US embassy cable - 05PARIS987

UNCLAS SECTION 01 OF 04 PARIS 000987 
 
SIPDIS 
 
FROM USOECD PARIS 
 
BRUSSELS FOR USEU 
 
FRANKFURT FOR TREASURY ATTACHE 
 
TREASURY FOR IA -- LESLIE HULL 
 
STATE PLEASE PASS USTR FOR WAMA 
 
E.O. 12958: N/A 
TAGS: ETRD, XG, XT, ZM, ECON, EFIN 
SUBJECT:  OECD TECHNICAL WORKSHOP ON TRADE AND 
STRUCTURAL ADJUSTMENT 
 
 
CONTAINS REPORT OF OECD MEETING -- NOT FOR INTERNET 
DISTRIBUTION. 
 
------------------------ 
SUMMARY AND INTRODUCTION 
------------------------ 
 
1.    On February 7, 2005, the Organization for 
Economic Cooperation and Development (OECD) held a 
technical workshop intended to seek advice from outside 
experts on its draft report on trade and structural 
adjustment.  The paper is to be completed in time for 
the OECD Ministerial Council Meeting May 3-4, 2005. 
This report is intended to help Washington 
policymakers, in particular the Council of Economic 
Advisors and the Federal Reserve, frame their own 
thinking in preparation for the Economic Policy 
Committee meeting in April.  End summary and 
introduction. 
 
----------------------------- 
MAKING THE MOST OUT OF CHANGE 
----------------------------- 
 
2.    On February 7, 2005, the Organization for 
Economic Cooperation and Development (OECD) held a 
technical workshop to discuss its draft study on trade 
and structural adjustment.  The paper is to be 
completed by the time of the OECD Ministerial Council 
Meeting May 3-4, 2005.  The Secretariat aims to develop 
a shorter booklet, approximately 20 pages, from key 
elements of the study, currently 329 pages including 
annexes in time for the Ministerial Council Meeting. 
 
3.    The study has been developed from a Swedish 
proposal at the OECD Ministerial Council Meeting in 
2003.  It aims to identify the requirements for 
successful trade-related structural adjustment via the 
reallocation of resources (human, physical and capital) 
to more efficient uses in response to the emergence of 
new sources of competition, technological change or 
shifting consumer preferences while limiting adjustment 
costs for individuals, communities and society as a 
whole. 
 
4.    With regard to best practices in the domestic 
policy setting, the draft recommends the promotion of 
macroeconomic stability, sound labor market policies, a 
sound regulatory and competition environment and a 
strong institutional and governance framework that will 
favor structural reform.  On the international side, 
the OECD recommends the adoption of liberal trade 
policies.  The OECD also recommends fostering bilateral 
and regional initiatives, noting that regulatory 
cooperation can foster opportunities through trade or 
ease adjustment strains in particular sectors as a 
complement to wider multilateral commitments.  Finally, 
the paper recommends fostering multilateral cooperation 
in trade and finance, in capacity building, and in 
corporate responsibility and core labor standards. 
 
--------------------------- 
TOO MUCH EMPHASIS ON LABOR? 
--------------------------- 
 
5.    Bernard Hoeckman of the World Bank noted that 
there was a heavy emphasis in the draft on the labor 
market, and wondered if more attention should not be 
paid to facilitating entry and exit of firms.  He said 
that the role of access to credit was also under- 
emphasized.  With regard to trade, he pointed out that 
developing countries had become heavy users of anti- 
dumping remedies.  This, and the rise of non-tariff 
barriers, was masking the failure to liberalize -- it 
is difficult to ensure that trade policy has changed in 
reality, or whether the rules have simply shifted. 
 
6.    Mr. Hoeckman also expressed surprise at the 
relatively favorable view in the report of export 
subsidies, which he characterized as anathema to 
economists.  He mentioned in particular the treatment 
of South Africa's Motor Industry Development Program 
(MIDP).  Note:  By comparison, the December 2004 IMF 
Article IV survey of South Africa said that "the 
financial structure of the MIDP was complicated and 
appeared to involve a combination of export subsidies 
and heightened protection for domestic production. The 
cost in terms of forgone fiscal revenue may be 
considerable." End note.  Hoeckman said that if the 
OECD did want to retain its somewhat more favorable 
view of export subsidies, it would require more 
explanation. 
 
--------------------- 
DENMARK AS ROLE MODEL 
--------------------- 
 
7.    Duncan Campbell of the International Labor 
Organization (ILO) suggested that aid should be used to 
help less developed countries to accept and adjust 
under trade liberalization.  He cited Denmark as an 
appropriate model which combined efficient micro-level 
flexibility with a good system of social security. 
Denmark, he said, has generous unemployment benefits 
but with a clearly defined end-point to make sure 
people do not remain permanently unemployed.  As a 
result, polls show that the sense of employment 
security is highest in Denmark, not because people are 
sure that they will have the same job ten years from 
now, but that they will have a job.  With regard to 
sequencing of reform, Mr. Campbell cited research 
findings that trade liberalization which was preceded 
by the establishment of core labor standards and 
freedom of association are generally more successful. 
 
