Oxford Review of Economic Policy, Volume 36, Number S1, 2020, pp.

S256–S269

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COVID-19 and public-sector capacity

Mariana Mazzucato* and Rainer Kattel**

Abstract:  The paper argues that to govern a pandemic, governments require dynamic capabilities
and capacity—too often missing. These include capacity to adapt and learn; capacity to align public
services and citizen needs; capacity to govern resilient production systems; and capacity to govern data
and digital platforms.
Keywords: COVID-19, public sector capacity, dynamic capabilities
JEL classification: D23, D73, H83, I0

I. Introduction
The COVID-19 pandemic presents a massive challenge to governments world-wide—
from the provision of income support to citizens and aid to struggling companies to
the strengthening of frontline health services. It also requires an unprecedented level of
collaboration between nations—from the race for a vaccine to learning how to test and
trace. One of the biggest lessons is that state capacity to manage a crisis of this propor-
tion is dependent on the cumulative investments that a state has made on its ability to
govern, do and manage. While the crisis is serious for all, it is especially a challenge for
countries that have ignored those needed investments in what we can call the ‘dynamic
capabilities of the public sector’ (Kattel and Mazzucato, 2018).
In the pre-COVID-19 world, governments were increasingly turning their attention
to how to tackle ‘grand challenges’ or ‘wicked issues’ such as climate change, demo-
graphic challenges, and the promotion of health and wellbeing (Mazzucato, 2018b,c).
Behind these challenges lie the difficulties of generating sustainable and inclusive
growth. Policy-makers increasingly dedicated their attentions to not only the rate of
economic growth, but also its direction (Mazzucato and Perez, 2015). Tackling grand

*Institute for Innovation and Public Purpose (IIPP), University College London; e-mail: m.mazzucato@
ucl.ac.uk (corresponding author)
**Institute for Innovation and Public Purpose (IIPP), University College London; e-mail: [email protected]
The research for this paper was partially funded by European Union Horizon 2020 Research and
Innovation action under grant agreement No. 822781 (Growinpro). We are grateful to Asker Voldsgaard,
Henry Li, Ville Takala, Antonio Andreoni, and Joshua Entsminger for their help with research for this paper;
and to the IIPP task force on COVID-19, including Wolfgang Drechsler, James Galbraith, Jayati Ghosh,
Stephanie Kelton, and Carlota Perez, for wide-ranging discussions related to the pandemic.
doi:10.1093/oxrep/graa031
© The Author(s) 2020. Published by Oxford University Press.
For permissions please e-mail: [email protected]
COVID-19 and public-sector capacity S257

challenges requires revitalizing private and public investment, innovation and collab-
oration. It is not about more state or less state, but a different type of state: one that
is able to act as an investor of first resort, catalysing new types of growth, and in so
doing crowd in private-sector investment and innovation—these are in essence func-
tions about expectations about future growth areas. This requires a new form of collab-

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oration between state and business, and is more about picking the willing than picking
winners (Mazzucato, 2013).
COVID-19 has magnified and accelerated the need for challenge-led policy frameworks.
The pandemic and its aftermath offer an opportunity to rethink our (economic) policy
foundations and to align them with the needs of the twenty-first century. The COVID-19
crisis has underlined the importance of public-sector capacity and capabilities to handle
emergencies, and the particular capabilities required to solve societal challenges—most
visibly the protection of public health. The pandemic has also, however, underlined the
importance of public sector as market shaper—not only market fixer (Mazzucato, 2016).
The public sector bears responsibility for the long-term resilience and stability of so-
cieties, and for shaping public outcomes through policy-making and public institutions.
Public-sector capacity is typically defined as the set of skills, capabilities, and resources
necessary to perform policy functions, from the provision of public services to policy
design and implementation (Wu et al., 2018).1 We argue that the pandemic has shown
the areas in which capacities are critical for governments in the aftermath of the crisis
and in rebuilding economies and societies: namely, capacity to adapt and learn; cap-
acity to align public services and citizen needs; capacity to govern resilient production
systems; and capacity to govern data and digital platforms.
Fundamentally, government intervention is only effective if the state has the corres-
ponding capabilities to act. Far from retrenching to the role of being at best a market
fixer and at worst an outsourcer, governments should invest in building their muscle in
critical areas, such as productive capacity, procurement capabilities, symbiotic public–
private collaborations that genuinely serve the public interest, and digital and data
expertise (while safeguarding privacy and security). History shows that without this,
governments are not even able to devise good ‘terms of reference’ for the companies to
which they outsource (Schick, 2001).
In this article we briefly summarize how governments have responded to the pandemic
and then discuss the implications for public-sector capacity in the post-COVID-19
world. We argue that to prepare for future pandemics, governments must build dynamic
capabilities in the following areas: capacity to adapt and learn; capacity to align public
services and citizen needs; capacity to govern resilient production systems; and capacity
to govern data and digital platforms.

