For an overview of what the OECD is doing regarding the current crisis, there are two large initiatives currently being undertaken. The first is the OECD's Strategic Response to the Economic Crisis which cuts across the organization and looks at two aspects of the crisis. The first aspect is dealing with getting the financial system back in operation. Much of that work is linked to what the IMF and other international institutions are doing, but the OECD is focusing on a number of additional aspects in this respect, including corporate governance and tax systems. The second aspect is how the OECD can deal not only with the immediate problem, but what can be done to strengthen long-term growth performance. Looking back to where the crisis came from, productivity growth in many OECD countries began showing declines before the crisis. Some root causes of the crisis and the decline of economic growth were happening prior to the crisis; the crisis only made this fact more clear. In order to emerge from the crisis in a stronger position, policies that can strengthen long-term growth must be considered.

The second area of work that is being undertaken by the organization was started before the crisis based on a request by member countries to once again look at policies to improve innovation performance. As mentioned, economic performance and productivity growth was declining in many OECD countries. Many countries had policies to improve innovation performance. For example, Europe had been following the Lisbon strategy for some time as it attempted to strengthen innovation performance in Europe. The Lisbon strategy has not had a big impact and many other countries in the OECD area were also struggling with how to improve growth and innovation performance. The question is whether more can be done to address this problem, including better policy recommendations and a coherent strategy to improve economic performance through innovation.

The idea of focusing on innovation came from both a need to strengthen economic growth and the fact that innovation itself was changing. Typically, innovation policies around ten years ago focused on science, technology and hard technological innovations. Many other types of changes in innovation were being ignored. The role of organizational change in innovation performance, which is necessary to make technology work well, was nonetheless ignored by many countries. Also, the focus in many countries was on pushing technology into the workplace, but not looking at market conditions and consumer demand for innovative products. The focus is quite different now because it takes a broader perspective on what innovation is. This may translate into changes in policies to strengthen innovation performance.

Innovation is typically thought to suffer in downturns. Variations in GDP growth and indicators of innovation, including patenting, research and development (R&D) and trademarks reveal that these factors fluctuate with the business cycle. If the economy goes down, certain types of innovation indicators will also go down. This is partly because much of the spending on R&D is dependent on cash flows. If cash flows decrease, companies cannot spend as much on R&D. The question is whether or not this will happen in the current crisis, which is primarily a financial crisis. Many companies that spend heavily on R&D entered the crisis with good cash positions. Quite a few companies thus have not yet cut back on R&D spending, though they may do so in the future. Also, looking at other aspects of innovation performance like investment and venture capital, there is a clear decline. There has been a fairly strong decline of venture capital in the United States, partly due to difficult financial markets. Moreover, difficult market situations also make it very hard for companies to enter markets.

R&D investment is now falling in some large companies and many have announced that R&D investment will be reduced. A reorientation is occurring with a growing focus on development rather than long-term research. However, according to a McKinsey & Co. survey, many companies admitted to reducing R&D spending and changing the types of R&D that they are undertaking. At the same time many companies were increasing R&D spending due to a perceived benefit of taking advantage of the current weak position of competitors. This exemplifies how crises occur in times when economies renew themselves and creative destruction takes place. Many big firms today, like Nokia, were created during downturns. A problem lies with smaller firms that are much more affected by the financial situation than such larger companies. The cash flows of many of these firms are drying up and there has been a sharp increase in bankruptcies and insolvencies in such firms around the world. New firms face similar dangers due to difficult market entry and exit conditions.

World trade is also a major factor affecting global innovation. Trade is an important determinant of all economies, and world trade has fallen sharply in the current crisis. This has had an impact on innovation and long-term growth performance because as economies become more global, global innovation networks will suffer as well. Demand decreases in certain industries that feed through to firms in different sectors. With these conditions, protectionist risks increase. Overall, since many large companies operate globally, there is a greater risk to growth and innovation.

