1. The Council of the OECD met on 31st May and 1st June at Ministerial level. The meeting was chaired by Mr. Jon Sigurdsson, Minister of Commerce and Industry of Iceland. The Vice Chairmen were Mr. Robert Urbain, Minister of International Trade of Belgium, and the Rt. Hon. Joe Clark, Secretary of State for External Affairs, the Hon. John Crosbie, Minister for International Trade, and the Hon. Michael Wilson, Minister of Finance of Canada. Ministers reviewed the general economic situation. They discussed the policy orientations necessary for economic and social progress in the OECD area and the developing countries.

2. The Council renewed the mandate of the Secretary-General of the OECD, Mr. Jean-Claude Paye, for a second period of five years with effect from 30th September 1989. On this occasion Ministers expressed their warmest thanks to Mr. Paye for the competence with which he has directed the Organisation during his first mandate.

MOVING AHEAD FROM THE ACHIEVEMENTS OF THE 1980s

3. The current economic situation in the OECD area is generally good: activity is robust; inflation has been contained at relatively moderate levels; substantial progress has been made in job creation; and investment is buoyant, reflecting business confidence bolstered by actions taken over the full range of economic policies and the steady strengthening of international economic cooperation.

4. Despite the achievements of recent years, much remains to be done. To ensure sustained, job creating, non-inflationary growth OECD governments will:

i) Resist inflationary pressures, which have recently re-emerged as a problem in many countries;

ii) Strengthen the process of reducing large current-account deficits and surpluses, a process which recently has weakened markedly;

iii) Reduce unemployment, which remains high in many countries, paying particular attention to the problems of youth and the long-term unemployed;

iv) Accelerate the reduction of structural rigidities and distortions within economies and internationally;

v) Establish sound public budgetary positions and promote efficient public management;

vi) Improve the structure and level of national saving in many countries and thereby contribute to a sustained buoyancy of productive investment;

vii) Reinforce the open multilateral trading system by vigorously pursuing the successful conclusion of the Uruguay Round negotiations in 1990, expanding market access, resisting protectionist pressures in all their manifestations, and refraining from any measure which could damage the multilateral trading system;

viii) Improve the protection and management of the environment, particularly through the better integration of economic and environmental decision-making, to ensure sustainable development for current and future generations;

ix) Pursue the establishment of strengthened and more operationally effective GATT rules and disciplines as well as substantial progressive reductions in agricultural support and protection resulting in correcting and preventing restrictions and distortions in world agricultural markets, as affirmed in the Uruguay Round framework approach, over an agreed period of time;

x) Strengthen policies supportive of the efforts of developing countries to find viable solutions to the debt and development problems that confront them.

POLICY DIRECTIONS

5. To meet these challenges and ensure improved economic performance over the next decade, governments will make full use of the policy instruments at their disposal and the synergy among them. The experience of the 1980s shows that implementing measures across the whole range of economic policies and across countries enhances the effectiveness of each specific measure.

6. Therefore:

i) Monetary policy will be directed to its primary objective, price stability in a growing economy. This will help create the conditions for stable and sustained growth. In some countries exchange rate stability is regarded as important in order to maintain domestic price and cost stability;

ii) Fiscal policy will aim, where appropriate, to reduce public-sector demands on private saving by continuing the process of consolidation. Governments will also aim to improve the quality and efficiency of both sides of the public-sector accounts by reducing distortions associated with the structure of taxation and by subjecting the level and composition of expenditure to closer scrutiny and better overall control;

iii) Governments will step up their actions in critical areas of structural reform to improve steadily the potential of economies, to create additional jobs without an acceleration of inflation and to enhance the effectiveness of macroeconomic policies;

iv) International economic cooperation will be intensified in respect of both macroeconomic and structural policies in support, inter alia, of the external adjustment process;

v) When Member countries enter into or strengthen regional arrangements, they will act in conformity with international obligations and with the objective of strengthening the open multilateral trading system and seek to ensure that the benefits from regional liberalization and dynamism will accrue not only to the participating countries but also to the world economy at large.

