A strengthened Global Economic Governance: Part 2 Economic challenges

Pedro_SOUSABy Pedro Sousa our Vice President,

The second in a series 4 articles entitled ‘The global economic disorder calls for a strengthened Global Economic Governance’


“The political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty.” – John Maynard Keynes



Stemming from the Global Financial Crisis of 2008, we are witnessing persistent global imbalances and a financial system failing to make productive investments that create much needed employment, increase productivity, and redeploy surpluses to maximize social and well-being returns. The result of some poor policy decisions has been increased public indebtedness in many countries, as the collapse of GDP hinders government revenues. Moreover, underinvestment in both the public and private sector has created a generation of young people who have spent years idle and increasingly alienated instead of using their skills and increasing their productivity. The increase in inequalities and the challenges of ageing societies in many parts of the world will raise the alarm even higher. Concern about the risk of future economic catastrophe in the wake of the financial crisis is still playing an important role. Emerging-market economies resisted better during the crisis, but growth has been less impressive in the last year or two and there is a hint of rising instability in these markets. This is reinforced by lingering fragility in the Eurozone.

In spite of deep and extremely hard fiscal efforts, many OECD countries are still dealing with the heaviest legacies of the crisis: low growth (forecasted at 1.9% in the OECD in 2015 and 1.4% in the euro area); stubbornly high unemployment levels (forecasted to remain around 7.0% in the OECD in 2015 and around 11% in the euro area)[1]. A return to the pre-crisis growth path remains a hard task for most countries. Other countries also share many of the same challenges: high long-term unemployment, slowing productivity, and falling labour force participation. Weak demand undermines potential growth, which in turn further depresses demand, as both investors and consumers lose confidence. This can lead to much talked about persistent stagnation or persistent jobless growth in which economies exiting recessions demonstrate economic growth while merely maintaining or decreasing their level of employment. It goes against the ambitious commitments made by advanced economies of the G20 in the context of the Brisbane Action Plan.

Inequality is undoubtedly one of the major challenges we are currently facing. It has been accelerating since the crisis in many countries. The fact is that inequality has increased in the last 30 years with wage gaps widening in a large majority of OECD countries and remaining on a high level in many emerging economies. Today, the average income of the richest 10% of the population is almost 9 times that of the poorest 10% on average in the OECD area, as opposed to 7 times in the 1980s and 8 times in the 1990s[2]. This was a period of sustained economic and employment growth, which suggests the benefits of economic growth did not automatically trickle down to the disadvantaged. The inherent dangers of neglecting inequality are obvious. Rising income inequality stifles upward social mobility and is in fact interconnected with other major problems governments are facing. More profoundly, OECD recent analysis shows that inequalities are not just about income, but also about opportunities in general, such as access to education and health, with the resulting risk of creating a negative spiral of underinvestment in skills, growing inequality and, down the line, slow growth. People, especially young people, excluded from the mainstream end up feeling disenfranchised. Unsurprisingly, right wing parties have been on the rise in Europe. High and growing inequality needs to be addressed urgently to ensure sustainable growth and prosperity in the long term, thus governments and policy makers need to put it at centre stage. This is likely one factor behind weak demand in some countries. Addressing inequality is not only a responsibility but also an opportunity. Addressing inequality is good for business as it creates a new demographic of consumers, thus widening the market for profits and services and increasing profit opportunities, especially for women. Efforts to reduce inequalities and achieve inclusive growth are a multi-stakeholder responsibility which will require concerted action at all levels, from local to national, and regional to global.

Following the 2008 financial and economic crisis, many countries are still trapped in a vicious circle of high and increasingly persistent unemployment and underemployment that should make policymakers extremely worried. It is urgent to improve the employment prospects. At the same time, Eurozone governments are facing large fiscal imbalances that constrain the range of policy options available to them to respond on a one-side basis, weakening citizens’ trust in public institutions. Governments must work together to promote policies to help workers during difficult economic periods. More must be done to tackle and long-term unemployment and youth unemployment. Young people have become discouraged and apathetic. Job quantity and quality, as well as youth inclusion, should be an essential part of the inclusive growth agenda. With so many people out of a job it is no wonder that voters seem to be losing trust in their representatives. We are living in a new era marked by complex and multifaceted challenges that we have to address within a context of widespread public distrust in government. This is a reflection of domestic reform fatigue. It is troubling that confidence in public institutions has fallen to an historic low, a crisis of trust in governments and to some extent, international institutions.

[1] OECD (2015), OECD Economic Outlook, Volume 2015 Issue 1, OECD Publishing, Paris: http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-outlook-volume-2015-issue-1_eco_outlook-v2015-1-en#page3

[2] OECD, Inequality and Income: http://www.oecd.org/inequality.htm





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