26 October 2016
Investment in high-quality vocational education and training and work-based learning is essential in tackling unemployment. Photo: Bloomberg
Investment in high-quality vocational education and training and work-based learning is essential in tackling unemployment. Photo: Bloomberg

How to mitigate slowing global growth

As the deepest economic crisis of our lifetimes stretches into its seventh year, most countries in the Organization for Economic Cooperation and Development are continuing to underperform.

This year, gross domestic product growth in the world’s advanced economies is expected to average 2 percent, compared with 3.2 percent worldwide.

And next year is shaping up to be no better, with output in the OECD growing by 2.5 percent while the rest of the world’s GDP expands at a 3.8 percent rate – close to the precrisis average.

But the long-term economic prospects of the global economy as a whole look gloomy.

As societies in many OECD countries age and catch-up growth in large emerging economies begins to wind down, global GDP growth is expected to fall from its annual average of 3.6 percent in the 2010-2020 period to an estimated 2.4 percent in 2050-2060.

This slump may be inevitable, but it can be mitigated.

Implementing policies to facilitate and reward long-term investments will be key to exiting the current crisis and boosting the world’s growth potential.

Investments, both public and private, are needed to foster green growth, support innovation and entrepreneurship, contribute to closing the inequality gaps that have widened during the crisis, and help build the skills that are essential for more resilient economies and more inclusive societies.

Although meeting these needs will require transformational changes in the behavior of governments and investors, the payoff will be significant.

In short, as we argued during the OECD forum and annual ministerial council meeting last week, this time we need to promote investments that focus on people and the planet.

The list of structural challenges facing countries around the globe is a long one.

But efforts to overcome at least four – high unemployment, an aging workforce, climate change and infrastructure deficiencies – would benefit significantly from policies promoting long-term investments.

Addressing the unemployment crisis, which has been particularly burdensome for the young, will require not only a strong recovery but also a renewed focus on the development of skills.

Investment in high-quality vocational education and training and work-based learning will be essential.

These types of investments continue to be beneficial throughout a worker’s life as exposure to new skills and knowledge allows him or her to adapt to an evolving technological and business environment.

Empowering today’s workers will also help meet the challenges resulting from aging populations.

Moreover, an increased focus on long-term investment will help resolve the conflicts traditionally associated with addressing climate change and building infrastructure.

One requires cuts in the emission of greenhouse gases; the other has tended to promote the combustion of fossil fuels for transport and energy.

The solution is relatively simple, provided the presence of political will: by putting a price on carbon and repealing policies that incentivize fossil-fuel consumption, investments can be channeled into the creation of a low-carbon economy, including the necessary clean-energy infrastructure.

In order to encourage private investors to pursue long-term, responsible projects, governments need to promote consistent policies and frameworks.

In addition to immediate uncertainties, investors are being held back by a shortage of incentives and a surplus of factors that reduce returns.

These include restrictive regulations that reduce firms’ ability to undertake new activities or enter new markets, especially across borders.

The OECD’s updated Policy Framework for Investment provides a blueprint for the promotion of investment and responsible business conduct.

Governments will also have to facilitate the participation of institutional investors.

The challenge of long-term investment cannot be resolved without attracting more diverse and private sources of finance.

In 2013, institutional investors in OECD countries alone held more than US$57 trillion in assets, and pension funds collected about US$1 trillion in new contributions.

Tools that could be used to leverage institutional investments include public-private partnerships to develop clear and transparent project pipelines for major green infrastructure projects, green banks and green bonds, and instruments that mitigate risk and enhance the availability of credit.

Regulations for international accounting and funding will have to be examined to identify policies that inadvertently discourage institutional investors from putting their resources into longer-term, illiquid assets.

Finally, public equity markets will have to be strengthened.

Savings must be channeled to firms that need capital for innovation and sustainable job creation.

Today, however, the quality of corporate governance frameworks worldwide is challenged by the growing complexity of investment chains and the dominance of passive and short-term investment strategies.

In a globally interdependent world, a better financial and investment system cannot be achieved on a country-by-country basis.

There may be no one-size-fits-all model for economic development, but, without global standards and complementary regulations, the long-term outlook for the world economy will remain bleak.

Copyright: Project Syndicate

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Secretary-General of the OECD

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