1. The Council of the OECD met on 12th and 13th May at Ministerial level. The meeting was chaired by Dr. Martin Bangemann, Federal Minister of Economics of the Federal Republic of Germany. The Vice-Chairmen were Mr. Uffe Ellemann-Jensen, Minister for Foreign Affairs, and Mr. Palle Simonsen, Minister of Finance, of Denmark; and Mr. Roger Douglas, Minister of Finance of New Zealand. On the fortieth anniversary of his Harvard speech, the Council paid tribute to the vision of international cooperation framed by General George C. Marshall.

I. Improving Growth Prospects

2. The economic strategy of the OECD countries has, over recent years, brought inflation down to its lowest level for a generation, at the same time maintaining positive growth rates. The long-term effort must be pursued, taking account of developments, in order to strengthen the prospects for stable and sustainable growth; to reduce substantially the levels of unemployment - unacceptably high almost everywhere; to correct the massive current account imbalances of the major countries; to consolidate the improvement in exchange rate configurations while achieving greater stability; and to improve the economic performance of developing countries. The first and foremost contribution that the OECD countries can make to world prosperity is to foster vigorous economies in an open multilateral trading system.

3 . In order to achieve these objectives, Ministers agree upon the following wide-ranging and mutually reinforcing actions. They are based on a common will to use to the full the possibilities of international co-operation and to exploit for the best the interactions between macro-economic and structural adjustment policies. Improved policies in both fields are interrelated elements in the strategy for stronger growth of output and employment. Both are essential. Macro-economic policies stabilise expectations, build confidence for the medium-term and strengthen growth prospects. Micro-economic policies create a more dynamic and responsive environment, in which growth and adjustment forces are stronger and macro-economic policies are more effective.

II. Macro-economic Policies

4. Macro-economic policies must respond simultaneously to three needs: maintaining medium-term orientations which contribute to the stability of expectations and building confidence; unwinding the present exceptionally large external imbalances of the major countries; exploiting to the full the potential for non-inflationary growth and thus for stronger job creation. International complementarity and compatibility of policies are essential in order that adjustment takes place in the perspective of growth and of exchange rate stability. Each country must make its contribution to the collective effort. In particular, the effective implementation of the commitments in the Louvre agreement , together with those in the recent communique of the Group of Seven countries, shall be achieved quickly. Member countries will reinforce their co-operation, continue to review the policy requirements of the situation and introduce further measures as necessary.

5. Monetary policies, supported by fiscal policies, should remain geared towards growth of monetary aggregates and maintenance of financial market conditions consistent with low inflation objectives and real growth potential; they should also contribute to the orderly behaviour of exchange rates. In view of the outlook for low inflation in many countries, a further decline of interest rates in these countries - in particular a market-led decline of long-term rates would be helpful.

6. Since the possibilities for monetary policy, by itself, to improve prospects are limited, these need to be enhanced by further action on the fiscal front.

7. In the United States. the process of reducing the Federal budget deficit - which is coming down from 5.2% of GNP in 1986 to less than 4% in 1987- must and will continue in the years ahead. Holding firm to this course is essential for external and domestic reasons. The confidence of economic agents, in the United States and elsewhere, depends heavily upon it; so do, consequently, the prospects for moderate interest rates and stable exchange rates, sound economic activity with an adequate flow of funds into productive investment, and resistance to protectionist temptations. These highly beneficial effects of reducing the Federal budget deficits should over time outweigh any short-term damping effect in the United States. Exchange rate changes have improved the cost competitiveness of US products and are having a positive effect on net exports.

8. For Japan the objective is to achieve stronger growth with domestic demand increasing more rapidly than output, accompanied by a rapid growth in imports, consistent with the substantial terms of trade gains which have taken place. The reaffirmation by the Japanese Government of its intention to further improve access to its domestic markets for foreign goods and services is also welcome. The Japanese authorities will take further substantial fiscal and other measures to strengthen the growth of domestic demand. This will not prejudice medium-term budgetary objectives of the central government. In this regard, it is to be noted that the recently announced Japanese initiative to expand domestic demand is part of the far-reaching longer-term effort to reorient the Japanese economy.

