Public banks must evolve from lenders to outcome-oriented partners to fuel innovation: Top Economist

• Prof. Mazzucato championed a "mission-oriented" approach, urging a shift away from the traditional view of state's role as simply fixing "market failures”
• The problem, she noted, is that this funding is not actually focused on helping those sectors transform towards mission accomplished

By Nishel Fernando 

Professor Mariana Mazzucato

Public banks must transform from mere financiers into strategic, outcome-oriented partners to drive the mission-led innovation needed for economic transformation, according to a top economist. 

Professor Mariana Mazzucato, the Founding Director of the Institute for Innovation and Public Purpose at University College London, argued that for nations to solve critical challenges such as climate change and social inequality, the quality and structure of finance are more important than the sheer supply.

Prof. Mazzucato championed a "mission-oriented" approach, urging a shift away from the traditional view of the State's role as simply fixing "market failures." Instead, she advocated for a proactive government that sets bold, ambitious goals, or "moonshots" and then catalyses innovation across public and private sectors to achieve them.

In this framework, public development banks play a pivotal role. 

"There's huge amounts of money in our national development banks, but when they're not outcome-oriented, they end up just providing finance to different sectors," she explained, while delivering the keynote address at the Asian Development Bank’s (ADB) Serendipity Knowledge event held in Colombo yesterday.

The problem, she noted, is that this funding is not actually focused on helping those sectors transform towards mission accomplished.

The key, according to Mazzucato, lies in providing "patient, long-term finance" that is conditional on achieving specific, ambitious targets. This contrasts with venture capital, which she described as "impatient, say exit-driven finance," focused on a quick return rather than long-term transformation.

Citing an example from Germany, she detailed how the public bank KFW structured its loans to the steel industry. 

"The loan that was provided to the steel sector in Germany was conditional that the sector actually lowers the material content of production," Mazzucato stated. 

"How they did it was up to them. Again, this is not about micromanaging innovation. It was a clear direction."

This approach, she said, led to the creation of one of the greenest steel sectors in the world. This model is about "picking the willing, not picking winners," she asserted. It involves identifying and funding companies, regardless of size, that are committed to innovating in line with national missions.

Prof. Mazzucato cautioned that for such partnerships to succeed, they must be built on a new social contract based on mutual benefit and shared risk. This "quid pro quo" ensures that when public funds de-risk major private sector innovation, the rewards are also shared with the public.

This requires building strong, dynamic capabilities within public institutions. She warned against the "consultification of government," referencing a former NASA procurement head who cautioned that over-reliance on outsourcing erodes the state's ability to even write the terms of reference for complex projects, let alone partner effectively.