II.  COVID-19 responses

COVID-19 is a huge test of governments’ capacity to lead societies through crisis.
Countries around the world have dedicated US$8 trillion, and counting, to relief pack-
ages with fiscal support or credit and equity injections (Gaspar et al., 2020). The crisis

1  See also Karo and Kattel (2018); Kattel and Mazzucato (2018).
S258 Mariana Mazzucato and Rainer Kattel

has affected a number of countries disproportionally due to different degrees of prep-

aration, foresight, and public-sector capacities to steer economic activity. Countries like
the US and the UK, in particular, have realized how vulnerable their production and
public health systems are, and how difficult it is to ramp up production and coordinate
supply chains for food, medicine, ventilators, protective equipment, and test kits. In

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these economies, the pandemic has pointed to the damage that managerial reforms in
the public sector, such as outsourcing and financialization of the economy, have caused
to the resilience of socio-economic systems. Before the crisis, many corporations in
the US and UK, in particular, had been more occupied with financialized practices to
maximize value for shareholders, rather than solving societal problems and prioritizing
their broader stakeholders (Lazonick and Mazzucato, 2013).
Other countries, such as Germany and South Korea, have shown much more resilience
in their production and health systems, thanks to the capacity of their governments to
coordinate private-sector activity and largely public ownership of critical health system
elements. Impressive test capacity in Germany and South Korea was made possible by
the existence of public laboratories and the presence of industries that could supply
the required safety equipment and chemicals (Chazan (2020) for Germany; Thompson
(2020) for South Korea). Countries in South-east Asia with relatively recent experiences
in tackling SARS were quick to respond with large-scale tracking of infections, and the
establishment of travel limitations and social distancing rules (Leadbeater et al., 2020).
In Germany, learning from managing floods and influenza during the last two decades
has led to operational emergency plans and risk analyses for pandemics and floods
being available since 2013 (Bouckaert et al., 2020).
There are also success stories in emerging markets. In India, while the national re-
sponse has been a failure in many ways, the state of Kerala’s successful response to
the crisis is also the result of long-term investment in the health sector (including the
protocols put in place after the Nipah virus outbreak) and a successful public–private
partnership model (Mazzucato and Quaggiotto, 2020). In Vietnam, the government
was quick to recognize the complexity of the problem, closed its borders early and rap-
idly spurred the development of low-cost test kits (Klingler-Vidra et al., 2020). Eastern
European countries were quick to emulate successful crisis-response practices from
South-east Asia and quickly closed borders, shut down large parts of public activity
and often made masks mandatory in public (Shotter and Jones, 2020).
Yet many developing countries have been caught in a damaging financial feedback loop
unleashed by the pandemic. The global economic breakdown has reduced the export and
tourist revenues that are required to service their external debt commitments, and there
is a need for internationally coordinated action to help these countries (Ghosh, 2020).
In addition to very high and sudden pressure on health systems, the pandemic has also cre-
ated a dramatic increase in the demand for essential medical supplies, particularly personal
protective equipment (PPE) for health workers, ventilators, and pharmaceuticals. PPE is
vital to protecting health workers from infections and enabling them to do their work safely.
Globally, the World Health Organization estimates that 89m medical masks, 76m
examination gloves, and 1.6m goggles are needed every month as the world battles the
pandemic.2 In the UK alone, where 14m items are used on a daily basis, demand for

