1.The Council of the Organisation for Economic Co-operation and Development met at Ministerial level on 13th and 14th June, 1979, under the chairmanship of Dr. Hannes Androsch, Vice-Chancellor and Federal Minister of Finance of Austria.

2. Renewed inflation and uncertain energy supplies have become major obstacles to achieving sustained economic growth and more jobs in OECD countries. Economic and energy policies must respond if serious consequences for both developed and developing countries are to be avoided. It will be easier to take the difficult decisions required if Member countries act together.

3. Ministers therefore agreed on the need for greater solidarity among Member countries. They carried forward the concerted action programme adopted last year, revised in the light of the current economic and energy situation, and agreed on some guidelines for policies over the medium term. They reviewed the outcome of UNCTAD V and reaffirmed their commitment to constructive co-operation with the developing countries.

I. Overcoming the Obstacles to Sustained Economic Growth

4. The programme of internationally concerted action adopted last year has yielded positive results in more internationally balanced economic growth, reduced payments imbalances and greater exchange rate stability. It is encouraging that:

• some countries succeeded in bringing inflation back down to the level of the 1960s,
• where capacity utilisation has risen and profitability has improved, productive investment has picked up: and,
• where demand management policies and exchange rates have been working in the right direction international payments imbalances have been sharply reduced.

5. On the other hand:

• even before the sharp rise in oil prices the underlying rate of inflation had begun to pick up again in a number of countries:
• unemployment remains unacceptably high in most Member countries;
• there has been a serious turn for the worse in the shorter and medium term energy situation; and,
• with slow growth and high unemployment there is an ever present threat of increased protectionism in all its many forms.

6. Inflation. Ministers agreed that the most obdurate obstacle to faster growth and more jobs is the continuing high rate of inflation in many Member countries, and the risk that it may accelerate. Inflation undermines growth directly by creating uncertainty and inhibiting investment; it may also require governments to pursue restrictive demand management policies.

7. Energy. Ministers examined the economic implications of the energy situation. They took note of the outcome of the meeting of the IEA Governing Board at Ministerial level on 21st-22nd May. There is now a real danger that, without responsible policies by oil consumers and producers alike, the energy situation will seriously damage the world economy.

8. Without effective action to restore balance in world oil markets the rise in oil prices could set off a new inflation-generated recession as in 1974-75. Many of the measures needed to reduce the growth of energy consumption quickly may be painful, but if they are not successful the inevitable consequences in terms of increased inflation leading to less growth and more unemployment will be far more costly and socially detrimental.

9. There is no escape from the reduction of real incomes caused by higher prices for imported oil; claims for compensatory increases in money incomes will only make matters worse by aggravating inflation and increasing unemployment.

l0. Payments imbalances. Welcome progress has been made in reducing payments imbalances within the OECD area, but they could re-emerge due to strengths and weaknesses in countries competitive positions, and become again a constraint on growth.

11. Higher oil import bills will inevitably worsen the current account situations of oil importing countries. While existing financial mechanisms seem capable of providing sufficient finance to meet higher current deficits in most cases, the resulting increase in indebtedness is a matter of concern to oil importing countries, especially the developing countries among them. Ministers noted that in present circumstances, countries highly dependent on the spot market may face particular difficulties.

The Policy Response

12. Ministers recognised that economic and energy policies have become inseparable. They are convinced that there is a combination of policies which can, over time, significantly ease the energy and inflation constraints on economic growth and permit continued economic and social progress. To this end they have agreed on the following guidelines for policy.

