Dimitri Zenghelis blogs about the Wealth Economy report, Building Forward: Investing in a Resilient Recovery, which highlights the urgent need to invest in a broad range of productive complementary assets that are necessary to secure sustained future prosperity.
The world has been transformed by the Covid-19 crisis and society is facing up to profound challenges. These include the real near-term risk of a protracted depression, a secular decline in productivity growth and mounting challenges associated with climate change and depleted natural capital. At the same time, the pandemic has exacerbated growing inequalities in income, wealth and access to public services like health, education, housing and transport.
In our report, Building Forward: Investing in a Resilient Recovery, we highlight the urgent need to invest in a broad range of productive complementary assets – human and social capital, natural capital and infrastructure – necessary to secure sustained future prosperity. These investments in society’s inclusive wealth will utilise a surplus of desired global savings, which has pushed global real risk free interest rates below zero, seriously testing the efficacy of monetary policy while helping to inflate the price of assets held mostly by the wealthiest. This can only exacerbate inequality over a period in which earnings growth for the majority stagnated.
The chief advantage of the Wealth Economy approach is to recognise the mutually reinforcing nature of society’s assets. Investment in one component of wealth influences the returns to all other investments. Because assets complement each other, the returns to any single element will be higher if they are treated as a portfolio. For example, when we invest in nature, we are enhancing productivity of a range of core assets including physical and human capital, thereby pushing forward the productivity potential of the economy. Investment in urban trees and woodlands promotes outdoor recreation, with positive effects on physical and mental health, reducing burdens on health systems while increasing the returns to housing investments. It also helps to lower carbon emissions, absorb harmful particulate pollution, increase water retention, provide cooling and shading services as well as promote healthy and happy workers, who are more productive and require fewer days off work. Indeed, Covid-19 has reminded the world of the urgent need to strengthen the quality and resilience of natural assets.
Building inclusive or true wealth means not only investing in resource-efficient low-carbon physical and human capital (to secure the skills and jobs necessary for the 21st century economy), but also generating sustainable knowledge, intangible capital and inclusive social capital. These have greater potential to boost productivity and generate prosperity than, for example, propping up fossil-fuel intensive assets.
Years of underinvestment in key public services in many countries has helped undermine the social contract, spawn popular discontent and nurture political polarisation. Investment in social and institutional capital is necessary to restore faith in effective and functional public institutions and replenish social cohesion. Around the globe, the importance of neighbourliness, human connection and community spirit as well as the desire to reconnect with nature was also heightened by the experience of lockdown.
Covid-19 has also illuminated the limitations of an over-centralised state. While growth and wealth creation in the last few decades has centred on large global cities, the policy response has failed to support people living in smaller towns and peripheral regions. It has become apparent that no economy can increase its productivity as a whole if only certain cities or places are thriving.
The challenge before us is about more than just building back economies after a virulent pandemic; it is about building forward to something better after decades of neglect. The pandemic, alongside mounting evidence of the consequences of climate and biodiversity crises, has opened many people’s eyes to the dangers of returning to the old growth model assessed using inadequate and outdated statistics.
This report provides practical, immediate and detailed policy guidance emerging from our Wealth Economy approach. It outlines a New Marshall Plan to harness the opportunities of a sustainable economy and ‘kick start’ productive innovation while keeping businesses competitive in a rapidly transitioning world.
Public investment is the key to building a resilient, inclusive and sustainable recovery and this will be funded through additional public sector debt. We apply a macroeconomic lens to show why investing in sustainable, inclusive and resilient growth is the best way to restore prosperity and address public sector indebtedness after the pandemic, even if it means a necessary temporary rise in the level of public debt to GDP. The latest IMF Fiscal Monitor (October 2020) reaffirms this finding. It argues that each dollar of increased public borrowing to invest in “job-rich, highly productive, and greener activities” can generate $2.7 in added output.
But this is about more than public money. It concerns a range of policies including pricing carbon and scarce resources, supporting early stage R&D and imposing standards and regulations to incentivise behavioural change and steer investment in the sustainable economy. It also requires institutional reforms, such as increased localism and devolution, the creation of national or regional investment banks with strong sustainability mandates and new long-term policy frameworks such as the UK Climate Change Act. Such institutional change can boost policy credibility and manage and reduce policy risk, thereby galvanising private investment at scale.
Statistical infrastructure actively shapes the future and inclusive wealth statistics can help guide policy efforts towards enhancing the capacity of nations to deliver government objectives and policies. Economic statistics do more than measure progress: they are the lens through which we view and understand the world. Additional support is required for statistical agencies to better measure broad asset stocks as metrics for sustainability. If we had started with better measures of assets like natural and social capital, we would likely have avoided many of the social and economic challenges which now confront us. These challenges, which include climate and environmental change, inequality, and social upheaval, cannot be overcome by focussing on GDP growth alone.
There is a window for the world to act fast and lock into more sustainable, inclusive and resilient wealth. If we miss it, the legacy of the Covid-19 pandemic could lead to a series of damaging social, environmental and economic emergencies. The consequences of a prolonged global depression would be profoundly damaging, the ramifications of social strife, irreversible depletion of ecosystems and unmanaged climate change would be ruinous.
Listen to podcast with Dimitri Zenghelis, Professor Diane Coyle and Dr Matthew Agarwala.