Economic crises have the tendency of exposing economic and institutional weaknesses. As such, they have the potential of causing damages considerably more severe than those from any given shock alone. Storm and heavy rains alone may result in some manageable damages—if dykes and embankments hold—but a catastrophe if ill-maintained dams breach at their respective weakest points, release torrents, and cause floods with the power to destroy lives and livelihoods. This is a central tenet in economic policymaking, viz., to prevent an adverse external shock from causing full-blown economic crises. An ex-ante focus on crisis resilience represents an important investment into the protection against the risk of losing macro-fiscal control when faced with severe headwinds and adversity.
The evolving climate crisis and rapid change in the global environment—from deglobalisation (sanctions, tariffs, de-risking) to energy transition (decarbonisation, net zero), technological innovation (artificial intelligence), and geo-political developments—affect the strength of, and alter the outlook on, economies around the globe. In this, not every economy is succeeding in translating evolving risks into opportunities and not every budget in absorbing corresponding pressures.
Broad access to, and active participation in, prosperity hinges on an economy’s ability to translate human capital into investment and innovation. A fertile ground for successful economies nourishes education, provides for health, and supports those in most dire need. Prosperous economies encourage participation in, and contribution to, economic activities by offering a solid regulatory and institutional environment that builds confidence and opens long-term perspectives for businesses and investors. This assessment is underpinned by an influential literature on endogenous growth, which centres on human capital, innovation, and knowledge as principal roots of sustainable development. Accordingly, to effect dynamic rates of inclusive growth over prolonged periods of time, an economy needs to be able to feed from the skills, initiative, and resources that are available. New ideas planted in productive grounds allow entire economies to grow, strengthen, and blossom.
Fiscal expenditures and policy reforms are thus anchored in considerations of improving conditions for growth and employment. In times of substantial changes to the external environment, a careful (re-)assessment of the quality and value of public expenditure and prioritisation of investments in physical and human capital, infrastructure, and entrepreneurship would represent a critical first step. Within a context of macro-fiscal stability, the adoption of ‘pro-growth’ policies—including those to protect the environment and increase administrative efficiency—will strengthen resilience. By encouraging knowledge to be generated, virtuous cycles of socio-economic development can be triggered, having ‘endogenous’ sources of innovation and productivity increase, fuel, and maintain economic success.
An effective development strategy outlines a process by which identified weaknesses are to be addressed with available resources to achieve overarching policy objectives. It requires interim benchmarks, processes of monitoring, and feedback loops to be able to identify early on unforeseen difficulties and bottlenecks. A strategy’s ultimate success hinges on its ability to work towards three dimensions of sustainability, viz., macro-fiscal, socio-political, and environmental. In this, the presently most demanding aspect relates to the need of linking, conceptually and operationally, the objectives of social cohesion with those of decarbonising fossil fuel-reliant economies. The absence of a clear narrative of how to address the twin challenge of encouraging the phase-out of greenhouse gas emissions in an equitable manner lies at the root of the credibility crises that confront policymakers worldwide.
Against the backdrop of prespecified objectives, the preparation process for socio-economic development strategies links identified vulnerabilities and emerging potentials to available policy instruments. The formulation of an ultimate blueprint towards dynamic rates of sustainable and inclusive growth represents the culmination of an unprejudiced process with broadest-possible contributions from stakeholders in the economy, complemented by the inclusion of know-how and financing possibilities from development partners and potential investors. It builds on an analytic diagnostic of an economy’s relative strengths and weaknesses as well as the identification (and quantification) of development potentials and socio-economic risks. The outline and sequencing of policy priorities—within a sustainable fiscal framework and against resource constraints and development risks—aims at providing orientation and planning security and, hence, a stimulus for an increase in investments and economic activities.
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