Policies for the Next 12-18 Months

13. Ministers agreed that:

i) The demand management elements in last year's concerted action programme will be carried forward with particular emphasis on:
• the need for a cooling-off period in the United States to achieve an important reduction in the rate of inflation
• the desirability of avoiding a significant slackening of the growth of domestic demand in the rest of the OECD area, taken as a whole, and the role that, to varying degrees, Germany, Japan, Switzerland, Belgium, the Netherlands and Austria can play in this respect; and,
• the need for virtually all other countries to pursue cautious demand management policies in order to reduce inflation and, in some cases, external deficits which pre-date the latest oil price rise.

  ii) To this end, however, effective action to reduce energy consumption, or increase production, or both, so as to implement the commitments agreed to in different fora to reduce Member countries demand for oil on the world market by some 2 mbd is essential. The present degree of understanding of the operation of the oil market is unsatisfactory and should be improved.

  iii) Higher oil prices should be passed on in an appropriate manner to energy users in order to encourage conservation and the development of alternative energy sources. Member countries that have not already done so should raise the price of domestically produced oil to the world level as soon as possible.

  iv) Important efforts will be made to gain acceptance of the fact that the rise in oil prices reduce for all social groups, the scope for higher real incomes.

  v) An assessment is being made, as a matter of urgency, of the progress that countries have made towards reduction of oil demand, and, under the direction of the Economic Policy Committee, of the macro-economic consequences of the energy situation. When these have been completed the Organisation will examine the implications for demand management policy. If substantial further oil price increases have occurred, growth objectives for 1980 will have to be reduced. Failure to limit the pass-through of higher oil prices into higher money incomes could also make more cautious demand management policies inevitable.

  vi) Close monetary co-operation, including through arrangements agreed between the United States, Germany, Japan and Switzerland, through the European Monetary System and through the IMF, will be continued.
  

Policies for Overcoming the Medium Term Constraints on Growth

The Inflation Constraint

14. Although there are differences between Member countries in the success they have had in restoring the conditions needed for sustained non-inflationary growth, improved economic performance requires consistent and sustained attention to the price stabilization objective. Countries where domestic pressures on the price level have been reduced are better placed to increase economic activity and reduce unemployment. Other countries must concentrate on achieving better price stability; as they succeed in this they will create the conditions for sustained growth and policies can become more growth-orientated.

15. Better price performance required cautious and steady monetary and fiscal policies. Budget deficits should not exceed any excess of savings in the private sector. Where rising taxes and social security charges have generated inflationary pressures the share of public expenditure in GNP will have to be restrained.

16. Better price performance also requires further efforts to seek greater consensus and where appropriate modify wage and price setting behaviour to restore the profitability of productive investment, ease inflationary pressures caused by the wage-price spiral, and facilitate necessary changes in relative prices and the structure of wages.

17. There is a risk that slow growth becomes self- perpetuating. It inhibits investment and encourages defensive attitudes on the part of Governments, business and labour such as protectionism and support for declining and inefficient activities. These reactions generally impair productivity and sharpen the inflation constraint on growth by raising costs and reducing the supply of available goods. It makes little sense to accept the need for a further period of unsatisfactory growth performance because of the inflation constraint if Governments then try to mitigate the effects on employment by measures which reduce productivity or increase costs and prices in other ways.

18. Cautious demand management policies should therefore be combined with action or the unwinding of previous actions to improve the supply side by benefiting from lower cost imports, encouraging investment, and facilitating necessary structural adjustments.

19. Ministers therefore stressed the importance of the special two-year programme on positive adjustment policies just adopted by the Organisation. All competent bodies of the Organisation will pay special attention to policies in their field of competence which have an impact on structural change. A special group of senior officials has been created to keep under review the macro-economic and international consequences of measures promoting or hindering necessary structural adjustments in the field of manpower, industrial, agricultural, regional, trade and other policies.

20. Positive adjustment should rely as far as possible on market forces to encourage mobility of labour and capital to their most productive uses. Measures to help sectors or firms in difficulty should be temporary and integrally linked to the implementation of plans to phase out obsolete capacity and reestablish financially viable entities. Positive adjustment can be facilitated by the dissemination of better information on the costs and benefits of government measures, proper consultation between labour and management, vigorous action to maintain competition and curb monopoly power, policies that encourage research, innovation and investment, well designed regional policies, and efforts to avoid unnecessary regulation and reporting requirements.