7. Ministers welcome the report on surveillance of structural policies by the Economic Policy Committee. [This report identifies nine areas for action: trade policies and the international trading system; agriculture; industrial support policies; international direct investment; financial markets; taxation; competition policy; labour markets; and the public sector.] They endorse its main conclusion that the case is even more compelling than ever before for pressing forward with reform on a broad front. Economic conditions for reform are favourable. In all Member countries and in Yugoslavia reform will foster more flexible and efficient markets for labour, capital and products, improve the efficiency of the public sector and enhance the effectiveness of macroeconomic policies. Ministers take note of the report by the Secretary-General on the implementation of multilateral surveillance. This contributes to sustaining the momentum of reform. Ministers invite the Secretary-General to continue to develop and strengthen the OECD's surveillance of structural reforms and policies.

8. Specific economic policy orientations required in individual countries were reviewed and agreed.

9. To ensure sustained, balanced growth, priorities in the United States remain to contain inflationary pressures and to reduce further the current-account deficit. Continued moderation of domestic demand and further decrease of public deficits are of critical importance to achieving these ends. U.S. authorities will continue to monitor wage, price and demand developments closely with a view to taking appropriate action should inflationary pressures not abate in response to policy measures already taken. The U.S. Administration will ensure that the recent measures to reduce the Federal budget deficit to $100 billion in FY1990 agreed between the President and Congressional leaders are fully enacted. Further measures will be taken as necessary to achieve the objective of eliminating it entirely by 1993 as a contribution to the reduction of the savings-investment gap. Moreover, priority attention will be given to dealing with the situation of troubled financial institutions and improving the system of prudential supervision. Furthermore, the U.S. will implement its trade policies in line with the objective of strengthening the open, multilateral trading system.

10. In both Japan and Germany, the authorities will continue to pursue prudent but flexible medium-term macroeconomic policies and accelerate structural reforms, in order to sustain strong, non-inflationary growth of domestic demand at a level that would promote significantly external adjustment, which recently has weakened.

a) In Japan, while major reform has recently been achieved to improve the tax systems, further progress will be made in adjusting public revenue and expenditure structures taking into account, inter alia, the prospective ageing of population. Structural reforms contributing to both price stability and external adjustment will be expedited. These include the removal of legal and other impediments to, as well as the review of taxation of land for, the more efficient use of land. Price competition will be strengthened and market access further facilitated for domestic and foreign participants through reforms in regulatory structures in the distribution and other service sectors. While substantial progress has already been made in the financial sector, financial liberalization and internationalisation will be continued further. In pursuing these and other measures, Japan will undertake to further improve market access both in goods and services, thereby contributing to a strong expansion of imports.

b) Germany will continue with the medium-term programme of fiscal consolidation and has embarked upon a policy of major structural reforms, including, inter alia, an overhaul of social security systems, a multi-year tax-reform, and the reform of the telecommunications sector. Efforts will be encouraged to introduce more flexible arrangements for working time, wage structures and job assignment. Particular attention will be given to improving the conditions for reemployment of those who are suffering from long-term unemployment. There is a need for structural reforms especially in the services sector where regulations and barriers to entry remain significant, such as the transport sector. The flexibility of the economy will be improved by reducing remaining structural impediments in domestic financial markets and through more liberal closing hours in the retail trade. Structural reforms will increase the dynamism of the economy, strengthen economic growth and, by supporting a shift of resources into more domestically oriented sectors, will contribute to the external adjustment process.

11. Other OECD countries will follow as appropriate similar broad policy orientations, with specific actions reflecting individual country situations. Among the other large OECD economies, immediate priorities are:

a) In France, the reforms already undertaken to make the economy more competitive will be reinforced by the priority given to an anti-inflation strategy involving, particularly, continued reduction of the budget deficit, competition policy and action to improve the underlying competitiveness of firms. The remaining foreign-exchange controls will be removed and the process of opening up to foreign investment continued. Control of public expenditure will be intensified, in the light of the consequences for the tax system of the liberalization of capital movements and the process of fiscal harmonisation in the EC, and the need to ensure that funds are available for current spending priorities, notably research and training.

b) In Italy, efforts will be stepped up to reduce budget deficits which exert upward pressure on interest rates, contributing to the increase of public debt and adding to inflationary pressures. Italy will also continue efforts to improve the efficiency of its public sector. Coordination between the public and private sectors will be improved to contribute to a more efficient allocation of resources. Tax reform will be intensified and thereby will increase resources available to support a sustained growth of investment. Through a variety of measures relating particularly to training and labour markets, Italy will continue to reduce structural disparities between the Centre-North, where overheating exists, and the South, where unemployment remains high.

