The pandemic exposed and exacerbated immense shortcomings in our economic system—in both the private and public sectors—as well as the urgency in tackling them. With dwindling fiscal revenues and a need for major public investments to confront the aftermath of the pandemic, the task is trickier than ever.
Despite high unemployment, labour shortages are present in fast-growing sectors of the economy. And, even though global central banks have been injecting massive amounts of liquidity into the economy, many innovative small and medium-size enterprises have only limited access to capital.
The “solution” of simply throwing more money at the problem—from both the Treasury and the Central Bank—is thus not a viable long-term option nor what is really needed to fix our economy’s woes and our mounting social problems. On the other hand, raising tax rates to lessen the fiscal blow or to prevent excess reliance on lax monetary policies would likely postpone the recovery and most certainly be both politically and socially unacceptable.
A failure to reform our economies risks wiping out 20 years of fiscal and socio-economic progress here and abroad. This risk is heightened by an increasingly challenging political environment: Globalization already delivered its low-hanging fruit and is now hitting speed bumps; increased inequalities and stagnant wages are intensifying the public’s thirst for social justice; and social media’s propagation of fake news and conspiracy theories is increasingly eroding public trust in our democratic institutions as exposed in the Netflix documentary The Social Dilemma and in Shoshana Zuboff’s recent book, The Age of Surveillance Capitalism. The list could go on.
Many of these challenges will only worsen if left unanswered, especially as cooperation among nations appears to be receding. A particularly pressing issue requiring global collaboration is the already overwhelming ecological footprint—climate change and degrading biodiversity—caused by mass production and consumption and exacerbated by global population growth.
To better respond to these challenges, governments around the world must set clear economic and social priorities for future generations. In particular, they must reform their national and international governance framework to lay the foundations of deeper collaborations between the private sector, public institutions, and multilateral organizations.
The Connected Futures of the Public and Private Sectors
Back in March of 2020, the rapid development and roll-out of an effective COVID-19 vaccine by private corporations with the support of the public sector, the widespread deployment of private telemedicine solutions in the public healthcare sector, and the implementation of unprecedented financial relief packages by governments all seemed unlikely. Yet they happened within a year.
Although these recent collaborative successes offer hope and point to the way forward, the pandemic crisis openly exposed the systemic vulnerabilities, if not failures, of the social governance model of developed nations that emerged after the Second World War.
Private Sector Inclinations
The pandemic revealed a crucial and nagging paradoxical flaw in the relationship between governments and the private sector.
By needlessly reducing the flexibility of the business environment, governments impede the ability and speed of the private sector to generate outcomes that are beneficial for society. They submit private companies to flawed and often politically motivated regulations as well as inefficient fiscal policies that fail to align the private sector’s incentives to innovate and to internalize costly negative externalities.
At other times, and especially since the 1980s, governments provide too much flexibility to the private sector. They often delude themselves through the use of poorly conceived indicators of competitiveness and productivity and an over-simplified rhetoric of light-touch intervention to which they only play lip service until disaster strikes.
This unusual combination ends up encouraging private companies to give in to some of their worst natural inclinations. They narrowly focus on maximizing short-term profits, they lobby in efforts to dodge regulations, they look for ways to reduce competition, and they spend heavily on avoiding taxes. Private gains maybe, but social losses all too often.
Public Sector Weaknesses
The pandemic has also exposed some blatant weaknesses in the public sector: misaligned incentives, a lack of accountability, archaic human-resource management, an absence of agility in public decision making, overcentralized decision centers, delays in policy implementation, as well as badly designed risk-management structures within the various public institutions.
It is time to recognize that our governments and the institutions of our civil society have become increasingly sclerotic and dysfunctional bureaucracies, unable to respond to the needs of their citizens. They are too ill-equipped to address the “normal” challenges posed by a fast-changing world, let alone those presented by global crises and emergencies.
In particular, these institutions’ short-termism and acute risk-aversion preclude the innovation required by civil society. They leave citizens open to ever-costlier disasters to which governments are blind and unprepared to respond.
