SM Tharman Shanmugaratnam at the Shoman Foundation in Jordan (May 2023)

Transcript of lecture by Senior Minister and Coordinating Minister for Social Policies Tharman Shanmugaratnam at the Shoman Foundation in Jordan on 'Turning Crisis to Opportunity: Reforming Global Finance For Development and Ecological Security' on 14 May 2023.


Distinguished guests,

Thank you for giving me this privilege of speaking to you this evening. We have an exceptionally distinguished audience. I had wanted to recognise some of you, but was advised that as there are many very important persons with us, it would be safer to simply address you collectively. But thank you, Mr Omar Al Jazy for your excellent introductory remarks. Let me get straight into the content of my speech.

Building resilience in an era of disorder and human insecurity

The fundamental task we have, wherever we are, is to build resilience and optimism in an era of disorder and profound human insecurity. It requires a reorientation in both national policies as well as the way we cooperate globally. It requires both national and global actions so that we can prosper, develop more inclusive societies, and address the challenges of the global commons at the same time.

In the two decades since the turn of the century, we’ve had three pandemics, one global financial crisis, a few other major financial shocks, and extreme environmental events that are more intense and more frequent than ever before</p>

We have had the worst heatwave in human history, in China. Extreme droughts and floods, sometimes in the same locations. More frequent wildfires. Even if we are not scientists, it is now obvious from the increased frequency and intensity of these environmental shocks that we are not just dealing with random events or bad luck. There is a pattern. The Earth system has shifted from a broadly stable state to an unstable state. And that together with the fact that geopolitically and geoeconomically, we are seeing the gradual unravelling of a system of rules that preserved an open global order.

That combination of fundamental shifts, ecological and geopolitical, now defines an era of disorder and human insecurity. Each time we get a new shock, a new pandemic or weather extremity, a new conflict or war, we must recognise that they are not independent of each other. And that it is the slow-moving undercurrents, that underpin the shocks, that we have to pay attention to. Our fundamental challenge has to be to tackle the undercurrents rather than wait for each new shock to arrive.

Three major reorientations

We need three major reorientations, nationally and globally, to address these undercurrents.

First, we have to place far more importance on pre-empting shocks and disruptions rather than responding to them after they occur. It requires that we take a longer view in economic policy, in politics, and in the way we prepare our populations for the future.

Globally, politics has become more short-term, economic policy more myopic, and we end up moving from one crisis to another. It is extremely costly -- each time you get a pandemic or a global financial crisis, it is extremely costly, financially. And it is also extremely damaging to human life and livelihoods when it comes to a pandemic or extreme weather events.

So, we’ve got to shift our orientation towards prevention and preparedness rather than responding to crises as and when they occur. Knowing that there is an undercurrent that can and must be addressed.

We are still way behind in the race against global warming. And we are flying blind into the next pandemic. The next pandemic will come, and it may very well be far more lethal and damaging than COVID was.

We no longer have the luxury of saying ‘things are difficult today, we will prepare for future crises later, or we will catch up later.’ The science makes clear that we cannot just catch up later, because what we are crossing tipping points in the meantime. Once we cross these ecological tipping points - the large-scale melting of the glaciers, the warming of the northern forests and other tipping points – we get an irreversible and cascading set of changes, with one tipping point leads to another tipping point. By then the problem will be much larger, the costs of mitigating and adapting to environmental shifts will be much larger, and the implications for food insecurity, forced migration, conflict, and stunted economic development become more dire. So, we cannot just ‘catch up later’. We have to move with urgency, to prevent and prepare for future shocks and the disorder they will bring.

A second reorientation. We must avoid macro-economic policies, both monetary policies and fiscal policies, that lead to a build-up of risk in normal times. We have seen a prolonged period of extraordinarily easy monetary policies following the global financial crisis -- close to zero interest rates, in fact negative rates in real terms - led by the advanced countries’ central banks seeking to raise the rate of inflation. It is probably the largest macroeconomic policy mistake in decades, and we are now paying the price for it as we exit easy monetary policies. And the price is not just inflation, which is evident everywhere, but also financial instability. Then major central banks through their monetary policies have enabled the build-up of risks in the financial system, as well as in the real economy. We will continue to pay a price for that.

