Tuesday, 11 October 2011

The OECD at 70

In 2011, the OECD has celebrated its 50th anniversary, with a series of conferences in Paris, Berlin, Switzerland and elsewhere. Better Policies for Better Lives: The OECD at 50 and Beyond, a booklet produced for the occasion, pitches its achievements over the past five decades. The OECD is a global soft-law organisation that lost its funding role enjoyed by its predecessor, the OEEC, and has virtually no hard-law authority. The organisation sets standards and establishes processes for ensuring their implementation. The soft-law pillar of the OECD relies for its intellectual and political credibility on two further pillars: the collection and analysis of a unique database that facilitates cross-country comparisons on economic and social issues (you get the OECD Factbook for free, including on your iPhone); and the organisation of committees and forums for policy dialogue among peers from member-countries and beyond.

A selection of major ‘soft laws’ achieved by the OECD would include: the  OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations (1961); OECD Guidelines for Multinational Enterprises (1976); Arrangement on Officially Supported Export Credits (1978);  Producer Support Estimate (PSE) for measuring support to agriculture (1987); OECD Jobs Strategy (1994); Anti-Bribery Convention (1997); PISA (2000); Recommendation on Untying Aid to Least Developed Countries (2001); Going for Growth (2005); Global Forum for Transparency and Information Exchange for Tax Purposes (2009). Note that most of these standards, codes, arrangements and guidelines aim at producing a global public good (or club good) while ensuring a level playing field among their adherents. Indeed, there is some reason to look back at 50 years with satisfaction.

But will the OECD celebrate its 70th anniversary? If yes, how? Badly, if you trust the judgment of a notable critic, Kishore Mahbubani (Dean, Lee Kuan Yew School of Public Policy at the National University of Singapore), who recently looked at the development achievements of DAC, concluding that the OECD had become a “sunset” organisation: “after having failed in its core mission, the OECD has clearly become a “sunset” organisation. Its disappearance will have no impact on the developing world.”

Twenty years from now and with current membership , the OECD is projected to represent just 43 percent of world GDP_PPP and 15 percent of world population. OECD will see its global share in world trade, flows, technology transfer and  policy lessons shrink, occurring increasingly outside the OECD area. The role reversal in global investment has already manifested itself in net international investment positions that changed dramatically, turning China into the world biggest foreign creditor, with the claims mostly to the US. Public debt dynamics have altered, with rating downgrades and rising sovereign risk spreads exceeding anemic OECD growth, while emerging countries generally enjoy very favorable debt dynamics – high growth, lower interest rates; after the waves of privatisation in the 1980s and 1990s, capital stock is being ‘renationalised’ in the form of sovereign wealth assets, foreign exchange reserves and export credit claims; meanwhile, assets are being shifted toward countries characterised by the Heritage foundation as'unfree' societies.

When the OECD turns 70, the world will have moved from a Pax Americana to a multipolar world. Historically, the rise and fall of superpowers  first occur in economics, then politics and policy paradigms, finally militarily. The shift of economic power towards China, India and other emerging countries points to a fundamental question, not least with respect to the ‘business model’ on which the OECD is built: what does it take to establish global compliance with international soft law? In other words: will the main compliance instruments - peer review and peer pressure - work in a multipolar setting? The OECD faces essentially two strikingly different alternatives:

a) Status Quo, with emphasis on comparing, disseminating and codifying BEST policy practices to a fairly homogenous ‘likeminded’ membership under implicit US leadership and with continued US support. The OECD would continue to constitute a club model of multilateralism (Fratianni & Pattison, 1976; Clifton & Diaz-Fuentes, 2011). Apart from exploiting economies of scale especially for its smaller members in analysing policy alternatives, it would be able to codify and implement transnational soft law similar to, say, the antibribery convention, an achievement unlikely to succeed under a more diverse membership. One might hope that the club would stay attractive to fast growing emerging-country outsiders exactly because the requirements of adherence to the club remain demanding – the Groucho-Marx-Paradoxon in reverse.

The example of the antibribery convention immediately sheds light on the major problem of the Status Quo: these best practices are unlikely to be respected by major competitors, so there would be no level playing field between OECD members and countries outside the club. Such a situation is arguably real today in areas such as corporate social responsibility, (un)tying of aid, or sustainable export credit.  A further drawback of the Status Quo is that club multilateralism would not contribute to global public goods such as Green Growth: Cooperation in zero-sum game situations - such as the extraction rights for exhaustible resources, the distribution of global commons (air, water) -  between the OECD and the rest of the world would be difficult to organise.

b) OECD as UN2:  The recent wave of OECD enlargement has done little  to alter the declining global economic clout of the OECD. Recognising this, a programme entitled ‘enhanced engagement’ was launched in 2007, for implementation in five key economies: Brazil, China, India, lndonesia and South Africa.  Although these countries had not stated their interest in joining, they were targeted by the OECD as countries that ‘might eventually be willing and able to join’.  Assume for a moment, that might indeed happen. The OECD would still not be universal (unlike UN1 or the Bretton Woods institutions), but it might stand a better chance of enforcing the global compliance with its codes, guidelines and standards. The pressure to adhere to OECD standards would rise even for outsiders. What stands in the way of turning the OECD into a UN2 with the Chinese, Indians and the rest on board?

First, the OECD would have to learn to shape policy advice for various different stages of institutional development, market informality and duality, perhaps along the ideas outlined in the structural economics of Justin Lin. Policy advice would have to de-emphasise efficiency and re-emphasise accumulation and resource shifts. For countries, such as China, where the accumulation of equipment capital and the dual-sector resource transfer remain the most important sources of growth, the deregulation of product or labour markets (in the presence of high informality anyway) matters relatively less , for now. In short: the OECD would need to strive for diversity in policy advice for a diverse membership.

 Second, membership would be very heterogeneous compared to the old OECD, in terms of policy experience, income levels, democracy and paradigms. The ‘old’ OECD can not pretend any longer to 'outreach' by imposing its standards to the new big emerging-country members: The latter would remain 'out of reach'! The edifice of OECD standards, practices, sources of growth built up over the past 50 years are essentially Western, formed in a market economy, decentralised and unauthoritarian setting. They are quite different from Eastern policy lessons and paradigms. The only way forward then would be fusion rather than imposition of standards. Not only is the fusion of Western and Eastern standards very difficult or impossible to design. Suboptimal outcomes would be likely, with costly frictions and policy failures, such as perhaps replicating industrial policy lessons from East Asia to advanced OECD countries. Perhaps most importantly, it can be doubted whether the instigator of the OEEC/ OECD would still like to remain on board, with a relatively diminished role in global standard scripting at the Chateau de la Muette.

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