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Who, what and whyis the OECD?
Economics of OECD Countries Introductory Lecture
Mark Robson LMH25 April 2005
Who, what and why is the OECD?
• Purpose of this lecture
• To set the scene for all those to follow (Martin Rebick on Friday)
• To put the economies in context
• To explain how the OECD came into being and what it does
• Not examinable!
What is the key question?
• Why did the USA so strongly want Mexico to become a member of the OECD in 1993 and was it the right decision?
• Or similarly– Japan and Korea– Germany and Czech Republic/Poland/Hungary
• Compare with– UK and Australia/New Zealand
Supranational Organisations
• United Nations (1945 - now 191 members)– Some linked but independent organisations (like the three
Bretton Woods institutions):
• International Monetary Fund• International Bank for Reconstruction and
Development (“The World Bank”)• World Trade Organisation
– Similarly WHO, ICAO, ILO, UPU, 7 others– Also offices (UNESCO) and programmes such as UNHCR,
UNDP, UNICEF
OECD is different• Minority sport with only 30 countries
– but now genuinely global, not regional such as ASEAN, APEC, NAFTA, MERCOSUR, EU
• Exclusive, by invitation only– regional groupings usually wish all neighbours to
join but this is deliberately selective
• European Commission has special status– on account of its role at eg WTO as negotiator for
the EU/Turkey Customs Union
Theory
• “An Economic Theory of Clubs” (1965)– James M Buchanan (Nobel Prizewinner 1986)
Economica 32:125, pp 1-14.– Inventor of Public Choice Theory– You can download it from JSTOR
– Bear in mind his context• “Racial discrimination was regulated by the so-called Jim Crow laws
from the Civil War, primarily (although not exclusively) in the U.S. Southern States. Such legal segregation lasted up to the 1960s.” (from www.nationmaster.com)
How did it start?
With a speech
by this man
on 5 June 1947:
How did it start?
With a speech
by this man
on 5 June 1947
George C Marshall,
US Secretary of
State, given at
Harvard University
The Marshall Plan
• “In considering the requirements for the rehabilitation of Europe, the physical loss of life, the visible destruction of cities, factories, mines and railroads was correctly estimated but it has become obvious during recent months that this visible destruction was probably less serious than the dislocation of the entire fabric of European economy.”
The Marshall Plan
• “The truth of the matter is that Europe's requirements for the next three or four years of foreign food and other essential products - principally from America - are so much greater than her present ability to pay that she must have substantial additional help or face economic, social, and political deterioration of a very grave character.”
The Marshall Plan
• “The remedy lies in breaking the vicious circle and restoring the confidence of the European people in the economic future of their own countries and of Europe as a whole. The manufacturer and the farmer throughout wide areas must be able and willing to exchange their products for currencies the continuing value of which is not open to question.”
The Marshall Plan
• “It would be neither fitting nor efficacious for this Government to undertake to draw up unilaterally a program designed to place Europe on its feet economically. This is the business of the Europeans. The initiative, I think, must come from Europe.”
The Marshall Plan
• “The role of this country should consist of friendly aid in the drafting of a European program and of later support of such a program so far as it may be practical for us to do so. The program should be a joint one, agreed to by a number, if not all European nations.”