9. In Germany, also, the growth of domestic demand, and particularly of private investment, must exceed substantially the growth of potential output. In order to support growth and external adjustment, the German government has already announced that some scheduled tax cuts will be accelerated to 1st January 1988 and a broader tax reform will be implemented in 1990. This will have a favourable influence on investment. In addition, further measures of structural adjustment, including reduction of subsidies, will be implemented. Taken together, these actions will contribute to an increase of the general budget deficit relative to GNP between now and 1990. Fiscal prudence over recent years permits this kind of action. Should there be a serious risk to the sustained expansion of domestic demand, especially private investment, the medium-term strategy for growth and higher employment would be adjusted as a consequence.

10. Other countries with substantial current account surpluses should also take appropriate action to encourage domestic demand growth relative to sustainable output.

11. Some countries face tight constraints insofar as fiscal policy is concerned. For countries which have large budget deficits, priority must continue to be given to correcting them. There are a few countries in Europe, however, where budget deficits are not large but where current account considerations constrain policy. Scope for fiscal action on the part of these countries would be increased and growth prospects improved if demand strengthened in their major trading partners. In this latter respect, and as an example, a co-operative economic strategy of the EEC countries could take advantage of their interdependence and be accompanied by other European countries.

III. Structural Adjustment Policies

12. Ministers welcome the Report on Structural Adjustment and Economic Performance. Despite progress in recent years, OECD economies are still hampered by major distortions and rigidities. These compound current macro-economic problems and retard growth. Increasing competition in product markets, responsiveness in factor markets and effectiveness in the public sector will contribute significantly to growth potential in all countries. Priorities in reforming structural policies will vary in individual countries reflecting differing national situations but also international requirements. It is thus essential that concerted action be guided by common principles. To ensure the greatest gains from reform, action must be broad, bold, sustained and, to the extent possible, built on international economic cooperation. The effects of such action will emerge mainly in the medium term. Implementation now, by expanding opportunities and bolstering confidence about the future, will underpin present efforts to strengthen non-inflationary growth and to reduce unemployment. Successful structural adjustment can simultaneously increase fairness and offer improving opportunities for all. Increasing social dialogue is an integral part of this process.

13. Industrial subsidies, to the extent they are a source of domestic and international distortions and an impediment to structural adjustment, should be reduced. The work on industrial subsidies initiated by the Organisation is, therefore, to be encouraged and pursued actively.

14. The conclusions drawn by the Economic Policy Committee [PRESS/A(87)25] on the Report on Structural Adjustment were endorsed and will guide action in the forthcoming years. The Secretary-General is requested to report. at appropriate intervals, on the work of the Organisation on micro-economic and structural issues at subsequent meetings of the Council at Ministerial Level.

Trade Policies

15. International trade provides, through competition, the most powerful means of promoting economic efficiency and growth. Measures which impede or distort the functioning of international markets tend to impair structural adjustment. preserve outdated economic structures, damage consumer interests, weaken incentives for efficient investment and thus hinder economic growth. Therefore, it is of paramount importance to reverse recent trends towards restrictive trade measures, notably of a bilateral or a discriminatory nature, and to act with determination to strengthen and extend the open multilateral trading system. The OECD will intensify its monitoring of the various aspects of trade policies.

16. The Uruguay Round presents a unique opportunity to create an improved framework for trade in the 1990s and beyond. It is essential to ensure that renewed signs of protectionism and conflict management on a bilateral basis should not be allowed to undermine confidence in the Punta del Este Declaration or in the negotiating process it has initiated. Ministers affirmed the determination of their countries to resist these trends and to work for rapid, sustained and substantive progress in the negotiations towards a balanced global result which would be of benefit to all, developed and developing countries alike. OECD countries will prove this determination by tabling in the coming months comprehensive proposals covering the various fields of the negotiations, by carrying out the standstill and rollback commitments they have entered into and by opposing domestic protectionist pressures. In keeping with the Punta del Este Declaration, Ministers reaffirmed that the conduct and the implementation of the outcome of the negotiations shall be treated as parts of a single undertaking. However, agreements reached at an early stage may be implemented on a provisional or a definitive basis by agreement prior to the formal conclusion of the negotiations. Early agreements shall be taken into account in assessing the overall balance of the negotiations.

