Update Papers - World Model United Nations

Organization for
Economic Cooperation and
Development
World Model UN 2012
Update Paper

T o p i c A U p d AT e: c o n f r o n T i n g T h e
c r i s i s in 2012
Since the plummeting of its economy in 2007, the
Euro-zone has experienced severe financial struggles,
evolving into—and further shaping—today’s sovereign
debt crisis. As a result, this has unsurprisingly
strained Europe’s economic productivity and growth.
Moreover, the crisis has greatly exacerbated previous
setbacks that European countries have been confronting
with respect to lagging productivity stimulants.
Only when Europe is relieved from the debt crisis will
it be able to re-address questions regarding improving
its productive capacity (and consequently, its economy).
However, it is clear that that these two matters are
intricately embedded within one another: productivity
is a major factor in achieving economic recovery,
but its culmination in times of economic downfall has
proven to be difficult. Consequentially, delegates in
the OECD must thus consider the following questions:
How should countries combat the debt crisis while developing
long-term plans for productivity and growth?
What are ways to attract interest in further investment
in R&D in the Euro-zone? What new challenges does
the EU face in light of the year 2012 with respect to
generating growth?
GDP Summary
There were marked differences in growth throughout
the Euro-zone in 2011. Germany’s economy
grew by three percent according to its statistics office.
Germany’s primary trading partners also performed
well, but signs of recession began to develop near the
end of the year. For instance, Greece’s GDP contracted
by six percent in 2011. Furthermore, Italy’s debt led
the crisis into a critical stage as it joined the “seven
percent club” (the group of Euro-zone countries whose
borrowing costs, as measured by ten-year bond yields,
have gone-- and remained-- above seven percent), 1 featuring
public debts close to 120 percent of its GDP. The
crisis continues to impact Euro-zone’s “core” economies
Germany and France, raising the likelihood of a
recession throughout 2012. 2
Credit Ratings Downgrade, 13 January 2012
Nine Euro-zone countries had their credit ratings
cut by Standard and Poor’s (S&P). France and
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Austria were stripped off their triple-A credit rating;
Malta, Slovenia, and Slovakia also faced a one-notch
downgrade; and Italy, Spain, Cypress, and Portugal’s
debts caused their ratings to be knocked down by two
notches. This occurred as a result of what S&P deemed
an unsatisfactory effort by these countries to fully address
their shared financial problems. Accord to the
company, EU leaders have misdiagnosed the crisis by
focusing too much on decreasing government budget
deficits and, in turn, not providing enough attention
to deeper causes of the crisis: the divergence in competitiveness
between the Euro-zone’s core of strong
economies and its struggling surrounding economies,
in addition to large cross-border debts that arise from
this gap. In short, as emphasized by S&P, reforms that
are solely based on fiscal austerity are not enough. 3
Euro-zone Unemployment
The unemployment rate in the seventeen countries
that use the Euro was 10.3% in November of 2011,
according to the Eurostat statistics agency. In the bloc
itself, there were 16.3 million people out of work and,
during the same time, the index of consumer confidence
(the economic sentiment indicator) fell to a
two-year low in December, well below the long-term
average. Spain’s unemployment rate was the highest at
22.9%, causing protests and civil unrest. Additionally,
in November, retail sales declined in the Euro-zone by
2.5% compared with the same month the previous year
(including in the richer, northern European countries).
4
Solution Towards Productivity?
