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Policy Proposals  Trade, Investiment, EPA/FTA Recommendations for redefining the OECD's Role in a Globalized World -- On the 50th Anniversary of Japan's Accession to the OECD --

February 18, 2014
KEIDANREN

The Organisation for Economic Co-operation and Development (OECD) was established by 20 countries in 1961 for the purpose that Europe and North America would cooperate with each other as equal partners with the aim of developing a free economy. Three years later, in 1964, Japan became the 21st OECD member and the first one from outside of Europe and North America. Together with the Tokyo Olympics, which were held the same year, Japan's accession to the OECD left an impression that Japan had recovered from the war. By becoming a member of the OECD, Japan was able to join the advanced countries and by accepting agreements such as the OECD Code of Liberalisation of Capital Movements, Japan was able to move to an open economic system that served as a foundation for its subsequent development.

Half a century later, now is the time to redefine the role of the OECD as the international environment undergoes significant changes. In order for Japan, which is taking itself out of long running deflation and is undergoing an economic recovery, to achieve sustained economic growth and gain the trust of the international community, it must push through structural reforms at home and make positive contributions abroad to the maintenance and formation of global economic order - global governance.

Since it joined the Business and Industry Advisory Committee to the OECD (BIAC), Keidanren has been consistently involved in OECD activities through the BIAC, and Marking the 50th anniversary of Japan's accession to the OECD, Keidanren has given further consideration to the role of the OECD in a globalized world on the basis of the discussions at BIAC Japan (Chairman: Katsutoshi Saito, Vice Chairman of Keidanren and Vice Chairman of BIAC). The following are our recommendations based on that consideration.

1. Changes in the International Environment

Today, economic globalization is progressing to an extent that the domestic policies and systems adopted by one country can easily affect those of other countries, let alone macroeconomic policies. At the same time, the rapid and non-linear development of digital technology and other technologies is facilitating further economic globalization and interdependence, while posing new challenges that need to be addressed on a global level. While liberal norms have spread since the end of the Cold War and the collapse of the Soviet Union, large emerging economies such as China and India have appeared mainly in Asia. As a result, OECD members, which accounted for a considerable part of the global economy until the end of the Cold War, have been losing weight in the global economy.

Those changes to the international environment have brought about an increase in issues that require international cooperation and policy coordination among countries and global rules. It is impossible for individual international organizations (including not only international institutions, but also informal systematic cooperation among countries, hereinafter referred to as ‘forums’) to address diverse and complex issues, and it has become evident that at forums in which a number of countries participate, it could be very difficult to reach a consensus due to conflict of interests among those countries. On the other hand, as can be seen in the liberalization of trade, for example, there is a growing trend for regions or like-minded countries to act as single entities. There are also issues such as cyberspace rules for which an appropriate forum that conducts discussions and considerations has not yet been determined.

In order to coordinate diversifying interests of countries and regions and to achieve global governance under those conditions, it is essential to ensure cooperation and collaboration between various types of bilateral, plurilateral (one of which is the OECD and including regional forums) and multilateral forums.

2. Current State of the OECD

Since its establishment, the number of OECD member countries has increased from 20 to 34 nations. The increase was striking particularly after the end of the Cold War when 10 countries joined. At the same time, the OECD has endeavored to strengthen its relationships with emerging countries which have gained power since that time. The Russian Federation is now a candidate to join the OECD, and a decision was made at last year's Meeting of the OECD Council at Ministerial Level to open accession discussions with Columbia and Latvia. In addition, Brazil, China, India, Indonesia and South Africa are designated as Key Partners.

The OECD serves as a forum, not for negotiations, but for cooperation and policy coordination and developing rules among advanced countries through "face-to-face discussions" and "gentle peer pressure," and it has set "standards for developed countries." The OECD also supports individual countries in adopting and implementing necessary policies by providing cross-sectional studies, international surveys and economic forecasts, among other things, which are based on the strong analytical skills of its secretariat, networks among experts from each member country, and input from the business (BIAC) and the labor (The Trade Union Advisory Committee to the OECD: TUAC). As the result of taking the lead in tackling emerging issues as a think tank of advanced countries, the OECD deals with a wide range of areas and has been called the "world's biggest think tank." The OECD has also recently begun to play a supporting role for the G20 summit, which began in 2008, by investigating and analyzing matters addressed at G20 Summits.

