The Internationa Monetary Fund (IMPF) 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.
Reforming international finance and cooperation goes to the heart of how we “do capitalism”. If we are serious about the Common Agenda, then it needs to be complemented by a new economics of the common good.
The international monetary system that 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.
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 on the edges of markets rather than doing what is actually needed: deliberately shaping the economic and financial system to advance the common good.
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 US$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 kind of sustainable, inclusive, and resilient economies envisioned by the SDG 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 that 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 digitisation, 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”.
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 cooperation among many sectors and types of firms. Rather than picking winners, the state would coordinate intersectoral responses among the willing.
Second, Covid-19 highlighted the importance of broad-based cooperation — within and across borders — to tackle global challenges. And yet, rich countries, aided by a flawed system of intellectual-property 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 could have been saved.
Unfortunately, the world seems to be moving away from cooperation. Tensions between the US and China are increasing the risk of financial fragmentation, and divergent investment strategies by regional MDBs are not helping matters. In fact, 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, coordination, 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.
Third, conditionality is crucial for placing equity, accessibility, and sustainability at the centre of contracts and financial instruments. The Covid-19 vaccine produced by Oxford 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 like the World Bank’s Financial Intermediary Fund, which leverages public and private resources to strengthen pandemic prevention, preparedness, and response capacities at the 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 IMF 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 of its partnerships with MDBs that involve investment in private-sector projects.
The recent UN secretary-general’s new report 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. ©2023 Project Syndicate
Mariana Mazzucato, Founding Director of the UCL Institute for Innovation and Public Purpose, is Chair of the World Health Organization’s Council on the Economics of Health for All and a co-author (with Rosie Collington) of The Big Con: How the Consulting Industry Weakens Our Businesses, Infantilizes Our Governments, and Warps Our Economies (Penguin Press, 2023).