During normal times, in between crises, we must create buffers rather than allow for a build-up of risks in the system. Because if we allow for the build-up of risk, we not only make future crises more likely, we are more vulnerable when the crisis we don’t expect comes, -- it may be geopolitical, it may be climatic, it be a pandemic, or it may be a financial crisis from an unexpected source.

We are in a world of recurrent shocks and crises. Our game in macroeconomic policy, both monetary and fiscal policy has to be to build up buffers in normal times, so we can respond effectively when the next crisis comes.

A third reorientation. We have to put a lot more store by collective action. Not just each nation acting on its own, not just each group within a nation acting on its own. Because the central problems are essentially of a global and collective nature. Obviously, climate change. What is now being recognised too is that water is a global crisis. It's not just a Jordanian crisis – the global water cycle is now unsustainable. And it is unsustainable in a way that it will lead to more problems in individual communities everywhere, more shortages of food and spread of diseases everywhere.

I'm just giving the examples of global warming and water. The same is true for the risks of pandemics. These are global problems requiring global solutions, where we all act together. Nationally, we must invest in prevention and preparedness for such crises, but we also need global support for countries, particularly low-income countries, and lower-middle income countries, so that they can invest in global public goods.

We all benefit from investing in global public goods, whether we are rich or poor countries. Of course, the better-off countries have to contribute a larger share of these investments. But we have to move away from thinking about this as a matter of aid, a transfer from one part of the world to another, from the north to the south, or from the rich to the poor. Think of it as investment we each make in collective security because that's what investing in global public goods is truly about.

Those are the three basic reorientations that we must make. The first as I mentioned, has to do with focusing our efforts on preventing crises rather than waiting to respond; the second has to do with macroeconomic policies building up buffers, rather than building up risks, in normal times; and the third has to do with thinking and investing collectively, because the central problems we face are of a collective nature.

Five policy and financial strategy shifts

What then are the shifts in policy and financial strategies that follow from this set of broad reorientations?

First, we have to invest at a higher level for a long period of time and recognise that it is not just a challenge by an opportunity to spur significantly stronger and better distributed global growth.

The scale of investment required is much larger than anything we've attempted before. There is a range of estimates, but broadly speaking the investment needed for climate mitigation and adaptation, addressing the global water crisis, and importantly also tackling the challenge of economic development in the developing world is much larger scale than has been done before. At minimum, it requires $1 trillion of investment each year on a continual basis in the developing world excluding China. Globally, it will require a few more trillion a year.

That sounds like a large sum but is in fact small if you compare it to the size of global capital markets. Global capital markets today are about $260 trillion and grow each year by a larger number than the investments I'm talking about. The money is there. It's a question of how we organise ourselves to be re-channel resources towards the energy transition, sustainability, and human security.

Think of it also not as a challenge but as an opportunity, because this is the largest opportunity for economic growth that we have seen in a long time. The amount of additional investment required, based on IMF analysis says, is about 3% of global GDP. Without being too precise, that 3% of GDP in extra investment should yield at least 0.7% extra growth each year, globally; in the developing world, this number will be higher. That’s about 20% to 25% faster than today’s underlying growth rates.

This is an opportunity for growth that we haven't seen in decades. An opportunity for the rich world, the poor world, and the middle-income world to benefit from. So, think of this challenge of the sustainable development goals and human security, not just as a challenge. Think of it as an opportunity, an opportunity for growth, better inclusivity, gender equality, and peace.

The second shift is to be design policies that address national development needs and global public goods at the same time. Countries which are low and middle income cannot avoid focussing on the immediate and pressing tasks of national development and job creation and will not want investments in global public goods to be at the expense of those national priorities. Global public goods don't just benefit them, they benefit the rest of the world. But if we avoid addressing the global commons, and countries focus purely on immediate national development tasks, we risk increasing carbon-intensive growth and increasing the risk of pandemics and other global disruptions.

There are however ample ways in which we avoid this trade-off between national development and global public goods. Take agriculture. If we move to precision irrigation, move to climate-smart agriculture, switch to crops which are drought resilient and to crops which require less water to grow - switching from rice to millet, for instance - these are strategies which are not against the interests of farmers. Well-designed, they raise yields and raise farmers’ incomes.