The Lisbon Agenda, set in 2000 to make Europe
“the most competitive, knowledge based economy
in the world” has failed to achieve its goals by the time
the year 2010 settled in. 5 In a report formed by the
High Level Group, published after the midterm evaluations
for the Lisbon Agenda, it was stressed that the
key to growth in Europe is the adoption and expansion
of Information and Communication Technologies
(ICT). Firstly, efficiencies are realized through rapid
technological progress in the production of ICT goods
and services in ICT producing industries. Secondly,
investments in ICTs provide more capital for workers,
raising their productivity. Finally, greater use of ICTs in
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all sectors of the economy helps firms to increase their
efficiency. In the short term, reductions in the relative
prices of ICT products increase investment; and
in the long term, as the new technologies are adopted,
“new goods are developed and new modes of business
organization come into use.” 6 Further emphasis on
innovation is highlighted in a report, titled “Europe
2020” by the European Commission in 2010. It deems
that Europe could still succeed as a Union, but must
strategize to exit the crisis and develop the EU into an
innovative, sustainable, and inclusive economy. 7 Delegates
in the OECD should consider and discuss these
aforementioned proposals in order to set up a sustainable
exit route out of the sovereign debt crisis.
T o p i c A: s U m m A r y o f T h e e U r o p e A n
d e b T crisis
The European debt crisis has derailed the European
Union’s aspirations for growth and development.
Following the 2008 global recession, a few European
Union countries, most notably Greece, suffered aggravated
debt struggles. Starting late 2009, fear of a
sovereign debt crisis grew, as banking policies became
more prudent and insecure, following the easy credit
practices that led to the 2008 recession.
Irish banks lent funds to property developers, leading
to a property bubble that, when it burst, left the government
owing private debt. The Greek government
increased its commitment to public workers by providing
increased pension benefits that ultimately left
it in external debt. 8 As such, the close connections of
the global financial system are such that if one nation
defaults on its debt to another, the lending nation is
placed under pressure, affecting its creditors, resulting
in a financial contagion and decreasing global investor
confidence.
On 2 February 2010, the Greek government froze
some civil servant salaries and raised fuel taxes in
a bid to boost revenue and decrease budget deficit,
having gained EU support on February 3 2010. In an
effort to calm fears of debt crisis, the EU considers
loan guarantees for Greece and the other troubled EU
members, under the condition that Greece proves its
ability to balance its budget. Early March, demonstra-
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tions erupted in Greece, as financial conditions worsened
after several banks were downgraded to BBB,
while EU members approached promises of assistance
with extreme caution. 9 The Portuguese government
announced budget cuts, privatization plans, and tax
increases on high incomes, which was followed by a
drop of Portugal’s credit rating to AA-.
Euro Zone leaders agreed on a joint bailout with the
International Monetary Fund for Greece on March
25 2010. Soon after, however, the Greek credit rating
dropped to a BBB-, with outlooks remaining negative.
This led the Euro Zone leaders to agree to a €30 billion
loan at a rate of 5%. Mr. Papandreou announced
23 April 2010 that Greece now “absolutely needs” aid
from the Euro Zone and the IMF ii .
On May 5 2010, the Euro dropped to a 14-month low
against the US Dollar as fears of contagion in the Euro
Zone grew. 10 Spain increased taxes for higher income
tiers around mid-May 2010, promising that the middle
class would not be affected by the new tax laws. Fitch
later dropped Spain’s rating to AA+ from AAA, citing
the tax increases as possible deterrents of its economic
growth.
Portugal’s ratings dropped in July 2010, following
protested austerity measures the government took in
attempt to keep its debt at bay and prevent contagion
from Greece and Spain. Moody’s Investor Services also
dropped Ireland’s ratings, citing rising debts and weak
growth outlook.
During mid-October 2010, the Irish ratings dropped
twice amidst budget cuts and austerity measures, with
rating services citing low political support for these
measures and negative outlook. This led the German
and French governments to agree upon a possible future
permanent bailout that would require significant
sacrifices from bond holders ii .
In February 2011, Germany and France call for a pact
for competitiveness with specific reforms to improve
growth in the Euro Zone, but are met with frosty
reception at EU summit. 11 Portuguese Prime Minister
Jose Socrates resigns on March 23 2011, following a
governmental collapse over austerity measures. On the
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next day, EU leaders agreed on the Euro Plus Pact, a
less comprehensive version of the pact for competitiveness.
