COVER STORY • 1

Interview with Álvaro Santos Pereira, Director of the Country Studies Branch at the Economics
Department of the OECDL

ong-Term Prospects for theOECD Economy Under the
Risk of the Delta Variant

By Japan SPOTLIGHT
The OECD is one of the major think tanks providing a mid- to long-term outlook for developed nations inthat it represents an objective, neutral and comprehensive perspective on their economies. With the current
threat of the Delta variant of Covid-19, how does the OECD view the economic outlook? Japan SPOTLIGHT
interviewed Álvaro Santos Pereira, director of the Country Studies Branch at the Economics Department of
the OECD who oversees the peer review process for its economic surveys and is thus well placed to assess
member nations’ long-term economic performance.
(Interviewed on Sept. 3, 2021)

How the OECD Could Help
Developing Nations Emerge
from the Worst of the Pandemic

vaccinations are not quite so effective and if thisremains the case, we are going to have somesituations that are highly unwelcome toeverybody. It’s very important to havecooperation between developed and developing
countries so that we can vaccinate the entire
world and get out of this pandemic, including its
strong negative impact on the economy.

JS: The availability of vaccines seems

to be key to restoring public healthbut also the economy. Somecountries have enough vaccines,
while some developing countries donot, which could create a gap in
economic growth. Do you think it will
be important to promote cooperation
between these two groups ofcountries to help the global economy
get out of this difficult situation?

JS: Overall, the economic landscapeof developed nations is very positive.
Do you see any disparity between
OECD economies or are they all ingood health?

Pereira: While many economies are recoveringstrongly, the upturn has been quicker in countries
like Australia, Canada, South Korea, and the United States compared toEurope or Japan, partly because of the restrictions that remain inplace. Australia was fast but now with the Delta variant new
restrictions are likely, and the outcome may not be as positive as wefirst thought. Certainly, we saw some OECD economies recovering
faster and this is strongly linked very often either to how successful
they were in limiting the pandemic through restrictions, or how fast
the vaccination efforts have occurred. So the US and Canada arerecovering much faster than many parts of the OECD. But remember,the OECD is a very heterogenous set of economies in which we havecountries like Colombia and Chile where I think the recovery is a little
slower than other parts of the OECD. Chile has been extremely
successful with its vaccination efforts. Even within the OECD we seesome divergent outcomes, even though in most countries recovery isunderway and it is a matter of months before they are fully recovered,
there is still a lot of uncertainty especially related to the Delta variant –many countries have 60-70% of their population vaccinated but thatmeans that 30% are not and the Delta variant is so contagious that thisÁlvaro Santos Pereira

Pereira: Many countries with high vaccination
rates are starting to rebound quite strongly. Strong vaccination efforts
are leading to the resumption of activity because there are now fewer
restrictions. This is not exactly the case in many other countries –parts of Africa and Latin America and even Asia have vaccination rates
lower than 1-2%, although in many countries this is up to about
10-20%. What this means for these countries is that very often,
especially with variants like Delta which are highly contagious,
restrictions will most likely remain in place in many sectors, and thisleads to different economic outcomes. So we see a strong correlation
between vaccination and economic activity.
We are projecting world GDP growth of around 6% and around
5.3% for OECD economies, but since we got the data for the second
quarter we think that growth is going to be even stronger for the OECDeconomies. For many other economies, however, this is not happening
because of vaccinations, so there will be a widening gap at least in the
short term. The priority should be for us to try to vaccinate as many
people as possible around the world so that we don’t have bad
surprises down the line. There are new variants against whichhttps://www.jef.or.jp/journal/

Japan SPOTLIGHT • November / December 20215

is putting pressure on ICU units, hospital beds and health centers.
There are still restrictions in some sectors due to the Delta variant.
Countries like Spain and Italy which rely on tourism are more affected
and are not recovering as fast as we thought. There are some issues
with global supply chains and labor shortages that are also adding to
the uncertainty and affecting the speed of the recovery.

Impact of Structural Problems on the
Recovery Process
JS: Many countries will have structural problems with

their economies – Japan has an aging population, forexample, and due to this factor the recovery process
may not be as stable as other countries. Could
factors other than policy affect the recovery track?

