OECD: Policy Barriers Demand Holds Back Global Trade

Photo by OECD

JAKARTA (TheInsiderStories) – Despite encouraging signs of recovery in business, investment and trade in the short term, there is not sufficient momentum to sustain healthy growth of productivity, the latest The Organization for Economic Co-operation and Development (OECD) interim economic outlook report has concluded.

OECD expects global economic growth to reach around 3.5 percent in 2017 and 3.7 percent in 2018, up from the 3 percent recorded in 2016, the result of somewhat stronger activity – more than anticipated – in first half (1H) 2017 in some of the largest economies: the E.U., Japan, China.

Short-term momentum is reflected in a rebound of industrial production, consumer spending and investment since 2H 2016, while trade growth has recovered from the slump it suffered in late 2015 and early 2016. Nevertheless, short-term momentum is no guarantee of sustainable medium-term growth.

‘Lifting medium-term global growth requires a durable strengthening of growth in emerging market economies but GDP growth has slowed overall in these countries since the 2000s, and the ability of catching up economies to grow faster than advanced economies has been mixed,’ Catherine L. Mann, OECD Chief Economist and Head of Economics Department said.

While trade openness (exports plus imports as a share of GDP) increases, a number of new restriction in some areas (particularly G-20 countries) rose. Policy must not be complacent in the face of stronger short-term momentum.

Stronger structural reform ambition should aim to address the missing engines of the current global upturn: private investment, trade, and productivity gains. More can be done to ease barriers to product-market entry and competition, both domestically and through a renewed commitment to trade and foreign direct investment openness.

‘Improved competition would help revive the stalled diffusion of innovation between frontier firms and the rest of the economy, and address growing productivity and wage dispersion. In many countries, there is significant scope to reform insolvenct regimes, thus redirecting resources trapped in zombie firms towards productive investment,’ she added.

In addition, coherent packages of structural reforms can enhance their overall effectiveness. Reforms to reduce barriers to product market competition, trade and investment should be accompanied by labour-market measures to help vulnerable workers transition to new jobs.

Integrated policy packages would help reap the benefits from innovation and globalisation, while dealing with the job losses that are concentrated in specific industries or regions.

World trade rose 4.2 percent on an annual basis in 1H 2017 compared to the same period in the previous year.  Developed economies’ exports were up 3.1 percent over the same period, while those of developing economies were up 5.9 percent.

The rapid pace of trade growth in 2017 is unlikely to be sustained next year for a number of reasons, including that trade growth in 2018 will not be measured against a weak base year, as is the case this year.

Also, monetary policy is expected to tighten in developed countries, as the Federal Reserve gradually raises interest rates in the United States and the European Central Bank looks to phase out quantitative easing in the Euro area; as well, fiscal expansion and easy credit in China are likely to be reined in, to prevent its economy from overheating.

Writing by Yosi Winosa, Email: yosi.winosa@theinsiderstories.com