17 . Ministers noted the welcome progress on trade in services in the Organisation. This is of particular importance in the light of the inclusion of services in the Uruguay Round. Further related work will be needed to refine the concepts for liberalisation of trade in services as well as continuing efforts to strengthen the OECD Codes of Liberalisation of Invisible Operations and of Capital Movements. This will be pursued actively.

18. Ministers welcome the agreement recently reached by the Participants in the Arrangement on Guidelines for Officially Supported Export Credits in response to directives from the 1984 and 1985 meetings of the Council of the OECD at Ministerial level. The agreement will strengthen substantially the Arrangement and reduce the risk of trade and aid distortions. Ministers also welcomed the recent agreement on the related DAC guiding principles. These are a tangible sign of co- operation in a difficult period.

Agriculture

19. The joint report of the Trade and Agriculture Committees ("National Policies and Agricultural Trade") was approved. This important work clearly highlights the serious imbalances that prevail in the markets for the main agricultural products. Boosted by policies which have prevented an adequate transmission of market signals to farmers, supply substantially exceeds effective demand. The cost of agricultural policies is considerable, for government budgets, for consumers and for the economy as a whole. Moreover, excessive support policies entail an increasing distortion of competition on world markets; run counter to the principle of comparative advantage which is at the root of international trade; and severely damage the situation of many developing countries. This steady deterioration, compounded by technological change and other factors such as slow economic growth or wide exchange rate changes, creates serious difficulties in international trade, which risk going beyond the bounds of agricultural trade alone.

20. All countries bear some responsibilities in the present situation. The deterioration must be halted and reversed. Some countries, or groups of countries, have begun to work in this direction. But, given the scope of the problems and their urgency, a concerted reform of agricultural policies will be implemented in a balanced manner.

21. Reform will be based on the following principles:

a) The long-term objective is to allow market signals to influence by way of a progressive and concerted reduction of agricultural support, as well as by all other appropriate means, the orientation of agricultural production; this will bring about a better allocation of resources which will benefit consumers and the economy in general.

b) In pursuing the long-term objective of agricultural reform, consideration may be given to social and other concerns, such as food security, environment protection or overall employment, which are not purely economic. The progressive correction of policies to achieve the long-term objective will require time; it is all the more necessary that this correction be started without delay.

c) The most pressing need is to avoid further deterioration of present market imbalances. It is necessary:

• on the demand side, to improve prospects as much as possible inside as well as outside the OECD area;
• on the supply side, to implement measures which, by reducing guaranteed prices and other types of production incentives, by imposing quantitative production restrictions, or by other means, will prevent an increase in excess supply.

d) When production restrictions are imposed or productive farming resources withdrawn by administrative decision, these steps should be taken in such a way as to minimise possible economic distortions and should be conceived and implemented in such a way as to permit better functioning of market mechanisms.

e) Rather than being provided through price guarantees or other measures linked to production or to factors of production, farm income support should, as appropriate, be sought through direct income support. This approach would be particularly well suited to meeting the needs of, amongst others, low-income farmers, those in particularly disadvantaged regions, or those affected by structural adjustment in agriculture.

f) The adjustment of the agricultural sector will be facilitated if it is supported by comprehensive policies for the development of various activities in rural areas. Farmers and their families will thus be helped to find supplementary or alternative income.

g) In implementing the above principles Governments retain flexibility in the choice of the means necessary for the fulfilment of their commitments.