21. Ministers also reaffirmed their attachment to an open world trading system and their determination to continue to fight against protectionism in all sectors and to work towards improvements in the system. They therefore:

i) Welcomed the completion of the Multilateral Trade Negotiations, and stressed the need for timely and effective implementation of the results.

ii) Extended their 1974 Trade Declaration (the "Trade Pledge") for an additional year.

iii) Agreed to make particular efforts in the work of the Organisation in the coming year to study the problems of agricultural trade.

22. Ministers agreed that better functioning of commodity markets, including improved market access and security of supplies, would benefit both consumers and producers and reduce one potential source of inflation.

23. There was broad agreement on the need, in appropriate cases, to pursue efforts to promote higher employment, particularly among the disadvantaged groups.

i)There may be scope for modifying hiring practices in the public and private sectors to alleviate the problems of youth and disadvantaged groups and to respond to the growing demand for flexible part-time job openings. The Organisation should study the possible role of marginal employment subsidies, and of shifts away from heavy payroll taxes, as well as the impact of migration policies on employment and the efficient functioning of labour markets.

ii) The possibility of work-sharing arrangements should be assessed; but attempts to increase the number of jobs by accelerating the tendency towards a shorter working week have to be looked at with caution since they may have inflationary consequences.

iii) There may be scope for expanded training and retraining programmes as a vehicule for improving skills and hence future productivity, while reducing current unemployment.

Measures such as those described above should be undertaken only after consideration of their possible adverse impact on productivity and inflation.

The energy constraint

24. Without strengthened policies energy supplies over the medium run will not be sufficient to support an adequate rate of economic growth. Taking into account the different situations in Member countries, Ministers agreed on the urgent need for:

i) A pricing and tax policy for oil and other energy sources which recognises that the long-term trend of real energy prices is almost certainly upwards, and that this expectation should become firmly embedded in the consciousness of energy users.

ii) Conservation programmes based on an appropriate mix of pricing policies, voluntary programmes, fiscal incentives and disincentives and mandatory controls where necessary; a major effort to increase production, trade and use of coal and gas; production of indigenous oil: continued development of nuclear power with the necessary safeguards, having due regard to legal and constitutional provisions; major R & D efforts on new energy techniques and renewable energy resources; and assistance to non-oil developing countries in the identification and development of their energy resources.

The balance of payments constraint

25. To ease the balance of payments constraints on growth:

i) Countries in a strong external position should maintain the momentum of domestic demand; deficit countries should concentrate on controlling domestic inflation; and exchange rates should play their proper role in the adjustment process.

ii) The structural imbalances that remain call for resolute policies to improve productivity and stimulate exports in the deficit countries, and policies by the surplus countries to encourage imports and rely primarily on domestic demand for economic growth.

iii) When current account imbalances nevertheless remain important, surplus countries should ensure offsetting capital outflows on a sustained basis. The Organisation is instructed to give further attention to these questions.

II. World Interdependence and Relations with Developing Countries

26. Ministers considered the implications of global economic trends for relations with developing countries. They reaffirmed the need for strengthened co-operation with the developing countries which is an indispensable element in achieving more sustained and stable world economic growth and which provides an improved basis for development policies. They stressed that in view of the difficult global policy challenges ahead, improved co-operation with developing countries had assumed even greater importance.

27. Ministers discussed the results of UNCTAD V. They felt that, although the overall results of the Conference had been limited, valuable progress had been made in specific areas. It is now essentiel to continue constructive co- operation with developing countries in the appropriate fora and in the preparations for the new International Development Strategy. In this connection, Ministers noted the importance of the participation of all countries, including the industrialised countries outside OECD, in the international development effort.

28. Ministers welcomed the convening of the United Nations Conference on Science and Technology for Development to be held in August in Vienna as a major opportunity to promote effective international scientific and technological co- operation, especially for the benefit of developing countries, and pledged to work towards its successful conclusion.

29. Ministers noted the value of pragmatic forms of consultation and co-operation with developing countries in areas of significant mutual interest. The contribution that the Organisation can make in this should be actively examined.

Trade and Adjustment

30. An expansion of world production and trade and further changes in their structures are essential means to raising living standards and promoting economic and social progress in developed and developing countries alike.

