1. The Council of the Organisation for Economic Co-operation and Development met at Ministerial Level on 3rd-4th June, 1980, under the Chairmanship of Mr. Kjeld Olesen, Minister of Foreign Affairs and Mr. Ivar Norgaard, Minister of Economic Affairs, for Denmark.

I. The Economic and Energy Situation

2. Ministers noted that the programme of concerted action adopted by Member countries in 1978 had beneficial results which have continued to make themselves felt over the last twelve months, particularly as regards reduced payments imbalances. But unemployment has remained unacceptably high, inflation has remained deeply entrenched in many countries, and progress towards better balanced and less inflationary growth has been interrupted by the massive rise in world oil prices.

3. At their meeting a year ago Ministers agreed that the right response to the inflationary impact of higher oil prices was non-accommodating monetary policies and tight fiscal policies, coupled with important efforts to gain acceptance for the fact that the rise in oil prices reduces, for all social groups, the scope for higher real incomes.

4. These policies are beginning to produce some positive results. In most Member countries, the latest wave of inflation may be nearing its peak, and there should be a slow but steady improvement over the next twelve months (unless there is a further rise in oil prices). An encouraging feature is that in quite a number of countries the inevitable real income losses resulting from higher oil prices appear to be being progressively absorbed without a significant acceleration in money incomes. Unavoidably, however, the combination of the rise in oil prices and the necessary restrictive monetary and fiscal policies is leading to an economic slowdown and rising unemployment in the OECD area over the next twelve months.

5. After reviewing the prospects, Ministers agreed that the basic aim is to restore price stability and to promote in both the short and the medium term the conditions for investment-led supply-oriented growth in output and employment. This involves:

• Bringing the oil-induced surge of inflation under control and keeping or bringing about a relationship between costs and prices sufficiently favourable to make investment worthwhile.
• As this is achieved, and as continuing efforts to reduce the underlying rate of inflation take effect, policies to ensure a sufficient level of activity for productive investment to be needed as well as profitable.
• Positive supply-oriented policies to improve productivity and inflation performance, and provide more jobs, through raising the share of savings and productive investment in GNP and improving the operation of product, capital and labour markets.

The Demand Side

6. Ministers noted the slowdown expected for the economy of the OECD area. They agreed, nonetheless, that in the period immediately ahead priority should continue to be given to containing oil-induced inflation and protecting the profitability of productive investment, in order to restore the conditions for an increase in employment, through:

• Monetary and fiscal policies designed to prevent higher oil prices from pushing up the underlying rate of inflation.
• A dialogue between or with the social partners on the need to accept the consequences of higher oil prices on real incomes, and on the role of labour market policies and other policies to improve the investment climate and the employment situation.

7. Ministers agreed that it would be a serious error to relax tight monetary and fiscal policies until the current surge in inflation has demonstrably been brought under control and the consequences of higher oil prices on real incomes are fully absorbed. As these are achieved, more buoyant private demand should emerge, particularly as adherence to target rates of monetary expansion should lead to significantly lower interest rates as credit demand eases and inflationary expectations subside. But, in many countries, it is doubtful whether on present policies there will be an entirely self-generated recovery. As the second oil shock is successfully absorbed, therefore, it may become desirable and possible to shift back to a less restrictive fiscal stance consistent with a balanced medium-term growth path. Countries where the underlying rate of inflation remains a major problem will, however, have to continue a restrictive monetary and fiscal stance, while countries where the oil shock has been absorbed and the underlying rate of inflation is satisfactory should not delay shifting their policy stance if the self-generated elements of recovery prove insufficient.

8. To the extent that, in the context of continuing efforts to reduce underlying inflation rates, room for fiscal action emerges over time, priority should be given to measures which lower costs and encourage investment, particularly investment in energy production, fuel switching and conservation.

9. Ministers agreed that Member countries, as a group, will have to accept a large but diminishing current account deficit, corresponding to their share of the counterpart of the OPEC surpluses, for some time to come. All countries will have to pursue policies designed to reduce inflation and to promote structural adaptation to higher energy prices. Those countries which have no difficulty in external financing should refrain from taking policy measures specifically aimed at reducing current account deficits.

