The following article is authored by Mehdi Shiva.
- The COVID-19 pandemic shed light on inequalities and contributed to situations in which policymakers must negotiate tighter budgets with increased demand to deliver more 'value'.
- Economic recovery despite constrained budgets could be facilitated through a better understanding of social value and how it can be enhanced and financed.
- Systematic changes through innovation and forward-thinking are necessary, placing sustainability, health and wellbeing at the centre stage of global policymaking.
Striking a balance: cost and value
The COVID-19 pandemic has dramatically set back progress in global development, exposing and exacerbating inequalities among peoples and countries. On the one hand, unprecedented increases in government spending coupled with reduced tax revenues have pushed global public debt up to record levels. The start of a war in Ukraine further increased uncertainty levels, along with inflation and the cost of living. The fraction of countries tightening fiscal policies next year is expected to reach its highest level since the early 1990s. Simultaneously, surging inflation has convinced central banks across the globe to collectively pursue a tightening monetary policy, a double-edged sword for the current circumstances that could send the world into another recession. Global growth is forecast to slow from 6.0 per cent in 2021 to 3.2 per cent in 2022 and 2.7 per cent in 2023 (IMF, 2022). This is the weakest growth profile since 2001, except for the global financial crisis and the acute phase of the COVID-19 pandemic.
On the other hand, many existing inequalities – ranging from health to economic outcomes across regions – were intensified and brought to the fore by the pandemic, and their complexities left little doubt that financial constraints would remain considerable in the years to come. Therefore, we face a challenging task of balancing out tighter budgets while negotiating the increased demand for delivering more 'value'. This calls for systematic changes through further innovation since business as usual might not be enough this time. A focus on cost squeeze is just one side of the coin; we can focus on boosting value creation instead.
Measuring what really matters
Decisions about where to allocate resources and how to prioritise activities have been mainly based on financial criteria. However, there is now growing global recognition that this leads to many unintended social consequences (Mazzucato, 2018). The problem is not so much that these financial criteria are flawed in themselves, but more that they are incomplete. Decisions must be balanced by the consideration of longer-term value to society and resources should be deployed optimally in accordance with sustainability and social value.
The focus of public service commissioning and performance management has shifted from the volume of 'outputs', towards 'outcomes' and 'impacts' (e.g., Shiva et al., 2021). However, this comes with a proliferation of measurement approaches which have been developed independently, from different perspectives and for different uses, albeit with the best of intentions. Unfortunately, this has led to confusion – at best, reducing the ability to make better-informed decisions and at worst, resulting in poor decision-making through the use of inappropriate measures. In response, there have been some attempts by standards institutes to further clarify 'social value' (e.g., British Standards Institution, 2020; Standards Australia, 2022). Also, governments are taking measures to utilise broader values in budget allocation (e.g., New Zealand’s Wellbeing Budget) and procurement (e.g., UK Social Value Act) (Government of New Zealand, 2022; Parliament of the United Kingdom, 2012).
Establishing effective public-private partnerships
As a result of the COVID crisis, global health sectors faced the revelation of serious shortcomings, especially the jarring lack of funding. Even the wealthiest countries were caught off-guard (Shiva, 2020). Weak public capacity caused by extensive reliance on private firms was identified as a reason for unpreparedness (Shiva, 2021). When public-private partnerships, particularly those involving critical state capacities, are not designed to serve the public interest, they might result in value destruction for society as a whole (Mazzucato and Quaggiotto, 2020).
The establishment of effective public-private partnerships would be supported by turning the focus from short-term financial gains to longer-term goals (such as outcome or impact) and by appreciating 'transaction benefits' of collaboration that come with transaction costs of outsourcing. Transaction benefits are the added value of transaction costs accrued through monitoring and evaluation, such as enhanced relational aspects (e.g., trust, flexibility in delivery, repeat play, improved operational knowledge of principles) (Kesting, 2020). Utilising models such as 'pay by result' or 'outcome-based contracts' might also be helpful in specific contexts. Such contracts lower the risks associated with asymmetric information (e.g., when the contractor is aware of information and the public authority is not) and misaligned motives (e.g., when the contractor seeks payoff with lowest effort, but the public authority wants delivery at lowest cost) by directly linking payment to the success of pre-defined targets (GO Lab, 2021).
Promoting innovative financing methods
Impact investment is a fast-growing market (715 billion USD in 2020), which seeks to address societal needs at scale and/or depth to generate a positive 'impact return' on investment. Financial returns still retain an influential role in the impact investors’ agenda. In 2020, an average rate of return of 8.5-12 per cent was expected in impact investment (Hand et al., 2020). The rising demand also raises the risk of 'impact washing', when a fund labels traditional investments as 'impact investments' in an attempt to benefit from the positive attributes linked to the class (e.g., marketing or tax incentives). Better governance and tighter regulations, facilitated by standard measurement methods for social value and effective public-private partnerships, could potentially utilise such private resources in creating value for the public. This additionally allows governments to co-create markets by involving private investors in activities which have the highest positive impact on society (Laplane and Mazzucato, 2020). To achieve sustainable development goals, the private sector has a key role to play and innovative financing can tap potentials in the market (Shiva et al., 2022).
Embracing equity considerations
A classical view in economics has been that greater social equity and national efficiency (growth and productivity) cannot be achieved simultaneously due to a policy 'trade-off' between the two. The prioritisation of efficiency has led us to surging inequality internationally, sub-nationally, geographically, spatially and socially across the world (Piketty, 2014). For instance, even in the Global North, there exists a geographical divide between a few 'superstar cities' and a multitude of 'left-behind places' (Collier, 2018).
Such disparities were most recently observed in the human cost of the pandemic (Shiva and Molana, 2021) as well as in vaccination rollouts. This calls for a rethinking of the existing principles and structures of corporate governance, land ownership, intellectual property rights, money creation and taxation (Jacobs and Mazzucato, 2016). Should policymakers fail to drive forward a more equitable model of economic growth and development, it will be at their peril (Fargher and Hallegate, 2020).
Looking ahead
How states build back their economies and how they plan to cover the huge costs involved are key discussions that will shape our societies and economies over the decades to come and beyond. Here, we have an opportunity to rethink how value is created and distributed, and how to reconcile and successfully pursue productivity and socio-spatial inclusion. Governments must take a firm stance in revolutionising their practices to tackle great challenges facing societies globally. They should not attempt to re-build back better, but focus on building a better forward.
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References
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Mehdi Shiva is an Economist at the Government Outcomes Lab, Blavatnik School of Government, University of Oxford.
The facts, ideas and opinions expressed in this piece are those of the authors; they are not necessarily those of UNESCO or any of its partners and stakeholders and do not commit nor imply any responsibility thereof. The designations employed and the presentation of material throughout this piece do not imply the expression of any opinion whatsoever on the part of UNESCO concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.