Environmental innovation has been increasing in recent years, though with current price conditions there is a reduced incentive to continue pursuing this kind of innovation. Consumers are buying less expensive goods, and thus environmentally friendly goods that generally come with a price premium are becoming less popular. Firms also find it more difficult to come out with new products and services that are more environmentally friendly but also more expensive. The falling price of oil has eroded financial incentives for environmental innovation. While GHG emissions are decreasing due to the U.S. economic slowdown in particular, the situation has been drawing more attention to environmental innovation. The overall situation for environmental innovation is a difficult one.

It has become clear that many industries that found themselves in trouble in the crisis were already in trouble before, with the crisis only serving to reveal longstanding problems. The automobile industry, for example, had large supply surpluses with many manufacturers running on unsustainable business models. The crisis has made these problems clearer. The crisis has also evolved from an event that initially hit only financial markets in affected countries to an economic crisis that has spread to countries with significant manufacturing industries.

Part of governments' responses to the crisis were stimulus packages. A mixture of bailouts and tax cuts attempted to revitalize both consumer and business spending. Most OECD economies have implemented such packages and several others have introduced legislation, with the largest being the $800 billion U.S. stimulus package. Stimulus package overall range from 0.3%-8.0% of GDP. Some non-OECD countries, including China, Russia and Brazil have also given strong boosts to overall spending, but the U.S. and South Korea have the largest packages as a percentage of GDP.

The packages implemented by most OECD countries were a mixture of stimulus and tax cuts, though some countries responded almost exclusively with spending cuts. Much of the money included in such packages was already allotted to certain projects or programs, so it is difficult to compare stimulus packages. The OECD is working to analyze what is in the packages to stimulate long-term economic growth. Many countries are focusing on infrastructure improvements as it has a large multiplier effect in terms of both short- and long-term growth performance. The infrastructure improvements happening now include both traditional and more modern types of infrastructure like broadband connections, smart electricity grids and others. There is also a focus on improving the quality of infrastructure.

Support for R&D and innovation is increasing because countries see these areas being affected by the crisis. There is more of an appreciation for investments in these areas. Investments in human capital have increased in connection with the focus on R&D and due to the higher unemployment caused by the crisis. There is also a need to help unemployed workers find new jobs and retrain them. Green technologies are making up an important element of stimulus packages in different countries, while entrepreneurial innovation is also receiving strong support. Generally, the largest category of investment in stimulus packages is infrastructure followed by human capital, and R&D.

At the same time there are many non-financial measures underway. Some countries do not have much room to maneuver fiscally, so there is a focus on improving governance, hastening administrative procedures, implementing measures to improve the efficiency of public administration and others. These measures are devised to complement fiscal measures in stimulus packages. Many countries are trying to implement double-dividend actions that stimulate both short-term demand and long-term growth. Some examples of this type of measure include investments in infrastructure, spending on training and the labor market, and easing market entry for new firms.

The long-term element of these actions improves the credibility of government actions. Using stimulus packages to improve both short- and long-term prospects allows the economy to come out of the crisis stronger than it was going into the crisis. The OECD has emphasized that the crisis is an opportunity to make changes which are normally difficult to make. The scope for policy changes is bigger during crises because the need for change is more apparent.

Investments in innovation can be of strategic importance for long-term growth. Most growth comes from improvements in efficiency, new technologies, new types of innovation, and doing things better. The crisis causes some of these types of investments to fade away, but governments are trying to cushion the fall in private R&D spending through support for private R&D. Many countries are investing in research infrastructure because it can be a double-dividend improvement. Many countries are also trying to connect spending in research, development and innovation to the market. Government policies are trying to connect innovation policies to new social and economic needs because this is where future markets will be located.