10. Ministers stressed the continued importance of close co- operation on monetary policies and exchange market intervention to avoid excessive exchange rate variations, or variations in interest rates which do not correspond to the internal needs of the economy, as means of dealing with major changes in the pattern of international payments.

The Supply Side

11. Ministers agreed on the importance of supply-side measures to encourage investment and improve the operation of the market mechanism through the removal of distortions and rigidities, vigorous action against restrictive business practices and maintaining an open system for international trade and investment.

12. Ministers agreed that policies which would encourage more buoyant productive investment over the medium run should:

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• Ease the pressure on resources and taxable capacity in countries where public expenditure has been rising too fast.
• Avoid sharp or unpredictable changes in the direction of policy, so as to reduce uncertainty.
• Promote reforms, where appropriate, to remove existing structural biases against the use of capital, and measures to improve the operation of capital markets and increase the supply of risk capital.
• Bear in mind the need to ensure an efficient international allocation of investment.

13. Ministers agreed that measures to remove or attenuate rigidities in labour markets should, over time, improve productivity and inflation performance, prevent the early emergence of bottlenecks as growth picks up, and enhance employment prospects in the medium term even where there are short-term job losses.

14. Ministers agreed that even if a satisfactory solution of the employment problem was not within reach in the short term, great efforts should be made to alleviate those aspects of the unemployment situation which can be effectively dealt with under present circumstances. The prospect of continuing high and rising levels of unemployment, especially among young people strengthens the case for such approaches as targeted programmes of training and work experience and, where appropriate, job creation or incentives to improve the employment prospects of disadvantaged groups as well as migrant workers.

15. In putting stress on the supply wide, Ministers reaffirmed the importance of the Orientations for positive adjustment policies, relying as far as possible on market forces to direct labour and capital to their most productive uses, which they adopted in June 1978, and welcomed the encouraging progress made in the Organisation's work in this area.

.Energy

16. The oil price increases in 1979/80 are severely damaging the world economy. Moreover the occurrence of two large and sudden price increases since 1973 reflect continuing danger for future economic and social development worldwide. The degree of risk is underlined by the fact that the multiple price increases since the beginning of 1980 have occurred despite falling oil demand, and appear to have been made without taking into account their adverse impact on the world economy.

17. Given the dangers outlined above and in particular the currently fragile state of the world economy and the serious damage that would be done by further large and sudden oil price increases, Ministers agreed that adequate arrangements to limit the damaging effects of short-term market disruptions will have to be carried through and adapted to the situation as it evolves.

18. Ministers agreed that, in order to restore satisfactory conditions for economic growth, strong policy action to improve the energy supply/demand pattern in the medium term is an urgent necessity. Ministers agreed that for this purpose the price mechanism has an important role to play in accelerating the process of using energy more rationally, switching away from oil and increasing production of alternative sources of energy. and thus bringing about the necessary structural change. It is therefore important for OECD countries, both as producers and consumers of energy, to make proper use of the price mechanism, fiscal measures and other energy policy measures to strengthen and hasten the action needed.

19. Decisions have been taken by OECD countries in various frameworks in order to:

• Strengthen energy policies in ways which ensure that structural changes in energy economies actually do take place over the medium term, reducing the need for energy, and oil in particular.
• Make proper use of short-term instruments to limit the damaging effects of short- term disruptions, which could occur in the oil market.

In this respect Ministers took note of the decisions taken at the meeting of the IEA Governing Board at Ministerial level on 22nd May, 1980. Ministers agreed that action on these lines is essential for continuing economic and social stability.

International Trade

20. Recognising that an open multilateral trading system is a prerequisite for the achievement of their macro-economic objectives and the importance of vigorous efforts to resist protectionism, governments of OECD Member countries have adopted the attached new Declaration on Trade Policy. They have, in particular, declared their determination to maintain and improve the open and multilateral trading system, implement fully and effectively the commitments made in the Multilateral Trade Negotiations, strengthen trade relations with the developing countries, and avoid restrictive measures in the trade field and on other current account transactions. They also agreed to continue efforts to ensure a more general public understanding of the advantages for all of an open trading system.

