Published on 14 May 2020
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Building recovery and a better future by investing in complementary assets

The pandemic has given a new and urgent dimension to the vision that productivity can be boosted by investing in resource-efficient, clean innovation. Economic growth and debt sustainability will be a high priority for all countries

Following the deliberate cessation of economic activity to contain the spread of the corona virus, the global economy faces unprecedented challenges with the risk of a protracted depression. Public intervention and leadership will be required to restore confidence and avoid a return to the old model of growth that has proved insufficiently productive, socially and regionally divisive and, even worse, dangerous (not least in the sense of making pandemics more likely).

Following COVID-19, economic growth and debt sustainability will be a high priority for all countries. However, there are grounds for optimism that a coordinated and ambitious transition to a more resilient, inclusive and sustainable economy can contribute to a more rapid recovery as well as to long-term prosperity.

This requires a comprehensive policy response which delivers investment at the scale and quality necessary. In the short run, the world faces a classic Keynesian paradox of thrift. This occurs when fear of a downturn leads business’ to cut investment and shed labour, banks to retrench credit and households to cut spending. When everyone responds in this way, expectations become self-fulfilling in generating a downturn. So the primary macroeconomic task is to offset this and stimulate private spending in the short run.

In the long run, the objective is to stimulate investment in complementary assets. In other words, to ‘crowd in’ capacity. This means investing in physical and produced capital by locking into future-proofed, productive and resilient infrastructure, and not spending public money propping up things like fossil fuel intensive assets with limited productivity potential. It also means investing in human capital, to secure the skills and jobs necessary for the 21st century economy, and reskilling workers to enable those affected by change to participate in the new economy.

Most importantly it also involves knowledge and intangible capital. The economy of the 21st century will be shaped by knowledge and innovation. It is the key driver of the growth in total factor productivity and will determine our ability to get more out of the resources we have (resource efficiency) by directing the ‘weightless’ economy to foster dematerialisation and decarbonisation. The sheer scale of the low-carbon transition, for example, means substantial network effects and economies of scale in production and discovery.

It requires investing in social and institutional capital to deliver effective and functional government, with popular support, rebuilding trust in the social contract.  Andy Haldane estimates that the cash-starved social sector (such as charities and enterprises with social objectives) generated the equivalent of around 10 per cent GDP in recent years, making it a key complementary asset requiring investment. It means tackling inequalities, not just in income but also in wealth and in ‘access’ to goods and services such as health, housing, transport, education and justice – inequalities exacerbated by COVID-19.

It requires investment in natural capital, as COVID-19 has reminded the world of the urgent need to strengthen the quality and resilience of natural assets. All of this requires additional resources for statistical agencies such as the ONS, to better measure the stock of broad assets against which to monitor and assess our underlying prosperity.

This investment can get people back to work and stimulate domestic spending and demand in the short run, while building capacity  – and ultimately supply – into the medium and long run. It has been shown to deliver a strong bang for every publicly borrowed buck. In recession, when resources are under-employed, public expenditure has a large multiplier effect. Each percentage point of GDP spent on investment can, if sustained, be expected to increase GDP ultimately by around 2 to 3 percent.

Sustainable, resilient and inclusive investments have some very appealing short- and long-run characteristics in a slump. In the short run, clean energy infrastructure, (such as insulation retrofits and building wind turbines, broadband networks, planting trees and restoring wetlands) is labour intensive but not susceptible to offshoring or imports. Consequently, they impart high short-run multipliers. In the long term, the economic multipliers are also high, as the operation and maintenance of more productive renewable technologies makes them less labour-intensive, and energy cost savings are passed to the wider economy.

Government spending in a recession not only generates positive benefits, it also prevents negative hysteresis effects on future supply, whereby capital is scrapped and labour skills are lost as a result of protracted under-utilisation. With unemployment spiralling to record levels in many countries, there are many potential jobs that are hugely productive from point of view of sustainability.

The reaction to the crisis has shown the possibility of rapid changes in ways of doing things. And it offers an opportunity to embed climate – and productivity – positive behaviours. These include: strengthening connected technologies and virtualisation through high-speed broadband; improving residential energy efficiency to decrease costs of working from home; anticipating a permanent shift in business travel; better use of urban space including staggering rush hours to reduce congestion and reclaiming streets for pedestrians and cyclists; increasing localisation and self-sufficiency by reducing reliance on fragile supply lines noting that security does not mean independence – for essentials such as medical supplies, food or energy global connectivity and collaboration enhances resilience.

By restoring confidence and supporting growth, investment in key complementary assets can generate public revenues which enhance medium-term debt sustainability while encouraging firms to invest at the same time as deleveraging debt. The opportunities to boost productivity by investing in resource-efficient, clean innovation are not new, but the pandemic has given this vision a new and urgent dimension. We have work to do building a more resilient, resource efficient and sustainable economy and we have unemployment, so it makes sense to get on with it now. Pulling the world out of recession requires a coordinated strategy to restore confidence, reduce financial risk and guide investor expectations. By contrast, an early return to austerity, in the guise of concern over limited fiscal space and debt overhang precluding necessary public investment, will commit the world to another decade of low growth and mounting public and private debt. Or worse.


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The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.


Dimitri Zenghelis

Dimitri Zenghelis

Special Advisor: The Wealth Economy

Dimitri Zenghelis is a Senior Visiting Fellow at the Grantham Research Institute at the LSE where, from 2013-2017, he was Head of Climate Policy. In 2014 he was Acting Chief...

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