Now is the time for a strong, sustainable and inclusive recovery

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This article is part of a series in which OECD experts and thought leaders – from around the world and all parts of society – address the COVID-19 crisis, discussing and developing solutions now and for the future. It aims to foster the fruitful exchange of expertise and perspectives across fields to help us rise to this critical challenge. Opinions expressed do not necessarily represent the views of the OECD.

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Dimitri Zenghelis is Senior Advisor for the Wealth Economy Project; Nick Stern is IG Patel Professor of Economics and Government, Chairman of the Grantham Research Institute on Climate Change and the Environment and Head of the India Observatory at the London School of Economics.

The world stands at an historic crossroads. There is an urgent need for a co-ordinated international response to repair the damage wrought by the global pandemic and build a resilient and productive global economy better able to handle future shocks. The alternative risks are global depression and decades of social and economic dislocation.

Even before the pandemic, the global economy was imbalanced. For more than a decade, too much global saving was chasing too little productive investment. The result was that interest rates fell close to zero and global productivity growth languished. Corporate borrowing expanded on the back of cheap credit while growing debt leverage inflated asset prices. As the rich grew wealthier, earnings growth for the majority stagnated. Inequality and failure to invest in public services undermined the social contract, spawned popular discontent and contributed to the rise in saving.

Pulling the world out of recession means framing a vision of a much better future. Restoring confidence requires harnessing the growth potential of an inclusive, resilient and resource-efficient economy. Previous studies (see Zenghelis, 2016 and Zenghelis, 2016; New Climate Economy Report; and Rydge et al., 2018) have highlighted opportunities associated with sustainable growth, but COVID-19 increases the urgency of shifting to a better growth model.

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Limiting human interaction to contain the pandemic will have severe implications. Viable businesses will go bust while human and knowledge capital will depreciate. But unlike previous wars or armed conflicts, few physical assets will have been destroyed. The greatest need for reconstruction will be in confidence. The fear of economic depression itself risks becoming a self-fulfilling prophecy as banks cut lending, businesses trim jobs and investment and individuals curtail spending.

Worries about repaying growing public debt and limited “fiscal space” must be addressed head on. Real bond rates in rich countries remain close to zero. This reflects abundant investor appetite for public borrowing, if it can generate real returns. Financial assets are not net wealth; what matters is how wisely borrowing is invested to generate resilient output and sustainable capacity.

Read the OECD policy brief From containment to recovery: Environmental responses to the COVID-19 pandemic and more on Environment & Climate

The evidence suggests every additional dollar of spending funded by public borrowing during a severe downturn is likely to raise output by USD 2-3 by leveraging private spending and “crowding in” productive capacity (see Blanchard and Leigh, 2013; and Lawrence et al., 2019). Productivity-augmenting green innovations, working with the technologies of the future, are particularly effective at generating economies of scale in production and discovery (see Houser et al., 2009; and Van der Meijden and Smulders, 2017). We have witnessed this effect in the dramatic declines in the costs of renewable energy, battery storage and electric vehicles.

The search for growth cannot mean a return to “business as usual”. There is a need to measure and invest in a broad range of complementary assets including not only physical and human capital, but also knowledge and intangible capital as well as natural and social capitalCOVID-19 lays bare the interaction between our environment and economy and the urgent need to strengthen the quality and resilience of natural assetsAt the same time, public money must not be spent propping up fossil-fuel intensive assets with limited productivity potential. Outdated skills risk unemployment, undermining both willingness to spend and social cohesion.

Impact Entrepreneurs: Building solutions for a post-COVID-19 world by Gabriela Gandel, Chief Executive Director, Impact Hub network and Tatiana Glad, Co-Founder and Director, Impact Hub Amsterdam

We must prepare for future pandemics, but we must also recognise that climate change is a deeper and bigger threat that doesn’t go away. The world has witnessed accelerated innovation in the use of connected technologies and virtualisation. Some behavioural changes could last long after coronavirus. Disruption and post-crisis recovery spending offers an opportunity to embed climate-positive behaviours. These include: less carbon-intensive travel; increased residential energy efficiency to decrease the energy costs of working from home; virtual learning and healthcare; strengthening high-speed broadband connectivity; increased self-sufficiency and more ‘people friendly’ use of urban space.

There is an urgent need for a co-ordinated international response to avoid a global depression and build a better future. This requires adopting a range of coherent policies. It also requires strengthened institutional arrangements, including national investment banks and multilateral co-ordination from the OECD, IMF, World Bank, regional development banks and development finance institutions. Isolationism, in terms of limiting trade and investment flows, cutting technological co-operation (including international collaboration to find a vaccine) and starving global institutions of support will leave the world less resilient and more fractious, making investment riskier. Well-functioning institutions boost confidence, reduce the costs of capital (by sharing and reducing risk) and help steer transformational growth.

Clarity of strategy, pursuing the technologies of the future and not those of the past, and credibility of policy will create the confidence to both invest and consume. Looking backwards, policy delay and inaction and uncertainty will have devastating economic and social effects. 

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Dimitri Zenghelis and Nick Stern

Grantham Research Institute

Dimitri Zenghelis is Senior Advisor for the Wealth Economy Project, which he previously led, centred at the Bennett Institute, Cambridge University and a Senior Visiting Fellow at the London School of Economics. He headed the Stern Review Team at the Office of Climate Change and was a lead author on the Stern Review on the Economics of Climate Change. Previously he was Head of Economic Forecasting at HM Treasury. /// Lord Stern is the IG Patel Professor of Economics and Government, Chairman of the Grantham Research Institute on Climate Change and the Environment and Head of the India Observatory at the London School of Economics. He was President of the Royal Economic Society (2018-19) and President of the British Academy (2013- 2017). He was elected Fellow of the Royal Society (June 2014). He has held academic appointments in the UK at Oxford, Warwick, the LSE and abroad at the Massachusetts Institute of Technology, the Ecole Polytechnique and the Collège de France in Paris, the Indian Statistical Institute in Bangalore and Delhi, and the Peopleʼs University of China in Beijing. He was Chief Economist of the European Bank for Reconstruction and Development 1994-1999, and Chief Economist and Senior Vice President at the World Bank, 2000-2003. He was knighted in 2004, made a cross-bench life peer in 2007 and appointed Companion of Honour in 2017 for services to economics, international relations and tackling climate change.

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