Remarks by Angel Gurría, OECD Secretary-General, delivered at the Business Bled Strategic Forum 2012

2 September 2012

Bled, Slovenia

(As prepared for delivery)

Ladies and Gentlemen:

It’s a great pleasure to participate in this Business Strategic Forum, here in Lake Bled, one of the most beautiful parts of Slovenia. The Bled School of Management (IEDC) is well known throughout Europe and beyond as one of the main nests for creative leadership and innovative management. It is an honour to be here. Thank you for this invitation.

This is indeed a great opportunity to share with you the OECD’s perspective on the current economic outlook, as well as our views on the economic situation of Slovenia and the key challenges that this country has to confront to achieve a stronger, cleaner and fairer growth.

Still in dire streets - The economic and employment outlook

We are still facing very difficult times. We are going through the fifth year of the crisis and it looks like the sixth one will also be rough. Policymakers have been left with a number of daunting legacies: weakened public finances, high debt, markets’ distrust, a new credit crunch, record unemployment, rising inequalities and low growth.

GDP growth across the OECD is forecast to slow to 1.6% in 2012, before recovering to 2.2% in 2013. Our latest Employment Outlook projects the unemployment rate to remain around 8% in the OECD area through the end of 2013. Some 48 million people are still unemployed and 15 million jobs need to be created only to bring the employment ratio back to pre-crisis levels.

The crisis in the euro area remains the single biggest downside risk facing the global outlook. Sovereign yields remain unacceptably high for some countries. The credit squeeze is intense and demand across the euro area has weakened. Risk of contagion to the rest of the world remains high. Thus, restoring stability and rebalancing the euro area economy and strengthening its financial system remain top priorities.

The situation is also difficult for Slovenia

The prolongation of this crisis has also affected Slovenia. Notwithstanding its important achievements throughout the past two decades - like building economic stability and making further progress in reducing inequalities -, like several other European countries, the Slovenian economy is now in a recession.

Our latest Economic Outlook projects a GDP contraction of around –2.0% for 2012 and of around –0.4% for 2013. In this context, Slovenia’s unemployment rate has reached 8.6% in the first quarter of 2012. The problem is that the government does not have much firepower to reverse these trends, as public finances are still weak and the fiscal consolidation effort is still on; despite a  relatively low public-debt-to-GDP ratio (at 47% in 2011).

To avoid a worsening of the crisis, which, in the worst case scenario, could force Slovenia to request international financial support; decisive reforms need to be implemented urgently. 

Let me highlight some of the areas where we think swift action is essential:

Policy Recommendations for Slovenia:  

• First, there is still significant scope for measures to raise productivity and improve competitiveness. Cost competitiveness has deteriorated due to above-productivity wage increases. A new social agreement introducing wage moderation could help Slovenia attract more investments and jobs. Greater openness to foreign capital is also crucial to boost FDI, competitiveness and potential output.
  
  
• Second, as our Review of Slovenia’s Innovation Policy shows, boosting innovation capability can help raise the productivity and competitiveness of Slovenian firms, move up the value chain and restructure the economy towards more knowledge-based activities. This calls for the reform of universities and public research organisations, as well as the streamlining of public policy and funding, to increase the economic and social benefit from R&D.
  
  
• Third, there is a need to do more on green tax reform and advance on the removal of environmentally harmful subsidies. The tax burden should be shifted away from capital and labour and the government should also consider increasing environmental taxes. This has a triple dividend of helping to address the budget deficit, strengthen incentives for environmental protection, and enhance economic efficiency.
  
  
• Fourth, Slovenia’s labour market is rigid and hampers economic adjustment. Therefore, labour market dualism should be addressed by reducing what is today the second highest level of employment protection in the OECD, while at the same time investing in people’s skills and education.
  
  
• Fifth, Slovenia has one of the least sustainable pension systems in the OECD, stemming from a combination of significant pension generosity and rapid population ageing. Pension expenditure is projected to increase by around 7 percentage points of GDP by 2060. To reverse this trend, the effective retirement age should be increased and net replacement rates reduced.
  
