of the consequences of climate change,” he said.

But is combating climate change compatible with the idea of “Going for Growth?” Some economists think a boom in “green” technologies could stimulate economies while helping keep climate change in check, but others aren't sure that fixing the planet is possible without diminishing GDP growth— a figure that has become synonymous with prosperity.

“While economies can reduce the intensity of their greenhouse gas emissions by relying on better technologies, they cannot completely de-couple economic growth from the environment,” Smita Brunnermeier, Professor of Economics and Public Affairs at Princeton University told MediaGlobal.

Encouraging the consumption and production that allows economies to function can be done with climate change goals in mind, but recovering from a global recession will have an environmental price.
Brunnermeier noted that the American economic stimulus package promotes investment in clean energy, but it also allocates billions of dollars for road construction and other projects that will produce large amounts of carbon dioxide and other pollutants.

Ultimately, failure to act on climate change by the industrialised countries that make up the OECD will hurt the world's least developed countries most. “What happens with climate change?” Gurría asked. “It really cuts across every single country — and more importantly, all the countries that are not here in this report.”

Article published courtesy of MediaGlobal