Crises present opportunities: to collaborate, to focus energy and to bring the world’s very best to the problems that matter most. In 2020, Covid gave us one such opportunity. In 2021, climate change presents another.
In 2020, on the occasion of the International Monetary Fund and World Bank Annual Meetings, I began a conversation that explored the idea of a “social contract”, loosely defined as the set of obligations and expectations that various participants within a society have of one another. The pandemic was exposing existing fault lines and because of the profound strains it placed on everyone – with little regard for social status or national identity – the fissures were widening into chasms. As we look ahead, are there lessons that we can take to deliver a just transition to a low-carbon society that is both sustainable and prosperous?
I explored this question with Baroness Minouche Shafik, Director of the London School of Economics and Political Science1 and author of the book “What We Owe Each Other: A New Social Contract”, and Professor Jeffrey Sachs, Director of the Centre for Sustainable Development at Columbia University2 and co-author of the World Happiness Report3.
What became clear as our discussion unfolded is that a well-functioning social contract and the world’s ability to address system-wide crises – such as climate change and its implications – are intrinsically woven together.
One creates the context that helps us collectively find a solution for the other. Put differently, very good national social contracts at home are the prerequisite for internationalism abroad.
1 https://www.imf.org/external/pubs/ft/fandd/2021/04/what-we-owe-each-other-book-minouche-shafik.htm 2 https://www.ft.com/content/cb7680f9-bad6-46f0-8b3b-ba0b5d5fab67 3 https://worldhappiness.report/ed/2021/
Society is everything. The way a society is structured has a weighty consequence for the lives of those living in it. It is the architecture of their opportunities and calamities.
The global pandemic and its inevitable economic aftermath have revealed the extent to which our existing social contract is no longer working to deliver on people’s expectations. Discontent is widespread.
Old arrangements have been broken by various forces, including some whose overall impact on society has been positive, including technological change and the entrance of increasingly educated women into the labour market. As a consequence, more risks – caring for the young and the old, maintaining skills, unemployment, aging – are being borne by individuals. These risks are hardest to shoulder for the most disadvantaged amongst us, which in turn is widening the gap between the haves and the have-nots, fuelling the division within our societies.
Yet in many areas, bearing risks individually is not only inequitable, it is also far less efficient and productive than sharing them across society. A social contract that delivers a better architecture across our societies would require initiatives such as early years education, child-care support, continuous training programmes, and benefits portability.
We need to think of those as investments not as consumption, and recognise their significant rates of return, not only by reducing inequality, but by also increasing productivity and growth.
The unevenness of risk sharing is equally visible amongst countries, where poorer nations are paying a larger share of the price, person-for-person, on both sides of climate calculation4. Worryingly, one consequence of the pandemic has been the rise in nationalism. Indeed, many governments put immediate national needs first, even when marginal action at a global level would have been more effective in addressing the pandemic than continuing action at the national level. Why is that?
According to Professor Sachs, the institutional and geopolitical framework for cooperation is not working particularly well today. He elaborates that “there is a breakdown in multilateralism and it needs to be repaired.”
Multilateralism is a system which requires institutions that must be protected and supported. A strong UN and well-resourced and legitimised agencies will provide the mechanism for the partnership between finance and rule of law, which in turn enables us to take a much broader view of international public goods.
Two situations have provided important lessons. First, during the global financial crisis, the G20 performed well as a convening body where the developed and developing countries came together and jointly solved problems. Second, during both the global financial crisis and the Covid-19 crisis, central banks worked collaboratively toward a unified objective.
They approached the monetary and financial system as an international public good, the continued functioning of which was essential to everyone. Immediate national interests were put aside, and a collective world view was prioritised.
The single-mindedness and alacrity of the central banks combined with the collegiality of the G20 provide important examples for us to take to the future and apply to the climate challenge.
4 From a climate change perspective, between 1990 to 2015, the richest 10% of the world’s population was responsible for nearly half of the growth in total emissions, while the bottom half was responsible for 6%. In contrast, the hotter parts of the planet are at the receiving end of comparatively harsher consequences of climate change.
Helping economies to transition safely and quickly is a shared moral imperative. It is also good business. Here, the collaboration between the private and public sectors, driving together toward a common good, will be critical.
The need for financing is, however, enormous. Developing countries are capital scarce. To accelerate their transition to low-carbon societies, trillions of dollars of investment is required in three broad categories: (i) human capital investment; (ii) infrastructure, digital, energy, transport; and (iii) business investment.
The combination of blended finance and the use of platforms can quickly and efficiently help capital flow from where it currently sits to where it’s needed most and get the impact we so desperately need. Platforms can increase speed and efficiency of investment flow by helping private sector investors quickly identify project financing opportunities. Blended finance, for its part, can significantly amplify and increase the scale of investments by “crowding-in” private sector resource. As Baroness Shafik put it, “small is beautiful, but big is necessary”.
Climate change and its impact is the greatest challenge of our age. To address it, there needs to be a great sense of urgency. But equally, it is a great opportunity.
Perhaps a better way of thinking about it is that to bring about sustainable solutions at pace, we must work together – within economies and across national boundaries – and create a shared vision of the future. A shared vision will require sharing both the burden and the benefits of that future.
We can have a more sustainable, inclusive and prosperous world, a tomorrow that is quite a bit better than today. But it is wholly dependent on the choices we make, the expectations we create, and the responsibilities we take – not just in the future, but now.
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