  
• Sixth, consumers and businesses need a healthy banking sector. Despite repeated recapitalisations, the state-controlled banks in Slovenia still appear too thinly capitalised to both absorb losses and continue to finance the economy. Therefore, urgent action is required to improve banks’ equity positions. An orderly deleveraging of banks and the corporate sector is key to restoring sound growth.
  
  
• Seventh, Slovenia must ensure that the framework for the governance of state-owned enterprises, which is currently being discussed, is robust enough to deal with the range of structural challenges facing the state owned sector, including competitiveness, deleveraging and privatisation. The overall objective must be to ensure consistency, predictability and transparency in the governance of state-owned enterprises. This will in turn help improve market and consumer confidence.
  
  
• Finally, the adoption of a so-called golden fiscal rule can help restore long-term fiscal sustainability. Of course, a golden fiscal rule is not necessarily something gold - it is simply a tool for more fiscal discipline. Germany, Italy and Spain all adopted a golden fiscal rule. Sweden and the UK for example went even beyond this and introduced a Fiscal Council to act as an autonomous watchdog over the fiscal decisions of the government. Yes, adopting a fiscal rule is a strong message of confidence to the world, an important signal that a country is serious, decisive and concrete about capping its debt. Slovenia should deliver this message now.

To ensure the implementation and success of all these reforms, Slovenia needs two critically important elements: an efficient public administration and a proven capacity to generate political consensus. In these turbulent times, many countries are taking bold decisions and implementing extraordinary transformations. The countries that cannot promote swift changes because of inefficient public services or a lack of consensus are falling behind.

The Slovenian government and its Parliament have a big responsibility in making reform happen. But the necessary transformations also need to come from the private sector. There are two areas in which entrepreneurs like you can make a big difference: innovation and green growth. Let me conclude with a few comments on these new sources of growth.

Innovation and Green Growth: New Sources of Growth.

Innovation has become crucial for the long-term competitiveness of European companies. But companies should not only invest in R&D. Investments are also crucial in intangible or knowledge-based assets such as brand equity, design, organizational capital and business models. Smart companies know that when they invest in intangibles, they can better capture value from global trade and global value chains.

European companies will increasingly need to rely on complementary non-production functions to create value. A large part of the future growth in European business is expected to come from so-called ‘manu-services’ which involves combining advanced manufacturing with a range of different services, including design, development, marketing, warranties and after-sales care.

Then comes the human factor. Innovation crucially depends on people: on their knowledge, creativity and skills. A better educated workforce is critical to moving up the global value chain. At the OECD, we launched a Skills Strategy to help governments work with all stakeholders, including businesses, to empower people to innovate by improving the quality of education, by facilitating the portability and transferability of skills, and by facilitating access to the skills markets. We must not forget that innovation, education and skills go hand in hand.

“Going green” must also be high on our agendas because green growth and increased resource efficiency are becoming more and more important. Not only because we are on a collision course with nature, but also in light of the growing demand and the growing cost of energy due to increasing population growth and industrialisation. Companies should innovate through new products, processes and technologies, to decouple growth from environmental pressures and to do this at the least possible cost.

But green innovation is not only about technology and products - better management practices, integrated strategies and green business models are also essential. Introducing organisational innovations such as environmental accounting can improve environmental performance and complement technological innovations. Green business models can generate solid business cases and jobs, while leading to significantly lower environmental impacts and supporting the transition towards green growth.

Ladies and Gentlemen:

A crisis is fertile ground for change. This is the moment to make decisions, to avoid inertia, to build the new. Europe’s future champions – governments and businesses – are those who are taking action now. Slovenia must achieve the necessary consensus to implement much needed structural reforms, while businesses must also urgently embark on innovative and sustainable approaches.

Let me conclude with the words of a traditional Slovenian saying: “Rana ura – zlata ura”! (“Early hour – golden hour”). There is no time to lose. You can turn this crisis into a new beginning for Slovenia. The OECD stands ready to help you design, promote and implement better policies for better lives!

Thank you very much.