Financing the common good

The UN has warned that ‘humanity’s very survival’ is threatened. Radical reform of international finance is required.

The International Monetary Fund and the World Bank recently held their annual spring meetings, which, according to the organisers, produced a ‘strong message of confidence and a willingness to cooperate’. But lofty rhetoric and good intentions will not be enough to create a truly inclusive and sustainable economy fit for the 21st century. For that, deep structural change is needed.

Some are calling for it. Mia Mottley, the prime minister of Barbados, advocates a ‘new consensus’ between wealthier and less wealthy countries. Similarly, the United Nations secretary-general, António Guterres, has called for a ‘common agenda’—a roadmap for global intergovernmental co-operation aimed at moving from ‘ideas to action’.

Reforming international finance and co-operation goes to the heart of how we ‘do capitalism’. If we are serious about the common agenda, it needs to be complemented by a new economics of the common good.

Not fit for purpose

The international monetary system which emerged in the aftermath of World War II undoubtedly represented an important innovation. But its structure is no longer fit for purpose. The challenges we face today—from climate change to public-health crises—are complex, interrelated and global in nature. Our financial institutions must reflect this reality.

Because the financial system echoes the logic of the entire economic system, this will require a more fundamental change: we must broaden the economic thinking that has long underpinned institutional mandates. To shape the markets of the future, maximising public value in the process, we must embrace an entirely new economics.

Most economic thinking today assigns the state and multilateral actors responsibility for removing barriers to economic activity, de-risking trade and finance and levelling the playing-field for business. As a result, governments and international lenders tinker around the edges of markets, rather than doing what is actually needed—deliberately shaping the economic and financial system to advance the common good.

Little progress

This helps to explain why the world is making so little progress toward the Sustainable Development Goals, which are supposed to be achieved by 2030, and why, as action lags, the costs of meeting the SDG targets are rising. Reflecting the current system’s inability to respond promptly to crises, let alone prevent them, the SDG financing gap has increased from $2.5 trillion annually before the Covid-19 pandemic to between $3.9 and $7 trillion today. While compensating countries for the loss and damage they suffer as a result of climate change or other crises is essential, creating the sustainable, inclusive and resilient economies envisioned by the SDGs agenda will require a proactive approach.

At the same time, many developing economies are struggling with large debt burdens, exacerbated by an international trade and monetary system which favours rich countries. To mitigate, prepare for and prevent crises, developing economies need patient, long-term finance. The question is how to mobilise and direct it.

The answer must reflect the principle of the common good. The need for governments, international financial institutions (IFIs) and multilateral development banks (MDBs) to account for the public good is well established. It is widely agreed, for example, that governance is needed to manage digitalisation, guide the energy transition and protect public health. But this consensus remains rooted in an ex-post mindset: the state intervenes only to correct market failures. Instead, state actors should be deliberately shaping—even co-creating—markets in which the common good is the primary objective.

Such a system requires an outcomes orientation; collaboration and knowledge-sharing; equity, accessibility and sustainability, and transparency and accountability. In each of these areas, the ‘how’ is just as important as the ‘what’.

Clear mission

The first step toward ensuring that finance supports the common good is to establish a clear mission. The 17 SDGs—with their 169 underlying targets—offer an ideal framework. But governments, IFIs and MDBs must articulate their objectives and commit to designing the tools, institutions and financial instruments needed to advance them.

This will entail a fundamental rethinking of the social contract between the state and business, with governments (as well as IFIs and MDBs) using innovative incentives, partnerships and conditions to align private finance with the public mission. For example, the German state-owned bank Kreditanstalt für Wiederaufbau (KfW) has promoted the green transition by issuing loans to the steel sector, conditioned on firms’ reduction of their resource use and greenhouse-gas emissions. Such interventions work not by levelling the playing-field but by tilting it toward the desired outcomes.

If done right, missions can shift the emphasis from financing particular sectors or types of firms to promoting ambitious goals that require co-operation among many sectors and types of firms. Rather than ‘picking winners’, the state would co-ordinate intersectoral responses among the willing.

Flawed system

Secondly, the pandemic highlighted the importance of broad-based co-operation—within and across borders—to tackle global challenges. And yet rich countries, aided by a flawed system of intellectual-property (IP) rights, hoarded vaccine doses when they became available and subsequent efforts to support effective redistribution were far from adequate. By making accessibility and equity an explicit objective, this ‘vaccine apartheid’ could have been avoided and more than a million lives saved.

Unfortunately, the world seems to be moving away from co-operation. Tensions between the United States and China are increasing the risk of financial fragmentation and divergent investment strategies by regional MDBs are not helping matters.

MDBs, which together hold $509 billion in assets and loans, must play a central role in advancing mission-oriented policy, because they typically offer developing countries concessional financing. In its recent SDG stimulus report, the UN estimates that MDBs could increase their loans by $487 billion—and nearly $1.9 trillion if governments paid in more capital. If these loans are to be leveraged for the common good, MDBs must incorporate shared objectives into their mandates.

More broadly, a common-good approach requires a comprehensive framework for global collaboration, co-ordination and knowledge-sharing. What counts as collective intelligence must be clearly defined and structures that impede its formation (such as IP regimes) must be reformed.

Likewise,if countries are to invest in tackling shared challenges, they must be able to benefit from a more equitable global financial system. Specifically, they need sufficient administrative capacity to absorb international finance, design contracts with business that maximise public value and ensure that the money is spent in ways that advance the common good. (Outsourcing capacity to intermediaries is not the answer.)

Conditionality crucial

Thirdly, conditionality is crucial for placing equity, accessibility and sustainability at the centre of contracts and financial instruments. The Covid-19 vaccine produced by Oxford University and AstraZeneca was relatively cheap and easy to transport and distribute globally because it met the condition of being storable in a normal refrigerator. The Pfizer-BioNTech vaccine, by contrast, required expensive ultra-cold storage and transport when it was first approved.

Such examples demonstrate why conditionality must underpin initiatives such as the World Bank’s Financial Intermediary Fund, which levers public and private resources to strengthen pandemic prevention, preparedness and response capacities at national, regional and global levels. To reach its potential, the FIF should commit to incorporating ‘common good’ conditions—concerning, say, IP and pricing regulation—into its contracts, with the goal of ensuring inclusive governance and universal access.

Lastly, an objective-oriented common-good approach is impossible without an equitable, accountable and credible financial system. But because our current global financial system is designed to be reactive, it promotes short-termism and perpetuates inequality between north and south. Changing this will require, for starters, reforming the governance of the International Monetary Fund and the World Bank, so that developing economies have a greater voice.

Furthermore, strengthening accountability and transparency mechanisms can help prevent misappropriation of funds, tax evasion and fraud. The FIF can help here, by embedding transparency-related conditions into all its partnerships with MDBs that involve investment in private-sector projects.

The UN secretary-general’s new report this week says that the ‘defining principle of the 2030 Agenda for Sustainable Development is a shared promise by every country to work together to secure the rights and well-being of everyone on a healthy, thriving planet. But halfway to 2030, that promise is in peril.’ Fulfilling it requires getting international finance right, which will be possible only if we replace the market-fixing paradigm with a market-shaping mindset, centred on the common good.

Republication forbidden—copyright Project Syndicate 2023, ‘Financing the common good’