2 For further details see: https://www.who.int/news-room/detail/03-03-2020-shortage-of-personal-pro-

tective-equipment-endangering-health-workers-worldwide.
COVID-19 and public-sector capacity S259

some items increased 5,000 per cent overnight (NHS Providers, 2020). Similar to the
story of PPE, the demand increased dramatically for ventilators and for pharmaceut-
icals that alleviate the symptoms of COVID-19.
In response to this global crisis, the magnitude of public investment in the health
sector has multiplied and gone global. According to one of the most comprehensive

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(although incomplete) surveys of global R&D funding for COVID-19, public-sector
investment from the governments of 28 countries and a supranational union that it
captures has totalled $7.7 billion as of 9 June 2020, of which $4.4 billion is dedicated
to vaccine development.3
In order to support employment, a wide range of countries have authorized direct
payments to firms to subsidize wages—including Australia, Denmark, France,
Germany, Estonia, Poland, Singapore, Saudi Arabia, the UK—in order to preserve
productive capacity while maintaining household incomes. Automatic stabilizing mech-
anisms, such as existing welfare state systems and labour market institutions, have
played key roles in enabling rapid responses. For instance, Germany’s short-term em-
ployment scheme, which supports workers’ wages when companies have to reduce work
hours (the so-called Kurzarbeit), has enabled the country to keep unemployment from
increasing rapidly. By May 2020 there were over 10m people enrolled in Germany’s em-
ployment support scheme (Ojeda-Sierra and Coulton, 2020).
Some countries are lending to companies with no strings attached, while Germany
and the UK, for instance, are ready to take ownership stakes in ailing companies
(Macfarlane and Gasperin, 2020). Denmark, for example, has specified that companies
receiving state aid cannot be domiciled in any of the EU’s recognized tax havens and
that large recipients cannot pay dividends or buy back their own shares until 2021.
However, large portions of government support are also being operationalized through
central bank operations, where there is often no conditionality attached.
Some countries are taking bold action in rethinking the industrial policy space. In
Germany, for instance, the government is planning to launch new policies that allow
government to buy strategic ownerships in companies, and limit foreign mergers and
acquisitions of German companies (Dettmer et al., 2020).
When it comes to data and digital, governments have also performed very differently
in the COVID-19 crisis, showing once again that throwing money at the problem is not a
viable solution if core capacities and capabilities are not there, or have been outsourced.
In East Asia, Singapore—after investing heavily in its government digital service unit—
has utilized tracking applications to trace the viral spread; South Korea adopted a very
aggressive high-tech tracking approach (a result of completely redrawing its pandemic
response legislation after the SARS debacle), but the government also opened up real-
time data on mask stocks and pharmacy locations, so that start-ups and citizens were
able to build a number of add-on services that helped ensure a more effective and safe
distribution (Mazzucato and Quaggiotto, 2020). It is telling that many Western gov-
ernments are very slow to react as their legal and technical infrastructure around data
is insufficiently developed. The UK, for instance, is still only testing a tracing app in
June 2020.

3 Policy Cures Research funding tracker is available here: https://www.policycuresresearch.org/

covid-19-r-d-tracker.
S260 Mariana Mazzucato and Rainer Kattel

The lockdown from COVID-19 has shown how deep existing digital divides are by
revealing which jobs and services can be provided or performed remotely and which
cannot, and it has also created new ones. Education has taken centre stage with the
demand for students to continue to be schooled through digital means. However, while
education can be delivered remotely—whether through online pre-recorded videos or

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live sessions—not all students have the same means, quality, or availability of access to
online services and a proper work environment. While education is far from the only
sector with access issues, it reflects the broader problem of global digital inequality in
terms of access and the restriction of fundamental opportunities to participate in so-
ciety under COVID-19.