22. The Uruguay Round is of decisive importance. The Ministerial Declaration of Punta del Este and its objectives provide for the improvement of market access and the reduction of trade barriers in agriculture and will furnish a framework for most of the measures necessary to give effect to the principles for agricultural reform agreed upon by OECD Ministers, including a progressive reduction of assistance to and protection of agriculture on a multi-country and multi-commodity basis. As agreed in paragraph 16, the Uruguay Round negotiations will be vigorously pursued and comprehensive negotiating proposals tabled over the coming months, in this as in other fields. In the Uruguay Round appropriate account should be taken of actions made unilaterally.

23. In order to permit a de-escalation of present tensions and thereby enhance prospects for the earliest possible progress in the Uruguay Round as a whole, OECD governments will carry out expeditiously their standstill and rollback commitments and, more generally, refrain from actions which would worsen the negotiating climate: they will, inter alia, avoid initiating actions which would result in stimulating production in surplus agricultural commodities and in isolating the domestic market further from international markets; additionally, they will act responsibly in disposing of surplus stocks and refrain from confrontational and destabilising trade practices.

24. Agricultural reform is not solely in the interests of Member countries. Developing countries which are agricultural exporters will benefit from a recovery on world markets. Developing countries which are importers of agricultural produce will be encouraged to base their economic development on more solid ground, by strengthening their own farm sector.

25. Agricultural reform poses vast and difficult problems for Member countries. Strengthened international co-operation is needed to overcome these problems. The OECD will continue to contribute to their solution by deepening further its work; by updating and improving the analytical tools it has begun to develop and which will prove particularly valuable in many respects; by monitoring the implementation of the various actions and principles listed above. The Secretary-General is asked to submit a progress report to the Council at Ministerial level in 1988.

Financial Markets

26. The process of liberalisation in financial markets and financial institutions must continue. In order to secure the clear benefits deriving from this process and to ensure the viability and stability of these markets, efforts will be intensified in the appropriate fora with a view to increasing compatibility and convergence of policies regarding prudential supervision of these markets.

Tax Reform

27. Most OECD countries have undertaken or are considering major tax reforms. Well-constructed tax reform can considerably enhance performance at both macro and micro-economic levels. Tax reform should focus on simplicity, equity and reducing distortions affecting incentives to work, save and invest. The competent bodies of the Organisation will actively contribute to reflection on tax reforms in Member countries and consider the best means of achieving them with due respect given to international aspects.

Technological Change

28. The development and diffusion of technology is central to the growth of output, employment and living standards. The process of technological change provides opportunities that must be grasped. Much work has already been done within the Organisation on analysing and interpreting various elements of this process. It now seems necessary to define an integrated and comprehensive approach to the different technology-related questions, to deepen the analysis in order to understand better, and make better use of, technological advances. The Secretary-General's intention to develop and carry out such an approach was welcomed. A progress report will be made to Ministers at their meeting in 1988.

Employment and Socio-Economic Reform

29. In view of the seriousness of unemployment problems in most countries, three areas of socio-economic reform are particularly important - all involve, in varying degrees, the private sector and the social partners as well as governments. First, there is a pressing need in many countries to improve the quality of education and training systems, and to adapt them more to the needs of societies and economies undergoing rapid structural change. Second, more flexible labour markets are needed to facilitate access to the new jobs emerging as structural and technical change accelerates. Third, employment and social protection policies need to evolve so that displaced and unemployed people are given not only income support but also - especially through training - opportunities and incentives to get back into work or other useful activities such as local employment initiatives. OECD work in these areas will be intensified, a key aim being to prepare a new framework for labour market policies as agreed at the meeting of the Manpower and Social Affairs Committee at Ministerial level in November 1986.

Environment

30. There is general agreement that environmental concerns have to be given a high priority in government policies, in order to safeguard and improve the quality of life as well as to preserve the resource base needed for sustained global economic development. Member countries will develop, within OECD, approaches and methods for more systematically and effectively incorporating environmental considerations into the policy-making process. Work will be intensified on policies needed to prevent more effectively the release of hazardous substances to the environment, including from large-scale accidents. In this connection international co-operation should be reinforced. The recently presented report of the World Commission on Environment and Development, "Our Common Future", will be studied closely in Member governments and in the Organisation.