Financing for small and innovative firms is also being provided. These firms are important because they bring radical ideas and approaches. Without these firms much will be lost in terms of innovation performance. A number of governments are trying to reduce payment delays for public procurement in order to make it easier for such companies to receive cash. Changes to tax payments and export credits are also being implemented. There is much policy development in the way of enhancing access to capital and liquidity for these firms by extending loans and providing loan guarantees. France is mediating between banks and small firms in order to increase access to liquidity.

Governments are also providing support to industries in need, sometimes indirectly. German government support for the car industry is an example where the government provides credit for consumers trading in inefficient cars or ones that pollute the air for newer models. Direct support programs for such industries come with high risk because they tend to lock into established economic structures, even if that structure is going through difficulties. General Motors, for example, is being looked at by the U.S. government in terms of how change and innovation can be stimulated in the firm. Another risk is that if existing companies receive too much support, it may cut into the opportunities for new companies with new ideas and new business models to thrive.

If governments are to provide support for companies in trouble, that support must be made conditional on restructuring and it should be limited in time. This will allow the firms to quickly emerge from bad financial situations and turn their businesses around. This could fuel protectionism as other countries may do the same thing, therefore it must be exercised carefully.

Environmental innovation is being incentivized during the current crisis and focus is being put on how to address climate change in the future. Some of the OECD work has focused on the crisis providing opportunities to increase efficiency. Some options in this regard include removing subsidies on fossil fuel energy production and consumption, and cutting trade barriers on environmentally friendly products. It is important, however, to send a clear, long-term signal to investors and the public about climate change. The International Energy Agency reports that while large firms are prepared to deliver environmentally friendly options to governments, the firms need clear signals from governments indicating their intention to move toward such technologies in order to reduce the risk of the investments that the firms will have to make.

While stimulus packages are important, implementation is key to the packages' effectiveness. It is not yet known how many of the countries' packages will play out as many of them are in the implementation phase right now. The dilemma faced by many countries is the need to stimulate the economy in the short run, which leads to actions that may not necessarily be the best for long-term growth. International coordination of stimulus packages is difficult, but it is an ideal course of action. With the growing role of government, the quality of government intervention is key. Evaluation of measures and coherency of the overall strategy are two major elements in this regard.

New opportunities have opened up with the crisis, specifically opportunities for OECD countries to think again about their futures, how economies can be reformed, how performance can be increased and other goals. The OECD is working toward a fairer, cleaner and stronger economy in the future. In that sense, the long run is not a time that will come in the future; it starts now.

Q: Please discuss the negative quantitative impact on the potential growth rate in the current crisis. Also, please discuss any possible positive impacts on potential or productivity growth rates due to the various stimulus packages.

Dirk PILAT
The OECD will release the next version of its economic outlook next month, including GDP growth estimates. The question of the impact of the crisis and the various stimulus measures is something which many countries are looking into at the moment, though it may be too early to give a definite answer and no one has come out with an exact estimate as of yet.

There is a great variety of measures used in different countries' stimulus plans. Research on modeling the stimulus packages is not being done currently. The OECD will be doing this in the future, but the focus has been on trying to get stimulus packages out to deal with the crisis, rather than focusing on what the exact impact will be. Some discussions have emerged on this topic in the press regarding a recovery beginning soon, and spending may be starting to affect some countries already.

Q: The OECD has put great emphasis on innovation through information technology in the Growth Project, but the presentation put more emphasis on real economy factors. Please explain the difference in this regard.

If this presentation has been put before the OECD committee members, please describe their reaction.

Dirk PILAT
This presentation focuses on short-term rather than long-term issues. In particular, it tries to put innovation in the short-term context of the crisis. The OECD is also exploring the long-term agenda, looking at what needs to do to improve growth and innovation in OECD countries in the future. Many OECD policies are based on R&D or other narrow parts of investment in innovation, but other types of innovation are also becoming important. Both the long- and short-term are important and they need to be brought together for sound analysis and policymaking.

