NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, October 14, 2015

Lawrence H. Summers, the Charles W. Eliot university professor at Harvard, is a former treasury secretary and director of the National Economic Council in the White House. He is writing occasional posts, to be featured on Wonkblog, about issues of national and international economics and policymaking.

During the annual IMF-World Bank meetings last week in Lima, Peru, I was part of a discussion on a proposed pandemic emergency financing facility. The subject brought together two things I am very interested in. First, the Lancet Commission on Global Health 2035, which I recently chaired, argues that underinvestment in health-related global public goods is a major problem — and that in particular the world is badly underinvesting in epidemic and pandemic protection relative to the risks involved. Second, after all that has gone wrong in recent years, it seems incumbent on all of us involved in finance to think about how financial innovations can address the real problems of real people.

The idea under discussion is a potentially powerful one: some public entity would issue bonds to investors which would be deemed to default in the event of an epidemic, assuring the availability of resources to respond before the epidemic takes on pandemic proportions. The facility would complement the new World Health Organization contingency fund as well as its existing financing mechanisms. Such bonds are routinely issued to mobilize resources that will trigger in the event of hurricanes or earthquakes. So called catastrophe bonds or cat-bonds offer higher yields to investors in return for taking risks that are not correlated with the normal risks of business cycle downturns.

This has the potential to be a win-win-win. The World Bank is using financial innovation to mitigate a major threat to the world, and especially the world's poor. The vast resources of the global capital market are being tapped to provide vitally important insurance – and bring much-needed financial discipline to pandemic preparedness and response. And investors who, at this time of zero rates, are desperate for return are getting a new vehicle in which to invest. Little wonder that the session brought together health advocates, national aid agencies and leading financial firms, all of whom were very positive.