Conference for European Economic Co-operation
• Led to creation of the Organisation for European Economic Co-operation (OEEC)
• Based in Paris
• Which dragged out the post-war reconstruction until 1960
• When the countries were all doing very nicely again and their diplomats and secretariat looking to justify their existence
OECD (1960)
• Dropped the “European” and added the “Development”
• Initial members (ie. ratifying in 1961/2):– Belgium, France, Germany, Italy, Luxembourg,
Netherlands (the original EC members)– Austria, Denmark, Greece, Ireland, Portugal,
Spain, Sweden, UK (later EC members)– Canada, United States, Iceland, Norway,
Switzerland, Turkey
New roles
• Many of the “homeless” functions from the defunct (1919 - 1946) League of Nations had been temporarily assumed by the UN, which acquired all its assets
• such as – international standardisation– frameworks to facilitate bilateral treaties
following an agreed model
League of Nations
• later United Nations in Geneva (Palais Wilson)
• Charter being Articles 1-26 of the Treaty of Versailles
• Best material in the world (probably) is in Sandiego – with John D Rockefeller money– http://history.acusd.edu/gen/WW2Timeline/1919League2.html– http://history.sandiego.edu/gen/text/versaillestreaty/league-images1.html
BUT
• The UN framework did not permit more developed countries to maintain their dominance over less developed countries
• Perfect case study: international tax policy and treaties to avoid double taxation– see the brilliant Sol Picciotto, International
Business Taxation (Law in Context), London: Weidenfeld and Nicolson, 1992
The double taxation problem
• Which nation has primacy to tax profits?
Capital exporter
Capital importer
Capital
Profits - taxed by country providing capital or country adding value?
Mexico and London drafts
• League Fiscal Committee– based at Princeton during WWII
• 1943 Mexico City draft– dominated by Latin Americans and Canada (all
capital importers
• Primacy of right to tax business income at source– “only in the State where the business or activity is
carried out”
Residence vs source
• Interest, dividends and royalties taxed at source
• Country of residence may tax but must give full credit
• 1946 London draft– dominated by capital exporters – limitation of tax at source to income produced
by a “permanent establishment”
Post war creation of UN
• Economic and Social Council– 1946/7 Financial and Fiscal Commission
• But international finances now for IMF and IBRD (World Bank)– Commission collapsed
• UN efforts concentrated on technical tax assistance to less developed countries– Model tax treaty work abandoned until taken up in
1955 by OEEC (led by Switzerland)
Becoming a OECD member
• In contrast to many other international organisations, becoming a member of the OECD is not an automatic process. The Member countries of the Organisation, meeting in its governing body (the Council), decide whether a country should be invited to join the OECD and on what conditions. This decision is taken at the end of what might be called "the accession process". (from www.oecd.org)
Becoming a member
• The Council determines the procedure to be followed and asks the appropriate Committees to examine the country's policies and regulations to ensure that it is ready to assume the responsibilities of OECD membership. Each country must have demonstrated its attachment to the basic values shared by all OECD members: an open market economy, democratic pluralism and respect for human rights. (from www.oecd.org)
Becoming a member
• Has any country failed in its application for membership? No. It is unlikely that the Council would begin an accession procedure unless there were a good chance of success. To date countries which have received such an invitation have had substantial links with the OECD. (from www.oecd.org)
Later joiners• 1964 - Japan
– Michio Morishima, Why Has Japan "Succeeded"?: Western Technology and the Japanese Ethos, Cambridge: CUP 1984
• 1969 - Finland• 1971 - Australia• 1973 - New Zealand
– but then no more until
• 1994 - Mexico• 1995 - Czech Republic• 1996 - Hungary, Poland, Korea• 2000 - Slovak Republic
Current Member countries
How do they rank in the world?• IMF Advanced Economies GDP 2003 $bn
– United States 10985– Japan 4302– Germany 2409– United Kingdom 1799 (G4)– France 1754– Italy 1471– Canada 867 (G7)– Spain 840– Korea 605– Netherlands 513 (10)
How do they rank in the world?• IMF Advanced Economies GDP 2003 $bn
– Australia 508– Switzerland 309– Belgium 303– Sweden 302– Taiwan 286 (15)– Austria 254– Norway 221– Denmark 211– Greece 174– Finland 162
How do they rank in the world?• IMF Advanced Economies GDP 2003 $bn
– Hong Kong 159
– Ireland 149
– Portugal 147
– Israel 109
– Singapore 91
– New Zealand 77
– Luxembourg 26
– Cyprus 13
– Iceland 11 (29)• omitting Mexico, Turkey, Poland, Czech, Hungary, Slovak
So who’s missing?• Top 10 “Other” Economies GDP 2003 $bn
– China 1410 (France is next bigger)– Mexico 626– India 575– Brazil 498– Russia 434– Turkey 240– Saudi Arabia 211– Poland 210– Indonesia 208– South Africa 164 (Finland is next smaller)
What are the main conditions?