This, however, only led to further credit downgrades
for Portugal and Greece, 12 ultimately forcing
Portugal to request a financial bailout from the European
Union.
The odds of a Greek default are near certain, more likely
a mandatory default than a voluntary one. As such,
the contagion has begun spreading, as Greece will be
unable to restructure on its own. Greece also faces the
threat of losing EU membership, further worsening
its chances of a successful restructure. Furthermore, a
default would lead to a state of panic in neighboring
countries, putting Portugal, Spain, Ireland, and Italy
next in line.
The escalated fear of defaulting and contagion has led
European banks to deposit in the European Central
Bank and further decreased credit to businesses. The
solvency crisis comes as a result of banks’ cash inflow
from assets not meeting the outflow from liabilities.
Thus, banks are forced to sell assets, decreasing the
amount of cash available for lending. The overall negative
outlook has caused banks to adopt prudent loaning
policies, choosing to benefit from the interest that
comes with deposits in the ECB rather than that of
loans to businesses. As a result, businesses are unable
to attain the funds they need for capital, leading to
macroeconomic slowdown, which suggests deep flaws
in the banking system. 13
French President Nicolas Sarkozy banks borrow
cheaply from the ECB and invest in high-yielding
government bonds, but critics say this circular logic is
the reason why the 2008 recession occurred in the first
place. Not surprisingly, a recent auction of Italian debt
failed to generate much interest, given the uncertain
market.
As confidence rises, banks should be able to increase
credit into the real economy to stimulate growth.
However, banks would now have to borrow from the
ECB, because of investor insecurity. The ECB’s exposure
to the European Banking system causes continued
nervousness on the part of investors, leaving the
banks with little cash to loan to businesses. Until banks
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restore their credit facilities, the real economy remains
stagnant, and without growth, the debt crisis will remain.
Suggested further reading:
Financial Times InDepth: http://www.ft.com/intl/indepth/euro-in-crisis
Timeline: European Debt Crisis: http://online.wsj.com/
public/resources/documents/info-EZdebt0210.html
Wikipedia, European Sovereign Debt Crisis: http://
en.wikipedia.org/wiki/European_sovereign_debt_crisis
T o p i c b U p d AT e: oecd A n n U A l
U p d AT e o n m U lT i n AT i o n A l c o r p o r AT e
r e g U l AT i o n
The Organization for Economic Cooperation and
Development has published an annual report on
the state of international regulation of the operation
and activities of Multinational Corporations. These
regulations include those that pertain to environmental
protection, fair labor standards, consumer safety
and protection, anti-trust and competition law, contract
transparency and enforcement and others. Other
regulations include those that permit the free flow of
labor, goods, technology and capital within and across
borders. The OECD’s recommendations on national
regulations vary between those of the developed
and the emerging world given their different macroeconomic
circumstances. The Developed world’s
economies have little to no growth because of a crisis
brought on by a financial sector that was unregulated.
While in the developing world, inflation is rising to
unsustainable levels largely because of regulations and
legal structure that are so heavy that they are distorting
their general macroeconomic behavior.
In the developed world, much of the prime source of
economic stagnation in recent years has originated
from multinational financial institutions that performed
the majority of their business practices outside
of the legal oversight of the nations within which they
operated in. These business practices ultimately wiped
trillions of dollars of value off of the balance sheets of
households, firms, and governments throughout the
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OECD. Lawmakers this year will be giving recommendations
from the OECD that we feel would bring oversight,
transparency, and in some cases restrictions to
these currently unregulated financial practices. In the
run-up to the crisis of 2008-2009, the minimum capital
required for banks to hold on their balance sheets
decreased. When the crisis arrived and bondholders
pulled their cash out of these large banks, they became
insolvent and threatened the entire global financial
system. The OECD feels these preventative steps would
decrease the likelihood of future financial crises.