c) In the United Kingdom, monetary policy will continue to be directed at reducing inflation. Fiscal policy provides for further repayment of public sector debt, while moving to a balanced budget over the medium term. Competition will be further encouraged in the provision of various professional services, and through the reform of restrictive trade practices law. Tax reform will continue to promote the improved performance of the economy, notably through further reductions, when practicable, in marginal tax rates. Employment training and educational standards will be further improved. There will be continued review and reform of regulations which are a burden on businesses.

d) In Canada, priority will be given to following through on the commitments set out in the recent budget: reducing inflation; reducing the budget deficit and controlling the growth of public debt; implementing a broadly-based sales tax - the Goods and Services Tax; and reforming the unemployment insurance system to place greater emphasis on human resources development as distinct from income maintenance. The Government will intensify efforts towards the removal of restrictions on inter-provincial trade.

e) The European Communities programme to complete the internal market in 1992 and improve its economic and social cohesion, is progressing steadily and has already given a strong momentum to structural policy reform, investment and growth. These moves are complemented by joint efforts by the European Communities and EFTA countries to deepen and extend their cooperation beyond the current free trade arrangements to create a European Economic Space, and will be in line with the objective of strengthening the open, multilateral trading system.

Financial Markets and Foreign Direct Investment

12. The continuing liberalization of financial markets and foreign direct investment is contributing to a more dynamic world economy. Ministers welcome the new impetus given to the liberalization process by the recent strengthening of the OECD Codes of Liberalization in the area of capital movements and financial services. The principles that underlie the OECD Codes and other OECD instruments will guide governments as they seek to prevent or reduce international difficulties arising from the existence of different financial systems and different degrees of openness to international competition.

13. Increasingly integrated securities markets have altered the challenges faced by prudential supervisors. The OECD has been examining the linkages across markets, system risks and the scope for improving the capacity of the system to manage those risks. The goal for the coming years will be to extend significantly international cooperation among supervisory and regulatory bodies in order to ensure the smooth, efficient and flexible working of the financial system.

14. While progress has been made in reducing the restrictions on inward foreign direct investment and flows have risen sharply, protectionist sentiment, sometimes as a spill-over from tensions in trade, threatens investment flows. In connection with the 1990 Review of the OECD Declaration and Decisions on International Investment and Multinational Enterprises, Ministers reaffirm their determination to resist such protectionism, to maintain an open investment climate and, inter alia, to strengthen the OECD National Treatment instrument. The balance that has characterized the Organisation's approach to international investment questions, including that between the different elements of the 1976 Declaration on International Investment and Multinational Enterprises, should continue to prevail.

Labour Markets, Education and Social Policies

15. The climate for entrepreneurship and job creation has improved, especially in small and new businesses, and moderate wage outcomes have made an important contribution to employment growth in many countries during the past years. Nevertheless, unemployment levels in certain OECD countries remain unacceptably high. Labour-market policies will be strengthened, in particular to fight youth and long-term unemployment, to seek further reduction of labour-market rigidities and to ensure that employment opportunities are fully exploited. Ministers welcome the efforts undertaken in the Organisation to develop a new framework for long-term policies aimed at more job-creating growth, increased functional and geographical mobility and smoother adjustment of the labour force.

16. A solid basic education, combined with post-compulsory education and training opportunities throughout working life, is essential for each individual to exploit fully employment opportunities. In close cooperation, governments and the private sector must step up efforts to meet these fundamental requirements.

17. Social protection systems are an essential expression of solidarity and contribute importantly to personal security and dignity, facilitating the acceptance of structural change. To remain viable, these systems must adjust to evolving circumstances and needs. In particular, full use must be made of the contribution they can provide for effectively underpinning labour-market and human resource enhancement policies.

18. More generally, social and labour-market policies should aim at the active participation of all groups, particularly the disadvantaged, in the economy and society at large. This will become all the more important as dependency rates rise with ageing populations and will require better integration of policies, programmes, entitlements and administrative structures, taking advantage of the signals and incentives provided by the market.

