It has been eight years since the onset of the economic crisis and global growth still remains elusive. The Organization for Economic Cooperation and Development’s (OECD) latest interim economic outlook projects that global GDP will expand by only three percent in 2016—its slowest pace in five years—and only slightly higher at 3.3 percent in 2017.1 The global economy is stuck below its long-run average of 3.75 percent.
In advanced economies, growth remains below what one would expect during a recovery phase, and labor markets continue to be marked by sluggish job creation and wage growth. Moreover, growth in several emerging market economies has also decelerated. Growth in China has slowed, with negative implications for global trade, investment and commodity prices. The recession in Brazil is deeper than previously anticipated and is associated with ongoing political uncertainty and rising inflation.
World trade volumes grew by around two percent in 2015, a pace which, in the past, has been linked to weak global economic performance. In this context, global macroeconomic policy, comprising monetary, fiscal and structural actions, must become more supportive of demand and resource reallocation. Monetary policy alone has been insufficient to deliver satisfactory growth, so greater use of sound fiscal and structural strategies is required.
OECD’s Policy Framework for Investment
Now is the time for collective fiscal action focused on investment spending to improve growth in the near term and increase long-term output potential. Going hand-in-hand with this is the need for more ambitious structural reforms to provide an environment conducive to private investment. At its last Ministerial Council Meeting in June 2015, the OECD delivered its updated Policy Framework for Investment (PFI), a comprehensive and systematic approach to improving investment conditions used across all continents by almost 30 countries at varying levels of development.
One of the areas that the PFI focuses upon is responsible business conduct (RBC) and providing policy advice to governments to better implement RBC through the promotion of best practices, working with all stakeholders, and establishing and enforcing legal frameworks that protect the public interest.
Trade is key to growth
Trade is another key area in need of urgent policy action. No country has achieved sustained growth and improved living standards without significant opening to trade and investment.
Global Value Chains (GVCs) have become a dominant feature of world trade, whereby the whole process of producing goods is carried out wherever the necessary skills and materials are available at a competitive cost and quality. Distributing production across borders highlights the need for countries to support open, predictable, and transparent trade and investment systems as tariffs and other restrictive measures impose unnecessary costs not only on foreign suppliers, but on domestic producers as well.
The OECD provides a broad range of information to help policymakers understand the effects of GVCs. For example, the trade in value-added (TiVA) indicators provide comprehensive statistical and analytical data on international production sharing. In addition, the Initiative on global value chains, production transformation and development facilitates policy dialogue and knowledge sharing between OECD and non-OECD countries to promote development by fostering participation and upgrading GVCs.
In October 2015, OECD and the World Trade Organization (WTO) jointly presented a new report to G20 trade ministers that focuses on making GVCs more inclusive, notably by overcoming participation constraints for small and medium-size enterprises (SMEs), and by facilitating access for low income developing countries (LIDCs).
Multilateral action is also needed to ensure trade openness. In 2013, WTO members concluded the Trade Facilitation Agreement (TFA) and, more recently, adopted new practices for export competition measures in agriculture. The challenge now is to find a flexible method to resolve the outstanding issues of most concern to businesses, from agriculture and non-agriculture market access to restrictions on services, investment and the digital economy. A growing number of WTO members are also turning to regional and multi-lateral approaches to address these twenty-first century policy challenges. The Trans-Pacific Partnership (TPP) recently became the first mega-initiative to be finalized.
In addition to negotiating market openness at the multi-lateral and regional levels, national efforts alone can stimulate trade and spur economic growth. For example, well-functioning transport, logistics, finance, communication and other services are needed to ensure a coordinated flow of goods and services along value chains.
The OECD Services Trade Restrictiveness Index (STRI) shows that significant restrictions on free movement of services exists in all countries, but also that no individual country is more or less restrictive than many others. All countries have much to gain from opening services markets which, in G20 countries, represent over 60 percent of all economic activity.
Inefficient customs and other border procedures also impose unnecessary costs on trade. The OECD estimates that implementing the TFA would reduce trade costs for businesses by up to 17.5 percent in some countries.2 By way of example, a one percent reduction in global trade costs would increase worldwide income by more than $40 billion.3 These estimates also predict that poor and lower-middle income countries would gain the most.
As countries continue to grapple with the effects of the financial crisis, the potential contribution of greater trade and investment openness as an economic stimulus remains underexploited, yet it is clear that there is significant opportunity for both unilateral and collective government action to provide much needed stimulus.
The combination of structural policy reforms and well-balanced monetary and fiscal actions can go a long way toward lifting the world economy out of its low-growth standstill and on to a path of stronger, fairer and more balanced growth.
As that cycle comes to a close, and with the expectation of flat prices during the foreseeable future, some countries are facing the painful process of balancing their internal and external accounts.
In tandem with this, the prospect of rising interest rates in the United States is increasing the cost of financing government spending around the world, making it yet more difficult to achieve the necessary adjustments. Partly as a cause, but also as a consequence of the latter, fears that growth of the world economy are screeching to a halt have hit global financial markets, especially in China, leading investors to run to the exit as they move to safer markets.
Mexico has not been immune to the external turmoil. With its strong commitment to free trade, undeterred capital flows, and a fluid exchange rate market, the country has benefited from being an active player in the global economy but that openness has also exposed the economy to the effects of the current instability in global financial markets. The Mexican peso, the most widely-traded emerging-market currency in the world, has suffered the brunt of such instability due to its use by foreign investors to hedge against events in other, less liquid emerging markets.
Mexico’s strong fundamentals, however, have helped differentiate the country from other emerging economies. An independent and credible monetary policy, a freely floating exchange rate, and strict banking supervision, as well as prudent fiscal and debt management, shield Mexico from external impacts and provide certainty to local and foreign investors.
Fiscal prudence has been coupled with other precautionary measures, such as the use of hedges against low oil prices and access to a flexible credit line from the International Monetary Fund. As a result, in 2015, public sector financing requirements declined by 0.5 percent of GDP, to close at 4.1 percent of GDP. Moreover, in a volatile context, financial variables have behaved in an orderly fashion and economic growth has accelerated to end the year at 2.5 percent or 3.2 percent, excluding the oil sector. For 2016, the Mexican legislature approved a further 0.5 percent reduction in the fiscal deficit, as a fraction of GDP.
These strengths notwithstanding, in the current context, Mexican authorities have sent a strong signal that they will act promptly and comprehensively to prevent external events from eroding domestic economic variables. With this in mind, on February 17, 2016, the country’s independent central bank, Banco de México, and the finance ministry took coordinated steps to reassure investors of their commitment to maintaining a stable macroeconomic environment, announcing an array of fiscal, monetary, and exchange-rate policy measures to respond to the present situation.
