Lessons for our economic recovery
Covid-19 has created two parallel crises: one in public health, one in the global economy. Vaccines look likely to provide a pathway out of the public health crisis, but there is no panacea for today’s economic challenges.
In March 2020, as the first wave of the pandemic raged through South Africa – my home – the economic shock was almost as immediately visible as the illness itself. As a family, our response was to launch the South Africa Future Trust (SAFT) with a billion Rand donation and an aim to provide immediate financial support for workers and companies impacted by the pandemic. Ten months on, SAFT has provided direct financial support to nearly 93,000 beneficiaries and almost 10,000 enterprises. But none of this would have been possible had the South African government not recognised the scale of the humanitarian crisis and provided thorough but expedited regulatory processing for SAFT’s operations. From idea to implementation, SAFT was up and running after a remarkable seven working days of cooperation.
The SAFT experience highlighted that in many countries and across many sectors, far too much regulation is heavy on process, with the purpose of the regulation sometimes lost. Rigid, rules-based regulation often stifles innovation or fails to keep up with industry changes, meaning it no longer serves its purpose.
Policymakers around the globe are starting to recognise the need for a change in approach to address today’s challenges. Vaccine approvals have been a case study in purpose-led regulation—which sets objectives, principles or outcomes for regulation, without specifying in detail how these are to be achieved. Economic policymakers should learn from the vaccine experience to drive a rapid and wide-reaching economic recovery.
Coronavirus vaccines were made possible thanks to outstanding scientific effort and regulators who have played their part by approving new vaccines at record speed. They have achieved this by recognising that the seriousness of the public health emergency required a willingness to look to new, data-driven ways to meet the same efficacy standards that slower, existing processes were required to meet. This flexibility allowed the UK Medicines and Healthcare products Regulatory Agency to fast-track emergency approval of the Pfizer/BioNTech vaccine only two months after efficacy data was submitted.
Today, whole economic sectors must adapt quickly to consumer, workforce and macroeconomic conditions that have witnessed once-in-a-generation changes in just twelve months. Companies have innovated at outstanding speed to meet these challenges, reconfiguring supply chains, moving to remote working and providing new ways of delivering goods and services to consumers. Businesses will need to invest if they are to lock in productivity gains from these changes and ensure they serve the changing needs of customers. Regulation must stay relevant and nimble if it does not want to become the sea anchor that swamps and sinks the ship.
But business investment was one of the pandemic’s first economic casualties, with 2020 consensus forecasts of -5 per cent in the US and -11.4 per cent in France. UK gross fixed investment was forecast to fall nearly 14 per cent last year. Increasing productive investment now is essential for driving the recovery. That is not just because of the need to restore demand to something like normal. It is because productive investment is needed to bring about necessary and desirable structural changes.
So, what must governments do to support businesses that want – that need – to invest? The starting point must be to strip away unnecessary barriers to productive investment. And that must begin with a new mindset towards regulation.
The change in mindset that is needed is from process-heavy, rules-based regulation, to regulation that is purpose-led and nimble. Flexibility would allow businesses to innovate and seek out better methods of achieving the regulatory goal. That flexibility also means that purpose-led regulation is more adaptable when market conditions are changing rapidly, such as now.
The UK government and the Bank of England are leading the way. Twelve years on from the financial crisis, the UK government has asked the Bank of England to assess whether some financial regulations may inadvertently be stifling investment in productive assets. And the Governor of the Bank of England, Andrew Bailey, is embracing this challenge by examining whether some rules can be changed to free up financing for investment, while still protecting financial stability. The Chancellor’s 9 November commitment to an outcomes-based approach to financial regulation and to launching the Long Term Asset Fund are additional steps in the right direction.
The UK is not alone in this pursuit. Singapore continues to provide cutting edge regulatory flexibility for new digital banks. Japan recently committed to follow a purpose-led approach to regulating artificial intelligence and emerging technology. Both of which are driving new business investment.
No-one is suggesting that financial and other types of regulation are not needed. The question is whether there are ways to serve the purpose of that regulation and stimulate innovation without unwelcome side effects. Vaccine regulators have proven this is possible in the face of a global pandemic, and the vanguard of economic policymakers is already moving in the right direction.
Policymakers across the globe must recognise the unparalleled economic crisis we face and consider purpose-led regulation as a driver of rapid and lasting economic recovery. As we have seen with vaccine development and SAFT, well-implemented, purpose-led regulation is essential for saving lives and economic livelihoods too.
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