Agriculture

19. Ministers take note of the joint report by the Agriculture and Trade Committees [Agricultural Policies, Markets and Trade: Monitoring and Outlook, 19891 and endorse its conclusions. Reduced production resulting mainly from the North American drought but also, to some extent, from policy measures, has contributed to the reduction in assistance in 1988 (as provisionally measured by PSE/CSE). In some instances, supply control systems have been effective in reducing production, but they may entail serious economic distortions. The cost of agricultural support for the OECD as a whole imposed on taxpayers and consumers amounted in 1988, according to Secretariat estimates, to approximately $270 billion. This figure is lower than those of 1986 and 1987 but is still above the level of 1985 and previous years. The role of market signals in orienting agricultural production remains insufficient almost everywhere. Trade tensions continue to be acute: market access has improved only in a few cases, and the use of measures affecting export competition, directly and indirectly, remains widespread.

20. It is therefore more than ever necessary that the process of agricultural reform be pursued vigorously, in conformity with the principles defined by Ministers in 1987 and 1988, and taking advantage of the present strength of markets. The successful completion of the Uruguay Round negotiations will be of decisive importance in this respect. Therefore, in accordance with the framework approach endorsed at the Mid-Term Review, Member countries will, in the months ahead, actively engage in substantive negotiations in Geneva (including the tabling of negotiating proposals) and meet their undertakings and stated intentions on short-term measures. Reform should be achieved through mutually reinforcing actions at domestic and international levels leading to a fair and market-oriented trading system through substantial, progressive reductions in agricultural support and protection and strengthened and more operationally effective GATT rules and disciplines.

21. The Organisation will continue its work on the monitoring of agricultural reform. This will include improving quantitative indicators (e.g. PSE/CSE) and analysis; analysing medium-term market trends and the medium-term impact of specific policies; assessing the scope and limitations of all relevant policy measures, such as supply control and direct income support; and examining the interrelationship between agriculture and the environment. Work undertaken on rural development policies will be actively pursued with a view to contributing to the identification and assessment of the range of actions available to stimulate, in rural areas, economically viable activities which would enhance development and growth in an environmentally sound way.

Industrial Subsidies

22. Industrial subsidies often present impediments to structural adjustments, distort resource allocation and engender international frictions. Reducing such subsidies is crucial for improving the flexibility of economies and for increasing international trade on a competitive basis. Ministers note the progress on the work in this area, following the mandates given in 1986 and 1987 and agreed to strengthen that work. Priority will now be given to completing the information gathering and reaching early agreement on concepts and methodology for the second phase of the work which will be directed at transparency and assessment of the economic impact of industrial subsidies.

Export Credit Subsidies

23. Ministers note with satisfaction the progress that has been made in strengthening the multilateral disciplines on trade- and aid-distorting export credit subsidies. This effort must be pursued actively. Ministers invite the competent bodies in the OECD to monitor closely the implementation of the recently updated Export Credit Arrangements and to assess whether their objectives are being met.

Energy

24. The growth of energy consumption, especially that of oil, risks exerting pressure on oil and energy supplies, with possible consequences for prices, inflation and the potential for economic growth. Therefore strong and continued action, as underlined by Energy Ministers of IEA countries, is necessary to achieve greater energy conservation and efficiency, diversification of supply, improved energy technology and emergency preparedness.

GLOBAL ISSUES

25. Global interdependence is an increasingly well recognised reality and is leading to intensified efforts to find solutions to problems related to the trade system, the protection of the environment and developing countries.

The Open Multilateral Trading System

26. The robust economic activity accompanied by strong growth in the volume of world trade over the past year has had only limited effect on the existing large number of trade-restrictive measures and practices. Persisting large external imbalances, as well as delays in structural adjustment, are a source of protectionist pressures and international frictions. Recourse to government intervention and grey area measures continues to erode the multilateral system. New interpretations of certain trade concepts such as "reciprocity" and "unfair trade practices" as well as new approaches implying a degree of balanced bilateral trade are being increasingly advocated in some quarters. Ministers firmly reject the tendency towards unilateralism, bilateralism, sectoralism and managed trade which threatens the multilateral system and undermines the Uruguay Round negotiations.

