OECD – a Prestigious Organisation, Whose Forecasts Have Come True
OECD's importance in economic forecasting
Poor people can be happier
Organisation of Economic Cooperation and Development (OECD) has been coming out with many reports about the world economy. It undertook a new study called ‘How is Life?’ In this study, OECD has detailed factors other than income that forms a base for leading a good life. It is generally considered that happiness comes out of financial prosperity and that poor people can never be happy. OECD’s study has disproved this theory. Denmark has the highest happiness among its people, according to the OECD study. It has a scale of 7.8, the highest in the world. USA is assigned 7.2. Brazil has 6.8. OECD average is 6.7. Japan has been assigned the number 6.1. Russia gets 5.3. India has 5.0 and China is placed at 4.7. China has more economic prosperity than India, Russia and Brazil. Yet, Chinese are not happy. This is because of several reasons. Chinese suffer from huge population pressure. As the huge population of China have to share the material resources, each gets lesser share than he desires. Also the high industrialisation brings high pollution in water, air and ground. Coupled with all these things, Chinese people do not have political freedom. They live under a repressive communist regime which does not allow any other political party to function.
Slowing down of economy in the second quarter
Another OECD reports says that global commodity trade has slowed down in the second quarter. However, according to the report, Brazil and China firmed up their exports. In the first quarter, imports by the top G7 countries and the emerging nations represented by BRICS increased in double digits at 10.1%. But in the second quartet, the figure drastically came down to just 1.1%. BRICS is a group of emerging countries represented by Brazil, Russia, India, China and South Africa. Exports also slowed down from 7.7% in the first quarter to 1.9% in the second quarter. But in the case of China, exports zoomed from 2.9% to 10% and its imports came down from 11.1% to 0.7%. For USA, imports came down from 11.1% to 3% and exports decreased from 5.6% to 2.6%. Brazil’s exports increased from 5.7% to 11.2%.
USA not in a position to assist now
The world economy is affected by the simultaneous jolts in Europe and USA. After the Second World War, the European economies were in shambles. But USA was ready with assistance with its Marshall Plan. But now, European economy is affected by huge debt, but USA is not in a position to help its allies as it is facing itself recessionary trends. Huge debt burden has affected Greece, Portugal, Spain and Ireland. Italy is next in line. The debt burden of Italy is much more than the combined debt figures of Greece, Ireland, Portugal and Spain. The stronger nations in Europe namely Britain, France and Germany are unable to provide a solution as their economies are also facing slowdown, if not a crisis.
China may restock commodities at lower prices
There is a direct relationship between industrial activity and consumption of commodities. As the economy has slowed down, industrial activity is also coming to a grinding halt and hence the commodities’ consumption by nations also has come down heavily. China consumes largest amount of metals in the world. A slowdown in Chinese economy means the price of metals will plunge. But the trend in fall in price may not be a continuous one. China may restock the commodities at lower prices. As long as there is no disruption in the supply side, demand will pick up at lower prices, then fall at higher prices. This trend is likely to continue for some time. US non-farm payrolls registered an increase of 117000 in the month of July, created positive sentiments in the world economy. Another positive aspect of the current world economy is that it has not yet slipped into recession. Only the rate of growth has come down.
If USA sneezes, China catches cold
Earlier, OECD warned that India and China would face a slowdown in their economic activities. The truth today is that no economy is isolated from the rest of the world. All the economies are interconnected. If US economy sneezes, China will catch cold. Nobody can claim that he is sitting in an ivory tower. If US and Europe are affected by economic crisis, then the Indian IT industry will slowdown. Chinese exports will slowdown. OECD is a Paris-based organisation and its warnings more often than not come true. OECD has Composite Lead Indicators (CLIs) for France, Canada, Italy, Germany, Brazil, Britain, India and China. These CLIs continue to point out slowdown in the world economy.
Green growth strategy
OECD has unveiled a green growth strategy for food and agriculture. It has advocated a major shift in farm policy and practice in order to feed the growing world population without damaging the environment and without overexploiting scarce natural resources. As the world population has crossed the seven billion mark recently, OECD’s advice assumes significance. OECD’s Green Growth Strategy, just published in June, stipulates that between now and 2050 when the world population is expected to rise by another one third of the present population, 200 million tonnes of meat and one billion tonnes of cereals need to be produced to cater to the needs of the population. The report suggests increasing resource use efficiency throughout the supply chain. It states that prices of goods will contribute to resource use efficiency. It advocates reduction of economically and environmentally harmful subsidies. The report advocates encouraging of eco-friendly measures and consumer information, improving market functioning, taking notice of social concerns and integrating global and domestic markets. The most important advice the report gives is to enforce well-defined property rights. This is because over exploitation will result when land and forests, marine resources and other areas lack clearly defined rights and ownership.
Doubts about double dip slump dispelled
When there was concern that the US economy was heading towards double dip slump, OECD dispelled such suspicions. It stated that the world economy was only slowing down and not heading towards double dip slump as forecast by some economists. Angel Gurria, Secretary General of OECD stated this clearly. Angel Gurria also said that the talks among the Euro zone leaders on bailing out Greece required a technical approach and covering of legal aspects. He also advocated a strong participation from the private sector in the bailout efforts. OECD was also not unduly concerned about rising commodity prices in the past as it viewed that the increasing prices would attract more investment from the farmers. OECD is of the opinion that productivity in agricultural sector needs to be increased. OECD also said that the price trend is up for the next ten years. This means a drop in price could be only a short term phenomena.
FDI in pharma sector could increase drug prices in India
India and OECD have agreed to promote better tax compliance, cooperate in issues related to transfer pricing and regulation of cross border disputes. OECD also saw a potential for double digit growth in Indian economy. OECD advocated for further reductions in trade and foreign direct investment barriers. But this is a grey area. India has to tread carefully in this area. If foreign investment is allowed, for example, in retail sector, it could increase the price of retail goods while ensuring closing down of shops of Indian business community. Similarly, if FDI is allowed in pharmaceutical industry, drug prices could shoot up. Poor people in India may not be able to afford life-saving drugs.
There is nothing wrong in taxing the stock market transactions
An OECD survey indicated that transaction tax is hurting equity trade in the stock markets. Here also, the suggestion is open to debate. From where will the Indian government get money for implementing its policies and programmes? Only by taxing people and goods will it get money. Individuals and institutions playing in the stock markets are rich people or belong to upper middle class. People in these sects can easily afford to pay tax to the government.
India is welcome to join OECD
OECD has welcomed India joining the organisation, but stated that India had to make the first move. At present OECD has 34 members representing 60% of world output. But even without joining OECD, India is cooperating with this prestigious organisation. For example, India joined OECD pact on chemical safety data. India has agreed to share safety tests on chemicals with OECD. It also means that the results of non-clinical chemical safety tests done in India will be acceptable to all other participating countries. Derivatives are the main culprit behind the financial meltdown in the world. Derivatives account for a sum that is ten times the world’s Gross Domestic Product (GDP). OECD has no suggestion to curb this activity. Speculation lifts the prices of all commodities ranging from food stuff to crude oil and metals. OECD is coordinating its activities with IMF and World Bank, but much more needs to be done. OECD’s fight against bribery and black money has reached a crucial stage. It is fighting to abolish all tax havens in the world so that nobody can park his illegal funds anywhere in the world safely.
World economy may recover in 2012
OECD is pushing the boundaries of understanding and knowledge by questioning the conventional wisdom. It advocates drastic changes in production, consumption and distribution, the three pillars of economics. OECD forecast easing of world growth to 4.2% this year from 4.9% in 2010 before increasing again to 4.6% in 2012.
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