Pereira: This is a key issue. We have two or three megatrends going
forward. In many countries like Japan, South Korea, Italy, and Spain
we have very fast aging. There are not enough migrants in many
countries to make up for the labor shortfall. This is one of the major
issues that these economies will face going forward. There is also
climate change, and we know that while there is a stronger
commitment now to get to net zero carbon at the global level by 2050
or earlier, climate change is going to be a huge issue in future. On theother hand, we have the issues of digitalization, which some countries
are adjusting to better than others. With all these trends, the speed ofrecovery is going to be affected. For countries to recover fast, they willneed public and private investment and also should undertake
structural reform in the next few months to speed up that recovery.
Certainly, like Japan, it is very important to have reforms in the labormarket, reforms to reskill the repopulation. In many countries such as
Switzerland there have been no major pension reforms for decades,
and so the current laws are out of date due to people living much
longer. The fastest growing demographic in Japan and in many partsof the world is the 100+ group. If we retire at 60 and then live until
100, this becomes unaffordable to the state and there must be somechange to our working practices and pension regimes. While it is also
an opportunity, we believe that the aging challenge must be front andcenter in future reform efforts. Using the recovery plans of thesecountries to tackle issues such as climate change or aging is very
important to ensure a strong economic recovery.
JS: You mention growth of 6% next year, but even withsuch strong growth rates it might be difficult for the
global economy to catch up with previous trends
before the pandemic. There could be a gap between
the case with the pandemic and the case without the
pandemic. There could be some deflationary gaps
existing even if there is a strong economic growthrate.

Pereira: We do agree and in our last economic outlook we estimatedhow long it would take for OECD countries to get back to prepandemic levels. In many emerging countries that we follow such as
Argentina and South Africa and even Saudi Arabia, we believe that it
will take between three and four years to return to the pre-pandemic
6 Japan SPOTLIGHT • November / December 2021

level. Other countries such as South Korea and the US have alreadypassed the pre-pandemic levels, and countries that rely on tourism
such as Spain and Italy will certainly take longer to recover than manyother countries. There will be divergent outcomes partly due tovaccination, reliance on supply chains that have been disrupted, andreliance on tourism, and for those countries it is likely to take a bit
longer to get to pre-pandemic levels. Some countries have alreadypassed these levels while some will take up to four years, and this isbased on everything going according to plan in terms of vaccinations
and lifting of restrictions, but of course there may be other variants
that could delay the recovery. On the other hand, if we can find an
effective treatment other than the vaccine, the recovery could be evenfaster. Based on these factors, our predictions may be different as wemove forward.

Concerns About Inflation & Unemployment
JS: Turning to inflation, loose monetary policy andexpansionary fiscal policy has continued for a longtime among OECD nations. Could excess pent-up
demand appear in the next couple of years and if so,should we be concerned about inflation?

Pereira: In countries that are recovering faster, we are seeing that
inflation is a bit stronger than we expected a few months ago, in the
US and even some European countries. This is because of higher
commodity prices, and some temporary supply-side constraints in
sectors such as semiconductors and shipping and, of course, higher
consumer demand. Pent-up demand is significant. One of the big
consequences of the pandemic was that governments acted very
swiftly by introducing strong policies to try to dampen unemployment
which could have increased dramatically. It could have increased a lot
more if it weren’t for job retention schemes and other policy support.
An unintended consequence of this was that policy support forhouseholds and firms allowed for insolvencies of firms to be much
lower than usual, but on the other hand we also saw savings reachalmost unprecedented levels in the past few decades. What this meansis that when the policy support is removed and the recovery starts
gathering steam, it is possible that part of these savings will be used inconsumption and will add to demand. A positive risk to growth will
possibly be that these savings will be used for consumption, it will leadto stronger consumer demand, and this will lead to stronger growth.
The other side to this higher demand is that inflation will go up andmight go up even further than expected. We are facing a world where
inflation will be stronger and higher than in the past few years which is
not necessarily bad, but the risk is that if inflation goes up higher andstays higher for a bit longer than we expected, then central banks will
be forced to react. Do we expect this to be temporary or permanent?
Right now, we and many people believe that inflation will spike a bit insome countries but is not likely to get out of control. What matters forcentral banks is to keep monitoring what is happening in terms ofinflation, but right now keeping policy support is crucial to ensure thatthe recovery gathers steam. We are already seeing interest rate hikes
in many developing countries. In emerging markets like Brazil, Mexico,
Turkey, and a few others they have already started hiking interest rates,
quite dramatically in some cases, and this affects commodity prices

due to exchange rate depreciation. The question is whether this higher
inflation will spread to other countries, like Japan and European
nations for example, and so central banks need to remain watchful.
JS: The rate of inflation and the unemployment rate

are correlated, and with interest rate hikes in the US
there is the concern about rising unemployment.
Thanks to unprecedentedly large-scale fiscal andmonetary stimulus, so far, the unemployment rate
does not seem to have been so serious around theworld, but from now on interest rate hikes may cause
concern.

