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MANAGING RISK
The next economic policy paradigm should seek to maintain financial stability amid sustainable, fair and green growth These flaws are widely acknowledged and will prompt another paradigm shift. What the paradigm will look like is hard to tell with precision, but it will surely contain the following elements. In order to preserve and build on the wide-ranging benefits of globalisation, it should seek to maintain financial stability amid sustainable, fair and green growth. Structural policies are pivotal and should pursue goals beyond such longer-term growth objectives, including facilitating fiscal consolidation, helping to narrow global imbalances via their impact on current accounts and capital flows, and supporting activity in the short run. But of course all strands of economic policy— prudential, fiscal, structural and monetary—have a role to play, each within their remit and proper assignments, but always in an integrated fashion for maximum impact. Importantly, mechanisms need to be found to allow different policy settings to co-exist across the globe in a way that promotes economic stability and growth. This will require international co-operation, surveillance and communication in setting priorities and in minimising any potential adverse side-effects that can arise from the resulting geographical constellation of policies. One aspect of this is the international effort underway to strengthen prudential frameworks around the world. Beyond this, the role of the G20 Framework for Strong Sustainable and Balanced Growth is to identify a combination of macroeconomic, structural and exchange-rate policies that would both strengthen growth prospects and help to achieve more
sustainable fiscal positions while minimising the risks of newly widening global imbalances. Co-operation is also necessary to strengthen the international monetary system. Over time we could expect emerging market economies to experience a real appreciation. If the nominal exchange rate is fixed, the required changes have to come through adjustments to wages and prices, which can be costly as it risks raising inflation expectations. Persistent currency misalignments can also generate unsustainable external imbalances. Hence reforms need to facilitate the movement of exchange rates in line with economic fundamentals so as to ensure that nominal exchange-rate adjustments act as a safety valve. On the other hand, of course, excessive exchange-rate volatility can also have its costs. Finally, a factor to take into account is that large yield-seeking capital flows to emerging market economies can increase the risk of a currency appreciation depressing competitiveness (or “Dutch disease”), reckless risk-taking and sudden stops or reversals. To smoothly channel and absorb capital inflows, emerging market economies should aim for an appropriate mix of macroeconomic policies. They must also reduce banking sector vulnerabilities by strengthening macroprudential frameworks, in order to further contain the risk of financial instability. The OECD has identified a possible way for structural policies to attenuate the financial stability risks associated with capital inflows—by encouraging more stable and productive forms of financing such as foreign direct investment. Capital restrictions should be a last resort and undertaken in a manner that preserves a level playing field. Recommended link “OECD at 50: Evolving Paradigms in Economic Policy Making”: www.oecd.org/dataoecd/32/22/48010330.pdf
OECD Yearbook 2012 © OECD 2012
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