Policy shifts also suggested for South Africa

Globally, the strengthening of economies for the future in key areas such as jobs, competition and taxation must now replace crisis management, according to the Organisation of Economic Co-operation and Development in its latest “Going for Growth” report. Governments already have begun removing some of the emergency measures brought in to save the global economy from collapse. They must now ensure that the policies which remain – and new action in the months ahead – boost growth and living standards for the long term. The report also offers important perspectives on policy options for South Africa.

“Going for Growth” finds that prudential banking regulation can be toughened without undermining competition. Strong supervision even appears to reduce the cost of credit for firms and households, as it helps to level the playing field. This is yet another reason why governments should resist allowing current financial sector reform proposals to be watered down.

The report says that unemployment will persist at higher levels than before the crisis, while investments will be riskier as the cost of capital rises. The recession has eroded the potential output of OECD economies over the medium term. The report estimates a permanent gross domestic product loss of 3% on average across these countries.

“The global recession has left deep scars,” said OECD secretary-general, Angel Gurría. “The only way to begin healing them is by taking effective action now to help our economies recover their lost potential.”

For each OECD country, the report identifies five priority areas for reform in order to maintain decent standards of living and strengthen economic activity. Common to many is the need for urgent action on jobs, competition and taxes. In the current economic climate, the benefits could not only boost long-term living standards and speed up job recovery, but also help strengthen public finances.

One of the greatest risks is that people with weaker ties to the labour market – such as older workers, youths, those on low incomes or single mothers – will stop looking for jobs. Governments need to boost spending on training and job searching at this critical time.

But they also need to provide the right incentives to the unemployed. This means resisting pressure to relax eligibility criteria for social transfers, the report says.

In a number of European countries, short-time work schemes avoided unnecessary layoffs during the recession. However, if left in place too long, they tend to protect unviable jobs and discourage the creation of new, more productive jobs. Credible time limits should be put on such schemes, the report suggests.

Action to enhance competition should not wait for a stronger recovery. Reducing obstacles to entering new markets, for instance in retail trade and liberal professions, would stimulate the creation of new businesses and boost jobs. This further would deliver incentives to improve efficiency, including through the weeding out of underperforming firms.

The report welcomes the phasing out of support to car manufacturers through “cash for clunkers” schemes across OECD countries.

Some of the tax measures taken in response to the crisis could prove beneficial to long-term growth and should be left intact, says the report. For instance, tax credits and direct grants for research and development can help counter a slump in innovation and, if well focused, can promote green initiatives. However, because the crisis has wreaked havoc with public finances, some taxes that were cut, will need to be raised.

The report recommends in general shifting the composition of taxes away from income and toward consumption and land. For instance, to strengthen growth, the United States could introduce a form of value-added tax, potentially making up for the loss of tax revenue as a result of extending previous income tax cuts to the majority of taxpayers.

For the first time, “Going for Growth” identifies priority reforms required to sustain strong growth in Brazil, China, India, Indonesia and South Africa – the five countries with which the OECD has developed a policy of  “enhanced engagement”. Beyond strengthening social welfare and education systems, the report recommends relaxing highly stringent regulations in product markets, strengthening property rights and contract enforcement, deepening financial markets, and reducing the size of informal sectors.

For more information, visit: www.oecd.org/goingforgrowth