8.    Howard Rosen of the U.S. Trade Adjustment 
Assistance Coalition said that the OECD draft missed 
the point:  structural adjustment is supposed to be a 
means towards the end of achieving higher wages and 
better standards of living, not shrinking industries. 
He said that most countries were not putting enough 
emphasis on prospective employment to absorb redundant 
labor resources.  In this regard, wage insurance 
programs in the United States and Germany are a 
positive model for the future which encourage people to 
find new jobs, and employers to hire them.  He 
encouraged drafters to re-formulate the report so that 
it could be used as a tool kit, or a reference guide, 
which countries could use to adapt to their own 
particular problems. 
 
----------------------- 
NOT ALL SUNNY IN SWEDEN 
----------------------- 
 
9.    Karolina Ekholm of the Stockholm School of 
Economics noted that the draft seemed to endorse a 
Swedish labor reform model, but she insisted that not 
everything in the Swedish model is good.  On the 
positive side, she said that in Sweden, free trade, 
active labor market policies (ALMPs) and low open 
unemployment in spite of generous unemployment benefits 
significantly weakened protectionist pressures. 
Summarizing recent literature on the Swedish labor 
model, however, she said, that there was no clear 
evidence of a positive effect of ALMPs on efficiency of 
matching prospective job seekers with jobs.  Subsidized 
employment seems to have some crowding out effects, 
while youth employment programs have strong crowding 
out effects.  ALMPs also appear to have the effect of 
reducing geographical mobility. 
 
10.  Ms. Ekholm recommended that the drafters consider 
that unemployment compensation levels fall with the 
unemployment period and that ALMPs be used as a test of 
willingness to work.  Why has Sweden apparently done so 
well in spite of the mixed result on labor market 
reform?  Ms. Ekholm said that Sweden's emphasis on 
macro stability played an important role.  She 
concluded with the observation that a slightly 
undervalued currency has been very helpful to Swedish 
industry, which generated a comment from the field that 
it was impossible for all countries in the world to 
have an undervalued currency. 
--------------------------------- 
GETTING IT RIGHT IN THE ANTIPODES 
--------------------------------- 
11.  Lisa Gropp of the Australian Productivity 
Commission spelled out Australia's recipe for recent 
structural adjustment success.  She said the political 
dimension had to be considered alongside the economic. 
General equilibrium modeling created the "bullet 
points" to inform the public of how much trade 
protection was costing them.  A broad constituency of 
the export and import-competing sectors combined to 
press for reform of the non-traded sectors, including 
network industries, and of the labor market. 
 
-------------------- 
SMALL STEPS IN JAPAN 
-------------------- 
 
12.  Risaburo Nezu of the Japanese Research Institute 
of Economy, Trade and Industry showed data comparing 
the ease of entry and exit of hardware and software 
manufacturers in the United States with the relatively 
static picture in his own country.  This was a great 
strength of the United States and a failing of Japan. 
On a positive note, he said the number of mergers and 
acquisitions have increased dramatically in Japan as a 
result of government policies.  The gradual shift away 
from seniority-based salary increases and lifetime 
employment guarantees towards performance-based 
promotions and compensation was another positive 
development in Japan.  He suggested that the draft 
focus more on adjustment in the high tech industry, but 
instead of talking about how to handle "adjustment" we 
should be looking for ways to enable "transformation". 
 
---------------- 
NO DIRIGISTE, HE 
---------------- 
 
13.  Patrick Messerlin of Paris's Sciences Po (the 
venue of Secretary Rice's February 8 speech) noted that 
the pace of structural change is a political choice. 
In the 1950s, he said, three million workers moved from 
the agricultural sector to the manufacturing sector 
with hardly a grumble.  In the 1970s, by comparison, 
moving 600,000 workers from one manufacturing sector to 
another was practically impossible.  On the proper 
sequencing of reforms, Mr. Messerlin recommended that 
goods and services markets be liberalized before labor 
and capital markets.  Like the ILO speaker, he favored 
the Danish model, which had both rights and obligations 
-- he said the draft report focused too much on rights 
and not enough on obligations.  With specific regard to 
compensation for structural adjustment, he said yes to 
compensating the small farmer, no to compensating the 
big farmer:  in France large, industrial farmers have 
had 20 years to collect abnormal profits as a result of 
trade protection -- "they don't deserve any additional 
compensation". 
 
14.  Mr. Messerlin also recommended the abolishment of 
anti-dumping and countervailing duty laws around the 
world, saying these were just substitutes for 
safeguards.  He made a pitch for changing the report to 
recommend that trade adjustment assistance be dropped, 
and adjustment assistance be made general, because it 
was often difficult to tell whether a worker lost his 
or her job as the result of trade liberalization or 
some other effect.  Finally, echoing Ms. Kropp's 
intervention, he called for developing a "culture of 
evaluation" in Europe which would allow policymakers as 
well as the public to examine the costs and benefits of 
a particular action. 
 
------------ 
THE WTO VIEW 
------------ 
 
15.  Like Mr. Messerlin, Robert Teh of the World Trade 
Organization spoke at length on the abuse of anti- 
dumping and countervailing duties as a substitute for 
safeguards.  He said that countries which use anti- 
dumping laws to handle structural adjustment issues 
undermine the credibility of the WTO.  Mr. Teh also 
said that the draft study takes too benign a view of 
the role of preferential trade arrangements in managing 
adjustment problems.  He noted that with complex rules 
of origin provisions, the level of protection often 
actually increases under these arrangements.  He 
expressed ambivalence towards core labor standards. 
Only to the extent that they underpin labor market 
efficiency, he said, should core labor standards be 
adopted. 
 
SMOLIK