27. Therefore Ministers express their determination to halt and reverse all such protectionist tendencies and to strengthen the open multilateral trading system. They will fulfill their Punta del Este standstill and rollback commitments, which, inter alia, require the avoidance of any trade-restrictive or distorting measure inconsistent with the provisions of the General Agreement and its instruments. They agree to make effective use of the improved GATT dispute settlement mechanism and to make progress in negotiations for further improvements, and they will avoid any discriminatory or autonomous actions which undermine the principles of the GATT and the integrity of the multilateral trading system, in conformity with the standstill commitment mentioned above. They invite the OECD to pursue its monitoring of trade policy developments in Member countries including in the fields of dumping and other related measures. In this respect full compliance with the commitment for early notification of all new measures is essential.

28. These developments underline the need for a successful outcome to the Uruguay Round in order to strengthen multilateralism in international trade in goods and services, and to open markets. The positive results of the Mid-Term Review provide a sound basis for the next phase of the negotiations, for which the work of the OECD will continue to provide analytical and conceptual support. Ministers agree on the necessity to table more specific proposals as soon as possible and to proceed without delay to substantive negotiations on all issues, including the new areas, so as to meet the deadline set for the end of the Round. Ministers reaffirm their determination to press forward and complete the Uruguay Round negotiations in 1990. They call upon all participants, both developed and developing, to make the most constructive contribution possible to a successful outcome.

Environment

29. Continuing environmental deterioration will threaten the achievement of sustainable economic development and an improved quality of life for all. It is therefore essential that all countries actively participate in confronting the range of environmental problems, including those of a global nature. The OECD countries bear a special responsibility in this respect. The recent series of high-level conferences and meetings make an important contribution to the process of international cooperation.

30. Given the magnitude, urgency and potential economic, social and ecological implications of environmental problems, all relevant national, regional and international organisations will have to be mobilised in the most effective and efficient way. The OECD will cooperate fully in this process and, building upon the work on environmental problems it has carried out over twenty years, will focus on those aspects where, by nature of its membership and structure, it can make a particular contribution.

31. Ministers reaffirmed the critical importance of integrating more systematically and effectively environment and economic decision-making, as a means of contributing to sustainable economic development. Taking advantage of its capacity in the field of economic analysis, the OECD will work to place environmental decision-making on firm analytical ground with respect to costs, benefits and resource implications of environmental proposals and initiatives, selection among policy options and where appropriate, to develop methods to ensure that environmental considerations become an integral part of economic policy-making. Particular attention will be paid to breaking new ground in such areas as: integrating environmental considerations into economic growth models; analysing environment-trade relationships; determining how price and other mechanisms can be used to achieve environmental objectives; assessing the economic costs and benefits of possible responses, including technologies, to cope with atmospheric, climatic, marine and other global environmental problems (in coordination with the work carried out in other competent bodies); and elaborating in economic terms the "sustainable development" concept.

32. In this respect intensified efforts for technological breakthrough are important to reconcile economic growth and environmental protection. The OECD will examine incentives and barriers to the innovation and diffusion of environmental technologies. It will also promote expanded information exchange on technological options.

33. Industry also has a central role in confronting the environmental challenges of the 1990s, especially in incorporating environmental concerns into their economic decisions. The OECD will continue to stimulate and support closer cooperation between governments and industry to meet these challenges. Progress is beginning to be made in fields such as waste minimisation, industrial processes that conserve energy and raw materials, the design and marketing of cost-effective "clean technologies", and the development of an economically viable pollution control and environmental management industry. There will be an expanded effort to analyse the economic dimensions of these activities and trends and promote information exchange on technological innovation and options. The OECD-BIAC Conference on "Environmental Problems and Industrial Policies in the 1990s" planned for October is an example of this. The agricultural sector also has a central role to play in correcting environmental problems, such as soil erosion and water pollution.

34. Close co-operation, involving the IEA and the NEA, on the crucial relationship between environment and energy will continue. Integrated policies which further energy security, environmental protection and economic growth are required. In view of increasing evidence of the risk of global warming and climate change and the necessity to respond to this issue, Ministers call for vigilant, serious and realistic assessment on a global basis of what energy policies can contribute to meeting these challenges, and of their economic and social impacts. Member governments should contribute in their energy policies to the solution of international and domestic environmental problems. As identified by IEA Ministers, they pledge to pursue in their respective energy policies greatly improved energy efficiency and conservation, new technologies and, where national decisions so contemplate, the use of nuclear power with maintained and improved safety in construction, operation and waste disposal. The transport sector also has a particular significance for the environment. The OECD is actively participating in the preparations for an ECMT Ministerial meeting on transport and the environment, which will be held in November 1989.

