Why the Covid-19 recovery needs a proactive public sector

Markets will not achieve green, sustainable or equitable economic growth by themselves.

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The global economy has been thrown a curveball in the shape of Covid-19. The crisis has shown up systemic shortcomings, both in the capacity of states to address the enormous public health emergency; and in the resilience of international industry to immediate and sustained disruption.

It has also de-blinkered our eyes to the inequality of modern living. Around 22 per cent of the UK population are experiencing the pandemic from a position of poverty. Our most disadvantaged pupils, and their teachers, are coping with a “digital divide”; 700,000 children live in homes without a laptop, desktop or tablet computer.

Racial inequality has been thrown into sharp relief. These are interlinked problems and come from long-term economic dysfunction – from the UK’s characteristics of finance-led and debt-led growth, compounded by austerity and underfunding.

But, more than this, the pandemic shines a light on how the proactive role of the state has been shifted from its purpose. Since the 1980s, governments have been steered to take a back seat on the economy, intervening only for the purpose of fixing market failures—and always worrying that government failure might be even worse.

This revision of the value creation capacity of the public sector narrows its potential to a dangerous degree. It assumes that only business can create value, with the public sector at best de-risking some of the process. Buying into this has sliced out one of the vital organs of productive and innovation capacity: the entrepreneurial state.

Indeed, it was a risk-taking, investor-of-first resort, innovative entrepeneurial state that got us all the technologies in our smart phones. From the internet to Google’s search function algorithm, to touchscreens, GPS, and voice recognition, to Elon Musk’s TESLA, seed investment came from public sector organisations like the DARPA and National Science Foundations in the United States.

And of course, it’s not just the US. There would be no start-up nation in Israel without Yozma, a public venture capital fund that provided long-term committed finance to some of the most innovative companies. And public banks have played a central role in diffusing renewable energy projects in areas that private finance was too fearful to tread. The key is not the state on its own, but public-private partnerships where the public part is ambitious – co-creating and shaping markets, not just fixing them.

An entrepeneurial state will be required to help guide the investments needed towards a long-term, sustainable post-coronavirus recovery. Without it, we are gambling in the dark on much longer-term societal emergencies, including the climate crisis. Covid-19 encourages us to take a refreshed look at the interplay between public and private and provides an opportunity for re-structuring these complex relationships. This means the public sector not only acts reactively to the crises at hand but proactively, co-creating and co-shaping markets.

Markets will not find the direction of economic growth in a green, sustainable or equitable way by themselves: only when there is a stable and consistent direction for investment will regulation and innovation converge. And there is still a huge investment gap. Low-carbon investment is $480bn short of the sum needed per year to meet the 1.5°C temperature increase target laid down in the Paris Agreement, and biodiversity investments need to increase by up to eight times in order to meet internationally agreed targets.

Mission-oriented innovation can provide a valuable framework for market co-creating. Missions see the public sector set an ambitious, concrete, and time-bound target, which designs in cross-sectoral, bottom-up innovation. Examples include reducing the amount of plastic entering the marine environment by 90 per cent by 2030 or creating 100 carbon-neutral cities in Europe.

Post-coronavirus renewal policy-making requires such clarity and courage, mobilising investment in the business sector, identifying areas to build resilience, and supporting vulnerable workers to acquire new skills. This is a concept we have written about extensively at the Institute for Innovation and Public Purpose, and will form the shape of a forthcoming book: Mission Economics. Missions have been taken up by the European Commission Research, Science and Innovation’s Horizon Europe programme, among others, and, we argue, should set the direction for Europe's 750bn green recovery. They set the direction of travel towards tackling large societal challenges, not just channelling funding into economic sectors, or pet projects.

This is important because investment is not neutral. Our research shows that who invests, how much they invest, and how they invest, heavily impacts the direction of investment made. State assistance for coronavirus-stricken companies acts as a defining market-shaper in both the immediate and long term. Imposing conditions on bailouts  – as many governments are doing – helps to steer financial resources strategically. Conditions can ensure that resources are reinvested productively instead of being captured by narrow or speculative interests.

Covid-19 conditionalities are a once-in-a-generation opportunity to support missions and shape markets – whether these are directing the market towards a green pathway, towards dissolving inequality, or in defence of workers’ rights. In France, the bailouts for both Renault and AirFrance were conditional on carbon reduction commitments, and in both France and Denmark, state aid is denied to any company domiciled in an EU-designated tax haven and large companies receiving aid are being barred from paying dividends or buying back their own shares until 2021. Similarly, in the US, Senator Elizabeth Warren has called for strict bailout conditions, including higher minimum wages, worker representation on corporate boards, and enduring restrictions on dividends, stock buybacks, and executive bonuses. And in the United Kingdom, the Bank of England has pressed for a temporary moratorium on dividends and buybacks.

When done right, conditionalities can align corporate behaviour with the needs of society, ensuring sustainable growth and a better relationship between workers and firms. Indeed, the “deal” part of any post-pandemic social contract, must be worker-focused. Labour markets have seen immense displacement. The burgeoning gig economy and self-employed workers have, broadly, been overlooked by government support.

To avoid scarring and hysteresis, the Just Transition approach that has been developed in the climate change sector must be implemented across multiple brown sectors, transforming them into sustainable green job creators. A green jobs guarantee can underpin this direction. Unions should be brought to the table for a green economic renewal that is not handed down from above, but co-created. A sustainable, climate-resilient economic renewal requires bold policymaking and investment that brings public purpose, and stakeholders, not shareholders, to the centre of decision-making.

Mariana Mazzucato is a professor in the economics of innovation and public value at University College London, where she is founding director of the Institute for Innovation and Public Purpose (IIPP). Martha McPherson is head of green economy and sustainable growth at the IIPP.

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