In the developing world, countries are experiencing
rising rates of inflation and currency appreciation that
threaten to derail growth. The prime source of this
high inflation stems from state mandates and regulations
that are too onerous and distorting. Developing
world regulations force overinvestment in bloated
sectors and enterprises favored by the government. In
China, the government imposes a cap on what banks
can pay depositors as interest for holding their money
in order to funnel more money into state-owned realestate
developers. The dominance of the financial sector
by state banks has starved small and medium private
firms from accessing the needed capital to operate
while favoring large state-owned and state-favored
construction and real-estate developers. State-owned
banks have been able to maintain supremacy of the
financial system through laws that have onerously high
capital requirements that keep smaller banks from
entering the market. There are also other laws that
prevent firms from issuing shares or bonds directly to
the public, forcing them to rely on state-banks for financing.
In India and the Middle East, similar policies
have suppressed the private sector. In Latin America,
laws allow entrenched labor union members from being
laid off, making it difficult for non-union members
from being able to enter the labor market. Structural
imbalances in emerging markets could be substantially
mitigated if restrictions on labor and capital markets
were loosened. The country’s household registration
system forces interregional migrants to pay for publicly-funded
education and health services out of pocket,
forcing them to store a disproportionate share of their
income into banks.
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Addressing the world’s corporate regulatory problems
will be difficult because of the differences in the diverse
problems the world’s countries face. But the OECD
as well as other international economic organizations
should refrain from imposing or recommending
regulations in a universal “one-size-fits-all” manner.
The rich world was sent into the Great Recession by
misallocated incentives in the financial sector brought
about by the deficit of regulatory oversight. But in
emerging markets, record growth is pushing up inflation
to unsustainable levels. This is because repressive
regulations have suppressed their private sectors from
expanding production. Especially in Asia, the developing
world is experiencing surging demand. But with
the private sector unable to increase supply to satisfy
demand, prices have only skyrocketed. In the case of
the emerging world, regulations especially pertaining
to Multinational Corporations need loosening.
T o p i c b U p d AT e: i n T e r n AT i o n A l
i n v e s T m e n T Upd AT e
In May 2011 the OECD revised the Guidelines for
Multinational Enterprises in order to adapt to the
changes in the field of international investment over
the past ten years. Since 1976, the Guidelines have
regulated the business conduct of Multinational Enterprises
(MNEs) in the adherent countries. This set of
recommendations aim to urge MNEs to work efficiently
and sustainably in their host countries tackling
issues such as the environment, combating bribery,
taxation, employment, human rights, etc. 14
Since their last revision in 2000, several developments
have called for further changes. Small and medium
enterprises have experienced a growing role in international
investment, due to the increasing economic
activity on the internet and the growth of service and
knowledge industries. Moreover, non-OECD nations
have attracted greater levels of investment during the
past ten years. Most noticeably, MNEs have been moving
from primary to secondary and tertiary industries
in regions such as Latin America and East Asia. 15
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May 2011 Update on the OECD Guidelines for
Multinational Enterprises
In May 2011, 42 countries agreed on an update to
the OECD Guidelines in order to further promote
responsible business conduct by MNEs and limit the
use of conflict minerals. Among these nations were all
34 OECD member states along with Argentina, Brazil,
Egypt, Latvia, Lithuania, Morocco, Peru, and Romania.
The terms of the update involve new regulation regarding
human rights and companies’ responsibilities over
their supply chains. 16 Some of the terms include: 17
Respect for human rights in operating nations.
Respect for environmental & labour standards
along with due diligence processes to reinforce
them. Including aims such as decent wages for
company workers, combating bribe solicitation
and extortion, as well as the promotion of sus
tainable consumption.
Further recommendations agreed upon by the governments
include: 18
Combating illicit trade in minerals responsible
for financing armed conflict
Identification and improved management of
supply chains
Even though some non-OECD members have agreed
upon the Guidelines, other rapidly developing economies
such as Russia, India, and China are yet to take
part in the discussion. In countries such as Russia
where corruption is rampant and cronyism is common
practice, the OECD would find it more difficult to
ensure the recommendations are met. 19
Questions for Discussion
How does the changing landscape of international
investment limit the potential for success of the OECD
Guidelines?
