News brief - July 2003 edition

OECD Observer

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GDP grows as leading indicator points up; New framework for managing conflict of interest; FATF steps up money laundering battle; Vanuatu removed from tax haven list; Jobless rate higher; Investors get cold feet; Brazil, Chile and Peru students struggle

Postitive indications…

Things may be looking up for the OECD area as a whole, particularly in the US and the euro area, but downward pressure is the message for the Japanese economy, according to the latest OECD composite leading indicator (CLI). The CLI for the OECD area, which can provide advance signals of likely turning points in the economy, showed a 1.0 point rise in May from the April level, while the six-month rate of change rose for the first time since May 2002.

The May figures suggest slow to moderate growth ahead in the OECD area, the United States and the euro area, with a 1.6 point rise in May in the US from the April level and a rise in the six-month rate of change after three months of downward or unchanged showings. For the euro area, the six-month rate of change headed upward for the first time in a year. But Japan’s CLI was still heading downward, continuing a trend on the six-month rate of change that goes back to December 2002. The UK continued an upward trend in the six-month rate of change which began in April after showing a strong downward trend since June 2002.

The OECD CLIs are designed to provide early signals of turning points (peaks and troughs) in economic activity. They are calculated by combining series that cover a wide range of key short-term economic indicators such as opinions about economic activity, housing permits granted, financial and monetary data, labour market statistics, information on production, stocks and orders, foreign trade, etc (for more information on OECD composite leading indicators, see link 1 below).

…as real GDP firms up

Growth firmed up in several OECD countries in the first quarter, including in the US (0.4%), Canada (0.6%) and France (0.3%). Britain and Japan both grew by 0.1%. Australia’s economy grew by a seasonally adjusted 0.7% compared with the preceding three month period, a percentage point faster than New Zealand and the Czech Republic, while Spain’s economy expanded by 0.5%. Korea’s economy contracted, by 0.4%, after growing by 2% in the fourth quarter of 2002. The sharpest quarterly decline was recorded for Finland (-1.3%), with lesser falls recorded for Germany, Italy, the Netherlands and Switzerland.

New OECD framework for managing conflict of interest  

OECD governments have agreed on the first international reference framework for understanding conflict of interest questions. The OECD’s new Guidelines for Managing Conflict of Interest in the Public Service (see link 2 at the bottom of the page) define just what is meant by a “conflict of interest” for a public official, and offer standards for resolving cases and preventing such conflicts from occurring. The OECD’s aim is to help governments ensure that, say, health officials do not favour a particular supplier in the hope of obtaining a new job, or, in an era of new forms of public-private partnership, that officials of regulatory agencies have not become too close to the business entities they are supposed to supervise.

Recent scandals involving conflict of interests in government, the public sector and the business world have focused fresh interest on a problem which is as complex and as universal as it is old. Conflict of interest in its many forms now seems to feature, on an almost daily basis, in the news worldwide. It was a major feature in the recent auditing problems involving Enron, Arthur Andersen and WorldCom, as well as corrupted public procurement processes in Europe. The OECD initiative is part of a drive to prevent the problem from growing.

The new guidelines urge governments to develop and implement comprehensive strategies for promoting integrity, identifying actual cases and areas of risk, and dealing effectively with conflicts of interest as they arise. Active monitoring is required to ensure effectiveness, and appropriate sanctions, including dismissal, must be available. The guidelines stress the need for officials to take personal responsibility for complying with the letter and the spirit of their organisation’s conflict of interest standards.

Will the guidelines work? They are not legally binding, and so may not add much in countries which already have legislation in this area. But as an international standard, they provide a valuable reference point when setting up or reviewing national conflict of interest policies, reviewing existing management systems, assessing risk, or providing training. In fact, several countries are already using the guidelines in this way.

The OECD is also working on a “toolkit” of practical measures to help governments and institutions with implementation. It expects to report on the implementation of the guidelines in 2006.

FATF steps up money laundering battle: Admits Russia and South Africa 

The Financial Action Task Force on money laundering and combating terrorist financing (FATF) issued a revised version of its Forty Recommendations to combat money laundering at the end of a plenary meeting in Berlin on 20 June 2003, the last of Germany’s presidency of the FATF. The release is intended to tighten international standards in the fight against money laundering and to create a substantially stronger framework for combating terrorist financing.

“In updating its Forty Recommendations against money laundering, the FATF has accomplished one of the most important tasks it has undertaken since its inception in 1989,” outgoing FATF president Jochen Sanio said.

Major changes to the recommendations include extending many anti-money laundering requirements to cover terrorist financing. The mandate of the FATF, which is an independent 31-member international body whose secretariat is housed at the OECD, was widened to include combating terrorist financing in the wake of the 11 September 2001 terrorist attacks in the US.

The updated recommendations also extend anti-money laundering measures to non-financial businesses and professions such as casinos, real estate agents, dealers in precious metals and stones, accountants, lawyers, and trust and company service providers.

The Russian Federation and South Africa were also admitted as full members of the FATF after a positive assessment of their systems for combating money laundering and terrorist financing.

Meanwhile, the FATF removed St Vincent and the Grenadines from its list of Non-Cooperative Countries and Territories (NCCTs) and welcomed further progress by some jurisdictions still on the list.

The current list of NCCTs is: Cook Islands, Egypt, Guatemala, Indonesia, Myanmar, Nauru, Nigeria, Philippines and Ukraine.

For more on the work of the FATF, see link 3 below.

