Leadership in troubled times
G7 Summit

Leadership in troubled times

The shock of Russia’s recent invasion of Ukraine adds instability to an already recovering global economy, but certain measures may help to cushion the blow

Germany took over the G7 presidency at a time when the global economy was returning to normal.

The recovery from the pandemic was well established, although its pace was uneven and inflation was rising.

Then a new shock arrived. Russia’s unprovoked, unjustifiable and illegal aggression against the people of Ukraine is first and foremost a deeply distressing humanitarian disaster. However, it also presents a serious threat to our rules-based international order and adds significant instability to a recovering global economy, causing lower growth and adding to inflation.

The pandemic and the war both require bold immediate measures to mitigate some of their negative short-term impacts. Both exacerbate and complicate pre-existing, long-term policy challenges.

First, on climate change.

In the wake of the war, energy supply and security challenges have collided with our energy transition and climate change mitigation objectives.

We want to do it all: cushion the cost burden on vulnerable households and firms, shore up energy security and remain on track to reach carbon neutrality by 2050.

To achieve this, we should ensure that our short-term responses to current pressures do not make it unnecessarily harder to meet our longer-term climate and energy transition objectives.

The best way to shield vulnerable households from the negative impact of higher energy prices is temporary, well-targeted, means-tested, lump-sum transfers providing a financial lifeline to vulnerable consumers. They still encourage energy savings and fuel switching by preserving price signals.

Price controls, in the form of price caps, energy tax cuts or general subsidies, dampen the incentives to shift to an energy system that is more diversified and depends less on fossil fuel. They blunt price signals and their general untargeted application makes them less equitable.

More ambitious efforts

Achieving global net zero emissions by 2050 also requires more ambitious and more consistent efforts on the foundation of more and better global cooperation.

The Organisation for Economic Co-operation and Development will continue to support those efforts including through the German G7 Climate Club initiative combined with our own Inclusive Forum on Carbon Mitigation Approaches.

Second, we need to optimise the benefits of the accelerating digital transformation of our economies while better managing the challenges and disruptions associated with it.

Affordable universal access, for households and businesses of all sizes, to high-quality digital infrastructure and a skilled workforce, while ensuring sound policy and regulatory approaches to competition, cross-border data flows, privacy, cyber security, tax and more, are important to provide a solid basis for securing long-term inclusive and sustainable growth.

The green and digital transitions will reshape economic activity and the labour market.

They risk creating new divides, including gender divides. New firms will emerge, some will adapt, others will close. This will involve significant labour market churn.

It is essential then that governments and other key stakeholders ensure that everyone has the best possible opportunity to participate in and benefit from those transitions.

Upskilling and reskilling

We must upskill and reskill workers and provide early, well-targeted employment services.

The OECD is supporting G7 efforts to adapt employment and skills policies to ensure workers are able to fully grasp the benefits of the digital and green transitions and are equipped to sustain them.

Third, the war is adding to stresses in global value chains provoked by the pandemic.

Strengthening supply chains for strategic and key goods, such as energy, critical raw materials and food, is indeed essential.

However, we should avoid redividing the world into separate trading blocs. We should be mindful that shortening global value chains would lead to efficiency losses and may well add to inflationary pressures.

A well-functioning global market, based on a rules-based trading system in good working order, has helped improve living standards around the world in the past and can do so in the future.

Rather than talk about de-globalisation, we should focus on making globalisation work better for people everywhere.

To address some of the supply logistics challenges that have become apparent in the wake of the pandemic and now Russia’s war, we also need to focus on the necessary improvements to our global trading infrastructure to facilitate efficient global trade flows in the future.

Fourth, our population is ageing.

Population ageing is a drag on growth. All other things being equal, it leads to lower tax revenues at a time when expenditures on health, long-term care and pensions are rising.

In response, we need to boost workforce participation, encourage people to work longer, do more to close the participation gender gap and improve the participation levels of people with a disability.

We also need to rebuild our fiscal buffers. We need to give ourselves the fiscal space to address all these structural challenges, while also making sure we are in the best, most resilient position possible to deal with the inevitable next external shock.

This is also why broadening tax bases is important, and why the full implementation of our agreement to reform international corporate tax arrangements will be essential.

We will continue to support the G7’s efforts on all these fronts.