Energy

31. The past year has seen considerable falls in the prices of oil, gas and coal. While lower energy prices have broad economic benefits, they tend to increase consumption and reduce indigenous production of energy. The Chernobyl reactor accident has underlined the safety aspects of nuclear power. These developments could intensify the tightening of energy markets expected for the 1990s. The Governing Board of the International Energy Agency, meeting at Ministerial level on 11th May 1987, agreed to strengthen existing policies in a number of areas in order to advance the objectives of energy policy while continuing to secure the general benefits of lower energy and oil prices. These areas include indigenous energy production, the efficient use of energy, diversification of sources of primary energy particularly those used in the generation of electricity, the promotion of free and open trade in energy, measures to respond to an interruption in oil supplies, and due recognition of environmental concerns.

IV. Relations with Developing Countries

32. In a world characterised by an increasing level of interdependence, the economic problems and performance of developing countries have become increasingly diverse. While a number of developing countries, particularly in Asia, have made significant progress, many others have suffered economic setbacks in recent years. Economic cooperation with developing countries must respond to varying capacities and needs in the critical areas of development, trade, debt and finance. Developed countries must strive to ensure a better environment for developing countries growth and exports in the interest of these countries as well as of the international economy more generally. In this regard, the implementation of the policy directions and objectives set out in this Communique will represent a significant contribution by OECD countries to better global prospects.

33. Economic policies in developing countries themselves will remain a major factor in their own performance. Upon them depend heavily confidence, savings and investment, both domestic and foreign. The wide range of developing countries presently implementing economic policy reforms to establish a sound development process must be supported and encouraged by all possible means including improved market access and official development assistance. In this regard, it is important to maintain and as far as possible increase the flow of development assistance, as well as to improve its quality and effectiveness. Those developing countries whose economic strength is already significant should progressively play their full part in the rights and obligations of the multilateral trading system. It is important that the potential offered by the private sector be fully exploited.

34. Large debt burdens remain a major impediment to growth in certain heavily indebted middle-income countries. There is no feasible alternative today to the co-operative strategy adopted for the solution of these problems. Only enhanced co-operative action, on a case by case basis, by all parties involved - debtor and creditor governments, the international financial institutions and private banks-- will permit reducing the strains in a growth-promoting environment. For some countries notable progress has been made in this process. However, in some cases difficulties in the adjustment and financing processes point to the need for improvements. The trend towards innovative and more flexible approaches on the financing side, both private and official, should play a key role in making debt burdens more manageable and restoring capital flows.

35. Even more constraining are debt problems among low-income countries. Proposals have recently been made by OECD countries for additional action to reduce the debt servicing burden of the poorest countries, especially in Sub-Saharan Africa, undertaking strong growth-oriented adjustment programmes. Early resu1ts from the current discussions among creditor governments will be urgently sought.

36. For poorer developing countries, provision of adequate concessional finance is essential. OECD countries record in this respect is already substantial but should be further enhanced. The volume and forms of aid must be commensurate with the growing requirements of policy reform programmes and broader development efforts The new DAC guiding principles for using aid to support improved development policies and programmes and strengthening aid co-ordination with developing countries are welcomed.

37. Commodity-dependent developing countries face difficult problems in view of the outlook for many commodities. An acceleration in world growth would improve the prospects for these countries. New efforts should be made to diversify their economies and to address the structural and development dimensions of commodity dependence. Action to remove measures distorting trade in commodities will make an important contribution to export prospects for commodity-dependent developing countries.

38. UNCTAD VII provides an opportunity to discuss with developing countries the major problems and policy issues in the global economy with a view to promoting common perceptions and effective policies for trade and development.

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Source: Activities of the OECD. Copyright OECD 1987. Reproduced by permission of the Organisation for Economic Co-operation and Development.