Even before the onset of the COVID-19 pandemic, there were numerous examples of the public sector’s weaknesses and the undesirable inclinations of the private sector.
The current discontent with globalization is a case in point. In the second half of the 20th century, financial market participants, global institutions, multinational corporations, and the developed nations’ economic punditocracy almost unanimously promoted the comprehensive and unequivocal benefits of global free-trade agreements. Governments worldwide obliged and ushered in a period of rather unrestrained globalization of increasingly open borders to the flow of capital, goods, services and labour. Today, however, most observers acknowledge that governments in most developed nations underestimated, or even ignored, the negative consequences that globalization would ultimately have on their low-skilled workers.
A second example relates to the botched U.S. financial deregulation in the 1980s and 1990s, which was partly responsible for the 2008-09 global financial crisis. Industry players rigged the system in their favour by capturing regulators and rating agencies and transferring risks to the public. Worse, with ill-conceived management models and accountability features, most culprits were able to dodge both the financial and criminal consequences of their actions. While it is true that the financial crisis was the direct consequence of the private sector’s failure to properly recognize and estimate systemic risks, it was accelerated by a lack of regulatory supervision and by the ability of private actors to privatize gains and socialize losses—a problem stemming from flawed public policies.
More recently, the disasters which resulted from extreme weather conditions in California in 2020 and Texas in early 2021 come to mind. These situations illustrate again how the mismanagement of risks by private actors operating in a flawed regulatory environment—a system which fails to incentivize firms to innovate and invest in internalizing risks—can lead to otherwise avoidable catastrophes.
Other examples of policy mishaps abound: the opioid epidemic, the crisis with fake news and social media, and our failures to address climate change. In all these cases, private-sector participants reacted to perverse incentives of poorly designed public policies and regulation.
These examples provide further evidence that the behaviour and fate of the private sector are intrinsically linked to the public sector. Too little regulation combined with a weak attribution of responsibilities usually leads the private sector to adopt excessively risky behaviour. Conversely, too stringent a regulatory environment can stifle risk-taking and kill innovation. In the opioid and social-media cases, the pursuit of short-term commercial objectives by industry players operating within a defective regulatory environment occurs at the public’s expense. In the case of climate change, both phenomena appear to be present simultaneously, attesting to the inadequacy of the current regulatory framework to address this complex issue.
Failing Public Policies
Increasingly cumbersome governance structures that have grown in size and complexity to the point of being counterproductive are no longer adequately responding to our contemporary challenges. Moreover, the apparent unwillingness of most governments to tolerate the necessary risks to muster innovative efforts in order to respond to the needs of their own citizens and to avert emerging crises is particularly worrisome.
The situation is ever paradoxical: While the often-stated objectives of public policy are to promote entrepreneurship, innovation, flexibility, responsiveness, empowerment, competition, risk taking, and skills development in the private sector and among its citizens, these same productivity- and competitiveness-enhancing factors are increasingly in short supply in monopolistically inclined, risk averse and centralized public sector and multilateral institutions.
On a macro level, the above examples strongly suggest an inherent failure in the design, implementation, and, over time, the management and coordination of public policies and regulation in many sectors. These systemic failures have surely contributed to the gradual erosion of the public’s trust in technocrats and regulators who, in spite of their expertise and increased scientific knowledge, are now viewed by many as part of the problem rather than the solution.
Finally, because many public policies failed to account for and address their longer-term economic and social costs, and also failed to correct the inequities that resulted from their presence, a large segment of the population in developed nations is now open—arguably with valid reasons—to the idea of reversing the overwhelming benefits, secured over the previous 75 years, of free trade, globalization, and financial deregulation.
Public Entrepreneurship and Private Responsibility
The current crisis thus represents both a wake-up call and an opportunity to start reforming the national and multilateral institutions we have been relying on for promoting social justice and economic prosperity as well as peace among nations since the end of the Second World War, as eloquently exposed recently in Foreign Affairs by Walter Russell Mead. The challenge for the public administration of the future is to build more flexible, decentralized, and responsive governance structures more apt at capturing, understanding, and interpreting the different and complex realities that prevail on the ground, and then appropriately adjusting public interventions and policies promptly, if not in real-time.