35. Ministers agree that cooperation with developing countries is essential for the solution of global environmental problems. The OECD will evaluate relevant policy experience in Member countries. On the basis of this information the Organisation will seek to coordinate policies among Member countries with a view to promoting mechanisms for technology transfer to developing countries; the balancing of long-term environmental costs and benefits against near-term economic growth objectives; the design of innovative approaches by development assistance institutions to environmental protection and natural resources management; and the integration of environmental considerations into development programmes, taking into account the legitimate interests and needs of developing countries in sustaining the growth of their economies and the financial and technological requirements to meet environmental challenges. Ministers encourage the development of appropriate environmental appraisal procedures for specific developmental projects and programmes financed directly or indirectly by Member governments. They recognise that public awareness of the environmental impact of potential projects is essential.

Developing Countries

36. The diversity of developing country experience in the 1980s has underlined the importance of individual developing country policies for progress. Sustainable broad-based growth and effective development rely upon policy reforms, carefully related to country situations, aimed at stabilising and liberalizing developing economies; strengthening the effectiveness of public administration, the private sector and the role of markets; tackling poverty; and enhancing human resources. The members of the DAC and the multilateral development and financing agencies have been adjusting and differentiating their assistance efforts and modalities to support developing country efforts in these areas. Ministers welcome the review launched by the DAC on major development and aid issues in the 1990s. The results of this work will be submitted to the Ministerial meeting in 1990.

37. Adequate, appropriate and timely financial support is crucial to the success of major economic and social reforms in developing countries. Despite efforts by some DAC countries, the rate of growth in overall concessional aid has slowed down. Ministers express their determination to reverse this trend and to continue to work for improved aid quality. Ministers welcome steps to write off or otherwise remove the burden of ODA loans to the poorest developing countries and urge all donor countries who are able to do so to consider further action along these lines. In addition to their development assistance efforts, the OECD countries have a clear responsibility for promoting an open vigorous international economic environment as an essential contribution to the development process. In this respect, an increase in total net resource flows, including foreign private investment, is also important for developing countries.

38. Persisting debt problems affect a wide range of developing countries. The key principles of the collaborative debt strategy as it has evolved over the past few years remain valid, with emphasis on the case-by-case approach and support to countries implementing effective growth-oriented reforms. In this context Ministers welcome the recent decisions of the IMF and World Bank Boards, which followed up the agreement in the Interim Committee, to strengthen the debt strategy. Ministers urge all parties to move quickly to build upon these steps. The Paris Club is following up the orientations agreed upon at the Toronto Summit in favour of the poorest and most indebted countries. Cooperative efforts in favour of these debt-ridden countries should be strongly pursued and supported.

39. Financial modalities are important but they must be buttressed by a wide-ranging set of economic policies in both the OECD and the debtor countries. Sound monetary, fiscal, and structural policies in the OECD countries will help the financial situation of the debtors by sustaining growth and creating conditions favourable to lower interest rates and stronger savings. OECD countries must also use every opportunity to strengthen the open multilateral trade and financial system, press for expanded and free trade with full participation of developing countries, resist protectionism and ensure that their markets are open to the exports of the developing countries.

Co-operation with Non-Members

40. Ministers welcome the successful launch in the past year of the dialogue with a number of dynamic Asian economies, whose role in the world economy is of growing significance. The initial exchange of views on changing patterns in the global economy and on key areas of common interest in policy-making was constructive. The experience thus far suggests considerable scope for further valuable contacts to identify and discuss issues of emerging importance. Ministers warmly welcome these developments, and endorse efforts to carry the dialogue forward through informal discussions on more specific issues. They call for a report at their meeting in 1990.

41. Given growing economic and environmental interdependence, Ministers consider it important that the OECD remain attentive to developments in countries in other regions of the world. Possibilities for mutually informative contacts will be carefully examined.

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Source: Activities of the OECD. Copyright OECD 1989. Reproduced by permission of the Organisation for Economic Co-operation and Development.