Pereira: To put things into perspective, at the end of 2020 around 22
million jobs had vanished in the OECD compared to 2019. This is quite
substantial, and globally at least 140 million jobs disappeared, so weare still talking about a massive impact. Right now, even though there
has been a recovery in many countries and lifting of restrictions, there
are still more than 8 million more people unemployed compared tobefore the crisis, and more than 14 million out of the labor force
compared to before the crisis. More than 20 million people are
unemployed or left the labor force due to the crisis. Not only are weconcerned about what happens next, but also unemployment did not
go up as much as we expected, due to unprecedented support policy
both for firms and for individuals.
However, when this policy support goes away, it is very possiblethat insolvencies will start going up and this will lead to more
unemployment. Many people may also lose their jobs, so it is very
possible that when policy support is withdrawn there might be anincrease in unemployment. Obviously, going forward, if there is apickup in inflation and this inflation becomes more entrenched andstronger, central banks will first have to normalize their policy which
will involve stopping purchasing assets, which they have been doing inrecent years. In other cases, it is very possible that in countries
experiencing substantial inflation like Brazil, Turkey and Mexico,interest rates will start going up. This will affect consumption andinvestment, and there might be an impact on growth and jobs. There
are still quite a lot of people unemployed and inactive compared tobefore the crisis, and in many developing countries there is muchhigher unemployment than there used to be.
So I am more concerned about getting the recovery underway andgetting rid of unemployment. Some countries that have not fully
recovered have been forced already to raise rates, and this could delay
the jobs recovery. In terms of job security, we believe that the mostimportant thing is jobs, and on the other hand it is very important thatgovernments should ensure that the recovery benefits everyone. In
this case, we think that strong income support for poorer households
will be important. Also, reforms to improve training in many countries
will be key to improving job security and to improving the skills andqualifications of people around the world.

Cumulative Debt as Another Structural
Impediment
JS: The cumulative debt question is very serious for

all countries because of this unprecedented large-

scale fiscal stimulus. Unfortunately, interest rates are
low, so therefore the governments in OECD countries
may not be concerned about interest payments
rising. To achieve sustainability of fiscal budgets,
some sort of macro policy coordination would benecessary. How do you assess the G7 initiative
recently adopted in the United Kingdom for aminimum corporate tax of 15%?
Pereira: As you know, we are a multilateral institution, and also theOECD has been front and center of the negotiations for internationaltax reform. My colleagues at the OECD are already working with morethan 130 countries to get a global agreement, so we were very happy
with the G7 agreement. We think that this is important for global
cooperation but are concerned about what could happen in the next
few years regarding fiscal sustainability in many countries because wewere seeing unprecedented levels of debt already before the crisis. We
already had large public and corporate debt and these countries werealready vulnerable either to raising rates or to changes in market
expectations.
Obviously with the crisis, governments have rightfully extended
strong policy support for both households and firms and have tried toavert a major economic catastrophe. But consequently, debt levels
have increased dramatically both in the public and private sectors. We
are very concerned that when the pandemic is over, some countries(especially non-OECD, emerging or developing countries) might haveproblems refinancing their debts and we might see some financial
volatility going forward. How can we avoid this potentially huge
volatility? Multilateral cooperation could help, to get an arrangement to
see if the debts could be financed in the long term, but also to ensure
more revenues in the long term. This cooperation on taxes is a way of
securing more revenues not only for OECD countries but also for nonOECD countries and this will be key to ensuring fiscal sustainability. In
the next few years, we are going to see tax reforms in many countries,
as well as pension reforms because fiscal issues will become front andcenter after the pandemic is over due to the very high levels of debt
that we are facing.

Income Inequality Possibly Exacerbated by
the Pandemic
JS: The unemployment and inflation issues areinversely correlated, and we need a well-balanced
approach to tackle both, avoiding inflation andachieving full employment. We need to employ as
many policy instruments as possible, including
structural policies for the supply side. In this regard,
perhaps income inequality is a very difficult issue totackle to achieve a strong economy. Do you thinkinclusive growth would be a key topic for discussion
within the OECD, and what would be the key
elements in this policy discussion?

