At the upcoming G7 summit in Cornwall, UK, the major economies’ leaders have a critical opportunity to agree on a plan that not only drives a strong recovery from the COVID-19 pandemic for their own countries, but also speeds the transition to a more sustainable, inclusive and resilient global economy.
A key lesson that I trust G7 governments have learned from COVID-19 is how exposed and vulnerable every country is to global threats – including infectious diseases, climate change and biodiversity loss. The challenges to well-being and prosperity highlighted by the pandemic are all interconnected, so we need an integrated approach to tackling them. The G7 has a special responsibility to lead here.
Rich-country leaders will understandably focus on the health of their own economies, which are showing signs of a rapid rebound. But they should recognise the need for significantly increased investment over the next decade to enable strong and sustained growth, and to respond to climate change and the loss of natural capital – including biodiversity. Countries should not repeat the mistake of the pre-pandemic ‘Roaring Twenties’ of a century ago by focusing primarily on consumption.
A recent pre-summit report requested by the United Kingdom’s prime minister, Boris Johnson, which I led, shows that G7 investment as a proportion of GDP prior to the pandemic was at its lowest level for several decades. In some countries, such as the UK, a drop in investment after the 2008-09 global financial crisis largely explains the following decade’s sluggish economic growth.
Our report recommends that the G7 should collectively invest an additional US$1trillion per year, relative to pre-pandemic levels, over the next decade to drive a sustainable and sustained recovery. While most of this increase – equivalent to 2% of these countries’ combined GDP – will come from the private sector, governments must set policies and expectations to encourage it; and must themselves be ready to invest, particularly over the next couple of years.
Over the longer term as well, G7 governments should be prepared to borrow to invest in order to boost growth and lay strong foundations for a green industrial revolution. Ambition is less risky than caution, because weak investment will mean an anemic economy. But this does not mean that finance ministries should abandon fiscal discipline. Rather, they should ensure that public finances are directed toward high-quality investments that can create sustained growth and build tax revenues.
A commitment to sustainable public finances over this decade will foster investment as long as premature austerity does not choke-off demand. Our analysis shows that investment opportunities in sustainable infrastructure and nature offer particularly attractive returns. The G7 countries should thus accelerate the decarbonisation of their economies by phasing out fossil fuels and replacing them with zero-emissions energy, transport, industry and agriculture.
For example, the G7 could pledge to ensure that 80% of their electricity is generated from zero-emissions sources by 2030. They could adopt net-zero standards for all new buildings from 2024, and aim to install 100 public electric-vehicle charging stations for every 100,000 people by 2023. These countries should also be investing much more to protect and restore nature on land and at sea, as well as in productive and sustainable agriculture.
But G7 leaders also need to recognise that their economies will recover fully only if growth is restored in the rest of the world. That is because most of the global demand over the next decade will come from emerging markets and developing countries.
The G7 must therefore work to mobilise finance and foster investment in these economies. Because no country will be safe from the pandemic until it is under control everywhere, the most critical and urgent need is to make up the shortfall in financial support for the COVID-19 Vaccine Global Access (COVAX) facility, and promote production and sharing of vaccines. All countries should have access to effective COVID-19 vaccines and the means to immunise their populations.
Furthermore, rich countries need to help developing economies with their external debts and access to finance through sources such as special drawing rights (SDRs), the International Monetary Fund’s reserve asset. Without such assistance, the world risks suffering a lost decade of development and failing to realise many of the United Nations Sustainable Development Goals.
The G7 must also ensure that rich countries belatedly fulfil their commitment – made in 2010 – to mobilise US$100billion per year from public and private sources by 2020 to help developing countries tackle climate change. They should seek to raise the annual amount substantially by 2025, and increase the concessional component.
This possibility, together with additional SDRs, the expansion of lending by multilateral development banks – and the use of resources that previously supported fossil-fuel investments – highlights the scope to mobilise more funds for poorer countries without overburdening public finances.
The crucial UN climate-change summit (COP26) in Glasgow during November risks failing if the rich world does not honour its financial commitments to developing countries and carry them forward to 2025. For this reason, the G7 gathering in Cornwall could be a turning point; not only in the recovery from this terrible pandemic, but also in the creation of a much healthier global economy.
Nicholas Stern, a former chief economist of the World Bank (2000-03) and co-chair of the international High-Level Commission on Carbon Prices, is Professor of Economics and Government and Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science.
Copyright: Project Syndicate, 2021. www.project-syndicate.org