Moreover, how will the involvement of some emerging
economies influence the discussion?
Can a larger group of nations produce an accord that is
easier to enforce?
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e n d n o T e s
1 “Europe’s Deepening Crisis”, The Economist.
2 “Europe’s Deepening Crisis”, The Economist.
3 “France Goes Soft-Core”, The Economist.
4 “Eurozone’s Unemployment Stays at Record
High”, BBC.
5 “The Lisbon Agenda, 2000 to 2010”, CESIS.
6 “The Economic Impact of ICT: Evidence and
Questions”, i2010 The High Level Group.
7 “Europe 2020”, European Commission.
8 Lewis, Michael (2011). Boomerang - Travels in
the New Third World. Norton. ISBN 978-0-393-08181
9 http://online.wsj.com/public/resources/documents/info-EZdebt0210.html
10 http://online.wsj.com/article/SB100014240527
48703961104575225684273878968.html
11 http://www.bbc.co.uk/news/world-europe-12368401
12 http://euobserver.com/19/32062
13 http://www.ft.com/intl/indepth/euro-in-crisis
14 OECD. “Guidelines for Multinational Enterprises”.
Web. 20 Jan. 2012.
15 OECD. “2011 Update of the OECD Guidelines
for Multinational Enterprises”. 25 May. 2011. Web. 18
Jan. 2012.
16 OECD. “New OECD Guidelines to promote
human rights and social development”. 25 May. 2011.
Web. 20 Jan. 2012.
17 OECD. “New OECD Guidelines to
promote human rights and social development”.
25 May. 2011. Web. 20 Jan. 2012.
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18 OECD. “New OECD Guidelines to
promote human rights and social development”.
25 May. 2011. Web. 20 Jan. 2012.
19 The Economist. “The OECD and corruption:
The tents of righteous”. 17 Sep. 2011. Web. 19 Jan.
2012. < http://www.economist.com/node/21529020>
b i b l i o g r A p h i c essAy
Topic A
Barrosso, Jose. “Europe 2020.” European Commission.
(2010): 6. Web. 16 Jan. 2012. .
“Eurozone Unemployment Stays at Record High.”
BBC. 06 001 2012: n. page. Web. 16 Jan. 2012. .
“Europe’s Deepening Crisis.” Economist. 13 001 2012:
n. page. Web. 16 Jan. 2012. .
“France Goes Soft-Core.” Economist. 14 001 2012: n.
page. Web. 16 Jan. 2012. .
Johansson, Börje, Charlie Karlsson, Mikaela Backman,
and Pia Juusola. “The Lisbon Agenda, from 2000
to 2010.” CESIS. (2007): 2. Web. 16 Jan. 2012. .
“The Economic Impact of ICT: Evidence and Questions.”
i2010 High Level Group. (2006): 3. Web. 16
Jan. 2012. .
Topic B
The Economist. “The OECD and corruption: The tents
of righteous”. 17 Sep. 2011. Web. 19 Jan. 2012. <
http://www.economist.com/node/21529020>
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OECD. “New OECD Guidelines to promote human
rights and social development”. 25 May. 2011. Web.
20 Jan. 2012.
OECD. “Guidelines for Multinational Enterprises”.
Web. 20 Jan. 2012. www.oecd.org/daf/investment/
guidelines
OECD. “2011 Update of the OECD Guidelines for
Multinational Enterprises”. 25 May. 2011. Web. 18
Jan. 2012. http://www.oecd.org/document/33/0,3746,
en_2649_34889_44086753_1_1_1_1,00.html
UNCTAD. “FDI trenes diverge widely: up in South
America and down in Central America and the Caribbean”.
17 Sep. 2009. Web. 19 Jan. 2012.
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