At the same time, as its member countries have increased, the OECD's characteristics as a "club of developed countries" or a forum where a small number of homogenous countries gather has gradually become diluted, and the OECD Ministerial Council Meeting has gradually lost the nature of a preparatory meeting for G8 summits. Moreover, with the launch of the G20 summit, which includes emerging countries as members and has been regarded as the "premier forum for international economic cooperation," the OECD's position in global governance has become blurred. The OECD and its member countries should be so attentive that the effectiveness of peer reviews to encourage the implementation of rules and policies may not be weakened due to the factors such as the increase in its membership.

Under these circumstances, OECD Secretary-General Angel Gurria has been advocating that the OECD should be a "think-and-do tank" and has worked hard to strengthen the OECD's organization and function.

3. Role Expected of the OECD

(1) Basic Direction

Considering the role expected of the OECD as a "think-and-do tank" in light of the above changes in the international environment and the current state of the OECD, the basic direction of the OECD is "selection and concentration," thereby further harnessing and making full use of its core strengths and features.

Specifically, rather than aiming at increasing its membership, the OECD is expected to continue to be comprised of advanced countries that share the fundamental values of freedom, democracy, rule of law, market economy, and respect for human rights and that have the willingness and ability to accept OECD rules that have been formulated on the basis of those values. As a "coalition of like-minded advanced countries," the OECD should become a core of various types of global governances through taking the lead in setting agendas and establishing and implementing policies. In areas where other forums play a central role, it is important that the OECD should contribute to global governance as the "best provider of knowledge and solutions" with respect to specific issues where it has a comparative advantage.

(2) Functions to be Strengthened

To perform the above mentioned role, the OECD needs to strengthen the following three functions (see Attachment for specific examples of each function).

  1. Enforcing OECD rules and ensuring level playing field with countries that have not adhered to OECD rules
    It is important to enforce rules (decisions, recommendations, guidelines, etc.) that have been or will be developed at the initiative of OECD member countries that share fundamental values through measures such as peer reviews in order to ensure that those rules are effective. By doing that, it is also necessary to forestall circumstances where other forums establish additional or discretionary rules, etc. that hinder the implementation and diffusion of OECD rules and place an unnecessary burden on businesses.

    Level playing field with those countries that have not adhered to OECD rules such as emerging countries should be secured through outreach efforts such as policy dialogue or through multilateral forums in which emerging countries participate such as the G20 summit and the World Trade Organization (WTO). However, in cases such as where it is necessary to reflect diversifying values, it is important to take a flexible approach on some issues by, for example, allowing emerging countries to take part in the process of developing and reviewing rules.

  2. Supporting policy formulation and implementation on the basis of objective data
    It is necessary to encourage the adoption of policies that address issues difficult to deal with domestically and institutionally by providing objective data based on surveys, statistics, forecasts, etc. to various countries and forums, and to ensure the smooth implementation of those policies by, for example, setting benchmarks and conducting peer reviews.

  3. Sharing the best practices of countries and regions
    With respect to issues for which an appropriate forum to conduct discussions and considerations has not yet been determined, it is necessary to promote measures to address those issues by sharing the best practices of countries and regions so that problems do not become more serious and, in some cases, a set of rules to deal with issues will be developed in the future.

Providing economic and employment outlooks for each country and country-specific reviews on the macroeconomic situation and structural issues in each country including new candidate countries and Key Partners has so far been a central activity of the OECD. These outlooks and reviews have had a certain effect on the economic policies of each country. Those activities continue to be important.

As a recently new initiative, the OECD Action Plan for Youth was compiled in 2013 to address youth unemployment, which is a common issue in each country, and the progress on measures to be taken in each country will be reported at this year's Ministerial Council Meeting. The OECD Council Recommendation on Gender Equality in Education, Employment and Entrepreneurship was also adopted in 2013. Increasing youth employment and promoting gender diversity are important issues for Japan as well, and we expect that those OECD initiatives will contribute to meet these challenges.