III.  Dynamic capabilities of the public sector: agility and

resilience are key
During pandemics, governments must respond to emergencies by organizing rapid re-
sponses and mobilizing resources. Effective governance requires capacities and capabil-
ities for both agility and resilience (Drechsler and Kattel, 2020). Unfortunately, these
are not only missing in reality, they are also missing in the theory about government.
Public-sector capacity is typically defined as the set of skills, capabilities and re-
sources necessary to perform policy functions, from the provision of public services to
policy design and implementation (Wu et al., 2018).4 The most comprehensive literature
review of dynamic capabilities in the public sector to date (Piening, 2013) shows that
our existing frameworks focus on exogenous sources of dynamism. Similarly, entre-
preneurial approach to strategy and leadership in public-sector organizations tends to
focus on the importance of individual leaders and teams in driving strategic initiatives
(Ongaro and Ferlie, 2020). Thus, the capacities associated with the public sector tend to
be narrow and focus on stability (i.e. continuity, transparency, predictability of services,
and interventions).
Yet, while there is a rich literature about firm-level dynamic capabilities (Teece and
Pisano, 1994), insufficient attention has been paid to where the equivalent level of pub-
lic-sector capacity comes from and its dynamic evolution over time. Instead, over the
years the idea that the public sector should at best fix market failures and seek the same
level of efficiency in the private sector has taken hold (Buchanan, 2003). An approach
wedded to static efficiency and ‘fixing’ does not justify the investment in the internal
capabilities to co-create value (Mazzucato, 2018a).
This type of thinking has mainly been influenced by public choice theory and the
development of new public management (NPM), or new public administration, in US
business schools. NPM, which gathered momentum in the 1980s, basically argued that
governments should adopt private-sector strategies to maximize value in the public
sector (Hood, 1991). Several strategies were high on the NPM list. One was introducing
some equivalent of the profit motive into the public sector to improve performance—
for example, efficiency targets. An example of this kind of thinking was UK legislation
in 1990 to create an internal market in the National Health Service (NHS), under which

4  See also Karo and Kattel (2018); Kattel and Mazzucato (2018).
COVID-19 and public-sector capacity S261

the state became a purchaser instead of a provider of health services and external sup-
pliers could bid against NHS suppliers to provide certain services as part of the NHS.
Another strategy was contracting out, franchising, or privatizing government ser-
vices. The purpose here was to address the principal–agent problem: citizens (the prin-
cipals) could not hold public-sector employees (their agents) accountable in the way

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shareholders could hold a corporation’s managers accountable—in theory at least.
Citizens’ main sanction in a democratic society was voting, which might have only an
indirect effect on bureaucrats (and did not apply in autocratic societies) and was a poor
substitute for the discipline of the profit motive by which shareholders could judge
corporate managers. To the extent that accountability and the discipline of the profit
motive were held to be weaker in the public sector than in the private sector, the public
sector was likely to be less efficient. And there was the idea that government should
limit itself to technical efforts to counter ‘market failure’, such as building codes, which
would minimize government failure and enhance public-sector efficiency by introduc-
ing market discipline (Lane, 2002).
NPM policies were widely implemented in advanced economies in the 1980s and
1990s, in particular in the UK, New Zealand, and Australia (Hood, 1995). By the
mid-1990s, however, concerns were growing about its effectiveness (Drechsler, 2005).
Yet, as Lapuente and Van de Walle have recently argued, ‘Administrations all over
the globe have taken measures in the three main themes of NPM: competition be-
tween public and private providers, incentives to public employees and the disaggre-
gation of public organisations’ (Lapuente and Van de Walle, 2020). Deregulation,
shareholder value, and new government practices, such as setting up arm’s-length
agencies and outsourcing, did not always work as well as theory said they should.
Since then, while there have been attempts at going beyond NPM (Moore, 2013), a
proper framework has not been developed that can understand how the state is re-
sponsible not only for fixing markets but also for shaping and co-creating them—and
the capabilities needed to do that (Mazzucato et al., 2020). We argue key capacities
and respective dynamic capabilities must be built and nurtured within public-sector
organizations (see also Meijer, 2019).