The Growth Project focuses on a number of elements of growth performance. For example, the OECD puts great stock in entrepreneurship and this sentiment remains important. In the current crisis this is very important as new companies need to be allowed into the market to foster renewal of industries. Innovation is also emphasized in the Growth Project. Information technology remains important and the OECD stressed in the Growth Project that things like extending broadband connections to homes and companies are essential in the infrastructures of 20th century economies.

Human capital remains an important element that was mentioned in the Growth Project. It was mentioned in the presentation in regards to the short term with many people losing their jobs and requiring retraining. The question also arises as to whether the education and training provided in OECD countries is the most relevant for the kind of economies that many countries are striving to move towards.

Q: Japanese policymakers stress the point that Japanese innovation is focused on manufacturing, but innovation in the service sector is more important today. It is unclear to Japan how innovation can be promoted in the service sector. How can innovation be fostered in a sector like, for example, banking?

Dirk PILAT
Several countries have admitted to problems of this sort and service sectors tend to be more innovative if they are not heavily regulated. Possibilities for new companies to enter, like in the airline industry when the market opened up, can lead to more innovation. What is different about innovation in services is that very little of it has to do with R&D. Service sector innovation is more about using technology and changing the way things are organized, marketed, designed, etc. There are still difficulties in understanding how that can be fostered. Existing government policies for stimulating R&D are not relevant to services companies. The United Kingdom and other European countries are putting a great deal of focus on innovation in the service sector. The OECD tries to look at good policy practices and disseminate that information, but in this area there is still very little policy.

Q: What is the difference between innovation and the industrial revolution that occurred in the West in the 18th century? For example, rail systems started around 200 years ago, 100 years ago automobile systems started and around 50 years ago aircraft transportation systems spread around the world. The information industry was very important to each one of these innovations in transportation.

Dirk PILAT
There have been a number of technologies which have had major impacts on society, including the steam engine, electricity, the internal combustion engine and information technology, among others. Some people have looked at the time in which these new technologies have diffused. Many old technologies like electricity took quite a long time to diffuse to most people. However, certain key components of information technology have diffused much quicker. This shows that changes in society are happening very quickly. The Internet has been in existence only for the last 15 years but has pervaded most peoples' lives very deeply.

Q: You said that when the government has to bail out existing companies, in order to avoid a situation where obsolete resources are locked into the economy, government aid should be made conditional. Please elaborate on conditionality and what kind of conditionality you feel is appropriate.

Dirk PILAT
Conditionality is necessary when helping firms that are in trouble. In this regard, restructuring is important. Companies need to use this to try and change the way they are doing things. Many firms get into trouble because they have business models that are no longer functional. Conditions that resolve this underlying problem are worth examining.

The OECD has always been wary of government support to industry, but if a government does want to provide support, it should be careful about what kinds of conditions are attached and what incentives are given to change the firm or industry and make it stronger for the future. There are also cases where the question of whether a company should be supported at all comes into play. It depends on the situation in which the economy and the company both find themselves in, and whether there is a real chance for a turnaround of the firm or industry.

Q: International coordination comes with advantages such as reducing duplication of R&D investment, or the scale of economies that coordination might bring about. Specifically, what kind of international coordination can be undertaken?

While European countries have some coordination going on in regards to their national stimulus packages, the nature of that coordination is not well understood. What else can be done to further stimulus package coordination amongst OECD and emerging economies?

Dirk PILAT
I am skeptical about how much can actually be done, but in theory it is always better if coordination can occur. A larger impact could be realized if similar measures were moving in the same direction at the same time. Also, if trying to stimulate similar areas in different countries, like in Europe, coordination would yield bigger results.

In practice, however, this is very difficult. There are many types of spending, implementation, project preparedness and other concerns that will clash and create complications. There are some efforts in the European Union to this effect, but they are not straightforward.

The OECD is focusing more on information exchange than coordination as knowing what other parties are doing can be very beneficial. Many countries have experience dealing with crises, but this crisis is different than any crisis seen before due to its global scale. This creates a wide scope for learning from other affected parties.