The Global Economy: Light at the End of the Tunnel?

We are still facing very difficult times. The financial crisis that erupted in September 2008 plunged the global economy into its most severe economic crisis in the post-war period. We estimate GDP in 2009 to have contracted by some 3.5% in the OECD area as a whole and unemployment to have reached a post-war high of 8.8% as of December 2009.

International investment — a major driver of world growth — declined by over 50% globally in 2009, and international M&A activity was a third of the level reached in 2007. Developing countries had shown resilience during the crisis, but in 2009 they finally suffered their first serious declines in inward international investment flows.

This was reflected in a 40% decline in international M&A activity going to the BRIC countries. But now we see a rebound, and the emerging economies like China, India and Brazil are leading the recovery.

Strong activity in emerging markets is propping up world trade, which the OECD expects to grow by about 6% this year. This is a strong rebound from the decline of over 12% in 2009.

The main challenge we face going forward is how to ensure that a solid recovery takes hold. This is important because the crisis will have a long-term impact on our economies’ growth performance.

We estimate that OECD countries have lost about 3% of their potential output as a result of the crisis. This loss is in part due to a durable increase in unemployment — as well as increased costs of capital and higher risk aversion.

New sources of growth like innovation and green growth, as well as structural measures to improve labor productivity and utilization, will therefore be crucial to put the world economy back on a strong, sustainable and jobs-rich growth path.

In the crisis, emerging economies have consolidated their positions as major international investors. The emerging economies in the G20 accounted for only 1% of G20 FDI outflows in 2000. By 2008, they accounted for 12% of FDI outflows.

This should facilitate inter-governmental cooperation on investment policies, because the interests of developed and emerging economies are no longer so starkly divided along the lines of home and host countries — everyone is a bit of both.

The OECD is becoming more inclusive in order to reflect these changes of the world economy. Twelve emerging countries, including Brazil, now adhere to the OECD investment instruments.

As emerging countries integrate into the world economy and increasingly invest in other countries, the time is right to improve international rules for investment protection.

A common legal framework on international investment may be appropriate for a world that is more and more integrated and that requires certainty and clarity for international operations.

I know this is a complex undertaking, and that we need to garner enough support, considering that in the past, we had some bad experiences when putting the investment discussions in the context of a multilateral framework.

In practical terms, the OECD is considering the feasibility of a non-binding “Model Investment Treaty,” building on converging understandings in OECD and partner countries — and invites other organizations to join these reflections.

Such a model treaty could be patterned after the OECD’s successful Model Tax Convention, which serves as the basis for a network of bilateral tax treaties spanning the globe. It would provide a framework on which countries could build individually tailored bilateral agreements covering the treatment of inward investment.

Such a “Model Investment Treaty” could reduce drafting and negotiation costs for negotiating parties, reduce transaction costs imposed on foreign investors and create the enabling conditions for equal competition among foreign investors.

It could be used by governments to foster more consistency and predictability in their bilateral and regional treaties, while allowing for flexibility in reflecting countries’ positions and adequate consideration of competing policy priorities.

A non-binding Model Investment Treaty would reflect consensus on core provisions for inclusion in an investment agreement. It would provide interpretations and options with regard to the wording of specific clauses.

It would record countries’ positions vis-à-vis the model’s provisions if necessary. A model treaty serves as a common reference point for the negotiating parties, which accelerates their discussions, facilitates a final agreement and increases mutual certainty about interpretations.

This example underscores how the role of the OECD is shifting — away from the club of “advanced” economies and toward a globally inclusive standard-setting organization in key areas of economic activity.

Increasingly, OECD-level discussions and/or negotiations are open to the participation of other countries. The work on tax havens is based on agreed international standards of transparency and exchange of information that have been negotiated between the OECD and other countries — and which all countries are now being asked to adopt.

The Global Forum on Transparency and Exchange of Information for Tax Purposes, which oversees this work, currently has 91 members, with the prospect of more countries joining.

The Working Group on Bribery, which oversees implementation of the OECD Anti-Bribery Convention, has 38 members, while the “Freedom of Investment” process hosted by the OECD Investment Committee brings together 41 countries in a dialogue on investment policy.

Its task is to help governments reconcile the need to preserve and expand an open international investment environment with their duty to safeguard the essential security interests of their people and take action to recover from the crisis.

In the ultimate analysis, what the OECD seeks to establish is an “arc of responsibility” covering these admittedly complex, but pivotal areas shaping tomorrow’s global economy — from combating tax evasion to establishing fair models for investment treaties.

Editor’s Note: This feature has been adapted from OECD Secretary-General Angel Gurría’s address at the USCIB Global Investment Conference in Washington, D.C., on March 10, 2010.