This task entails moving away from a confrontational regulatory approach—excessively influenced by interest groups and powerful lobbies—toward a longer-term collaborative approach, one aimed at better integrating the public’s needs, enhancing its prosperity and quality of life, promoting innovation, and reducing the socialization of excessive private risk-taking.
In short, adopting such a public entrepreneurship governance structure would require politicians to tolerate risk-taking in the name of capturing genuine social and economic opportunities and also in preventing potentially disastrous outcomes. This kind of public sector would in turn allow the private sector to adopt a more responsible investment approach in which entrepreneurs and corporations have incentives to innovate while integrating externalities and public welfare into their investment decisions.
The task described may appear daunting, but many reforms of the public sector are within easy reach. For example, as workers are changing jobs much more frequently than in the past, the portability of health insurance and pensions between employers, whether private or public, could offer households more autonomy and flexibility in managing their health care and pension plans.
Another example: With the widespread use of the Internet, the low cost of data processing, and the free access to powerful learning tools, academic institutions should lead the way in democratizing education. By helping to transmit self-learning skills to more individuals, schools could transform these skills into a permanent source of productivity gains for companies as well as job security for workers.
Training the unemployed is not straightforward, but we can nonetheless improve on the status quo. Most government training programs have had poor results. Older and less mobile workers have a hard time regaining employment or their previous income when they switch careers, making them hesitant to enroll into training programs. Also, the limited horizon of their career, combined with the difficulties in learning new skills and acquiring knowledge at an older age, reduces the payoff from training. These factors may also encourage employers to hire younger workers.
Yet many innovative private initiatives and new public programs are being developed to help such workers reintegrate into the labour force. They focus on providing better information to identify which regions, sectors, and skills are experiencing labour shortages. Facing the right set of incentives, several companies have already set up their own training programs to provide individuals with the skills required for the jobs of the immediate future. Some workers are even encouraged towards radical reskilling, which means that “I can take a front-desk hotel clerk and turn him into a cybersecurity technician. I can take an airline counter agent and turn her into a data consultant.”
For example, despite its ruthless reputation, Amazon unveiled a new global initiative last December to retrain 29 million people by 2025. The primary objective is to provide mostly non-Amazon workers, many of whom lost their jobs and careers because of the pandemic, with new cloud-computing skills deemed to be in short supply for many companies worldwide that are clients of Amazon Web Services.
A New Framework
With the burden of the COVID-19 pandemic added to the great challenges already posed by climate change, slow productivity growth, and mounting social concerns, the aim of institutional reforms and policy innovation should go beyond the usual narrow neoliberal playbook. To enhance the speed, breadth, and sustainability of the recovery as well as the competitiveness of the whole economy, we propose that governments develop a new framework to foster public entrepreneurship and responsible private investments. And we submit that a set of ten principles can guide their actions.
The framework we propose is a paradigm shift away from narrow neoclassical economic thinking. Instead, it supports collaborative policies to accelerate economic development from both organizational and technological innovations. It definitely involves embracing more proactive policies and innovations to internalize externalities and drive social benefits. It also encourages enabling new policy experiments, and recognizes that, in an entrepreneurial approach to policy-making, some failures must be accepted along the path to discovering the policy successes.
A heightened level of innovative government intervention aimed at increasing collaboration with the private sector and the adoption of proactive innovation policies do not contradict the endgame necessity of maintaining fiscal responsibility, promoting private markets and free trade, as well as preserving private incentives for citizens, workers, entrepreneurs, and other market participants.
In that sense, the framework we put forward requires moving away from the old corporatist model of privileged lobby relationships between private sector participants and public officials. Our central idea is to provide the foundations for a more socially responsible and sustainable economic growth model and make better use of resources available in both the private and the public sector.
