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OECD:  Right Policies Could Foster Economic Growth

The Paris-based Organization for Economic Co-operation and Development, or OECD, predicted that the economies of its member countries will contract by 4.3 percent this year due to the deepening financial crisis and a collapse in world trade.

But the 30-member group of mostly industrialized nations, including the United States, said government intervention in the banking industry and the form of fiscal stimulus could facilitate faster economic recovery.

This is OECD Chief Economist Klaus Schmidt-Hebbel, speaking from Paris to an audience here in Washington.

"The bottom line of our analysis, our forecast, is that we think there is light at the end of the tunnel. While some have dubbed this severe global downturn 'a great recession,' it will remain far from turning into a repeat of the 1930's Great Depression, thanks to the quality and intensity of government policies that are currently being undertaken," he said.

The OECD's new outlook was released in time for this week's summit of 20 of the biggest leading and emerging economies - the G-20 - which will focus on global economic recovery.

The OECD said the most urgent task for individual countries and the G-20 to undertake is to strengthen the financial system so that banks can resume lending. The next step, it said, is economic stimulus. But the OECD warned that there are still many factors that could derail economic recovery.

Schmidt-Hebbel said that selectively subsidizing domestic industries could have a negative effect.

"Generally, these subsidies are unfair because they benefit certain sectors -- maybe car producers, maybe steel and iron, maybe domestic construction firms - but they discriminate by not favoring other sectors, which do not benefit from this," he said.

Schmidt-Hebbel said that developing economies have been hit especially hard by the global recession, in part, because of the declining price of commodities.

He said that while this has helped most OECD countries that buy and consume commodities such as oil, it has had the opposite effect for developing nations.

To help developing economies, Schmidt-Hebbel said one proposal that will be considered by the G-20 is to commit more money to international development banks, particularly the International Monetary Fund.