Think of healthcare. Clearly, we need to invest in global public goods to prevent pandemics - better surveillance systems, scaled up facilities to manufacture vaccines, diagnostics and drugs, for example. But there are many investments that meet immediate national needs at the same time – strengthening of primary health care systems and human resources so as to enhance our abilities to detect and diagnose new diseases before they spread. These help not just to prevent the next pandemic but improve national health outcomes. They also help prevent non-transmissible diseases like Tuberculosis.

Likewise for the major effort to transition from high carbon to low carbon energy mixes in each country, including increasing the efficiency of use of energy in every industry. Sector by sector, country by country, there is potential to enable continued growth, and create better jobs, while reducing overall carbon emissions.

Third shift we must make is to invest more in the international financial institutions, the World Bank and other MDBs, and the IMF. Whatever criticisms they face, they are valuable institutions because the public dollar we put in them is multiplied and achieves greater development impact. They multiply the public dollar on the capital markets, and they crowd in private capital.

When we consider the scale of investment required for the transition to sustainability, $1 trillion each year in the developing world excluding China, or about $7 trillion globally - we can only invest on that scale by mobilizing private capital. The role of public capital must hence be to incentivise private capital investment to serve the public good.

The MDBs have to reorient themselves, from lending dollar to countries to helping to de-risk the environment, so as to bring down the cost of capital that countries face in attracting private investment. We have to bring down risk in order to bring down the returns on private investment, and hence bring down the cost of capital to receiving nations. Bringing down the cost of capital is critical if we are to address both national development needs and investment in global public goods.

There are ways of doing it, which I needn’t elaborate. But we are barely exploiting the opportunities we have in finance to diversify the risks on infrastructural investments in the developing world, and to create asset classes with diversified risk that can attract institutional investors.

We also need to run the IFI system as a system. The development finance landscape today is too fragmented, too siloed, and uncoordinated. We have many multilateral development banks, who generally operate quite independently of each other, and many more development finance institutions operating with broadly similar objectives. We have to bring them together to work country by country, on country platforms, coordinating their efforts, working with national authorities, mobilizing private finance within more coherent platforms, and scaling up development impact.

We also have to strengthen the global financial safety net, with the IMF as its global anchor. 30 or 40 years ago, when problems happened in a country, they were often because the country itself messed things up themselves or had bad luck such as with a hurricane or earthquake. Today, the crises that are happen are very often due to global developments. Most of the crises in the last 20 years, were global crises, with problems in one part of the world spilling over to the rest of the world.

That’s a fundamental reason why we need a global financial safety net, and a much stronger one as we enter an era of disorder. The IMF has to be a stronger anchor within that system.

The fourth shift has to be in national responsibility. At the end of the day, this has to be a global pact, economic and political. It must involve stronger global support for countries for national development and for investment in global public goods, but also stronger national strategies to raise revenues, develop domestic capital markets that pensions funds and other institutional investors can participate in, and develop domestic governance capacities. I know Jordan is making an important effort to raise revenues for the medium to long term.

State capacity – to tackle corruption and money laundering, and to promote industry – is also critical. And there too, we require global cooperation to support the developing world. It is no longer simply a matter of transfers of knowledge from the global north to the global. south. The knowledge is now flowing in every direction. And if you look especially at cities, knowledge is being transferred, such as on experiences with sustainability and developing inclusive living – from cities in the south as well. The knowledge must flow in every direction.

A fifth and shift is in how we adjust to a multipolar world. It does not need to be a polarised world. Multipolarity need not mean a polarised world. The US and China in particular, have to avoid zero-sum thinking to avoid a polarized world.

The raw fact is that we will not be able to address the challenges of the global commons – climate change, pandemic prevention, and other challenges of the commons – nor tackle the challenges of economic development which ultimately affect all of us including the rich countries, unless the major powers find common ground in which they collaborate for the global good. It is also in their national interest to do so, and to strengthen the roles of the multilateral system.

Developing that non-zero-sum game approach in global relations however rests ultimately on domestic strategy. An open global order has to rest on domestic societies which are not becoming more polarised. Hence domestic strategies in education, in worker training, in affordable healthcare, and in inclusive growth, need strengthening. They are ultimately the foundation for an open global order, and how we avoid a polarised world.

We have a window of opportunity now which we have to use to build momentum in the direction of these changes. The world does not change overnight. We can’t radically reorder the world within one or two years. But we have to build momentum and take bold steps in the directions needed. Move ahead even if we haven’t got it perfectly designed, and don’t let the perfect get in the way of the urgent and necessary.