21. Ministers, having in mind their common aim to expand world trade, gave their full support to the efforts under way to adapt the terms of the Arrangement on Export Credits to bring them closer to current market conditions and reduce distortions in export competition, recognising the differentiated treatment of developing countries in the Arrangement. They welcomed the immediate measure recently taken in the field of interest rates and encouraged the Participants in the Arrangement to pursue their efforts, as it was agreed among them, with a view to reaching a mutually acceptable solution by 1st December, 1980.

22. Ministers reaffirmed the importance they attach to international co-operation in the field of commodity policy in the interest of all producer and consumer countries, recognising the special interests of developing countries in this field. They expressed their determination to contribute to the successful outcome or the negotiating conference on a common fund and to progress in discussions and negotiations on commodities and commodity agreements with a view to improving international commodity trade, in particular long term supply and demand prospects.

23. Ministers also agreed on the need to:

i) ensure that actions taken to deal with the problems of specific sectors, including those in the field of trade policy, conform to the agreed Orientations for positive adjustment policies, and are consistent with the objectives of containing inflation and improving productivity and with the mutual benefit deriving from the increased trade between developed and developing countries;

ii) intensify efforts in the agriculture sector towards the achievement of the objectives agreed at the meeting of the Committee for Agriculture at Ministerial level in March 1980, inter alia to facilitate a more efficient use of agricultural resources on a world- wide scale and an orderly expansion of world trade and to improve both access to markets and security of supply and to avoid trade practices that lead to market distortions.

24. Ministers considered the implications of global economic trends for relations with developing countries and affirmed their determination to respond positively to the needs of developing countries in the difficult period ahead. They stressed the importance of constructive co-operation with developing countries in forthcoming international negotiations with the aim of restructuring international economic relations in order to improve the functioning of the interdependent world economy and to help developing countries to achieve rapid economic and social development.

25. Ministers emphasized that the effects which the economic slowdown in the OECD area may have on developing countries growth must and can be minimised and that it is critically important for developing countries as well as industrial countries that policies strive to this end. They stressed that in the current circumstances it is in the best interest of all that OECD countries pursue policies which curb inflation and favour investment over consumption, thereby laying the ground for faster non-inflationary growth in the 1980s.

26. The immediate consequences for developing countries of the oil price rises and the economic slowdown in the OECD area are major increases in their current account deficits and balance-of-payments adjustment problems. Ministers considered that the situation called for a combination of effective mechanisms for development and balance-of-payments financing and determined policies: by developing countries to contain inflation, to adjust to external constraints and to step up productive investment as part of coherent adjustment and longer-term development efforts; by OECD countries, in addition to their development financing efforts, to maintain open markets to facilitate developing countries efforts to expand exports.

Effective Mechanisms for Development and Balance-of-Payments Financing

27. Ministers recognized the key role of the recycling process. They recognised the difficulties of the developing countries in their development and balance-of-payments financing which have been increased by the deterioration in the global economic situation. They were agreed on the importance of keeping existing arrangements for coping with development and balance-of-payments financing needs under review. Ministers believed it was important to ensure that mechanisms, policies and resources were adequate. They noted that these matters were under consideration in the International Monetary Fund and in the World Bank and expressed the wish that the complementary work in the OECD on recycling problems for developing countries should continue to be pursued.

28. Ministers emphasized that, especially in view of the difficulties of some developing countries in attracting commercial lending, the international financing institutions must play an important role in providing adequate financial assistance including lending for structural change, while encouraging effective adjustment policies. They agreed that these institutions should have effective policy and financial support and that legislative delays in replenishment actions should be overcome as quickly as possible. They fully support the adaptations in the international financial institutions now underway.

