The $16 trillion wipeout in global stock markets over the past month highlights the intense vulnerabilities in our economic climate to shocks.
Around the world, millions became unemployed practically overnight and millions lost a huge portion of their savings.
These events will have catastrophic consequences for people's well-being and can shape economic and political trends for years, otherwise decades. It doesn't even take into account the impacts from the Covid-19 pandemic on human health insurance and the tragic situation unfolding in hospitals all over the world.
Much will be written about this historical event as society takes stock of what just occurred, but one thing is apparent: resilience should be a power in the policy response.
As investors of last resort, governments have the key role to experience. The central bank playbook in 2008 and 2023 is comparable, as liquidity evaporated and financial contagion spread, central banks had to part of as buyers of last resort with increasingly larger rescue packages.
At the same time, governments will work desperately around the fiscal front to supply economic stimulus towards the real economy and prevent an economic downturn. Estimates of bailout packages are in the order of $10 trillion globally and growing.
So where performs this leave us?
Governments and taxpayers bear the best risk and therefore possess the mandate and responsibility to reduce these risks.
There is a cost but as we clearly see with the Covid-19 pandemic, the price of prevention pales in comparison. Exactly the same might be said about climate change.
A working paper in the US National Bureau of monetary Research found that by 2100, the costs of climate change would cut back global GDP by 7.22% while the costs of prevention – by meeting the goals from the Paris Agreement – are substantially less, around 1.07% of worldwide GDP.
For the united states, the cost of inaction is even higher at 10.5% of GDP. To put things into perspective, this really is roughly using the costs of the Covid-19 pandemic every year.
As we move ahead past this crisis, policymakers must have resilience right in front of the minds. Below are some practical steps that may be taken in our policy response not only to enable us to enhance green growth and reduce greenhouse gas emissions but additionally to create a more resilient economic climate.
Rebalance incentives for publicly owned companies to reward long-term sustainability over short-term profits
Companies are too centered on the next quarter in the expense of their long-term financial viability. Fiscal and monetary policies have to reward long-term investment and risk reduction. Executives shouldn't be compensated according to stock performance but broader metrics.
Company boards should emphasise long-term stability and survivability. Built into this is the have to address climate risk. Stock buybacks financed with debt ought to be forbidden.
Better safety nets
Our world is moving towards greater disruptions from climate change, but also other types of crises driven by greater interconnectedness, which generates systemic risk. With with Covid-19, a crisis in one location can quickly spread to the rest of the world and this is not limited to communicable diseases.
Financial crises in one corner of the globe can impact our supply chains, and our markets as exchanging various lending options is linked in incredibly complex arrangements, again, generating systemic risk. A global with more risks needs better safety nets and more resilient systems. There is a need to improve safety nets for all citizens whether these are economic, health and climate-related shocks.
Eliminate fossil fuel subsidies
An estimated $5.2 trillion is spent annually on fossil fuel subsidies. This is wasteful and damaging towards the environment. It results in inefficient use and unnecessary greenhouse gas emissions, creates rent-seeking in the economy and presents an enormous opportunity cost for taxpayers.
Trillions should, instead, be invested in industries for the future that have the potential to maintain our energy needs while eliminating the risk of global warming. With oil around $25 per barrel, consumer subsidies might be eliminated with very little consequences.
Embrace telework trends
As companies and consumers race to adjust to the huge disruptions from Covid-induced shutdowns, we view how millions of workers have adapted to working from home and used new technologies to collaborate in ways which were unimaginable a decade ago.
A distributed workforce can boost the resilience of business operations, can massively reduce transport-related emissions from commuting and work-related travel and may even increase the affordability of cities and generate distributional effects as there is less have to concentrate workers in one location.
Embrace the general public sector
View the general public sector less an investor of last measure but because an innovator, shaping future investment trends in a manner that is aligned with societal goals. Public investment shapes markets and creates advantages to society the private sector cannot provide.
Through publicly-funded research and development programmes, scientists allow us the core technologies behind the web and medicine. Similarly, the revolutions taking place in renewable energy production, electric storage and electrified transportation would not have been possible without early-stage investments produced by the public sector.
Investments for public benefit in areas like new energy technologies, public health insurance and urban infrastructure are important to reducing long-term risks and can ultimately lower public outlays when disasters strike.
While there is still hope for this public health threat to become minimised and, hopefully, eventually eliminated, our economic response may have repercussions for decades.
It's the right time to focus on a vision for a resilient, inclusive, and sustainable economy.