(3) Points that Require Attention in Strengthening Functions

The following points should be brought to attention in the course of strengthening the functions described in (2) above.

  1. Promoting Cross-sectional studies
    Under the leadership of Secretary-General Gurria, silos of directorates and committees in the OECD have been shaken up and cross-sectional or "horizontal" studies have been conducted when formulating innovation strategies, etc., especially since the global financial and economic crisis. It is necessary to further promote such horizontal studies. As infrastructure for that purpose, the OECD should utilize information and communications technology and make it possible to share and utilize studies and discussions by each directorate and committee within its organization and with advisory bodies such as the BIAC.

  2. Reflecting Asian perspective
    As part of efforts to promote OECD rules in Asia and to reflect an Asian perspective in OECD rules, it is necessary for the OECD to not only approach Asian countries individually, but also cooperate with regional organizations in Asia such as the Asia-Pacific Economic Cooperation (APEC), which features a non-binding nature and is expected to serve as a "pathfinder" to global rules, the Association of Southeast Asian Nations (ASEAN) and the Economic Research Institute for ASEAN and East Asia (ERIA). We believe that these efforts will help avoid duplication of work and make it possible to quickly formulate and disseminate rules, and it will also complement the relationship between Asia and Europe, which is not as robust as the Transpacific and Transatlantic relationships. In creating global rules, it is also effective to substantially secure governance by combining those rules with voluntary codes of conduct, which Asian countries can easily become accustomed to.

  3. Further strengthening of dialogue with the business community
    With the globalization of the economy, advances in technology, and a diversification of business models, considering that there is the case where companies and business communities, rather than governments, take the lead in coordinating policies and establishing rules, the OECD must work to further strengthen dialogue with the business community through the BIAC. In doing so, it is important for the OECD to propose agenda and provide materials to the BIAC as quickly as possible in order to reap the benefits of those dialogues.

    The BIAC on its own needs to make the best use of its limited personnel and financial resources to effectively send out specific and practical messages based on input from companies and economic organizations, participate in activities such as the establishment of rules at the OECD from the drafting stage, and also work to create a business-friendly environment. To that end, the BIAC as an advisory body to the OECD should be not only reactive to agendas set by the OECD, but also proactive to express the voice of business on outstanding issues by maintaining daily contact with related directorates and committees of the OECD. As the fusion of industries increases with technological innovation and business boundaries are lowered, it is indispensable that the BIAC also conduct cross-sectional studies. The BIAC is also expected to play a leading role ahead of the OECD with respect to outreach efforts to emerging countries and developing countries.

    In order to efficiently reflect the opinions of companies and the business community in policy coordination and rules developed by the OECD, in parallel with working on the OECD through the BIAC, it would be effective to work directly on the government of each country through BIAC member associations.

(4) Regular Assessments of Activities

The activities of the OECD should be regularly assessed by outcomes, not by output such as publishing reports and holding meetings. Outcomes are measured by the degree to which global governance of each issue is being achieved and the degree to which the OECD has contributed to that. By "selecting and concentrating" its activities on the basis of those assessments, the OECD should be able to avoid being bloated and inflexible and it should concentrate its personnel and financial resources on the three functions mentioned in (2) above and areas where it has a comparative advantage.

4. The OECD and Japan

(1) Utilizing the OECD

Japan should extensively utilize the achievements and the functions of the OECD described above to realize its national interests including the revitalization of its economy. Specifically, Japan should support international business activities by taking part in the establishment of rules, promote domestic structural reform on the basis of objective data, improve its international credibility by sharing best practices, and rectify vertically-divided administrative systems by participating in cross-sectional projects.

