To bridge divide at heart of US-China tensions, start with global rethink of public sector’s role

The oracle has spoken not from Delphi in ancient Greece but from modern-day Switzerland, home to the World Economic Forum (WEF). It has uttered words of wisdom in calling for a “new vision” of how the public and private sectors can work together to save the global economy.

This is absolutely essential if the world is to meet its monumental socioeconomic challenges. The WEF call also goes to the heart of the divide between market and state capitalism that is largely responsible for the growing tensions between the United States and China.

A “new narrative on the role of the public sector is needed, away from that of burdensome bureaucracy to one of market co-creator”, suggests a June report by the Network of Global Future Councils, established by the WEF to review prospects for creating “new, inclusive and sustainable markets”.

What is remarkable about this exercise of bringing together what the WEF calls “nearly 1,000 top thinkers” from among policymakers, businessmen, economists and others around the world is its mould-breaking analysis of the potential benefits of upgrading public sector entities.

The WEF report goes so far as to suggest that public investment in the global economy should become the “investment of first resort”. This is not a call to abandon the private sector (or financial markets) but to invest aggressively in the public sector so it can fulfil its full potential.

Yet the opposite has been happening. Advanced economies have progressively disinvested in the capabilities of their public sector in recent decades instead of acknowledging that only the combined efforts of public and private sectors can achieve broader and better economic growth.

The WEF is offering eminently sensible suggestions when the world is faced with colossal financial and organisational challenges that are beyond the abilities of private enterprise and financial markets to deal with separately.

Foremost is finding not only the money (maybe up to US$100 trillion) but critically the institutional capability to counter the impact of climate change. This needs resources on the scale of a “moon shot” or a new Marshall Plan, but these don’t exist in the private sector alone.

Global infrastructure provision, digital as well as physical, is likely to require investment on a similar scale in coming decades. China took a bold lead by launching its Belt and Road Initiative, and Western economies have been scrambling rather ineffectually since to match it.

Multi-trillion dollar investment is needed too in health and welfare services to cope with the certainty of future pandemics, not to mention the huge amounts required to rebuild manufacturing supply chains ruptured by Covid-19 and geopolitical tensions.

What the WEF is advocating is not turning back the ideological clock to an era of socialist planning or the rejection of market forces but rather a conscious drive to upgrade the quality of public institutions by investing in their skills and introducing a “risk and reward” culture.

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There are huge potential gains by way of economic and social returns from upgrading the abilities of state agencies in this way, so that they can act as active (rather than “sleeping”) partners in public-private partnerships and serve as planners and guiding intermediaries.

This approach points the way towards achieving a critical synthesis between “market” and state-controlled economies. The lack of such a synthesis has put the world’s first and second largest economies, those of the US and China, on an effective war footing and many others along with them.

There is a dawning realisation of the need for change in the way economies coexist (or fail to do so) and that this will involve rethinking the role of the state.

People from backgrounds as diverse as those of BlackRock chief Larry Fink to Columbia University professor Jeffrey Sachs have argued recently, for example, that public institutions, such as multilateral development banks, be given a greater role in helping to avert systemic economic threats.

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State or multilateral agencies are not inherently inferior to private enterprise, nor is the profit motive a force that automatically creates efficiency and excellence in the private sector. As the WEF says, insufficient investment in public sector resources is the problem.

Governments must learn to better nurture state assets. International Monetary Fund analysis has revealed the remarkably extensive role played by state-owned enterprises, not just in China but around the world, in emerging and advanced economies alike.

Over the past decade, state-owned enterprises have doubled in importance among the world’s largest corporations. At US$45 trillion, their assets are 20 per cent of corporate assets. It is time to capitalise on such assets and capabilities by abandoning ideological bias against the public sector.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs