Opinion at the Jakarta Post

G20 must drive massive and targeted investment ramp-ups amidst multiple crises

By Prof. dr. Rob van Tulder and Michael Putra

The World Bank’s latest Global Economic Prospects was dominated by the adverse impact of the Russian military action in Ukraine to the world economy that is just about to recover from the Covid pandemic. Emerging market and developing economies (EMDEs) as well as least developed countries are disproportionally impacted because many households in these countries spend larger proportion on food and energy. To put numbers into the problem, the International Energy Agency (IEA) estimated that the current energy crisis risk pushing nearly 90 million people in Asia and Africa who previously had access to electricity to no longer afford basic energy.

As such, it was prompt for President Joko Widodo to raise both the food and energy crises in his encounters with President Zelensky and President Putin, on top of his call for a peaceful resolution to the conflict. Although similar messages have been conveyed by others, this time the messenger had a unique legitimacy: as the leader of one of the largest EMDEs and holder of the G20 presidency who will host its summit in November this year.

Since its inception, G20 has been accustomed to complex issues to address global financial and economic crises. This time, however, the group is dealing with a different level of complexity requiring an extra skillful and delicate diplomacy in addition to the tables take prudent policies for sustainable – equitable and inclusive – economic growth.

In the face of extreme volatility, governments and businesses are often tempted to be shortsighted and make knee jerk policies or investment decisions. Volatilities are here to stay though, and future volatilities can only be mitigated by decisions made today in pursuit of a resilient society. In a recent editorial, The Economist (June 18th) framed the search for resilience as “reinventing globalisation” and safeguarding positive effects such as lifting 1 billion people out of extreme poverty. Reinventing globalization implies a clear departure from hyper-efficiency, global value chains based on extreme labour divisions, reinstate degrees of vertical integration, local (strategic) autonomy and circular value chains supported by longer-term contracts and higher degrees of diversification and inclusion. The (hybrid) governance translation of this ambition is largely covered by the Sustainable Development Goals (SDGs). SDGs were formulated in 2015, intended to be achieved in 2030 and subscribed to by all countries as well as more than 80% of major companies in the world. It is easy to put “lofty” goals such as the SDGs aside in times of crisis, but the truth is the world would have coped better with today’s crises if we had been closer to the goals in the SDGs. Regions with better healthcare system coped better with pandemic. Power grids with more indigenous renewable generation are less prone to shocks in the global energy supply. Better rural infrastructure and more resilient agricultural practices would provide a much-needed buffer in times of food crisis. As Niall Ferguson put it, “A catastrophe lays bare the societies and states that it strikes. It is a moment of truth, of revelation, exposing some as fragile, others as resilient, and others as ‘antifragile’—able not just to withstand disaster but to be strengthened by it.”

G20 therefore must uphold, and lead, the SDGs “Decade of Action” especially because of its bumpy start with the pandemic and the Russia-Ukraine conflict. Not coincidentally, there is at least one common dire need between what is required to address current food and energy crises with what is required to pursue SDGs: more targeted investments. Much more of it, both public but in particular private investments. 

The Covid-19 pandemic significantly affected global economy and shrunk investments in areas important to achieve SDGs, including energy transition that is one of the main pillars of Indonesia’s G20 presidency. The United Nations Conference on Trade and Development (UNCTAD) in its World Investment Report 2022 soberingly estimated that Foreign Direct Investment (FDI) in 2022 will at best remain flat as investors are pressed with uncertainties. Multinational enterprises’ appetite in investing in new productive assets overseas is weak despite high profits. In developing economies, FDI flows grew more slowly than the developed regions. This trend must be reversed if we are to address food and energy crises that are disproportionately impacting developing economies.

(Re-)directing investments usually follow a simple mantra but with a complicated implementation: reconfigure the risk and reward profiles. Although policies are set by governments, businesses are the ones who make investment decisions across the entire value chain. From agricultural or upstream energy companies investing in more sustainable production, traders and transporters, all the way to retailers who ensure smooth distribution to customers. These countless investment decisions (including decisions not to invest) are made as part of an ecosystem of companies’ long-term strategy, societal values where they operate, enabling or disabling policies, reliability of supply chain, availability of human capital, country risks, and so on. Companies – big and small – are at the ones with the full view of the investments “instrument panel”. In times of turbulence, government policies should therefore, more than ever, try to provide for a stable reading on investors’ instrument panel to pursue the right types of investments.

The problem is that it is much easier to adequately respond to an incident than to a structural / systemic event. The current energy and food crisis are not an “incident” nor are they a result from a single incident. In early 2020, the Executive Director of UN World Food Programme already warned that the world was “on the brink of a hunger pandemic”. IEA had also been issuing warning signs of global energy investment trends in recent years (i.e. far from sufficient investments in energy transition), well in advance of the Russian military operations in Ukraine.

These are systemic risks from a hyperconnected world, and therefore their effective management must also take into account systemic thinking – to avoid the “butterfly defect”, which is a phenomenon that highlight the often-ineffective management of these risks. Unless these are effectively addressed, it will lead to greater protectionism and slower growth. “Governments and firms must remember that resilience comes from diversification, not concentration at home”, wrote The Economist also recently. Closer to Indonesia, the quagmires it faced earlier this year on the export restrictions of palm oil and coal are examples of knee-jerk reactions to systemic problems that undoubtedly affect present and future investors’ decisions.

Policy discussions certainly need to be more iterative than ever between government, civil society and businesses. However, businesses must also be cognizant and truthful to themselves on what is their motivation in pursuit of a more sustainable business – and how much gap they accept  with its realization. Using the Better Business Scan, an open tool that translates decades of research to guide companies’ journey towards sustainability, organizations can identify such gaps (accessible at www.betterbusinessscan.org). Only with these open discussions can policies – both stick and carrot – be effectively designed to reconfigure the risk and reward profile.

The G20 summit of 2022 has their work cut out. In our view this concerns restoring trust in the SDG-agenda and nurture its potential to align state policies for sustainable development and corporate strategies in support of the SDGs.  Before the leaders leave the Island of Gods, every communique they convey to the world will have bearings on investment decisions globally – and many would pray towards a more resilient world. After all, businesses cannot thrive in a society that fails and societies cannot be resilient where businesses blunder.

***

Prof. dr. Rob van Tulder is professor of International Business-Society Management at Rotterdam School of Management, Erasmus University; and Michael Putra is a PhD candidate at Rotterdam School of Management, Erasmus University. The views expressed are their own.

An edited version of this article was published in thejakartapost.com on July 8, 2022 with the same title Click to read: https://www.thejakartapost.com/paper/2022/07/07/g20-must-drive-massive-and-targeted-investment-ramp-ups-amid-multiple-crises.html

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  • Byline

    Michael is a professional leader in the fields of energy investments, complex commercial deals, and sustainability with extensive international experience. His personal interests span from socio-political issues, history, and culture.

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