16 Nov 10 Steps to Success in the Face of Five Megatrends
By Devadas Krishnadas
Covid-19 has derailed the economic trajectories of countries across the spectrum. Emerging economies, in particular, have been hard hit and many are in disarray. Covid-19 has undoubtedly been destructive and disruptive, but it can also be seen as an opportunity to press ‘reset’ and chart a course, not just out of the pandemic, but towards economic and social progress for the long-term.
The Future-Moves Group recently released the Future Governance Index (or FGI), a first of its kind index that measures and analyses the government performance and governance readiness of 65 countries in the face of five megatrends.
The megatrends are Climate Change & Resource Scarcity; Technological Advancement; Ageing & Urbanising Population; Shocks & Crises; and Slowbalisation.
Countries, especially emerging economies, do not have to guess how to do better in the context of these trends. Below, I outline ten points that represent the essential factors for growth, which together form a roadmap to a brighter and better future.
First, is the importance of leadership that has vision, moral authority and, crucially, which treats the longer-term interest of the nation as its prime priority. Such leadership cannot be concentrated in one single person – there must be a cohesive cadre of apex leaders, working harmoniously together to achieve ambitious and aspirational national goals.
Second, there must be trust between the leaders, the people and businesses. Without this ‘trust pact’, little can be accomplished. As is detailed in the FGI, each nation needs to think in terms of a ‘Governance Bank’, which has three ‘capital accounts’ – economic, social and political. All three accounts need to be topped up regularly through sound policies, solid planning and effective delivery of public services and public goods.
Third, as the economist Douglas North has eloquently argued, is the importance of institutions. Institutions are not just entities and buildings but also the rule of law. Institutions are the mechanisms through which policies get turned into action. They are also the disintermediating mechanism to forge a trust pact between the leadership and the people. The performance of institutions is a vital depositor to the ‘Governance Bank’
Another critical depositor into the ‘Governance Bank’ is an effective and efficient public administration that delivers positive outcomes for the community and the economy. It is not about the size of government but the quality of government, and how well it catalyses both community and the economy through not just policy and planning, but crucially, delivery of outcomes and in a trustworthy manner.
Fourth, the government needs to invest in and maximise the human capital of its people. At the fundamental level, it means investing into productive infrastructure such as education, health, civil security and transport. These expenditures should not be perceived as a cost, even if they come at the expense of borrowing. They should rightly be perceived as investments which will generate intergenerational returns. As such, they cannot be one-offs but must be sustained, with a focus on continuous maintenance and upgrading to activate the latent potential of the people.
Fifth, having put in place good leadership, conceptualised a policy and planning model to increase the ‘Governance Bank’, established sound and strong institutions and invested in maximising human capital, the focus should turn to using these virtues to attract Foreign Direct Investment (FDI) to supplement the domestic capital base. International money markets, global corporations and private equity are not short of capital, but they are short on opportunities for investments. Getting the five fundamentals in place provides a powerful business case to attract FDI.
However, investors abhor uncertainty. Thus, there must be a sixth condition. This is political and policy certainty and predictability. Investors want to deal with economies where the rules do not change arbitrarily, where they can see that the government is investing to create the optimal conditions to attract capital, where there is transparency and accountability in both politics and policymaking. They want to deal with institutions they can trust and deal with openly. Creating a track record for policy action that results in actual promised outcomes and a reputation for a rational and pro-business politics and policy environment will motivate foreign investors to place bets in the prospects and potential of a nation.
A seventh requirement is something that a crisis such as Covid-19 has taught us all. And that is that it is important to have ‘shock absorbers’ to handle a major crisis. This is founded on a stable and competent leadership supported by a competent and nimble public administration. But it also calls for stable and sound fiscal management. A country’s fiscal balance should not be overexposed to overseas borrowing and, ideally, should be running a surplus to be split between reinvesting into productive infrastructure and savings as reserves. A country which has the discipline to pace itself and restrain from ‘trophy’ investments while exercising tight fiscal discipline will be well placed to introduce counter-cyclical measures during an economic or financial crisis.
We live in a technological age. The old model of economic development where countries worked their way progressively up different stages of development has been hugely disrupted by technology. By maximising human capital and attracting FDI, a country can ‘leapfrog’ stages and pursue an accelerated path towards becoming a middle-income country and eventually an advanced economy. As the economist Robert Solow has argued, technology is closely linked to productivity improvements. Productivity improvements in turn generate quality growth of a kind that lifts wages and general welfare. This is the eighth condition that can and should be pursued to enable countries to surf disruptive technological waves.
Ninth is the importance of activating, promoting and supporting entrepreneurship. While FDI is a good thing, especially if it is ‘sticky’ capital that is committed to creating jobs and is committed for the long term, it is vital that the local business community also flourishes and benefits from the positive knock-on effects of FDI. Targeted grants, subsidies and advisory support, as well as minimising the costs of doing business and avoiding unnecessary ‘red tape’, all essentially contribute to activating the ‘animal spirits’ in the local business community.
Tenth, and finally, there should be a well-constructed redistributive system to ensure that no one is left behind in the pursuit of growth. I already touched on quality growth, but its twin ‘inclusive growth’ is equally important. Lower income households should be given equal opportunities to become socially mobile through access to affordable and quality public services. Rural areas should not be neglected by the attraction of ‘urban capture’. The ‘tax and benefits’ model should be tilted to help lift up all households and ensure that the well-off are contributing to the ‘social capital account’. Ensuring that growth is inclusive, promoting social mobility and putting in place an equitable redistributive system will sustain and ensure social cohesion. A united people will be the engine that powers a country forward. A divided and divisive people will be a fragile foundation for all the other building blocks to success to rest upon.
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