Public-Private Solutions to Safeguard Economies Everywhere

The COVID-19 pandemic has crushed economies across the globe – and we expect the recovery will be a grueling and inconsistent process. This crisis, however, also creates opportunities to unite historically disparate investor groups to help build economic and market sustainability and resiliency.

Public-private partnerships and solutions that bring the rather arcane world of “development finance” into mainstream investment practice could be an important, and beneficial, development to come out of this extraordinarily difficult period.

The current pandemic is likely to hasten existing economic trends, while shifting preferences among savers and consumers will alter the structure of economies and markets across the globe. In the developed world, yields have fallen significantly – hurting savers, in particular those closest to retirement. While the incremental liquidity provided by central banks has supported equity market valuations, it only acts to pull future returns of equities to the present time, which leads to lower equity return expectations for the future.

The developing world has the reverse problem. Many developing economies, particularly in Africa, have younger demographics but lack the capital and infrastructure required to harness the energy of the population to create future prosperity. In the United States, small and midsize enterprises (SME) represent half of all jobs in the country and 64% of new job formation. The same dynamic exists in Africa, where SMEs contribute 60% of total employment and four of every five new jobs. What is missing is the ability for the private sector to finance both the infrastructure and the capital needs of these companies. The pandemic amplifies this imperative.

Surplus capital from developed countries has historically found its way to the developing world through governments. Long-standing supranational development finance institutions (DFIs) – such as the World Bank’s International Finance Corporation and the Inter-American Development Bank’s IDB Invest – have created networks and processes that allow them to lend directly to companies in the developing world, and they are very effective in their sourcing and management of these investments. The other channel has been for the private sector to invest in emerging market government bonds, which in turn have been used to finance much-needed infrastructure.