29. Ministers agreed that in this period of difficult adjustment and development financing problems increased levels of official development assistance are of particular importance for developing countries, especially the most disadvantaged among them. Ministers affirmed the determination of their governments to contribute adequately and to the best of their ability to the international aid effort, in accordance with their commitments to the international aid objectives. They stressed the importance of improved aid effectiveness and quality to achieve the greatest possible development effects and to sustain public opinion support. Ministers welcomed that OPEC countries have become a major source of aid and hope that these countries will decide to channel part of their increased earnings into renewed ODA expansion. They expressed the hope that CMEA countries would strengthen their contribution to the international development assistance effort.

Direct Investment

30. Ministers emphasized the importance of an improved investment climate to achieve an enlarged flow of direct investment to developing countries. The negotiations in the United Nations on a Code of Conduct for Transnational Corporations should result in a positive outcome at an early moment. Ministers expressed their determination to contribute to this result.

Trade

31. The determination of OECD governments to strengthen trade relations with the developing countries is reflected in the new Declaration on Trade Policy and other relevant conclusions of this meeting (see paragraphs 20-23 above). Ministers stressed the potential advantages of the Multilateral Trade Negotiations for developing countries and noted that the greater the number of countries which decide to use and participate in the mechanisms provided by Multilateral Trade Negotiations, the greater will be the prospect of improvements in trade relations between developed and developing countries. Ministers also recognised the importance of commodities for the export earnings of the developing countries. As stated in paragraph 22 above, they expressed their determination to continue their efforts to promote international co-operation in the commodity field, including in negotiations on a Common Fund, bearing in mind the special interests of the developing countries.

Energy Co-operation

32. Ministers affirmed the importance they attach to discussion of energy issues with developing countries with a view to considering questions of common interest. They stressed the need for strengthened co-operation with interested developing countries to help them in identifying and developing their indigenous energy resources, thereby contributing to their own economic development and to more balanced world energy markets. In their view this is a particularly promising area for co-operation between industrial countries and oil-exporting countries. OECD countries are also ready to strengthen industrial and technological co-operation with oil-exporting developing countries to help them in their efforts to build strong and diversified economies.

Food Supply and Food Security

33. Ministers agreed that action to secure adequate food supplies and greater food security are high priority international objectives. International measures to support national programmes to increase food production, particularly for low-income food deficit countries, should be considered urgently. In this context, they stressed the desirability of an improved grains agreement and measures to reduce fluctuations in agricultural markets.

Refugees

34. Ministers noted that the numbers and problems of refugees were growing dramatically, and stressed the need for greater and more timely relief efforts.

The Brandt Commission Report

35. Ministers welcomed the Report by the Independent Commission on International Development Issues which should provide a major impetus to action by increasing awareness of the common interest in and responsibility for better balanced global economic progress and of the incompatibility of widespread extreme poverty and privation with global peace and progress.

The New International Development Strategy and The Global Negotiations

36. Ministers attach great importance to the adoption by the upcoming Special Session of the United Nations General Assembly of the new International Development Strategy for the coming development decade as an expression of the determination of the international community to make progress towards the fundamental objectives of development - improving the productivity of the economy and welfare of people, especially in the most disadvantaged developing countries, and working towards more equitable international economic relations. It is important that the new Strategy be realistically ambitious, comprehensive and provide an effective framework for improved development co-operation.

37. Ministers welcomed the forthcoming global negotiations on international economic co-operation for development as a major opportunity to tackle problems of common concern. They expressed their determination, after adequate preparation, to contribute to the success of these negotiations which should reflect the common interest of all participating countries. They reaffirmed the commitment of their governments to General Assembly Resolution 34/138 and emphasized the necessity of agreement on an agenda and procedures under which:

• there is concentration on problems of importance for the global economy and for development;
• a coherent and integrated approach is ensured;
• full use is made of the competence of the existing specialised bodies;
• the contributions of all countries can be mobilised.

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Source: Activities of the OECD. Copyright OECD 1980. Reproduced by permission of the Organisation for Economic Co-operation and Development.