Ten Economic “First Principles”
This new framework of public entrepreneurship and responsible private investment should be guided by a broad, pragmatic, and rational view of the world. This view can be expressed in ten widely accepted economic principles:
1. Fiscal Responsibility. The massive non-recurring government expenses necessary to pull the economy out of the current crisis will have to be reversed along a flexible timetable. Such a timetable will depend on the situation, but its phasing-out as an objective must be recognized and factored in from the outset. Austerity measures such as tax increases, curtailment of public services, and attempts at debt reduction through various monetary expedients will not do the trick and should definitely not be the chosen approach. Similarly, simply throwing more money at problems without significant institutional reforms might be popular but would be irresponsible.
Restoring fiscal balance will require broadening the tax base rather than resorting to raising tax rates on workers and wealth-creating businesses. Putting an end to tax havens, limiting tax evasion, pricing carbon more efficiently, and levying fair fees on firms for using individuals’ data and distributing content they can currently appropriate for free are options that should be closely considered.
2. Prudent Public Investments. The profitability of future public spending in order to remedy under-investments in several public sectors (e.g., health, education), close the infrastructure deficit, and address climate change must be assessed in light of both their economic and social benefits. The injection of money into ill-designed or obsolete programs, whose genuine viability is seldom demonstrated, needs to be avoided. A workable framework to govern public-private partnerships to finance massive infrastructure projects is thus necessary to ensure that such projects are realized according to both their social priority and financial viability.
Moreover, public investment decisions must be based on the projects’ real capital cost, not the government cost of borrowing. There is a natural tendency to forget that the government’s relatively lower cost of borrowing reflects its ability to tax its residents and thereby impute and transfer the risk of its investment to taxpayers rather than to the projects themselves. However, the real cost of capital of each project should reflect the genuine risk of the investment regardless of whether it is privately or publicly financed. Forgetting this simple principle leads to a misallocation of public resources and sub-optimal investments.
3. Innovation-Friendly Regulation. A new regulatory framework must entail the elimination of obstacles to innovation in several economic sectors without being detrimental to workers, citizens, and the environment. Cost-benefit analysis should be central to the design of new regulations and to the review of existing ones. In particular, risks need to be appropriately shared between the private and public sector, in such a way that maintains private incentives to innovate and compete without requiring the public to bear the cost of inappropriate private behaviour.
4. A Favourable Business Environment. Government must create and foster the development of a favourable business environment for the private sector. However, it should orient its actions and initiatives based on the idea that the private sector should play as much as possible the main role in the recovery and be incentivized to internalize externalities and social benefits. History has shown that the private sector does a better job at allocating resources as it responds more quickly to price signals sent by properly regulated markets.
5. More Responsive Government. Government should enact public sector reforms to improve its own risk management structures and thereby better and more quickly respond to rapidly evolving social needs. Currently, risk averse and increasingly quagmire-embroiled bureaucracies are ineptly resisting the adoption of socially valuable private and public sector innovations. The reluctance of government to adopt and promote telemedicine practices is a perfect example of such obstruction. The COVID-19 crisis showed that telemedicine could be promptly deployed with great benefits to respond to social needs as well as to improve quality of health service, economic efficiency, and social welfare.
6. Alleviating Labour Shortages. Encouraging immigration and the development and reskilling of human capital should be recognized as important policy levers for the economic recovery. Such policies can alleviate skilled or specialized labour shortages, reintegrate unemployed workers into the labour market, and create new businesses. In a fast-moving world, where technological change creates disruptions, it is increasingly important to develop the proper mechanisms, practices, and institutions to allow a flexible workforce to seamlessly acquire new skills on the job and to encourage a more fluid international labour market to respond to regional labour market imbalances.
7. Resisting the Siren Song of Protectionism. Free trade confers real and sustainable benefits as countries adjust their production patterns along the lines of their comparative advantages. This environment allows our companies to remain more competitive at home and abroad, and our citizens to enjoy access to a wide variety of products at low prices.