• “The Committee on Capital Movements and Invisible Transactions and the Committee on International Investment and Multinational Enterprises jointly examine how the reviewed country would implement – the Code of Liberalisation of Capital Movements
– the Code of Liberalisation of Current Invisible Operations
were it to become a member of the Organisation.”
What are the main conditions?
• “The Codes are legally binding instruments. The core principles underlying the Codes are equality of treatment and non-discrimination. This means that a country may not privilege its nationals in comparison to those from other Member countries, nor may it favour one Member country over another.”
• There are also 160+ other legal instruments– but these two are the key ones
– many of the others concern standards/data disclosure
The subject areas• Agriculture, Capital Movements, Competition Law and
Policy, Consumer Policy, Current Invisible Operations, Development Assistance, Education, Employment, Labour and Social Affairs, Energy, Environment, Financial Markets, Fiscal Affairs, Information Computer and Communications Policy, Insurance, International Investment and Multinational Enterprises, Nuclear Energy, Public Management, Scientific and Technological Policy, Shipbuilding and Maritime Transport, Steel, Tourism, Trade
The (informal) theory of clubs
• Whom you keep out is more important than
• Whom you let in
• There is a high joining fee
• New members have to be “sponsored”
• And the existing members all persuaded
Curiosities of governance
• Unlike Bretton Woods, controlled by Finance Ministries…
• …OECD is controlled by Foreign Affairs Ministries/State Departments
• Ambassadors are appointed to the governing Council– where all countries are treated completely equally and
all decisions must be unanimous!
• It is temporary, with only one year budgets
How did Mexico join?
• The OECD official languages had always been English and French
• The headquarters had always been in Paris
• With the collapse of the Soviet bloc, the Germans saw a great opportunity in 1993
• To shift the focus east, move HQ to Bonn, introducing German as an official language, and open up the western borders
Diplomatic character
• No-one else wanted to move to Bonn or speak German (understandably)
• BUT the principle of desirable expansion into new markets was accepted– the target countries were not ready yet
• The US and Canada had introduced Mexico to NAFTA (Dec 1992, in force Jan 1994)– So it was already committed to REGIONAL
openness by then
National (self) interest
• English, French and Spanish speaking countries were all happy with the languages
• Northern American focus now distracted attention from German eastern ambitions
• The precedent (the first new member since 1973) opened up possibilities for Japan in respect of South East Asia
• For everyone else, in South America– and crucially, the Germans could hardly object!
What happened next?• Catastrophe in 1994 (very many studies)!
– Not today’s subject but why not take a look at Marco Espinosa and Steven Russell, The Mexican economic crisis: alternative views, Economic Review of the Federal Reserve Bank of Atlanta, 1996
– Download http://www.frbatlanta.org/frbatlanta/filelegacydocs/Espin811.pdf
• “The Mexican financial crisis was an expectations-driven liquidity crisis that shares many similarities with the financial panics that afflicted the U.S. economy during the late nineteenth century. The immediate cause was political turmoil.”
Samuel Goldberg and Schmuyle
Paintings by Victor Hartmann (d 1873)
• From “Pictures at an Exhibition” as set to music by Modest Mussorgsky– “Samuel Goldberg is richly dressed, and Schmuyle is in
rags. Mussorgsky combines the two paintings into one piece of music where he depicts a conversation between the two. The rich Jew (the supposed debtor) is represented by a heavy pompous theme, the poor man (the creditor) by a high-pitched bleating theme. As time goes on, the rich man's voice drowns out the other's, as the themes merge.”
• Who is doing whom the favour?
For (a lot) more on the OECD
• You can spend hours at www.oecd.org
• Plenty of interesting comparative data, research studies and analysis
• But don’t believe all the propaganda
• Key points– access to new markets– geographic/language/cultural associations provide
comparative advantage for current members