(i)  Capacity to adapt and learn

While the COVID-19 responses have shown how vital both long-term and short-term
capacities and capabilities are in the public sector, the last half-century has been charac-
terized by a retrenchment of governments’ ability to adapt and learn as both functions
have been increasingly outsourced. Outsourcing in itself is not a problem as long as
governments remain capable, if foresight and risk-preparedness capabilities are main-
tained and if the underlying ‘partnerships’ with the private sector are truly designed in
the public interest. The irony is that the extensive outsourcing has even damaged gov-
ernments’ abilities to structure contracts with well-formulated terms of reference, as the
Ventilator Challenge debacle in the UK has shown.
Yet, NPM has failed to deliver on its promise to cut costs. For instance, Hood and
Dixon (2015) have found that despite three decades of outsourcing and much-hyped
NPM initiatives, civil service staff costs were about the same in real terms in 2012–13 as
they had been over 30 years earlier.
S262 Mariana Mazzucato and Rainer Kattel

Furthermore, all countries have not been equally subsumed by NPM reforms. As
Pollitt and Bouckaert argued almost a decade ago, some leading OECD countries have
attempted to transcend NPM reforms by supplementing them via returning to key
Weberian values such as rule by law, expertise, and merit (Pollitt and Bouckaert, 2011;
see also Drechsler and Kattel, 2009). Prior to the COVID-19 crisis, leading public ad-

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ministrations among developed economies were in essence neo-Weberian (e.g. countries
such as New Zealand and Singapore), while many others suffered from the negative
effects of NPM reforms. The COVID-19 responses show that countries tend to revert
to their dominant existing routines regarding underlying capacities: for instance, while
the UK seeks to largely outsource the response to the pandemic, Singapore or Germany
rely strongly on public actors.

(ii)  Capacity to align public services and citizen needs

Public services have been a frequent target of NPM reforms, in particular health care,
since it is often a large, cost-driving branch of the public sector with certain similarities
to private services, e.g. production of individual services and a certain scope for stand-
ardization and quantitative monitoring of production. Yet, there is no evidence that
such reforms have led to improved outcomes (Simonet, 2011). Rather, they have led to
a more transactional view of public services that focuses on the ease and efficiency of
delivery rather than on satisfying substantive needs or developing human capabilities
(Cottam, 2018).
The UK has been a forerunner in implementing NPM in the public sector. The UK
government has become increasingly reliant on external consultancy for managing the
state, particularly since 2002 (Weiss, 2019). The NHS has trebled spending on manage-
ment consultants during 2016–19, despite pledges by successive health secretaries to
curb such expenditures (Oliver, 2019). The COVID-19 crisis has been used as an occa-
sion to further outsource core public health tasks to private firms, increasing the likeli-
hood that the public sector will learn only limited lessons and become more dependent
on the private sector for future emergencies (Garside and Neate, 2020).

(iii)  Capacity to govern resilient production systems

It is much less discussed that innovation policy as it is practised today and NPM re-
forms burst on to the (Western) policy stage at the same time in the early 1980s
(Rothwell and Zegveld, 1981; Sweeney, 1985). This was, and is, an uneasy marriage:
many of the criticisms of innovation policy, particularly its ineffectiveness in delivering
greener and more inclusive growth, have to do with the NPM practices underlying it
(Karo and Kattel, 2014). This is due to the overall emphasis of NPM reforms on finan-
cial cost-efficiency at the expense of, paradoxically, both long-term vision-setting (ex-
tending beyond normal/accepted project and performance management frameworks)
and the ability to take onboard the uncertainties and risks of innovation (that cannot
be ex ante codified into project and performance contracts).
Since the early 1990s, innovation policy focused on short-term efficiencies and fixing
market failures (static inefficiencies) has been complemented by increased trade liber-
alizations. Together, these factors have played a key role in the increased vulnerability
COVID-19 and public-sector capacity S263

of production value and supply chains in many countries (Andreoni et al., 2019). Since
the early 2000s, new global rules have become even more stringent and the combined
use of intellectual property, dispute regulations and non-tariff barriers have limited the
policy space—and hence capacities—of developing and emerging economies (Wade,
2003; Andreoni et al., 2019).