The arguments in favour of protectionism can be seductive, but they are wrong. Granted, reducing the barriers to the free flow of goods and services across nations can have short-term dislocating impacts on communities. But a better distribution of the undeniable welfare-enhancing gains generated by free trade is the solution. As for innovation, refraining from the benefits of freer trade, under the pretext that we can’t agree on how to share such gains, is the real missed opportunity.
8. Efficient Tax Policies. Fundamental tax reforms should be pursued jointly by various governments to optimize the efficiency of the tax code, broaden the tax base and render tax avoidance and tax evasion ultimately negligible. International cooperation is also essential as there is a pressing need to optimize the efficiency of the corporate tax system through a better coordination of individual domestic tax policies as opposed to the futility of individual countries competing to offer relative tax advantages to private businesses to attract investment; the Biden administration’s recent push toward a minimum global corporate tax is a step in the right direction.
The international adoption of Border Carbon Adjustments, currently being considered and promoted by the Biden administration, would also facilitate the adoption of carbon taxes globally and be particularly beneficial to address climate change.
9. Fair Redistribution Programs. Inequalities should be fought on the basis of equalities of opportunity to preserve incentives and inclusion and to encourage civic participation and social cohesion. There needs to exist in the design of social programs a better balance between the development of the welfare state and the preservation of individual incentives to participate in the economic and social life of their communities. Many ill-designed and costly entitlement programs instead destroy individual incentives while also depriving many vulnerable individuals from the dignity they deserve.
10. Renewed Global Cooperation. Deeper global cooperation needs to be fostered given the cross-border nature of several of the challenges confronting us in the next decades, including pandemics, climate change, global trade, international migration, and, as mentioned above, taxation. In this spirit, multilateral institutions would benefit from an injection of the same public entrepreneurship discussed above. In particular, environmental protection and climate change should be tackled by using efficient market-based policies, which would also drive the private sector to create innovative solutions to the climate crisis.
The COVID-19 pandemic has been faced by a high level of domestic social cohesion, collaboration between the private and the public sectors, and our ability to cooperate globally. We have now reached an inflection point where governments will be tempted or forced to spend massively more than what past circumstances would have dictated. It is thus time to lay the foundations of a flexible and credible economic recovery framework to better use our resources and to foster the emergence, post-pandemic, of sustainable economic growth and more inclusive economic prosperity.
We have proposed that this new framework be based on a balanced mix of public entrepreneurship and responsible private investments. We have also advocated that its implementation should be guided by ten time-honoured economic first principles. The careful application of such principles should help bring about a post-pandemic recovery where governments better respond to the needs of their constituents; workers and entrepreneurs thrive through increased collaboration; and all members of society are more fully engaged.
About the Authors
Stéphane Dupuis is Partner at DRTP Consulting inc., where he provides consulting services in transfer pricing (TP), intellectual property valuation and economic research and advisory. Stéphane started his career in consulting at Ernst & Young in 1997. Prior to founding DRTP Consulting in 2012, Stéphane was Partner in KPMG’s global TP practice (Montreal Office) and Chief Economist of KPMG’s Eastern Canada TP practice from 2003 to 2012.
Luc Vallée was Chief Strategist at Laurentian Bank Securities from 2014 to 2019. He was Chief Economist and the Director of Research at Canada Economic Development from 2009 to 2014.
From 2001 to 2008, he was Chief Economist and Vice-President at the Caisse de dépôt et placement du Québec. From 1999 to 2001, he was successively Chief Financial Officer and Vice-President, Corporate Strategy for Mediagrif Interactive Technologies.
Mr. Vallée was Deputy Treasurer at Canadian National Railways from 1997 to 1999 and Professor of Applied Economics at l'École des Hautes Études Commerciales from 1989 to 1996.
He was President of the Association des économistes québécois (ASDEQ) in 2005-06, a member of Statistics Canada’s National Statistics Council in 2008-09 and a member of the comité consultatif de l’Institut de la Statistique du Québec sur l’innovation from 2009 to 2014.
Mr. Vallée holds a Ph.D. in economics from the Massachusetts Institute of Technology.