31. Ministers acknowledged the desire of developing countries to industrialise further and to contribute a larger share of world trade in accordance with their comparative advantage. They stand ready to assist in this process in such areas as trade, investment and technical co- operation.

32. Ministers stressed the importance to trade relations with developing countries of the general measures to maintain and further improve the open international trade system now being taken. In particular they:

i) Underlined the significance of the new special two- year programme of the Organisation on positive adjustment policies to facilitate mutually beneficial structural change in production and trade.

ii) Emphasized the significance of the renewed Trade Pledge for their trade with developing countries.

iii) Declared their determination to implement the results of the Multilateral Trade Negotiations and to build on these results taking into account the particular concerns of developing countries.

33. While OECD countries bear a particular responsibility in the maintenance of an open international economic system, they believe that developing countries, in particular those which have reached a relatively advanced stage of industrialisation and have shown their capacity to compete effectively on international markets, should gradually take a larger part in this effort: by liberalising trade both among themselves and globally, complying more fully with international rules in this field, and more generally adopting policies contributing to satisfactory trade and payments relations.

Energy Co-operation

34. Ministers reaffirmed their willingness to contribute to international energy co-operation among developed and developing countries and to discuss energy questions of mutual interest with oil-exporting and oil-importing developing countries. They welcomed the adoption by the World Bank of an energy programme which should serve to strengthen the domestic energy production of oil-importing developing countries and noted related activities by other international and regional institutions. They stressed the urgency of examining with interested developing countries the scope for strengthened co-operation to identify and develop these countries energy resources. They welcomed the report of the OECD Council Working Party established last year to develop a co-ordinated effort to help developing countries to bring into use technologies related to renewable energy, especially in the light of the forthcoming United Nations Conference on New and Renewable Energy Resources.

Commodities

35. Ministers noted with satisfaction the results of the negotiations on the Common Fund. They agreed to pursue, in a positive spirit, the establishment of this mechanism as well as the current discussions and negotiations on individual commodity agreements. They emphasized their interest in examining the scope for further action to strengthen food and commodity production and processing in developing countries, bearing in mind their development needs and priorities.

Environment

36. Stemming and reversing environmental degradation through deforestation, desertification and soil and water erosion is a matter of global concern and required international co- operation. Ministers recognised that developing countries have limited resources for such purposes and need international support.

Aid and Financial Resource Transfers

37. Ministers underlined the importance and substantially- increased and stable flows of aid, finance and investment. Recognising the essential role of aid, Ministers called for an expanded, qualitatively-improved, and equitably shared collective effort for official development assistance. Concessional transfers should, as far as possible, be concentrated on the least-developed and other developing countries most in need. They invited the Development Assistance Committee, bearing in mind the studies on this subject in other international fora, to conduct an in-depth review of the scope for improved financial co-operation with developing countries, at adequate levels and reflecting their specific development problems, including their debt problems with a view to contributing positively to the new International Development Strategy.

III. International Investment and Multinational Enterprises

38. The Ministers undertook the Review foreseen in the 1976 agreements on International Investment and Multinational Enterprises. They noted with satisfaction that the three related instruments approved in 1976, dealing respectively with guidelines for multinational enterprises, national treatment for enterprises under foreign control and with incentives and disincentives for investment, have demonstrated their effectiveness as a framework for strengthened international co-operation in matters related to international investment and multinational enterprises not only for the Member governments but also for the business community and the labour organisations.

39. Ministers affirmed the continued commitment of their governments to the 1976 Declaration. They agreed to steps designed to further strengthen the effectiveness of their co-operation in future. In this connection, as regards the guidelines for multinational enterprises, where one addition is being introduced, the follow-up procedures at national and international levels are to be strengthened and developed further through additional arrangements for consultations with business and labour and for reporting. Ministers also approved new work to be undertaken on the use of investment incentives and disincentives and the international repercussions on other countries of such measures.

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Source: Activities of the OECD. Copyright OECD 1979. Reproduced by permission of the Organisation for Economic Co-operation and Development.