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(iv)  Capacity to govern data and digital platforms
NPM reforms led many governments to outsource their IT functions, which has had a
harmful effect on governments’ digital capacities and capabilities. Comparing a range
of countries, Dunleavy et  al. (2006) found that countries with the most enthusiastic
uptake of NPM had fared particularly poorly in exploiting digitalization, with the UK
emerging as ‘a world leader in ineffective IT schemes for government’. By hollowing
out public-sector capabilities and bringing in new contractually based risks and bar-
riers to cross-government policy-making, NPM has drastically impaired government
IT modernization.
Today governments are creating platforms to identify citizens, collect taxes, and pro-
vide public services. Owing to concerns in the early days of the Internet about official
misuse of data, much of the current data architecture was built by private companies.
But government platforms now have enormous potential to improve the efficiency
of the public sector and to democratize the platform economy (Cordella and Paletti,
2019). To realize the potential of government platforms, we will need to rethink the
governance of data, develop new institutions, and, given the dynamics of the platform
economy, experiment with alternative forms of ownership. To take just one of many
examples, the data that one generates when using Google Maps, Uber, or Citymapper—
or any other platform that relies on taxpayer-funded technologies—could be deployed
to improve public transportation, traffic patterns, and other services, rather than simply
monetized for private profits.

IV.  Capacity-building for the post-COVID-19 world

In order to (re-)build public-sector capacities for the post-COVID-19 world, we argue
that we need to theorize public sector from a new perspective: government as actively
shaping markets rather than simply fixing failures. Such fundamental frameworks
matter as they constitute the policy reality within which politicians and civil servants
act. Current theoretical frameworks for public-sector capacity are derived from neo-
classical economic theory, in particular microeconomic theory and welfare economics,
emphasizing how individuals find optimal solutions via markets. Governments have a
role to play if, and only if, markets are proven not to deliver optimal results and need
‘fixing’. In practice, such frameworks take the form of specific policy analytical tools,
such as static ex ante cost–benefit analysis, which weigh up monetized benefits and costs
(Kattel et al., 2018). Costs (including the costs of potential government failure) are usu-
ally defined by their opportunity cost; that is, the value that reflects the best alternative
use a good or service could be put to (including a do-nothing/business-as-usual option),
S264 Mariana Mazzucato and Rainer Kattel

with all else (including all other prices) assumed equal, and with market prices usually
the starting point for the analysis (see, for example, HM Treasury (2018, p. 6)).
Such policy frameworks are mostly aimed at preventing costly government failures;
by their very nature, they cannot tell us very much at all about proactive market cre-
ating and shaping; nor how and what kind of capacities governments should build. This

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limitation is of crucial importance. Public policies aimed at accelerating innovation and
changing its directionality (i.e. towards more sustainable and inclusive growth) create,
by definition, new technologies and radically change the prices, availability, and exist-
ence of goods and services. Their central purpose is to transform underlying relation-
ships, a wide range of prices and the broader environment (OECD, 2015). By always
comparing the policy intervention with the status quo and emphasizing short-term
risks, existing policy frameworks and approaches encourage decision-makers to prefer
small-scale, marginal interventions and the development of respective capacities.
Take a green-directed transition as an example: policies must go beyond independent
initiatives and discrete approaches, and be characterized by a new lens for economy-
wide growth. Markets will not find a green direction on their own. There is not yet
a ready-made route that will make multi-directional, experimental, green innovation
profitable. Only when there is a stable and consistent direction for investment will regu-
lation and innovation converge along a green trajectory. The transition must be under-
pinned by long-term, patient finance, which is willing to take risks, and able to mobilize
and crowd in other investors (Mazzucato and Semieniuk, 2018). To avoid innovation
continuing its route of locking to a high-carbon path, and to actively turn our backs on
stagnant innovation landscapes, policy must ensure that investments into low-carbon
innovation are rewarded. This can be done by using the full array of government in-
struments—from procurement policy to prize schemes—to ‘pick the willing’: those or-
ganizations willing to take on the difficult investment required for a green transition.
Governments cannot micromanage this process, as that would stifle innovation, but
they can set a clear direction, make the initial high-risk bold investments which crowd
in private actors later on, and reward those who are willing to invest and innovate.
Another example is digital technologies. They provide great opportunities to solve
grand challenges if governed with a strong sense of public purpose (Perez, 2019). The
key risk to this potential offered by artificial intelligence and other technologies lies not
in the pace of their development, but in how and for what purpose they are designed
and deployed (Mazzucato, 2019). COVID-19 has brought to the fore long-held con-
cerns about the digital economy: the monopoly power of big tech, the lack of privacy,
poor government capabilities, and the digital divide between those with and without ac-
cess. There is a vast potential for governments to change course and steer digitalization
towards deliberate ends, and away from the current motives of targeted advertisement
and behaviour modification based on monetizing personal information. On a funda-
mental level, the digitalization of society should be undergirded by revising our social
contracts for the digital era with new, adequate rights and new governance structures to
uphold them (Bria, 2020).
Governments need to counteract the hollowing out of public organizations’ ability to
steer and analyse their own domain. The lack of investment in in-house public capabil-
ities has resulted in the loss of institutional memory and an increased dependence on
consulting companies. Crucially, talented people are motivated not just by high salaries,
but also by the prospect of being able to apply their skills for the advancement of the
COVID-19 and public-sector capacity S265