Vanuatu removed from tax haven list 

Vanuatu is the first country to have been taken off the OECD’s list of uncooperative tax havens, after pledging to make its tax and regulatory system more transparent. Vanuatu also said it would set up an effective exchange of information on tax matters with OECD countries by the end of 2005.

A total of 32 countries outside the OECD have now committed to the principles of transparency and exchange of information for tax purposes. The OECD has said it hopes the six jurisdictions remaining on the list of uncooperative tax havens published in April 2002 (Andorra, Liechtenstein, Liberia, Monaco, the Marshall Islands and Nauru) will make similar commitments.

Vanuatu will be invited to join OECD members and other countries in meetings of the OECD’s Global Forum on Taxation to discuss designing standards related to its commitment.

In a letter to the OECD’s secretary-general, Donald Johnston, Vanuatu’s finance minister, Sela Molisa, said his government hoped that OECD countries and other international organisations would take into account the adverse effect on revenue of the small island economy of meeting these commitments when deciding development assistance levels.

He also looked forward to receiving technical assistance in meeting Vanuatu’s tax transparency commitments.

For more on harmful tax competition, see link 4 below.

Jobless rate higher 

Unemployment in the OECD area rose to 7.2% in May from a revised 7.1% in April, and up from 6.9% a year earlier. The standardised unemployment rate for the United States rose to 6.1%, up from 6.0% in April and 5.8% a year earlier.

Euro area unemployment was unchanged from the April level at 8.8%, but up from 8.3% a year earlier. The Japanese jobless rate held steady at 5.4%, the same as in April and unchanged from May a year ago. The German jobless rate rose almost a full percentage point from a year earlier, at 9.4% in May, up from 8.5% in May 2002, while the rate for the Group of Seven leading industrial nations was up to 6.8% in May from 6.7% the previous month and 6.5% a year earlier.

The only OECD countries to see their jobless rates fall in May from the previous month were Australia, down from 6.1% to 6.0%, Poland, down from 20.2% to 20.1%, the Slovak Republic, down from 16.8% to 16.6%, and Spain, down from 11.4% to 11.3%.

Investors get cold feet 

Foreign direct investment (FDI) in OECD countries fell 20% in 2002, following steep declines the previous year and the signs are for a further drop in 2003. That is the message from a new OECD report, “Trends and Recent Developments in Foreign Direct Investment”.

The continued weakness of the global economy, relatively flat stock markets, uncertainties over international security and heavy debt loads in sectors like telecommunications all contributed to the decline, which saw fixed investments into OECD countries fall to US$490 billion in 2002, down from US$615 billion in 2001. This was about a third of the level in 2000, the report says.

The drop was concentrated mainly in the United States, where FDI plunged to US$30 billion in 2002 from US$131 billion in 2001, and the United Kingdom where it fell to US$25 billion from US$62 billion. FDI flows into other OECD countries as a whole actually rose slightly in 2002, up 3% or US$14 billion from the 2001 level.

If the downward trend of mergers and acquisitions in the first five months of the year continues, OECD countries could be heading for a further fall of 25% to 30% in FDI in 2003, the report says.

In contrast, investment flowing out of the 30 OECD member countries showed a more modest decline. Outward FDI hit US$609 billion in 2002, down from US$690 billion the previous year. Developing countries were major beneficiaries of net outflows from OECD countries, and for the first time China became the world’s largest recipient of FDI in 2002 with total inflows of US$53 billion, though in per head terms, this remains relatively small (see article by Ken Davies, “China’s economy: Still some way to go”, OECD Observer No. 238, July 2003).

The report will be included as a chapter in the forthcoming annual publication, OECD International Investment Perspectives, expected in September.

Brazil, Chile, Peru students struggle, says OECD/UNESCO report 

Several Latin American countries lag seriously behind in reading, maths and science, regardless of income levels, whereas Finland’s 15-year-olds are among the world’s best in terms of reading literacy, and students in Japan, Hong Kong-China and Korea lead in mathematics and science. These are some of the key lessons from a new survey of 15-year-olds in 43 countries, Literacy Skills for the World of Tomorrow, published jointly by the OECD and UNESCO. The report is based on data gathered in the much-publicised OECD Programme for International Student Assessment (PISA).

PISA measures how well 15-year-olds are prepared to meet the challenges of today’s knowledge societies, by administering tests and background questionnaires to between 4,500 and 10,000 students in each participating country. The latest report compares and analyses data collected in 2002 from 15 mainly middle-income countries and economies – Albania, Argentina, Brazil, Bulgaria, Chile, Hong Kong-China, Indonesia, Israel, Latvia, Liechtenstein, FYR Macedonia, Peru, Romania, the Russian Federation and Thailand – with data collected in 2000 from 28 of the 30 member countries of the OECD.

Among the non-OECD economies, students in Hong Kong-China emerge as star performers, but students in Latin America are well behind. Some 80% of Peru’s 15-year-olds were at Level 1 and below in reading literacy, indicating that they have serious difficulties in using reading as a tool to advance and extend their knowledge and skills in other areas. Brazil and Chile also recorded disappointing performances.

The study found that while higher average spending per student tends to bring higher average performance in reading, mathematic and scientific literacy, it does not guarantee it. And differences in performance related to social status also varied widely between countries. The countries with the highest gap in reading skills between students from rich and poor families included two OECD countries – the United States and Mexico. The report links these trends to the quality of national education systems.

For a free electronic download of the full report or the executive summary, and for more information on PISA, see link 5 below.

©OECD Observer No 238, July 2003




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