Pereira: Inclusive growth has been at the forefront of OECD
discussions for many years, partly because we have seen over the pastfew decades an increase in inequality in different parts of the world,
Japan SPOTLIGHT • November / December 20217

both inside countries and between countries. We do think it is very
important to tackle the issue. Obviously, the pandemic has aggravatedthese issues because the demand for skilled workers has increased
and because these skills are more in demand their incomes have gone
up. On the other hand, we know that the demand for low-skilledworkers went down, and in many emerging markets not only did it go
down but also the losses in jobs happened for the low-skilled, forwomen, and for young people and informal workers. So there has
certainly been an increase in inequality in many countries, but what is
the solution?
Then there is the aging issue – many countries will have toimplement tax reforms, pension reforms and labor reforms to tackle
this. Many countries are facing skills shortages, and so they will haveto re-skill their populations, providing lifelong learning for many of
their workers. Many countries will have to attract more immigrants
from other countries, as the US and Canada have done for a while.
Also, we do think that it is going to be key to invest in people, skills,
and training in the future. If you can work on these, then the gap
between skilled and the unskilled workers will be lower, which will leadto more inclusive growth and to lower inequalities. We do think thatcountries should think about reforms to make growth work for all, andso stronger growth will be vital to propel a strong recovery, which will
also help to alleviate the debt problem by tackling the debt/GDP ratio.
Supporting the recovery with reforms will be crucial, as will inclusive
growth going forward.
JS: In order to achieve structural reform and to reduceincome inequality, free trade and free competition
polices will be very important to vitalize the economy
so that we can reduce inequality and inefficiency andachieve high-growth potential in the post-pandemic
period.

Pereira: I totally agree. We certainly believe that in many countries
there is not enough competition and because of this, prices are higher
than they should be. This is one of the reasons behind the multilateraltax policy, so that we can ensure fairer competition. So we do thinkthat this is going to be extremely important in the future and now thatthe world is becoming even more digital and companies ever moreglobal, it is important to ensure that there are lower barriers tocompetition or to entry, and that competition becomes one of the mostimportant elements of a country’s policy to create more jobs andensure stronger and more inclusive growth. Making growth work for
all is key and a crucial element of this is more competition rather thanless.

New Missions of OECD
JS: Today, the role of emerging economies in the

global economy is crucial. In this regard, the OECD
may look to strengthen its outreach activities toassess the performance of emerging economies.
Could you introduce the direction of the OECD’s
work for emerging economies?

Pereira: We are already covering the large emerging market
8 Japan SPOTLIGHT • November / December 2021

economies, and in the past few years we have had the support ofJapan in studying and working with more countries in Southeast Asiaand Latin America. We are just starting with Vietnam and have finishedreports on Thailand and Malaysia. We are also working with China,
India, Brazil, Argentina and so on. We do think it is very important for
the OECD and other multilateral institutions to strengthen theircooperation and work with emerging market economies, because partof the growth that will come in the global economy will come fromthose countries, but also because of the challenges that they face. Oneof the issues in many emerging market economies is likely to be thefiscal situation and their high debt levels and what will happen tofinancial markets because of that. So we do think it is very importantto give advice to those countries, especially about reforms as theOECD is all about reforms. How can countries implement reforms to
improve their performance? I strongly believe that institutions like theOECD can help by giving good advice to countries – emerging markets
and non-emerging markets – to try to identify and prioritize reforms
toward stronger growth and more job creation. Certainly, this issomething that we intend to do, and we work on many emerging
market economies and are trying to increase the number of countries
that we cover so that we can provide this support.
JS: The OECD has been working very hard on theissue of welfare and happiness. With the pandemic,
these issues are more important than even before.
Could you introduce some of these current
initiatives?

Pereira: The OECD has for many years been working on well-being
and how to measure it, so it is a key priority to pursue what is called
the “better life initiative”. We also try to develop and provide adashboard of indicators on our publications like How’s Life? and to try
to understand what increases or decreases well-being for people.
Economists for years have been working on happiness and well-being,
but international institutions like the OECD have been devoted to it in
the past few years. We are starting to work with individual countries on
this issue; for example, with New Zealand we recently prepared asurvey focused on how to increase well-being, and in Austria and a
few other countries. When we study well-being, we investigate thefactors that can improve well-being and do surveys to understand thisbetter. On the other hand, we try to measure the progress of well-being
through a dashboard of indicators to precisely understand whether
people’s well-being and welfare is rising or falling.
Having done this, you can start to think about how to design
policies, not only measuring welfare and happiness but how to
improve it, and the OECD has been devoting a substantial amount of
resources to this. We think that since there is high demand in many
countries for this topic, this work will continue after the pandemic isover. People are currently more concerned about their jobs and thelegacies of the crisis, but after we start recovering this will be a toppriority.

Written with the cooperation of Joel Challender who is a translator, interpreter,
researcher and writer specializing in Japanese disaster preparedness.