These would be only possible if the OECD's personnel and financial resources are devoted to themes that are beneficial for Japan. In order for the OECD to do so, it is indispensable for Japan to maintain its vitality as the third largest economy in the world. Japan should also enhance its influence within the OECD by actively working to maintain its relationships with the other member countries and playing a leading role in running relevant meetings, and be engaged in setting agendas. It is also necessary to increase the number of Japanese staff at the OECD secretariat, including interns from companies.

  1. Supporting international business activities through active participation in the establishment of rules
    Rules which are established at the OECD often deal with certain circumstances that might occur in the future rather than the problems we are facing now. It is easy therefore to overlook their significance. There is also a possibility that OECD rules will be transposed into domestic laws in time or they will have a legal function as internationally recognized standards.

    Japan has tried to improve business environment domestically and internationally by following OECD rules, as can be seen with rules such as the Code of Liberalisation of Capital Movements, the Model Tax Convention, and the Guidelines for Consumer Protection in the Context of Electronic Commerce. The reality, however, is that Japan has actually taken a passive stance in that regard. From now on, it is important for Japan to take a stance of "creating rules" rather than "observing rules" and become involved in the OECD process from the stage of designing and drafting rules, with its government and business community working together or in partnership with the business communities of other member countries, with a view to supporting the international business activities.

  2. Promoting domestic structural reform on the basis of objective data
    With attention on growth strategy as the "third arrow" of the Abe administration's economic policy, it is necessary to advance reforms by using objective data of the OECD as evidence for their necessity and legitimacy. OECD can provide for such data as statistics, forecasts, and examples of successful reforms in other countries that are thought to be useful in promoting structural reform in the areas of public finance, social security, and regulations and systems, which is essential for Japan to achieve sustained growth.

  3. Improving Japan's international credibility by sharing best practices
    Japan faces issues, which many other counties will experience in the future or that have no precedent in other countries as a model, such as a rapid aging of its population, risks from many natural disasters and the problem of limited natural resources, and Japan is expected to accumulate a set of policies and knowhow in areas such as health promotion and preventative care, disaster prevention and reduction, and energy and prevention of global warming. It is important that Japan will further utilize the OECD and share its best practices with other countries and regions, thereby increasing its presence, improving its credibility in the international community, and increasing its business opportunities.

  4. Rectifying vertically-divided administrative systems by participating in horizontal projects
    With respect to Japan's administration, harmful effects of vertical sectionalism and a lack of a control tower function have long been pointed out. This can be applied to the way how ministries deal with the OECD. It has been pointed out that the Government of Japan falls short of working out a common position from a strategic perspective or assigning ministries to deliberate on issues under consideration at the OECD on the basis of strategic understanding of those issues. More active participation in cross-sectional or horizontal projects implemented by the OECD would contribute to rectifying its vertically-divided administrative system.

(2) Contributing to Global Governance through the OECD

Japan should also make positive contributions to global governance through the OECD. That will help Japan earn the trust and confidence of the world broadly. Sharing best practices as described in (1)(iii) above is important from this perspective as well.

Japan, which was the first country in Asia to join the OECD, supported South Korea's accession in 1996 and has since worked to strengthen the OECD's relationship with Southeast Asia. It is important that Japan embody rules and norms that have been established on the basis of the fundamental values shared by OECD member counties in its own systems and actions, show other countries in Asia that those rules are universal and go beyond the interests of the advanced countries of Europe and North America, and positively reflect an Asian perspective in OECD rules as explained in 3(3)(ii). The role that Japan is expected to play is in fact building bridges between the OECD and Asia in that way.

Japan will chair the OECD Ministerial Council Meeting to be held this May, and it will take up "strengthening the relationship with Southeast Asia" as one of the themes of that meeting. That meeting should be an opportunity to further strengthen those efforts.

It cannot be said that people in Japan have currently a great deal of interest in the OECD. In concluding these recommendations, however, we at KEIDANREN expect that projects to be conducted for this year on the occasion of the 50th anniversary of Japan's membership in the OECD will be a good opportunity to raise interest in the OECD in Japan. KEIDANREN will also make efforts to ensure that the OECD is recognized as a genuinely effective international forum by providing a range of opportunities for businesses in Japan to take part in the establishment of global rules through the OECD.

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