common good through challenging analytical work. Outsourcing has voided many gov-
ernment agencies of such challenging and motivating tasks. Furthermore, incentives for
risk-taking and experimentalism can be put in place in order to foster an environment
where failure and learning from failure are not only permissible, but encouraged. Agile
bureaucracies require highly motivated, high-capacity (career) civil servants (Drechsler

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and Kattel, 2020).
Perhaps somewhat counterintuitively, investment in long-term skills and capabilities
within public organizations provides sources of agility and responsiveness during deep
crises and their aftermath. It is no coincidence that another pandemic response success
story comes from New Zealand, a country that in the 1980s had fully embraced the new
public management outsourcing mantra, only to change course and begin a period of
insourcing capacity back into government (Warner, 2008). Perhaps not surprisingly, in
early June 2020 it also became the first country in the world to be free of COVID-19.

V. Concluding remarks
The contrasting trajectories of the COVID-19 response in the US and UK, and coun-
tries such as Germany, New Zealand, Vietnam, or South Korea, point to important
lessons for the future. Far from retrenching to the role of being at best a market fixer
and at worst an outsourcer, governments should invest in building their muscle in crit-
ical areas such as capacity to adapt and learn; capacity to align public services and
citizen needs; capacity to govern resilient production systems; and capacity to govern
data and digital platforms. A broad set of capabilities can be quickly activated in times
of ‘forced experimentation’ induced by crises and turned into intentional experimen-
tation for long-term recovery purposes through a challenge-driven approach—that is,
public–private partnerships aimed at solving key societal problems, from those related
to health to those on the climate or the digital divide (Mazzucato, 2018b). A challenge-
driven approach, however, needs new policy frameworks, capacities, and capabilities,
focusing on market-shaping leadership, skills, tools, and methods.
A challenge- or mission-oriented approach, driven by strong public capacity aimed
at solving problems, is not synonymous with top-down decision-making, but with the
dynamism necessary to create more effective interfaces with innovators across the whole
of society, rethinking intellectual property regimes and R&D investments to catalyse
the distributed intelligence of the private sector and individual citizens.
At the international level, a challenge- or mission-oriented approach could pave the
way for better coordinating mechanisms that accelerate mutual learning and transfer
of capabilities. Such a frame could also galvanize a greater level of coordination and
collaboration among governments, and trigger new investments in effective mechan-
isms for multinational governance. The end result of embracing this approach will be
the progressive broadening of the options available to policy-makers—an essential pre-
requisite for resilience in times of uncertainty. In times of big crises (from financial
to climate and health), lack of choices drastically reduces the public sector’s room to
manoeuvre.
In sum, decades of a misplaced focus on privatization, outsourcing, and static effi-
ciency have left many governments with reduced options and capacities in the face of
S266 Mariana Mazzucato and Rainer Kattel

the crisis. Governments require choices, and the capacity to manoeuvre flexibly and
with competence. Lessons from successful responses to COVID-19 show that building
back better, and preparing for future crises, means investing in core public-sector cap-
acities and capabilities, including the ability to interact with other value creators in so-
ciety—designing contracts to deliver in the public interest. As the saying goes, a crisis

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should not go to waste: let’s hope it brings on a new understanding of how to develop
the dynamic capabilities of the public sector—and why it matters.

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