The October 10 issue of The Economist includes a special report on the impact of covid-19 on the global economy, with eight article on the subject. “The pandemic has caused the world’s economies to diverge,” notes the issue’s overview article. “But its long-term impact will be even more far-reaching… huge gaps between the performance of countries are opening up - which could yet recast the world’s economic order.”
According to the OECD, whereas China’s economy is expected to be 10% larger by the end of 2021 than it was in pre-pandemic 2019, the US economy will be essentially the same size, while the economies of the Euro area, the UK, Japan and South Korea will see a decline by the end of 2021 compared to their pre-pandemic levels.
“The covid-19 pandemic will accelerate change in the world economy,” says The Economist. It’s becoming increasingly clear that “the pandemic will lead to immense structural changes in the global economy: less globalized, more digitized, and less equal.” Supply chains will bring production closer to home to cut risks. Office workers will continue to work from their homes for at least part of the week. Lower paid urban service workers will face unemployment and need to find new jobs. The gulf between Wall Street and Main Street will widen. “The challenge for democratic governments will be to adapt to all these changes while maintaining popular consent for their policies and for free markets.”
Let me discuss the three key areas where The Economist expects long-lasting changes: globalization, digitization and inequality.
Less Globalization
“The pandemic will not end globalisation, but it will reshape it,” says the special report in one of its articles. “As the pandemic spread, location ceased to matter much. There was no escaping the disease: the world economy saw its deepest, most synchronised collapse on record. The supply-chain panic has left a lasting impression. For business, it is further evidence of the risks of distant disruption. For governments it offers more reasons to turn inward. The result is to accelerate changes to globalisation that were already in train.”
The 1990s and 2000s were truly a golden age of globalization. Thomas Friedman’s The World is Flat became an international best-seller in 2005 by nicely explaining the key forces that were flattening the world, - from the explosive growth of the Internet to the rise of global supply chains.
But, globalization had already started to slow down in the 2010s for a number of reasons, such as the increasing competition faced by global firms from local rivals. Then came the trade wars and tariffs of the past three years, with the average tariff rate on American imports rising to 3.4%, the highest in 40 years.
Covid-19 has had a much bigger impact than previous supply chain disruptions like the 2003 outbreak of SARS in Asia and the 2011 Fukushima nuclear disaster. Those events were much more localized, lasted a relatively short time, and mostly impacted supply, not demand, whereas covid-19 has been affecting consumer demand as well as supply chains, and is likely to last quite a bit longer.
“The history of supply chains is that they are not robust but they are resilient, because companies are quick to find workarounds… Rather than a wholesale break, covid-19 is likely to cause an acceleration of forces already in motion. Firms will trade off a bit of efficiency for more robustness, realising that in the long run the robotisation of manufacturing may lead to more local production anyway. Governments will shorten and diversify supply chains for medical equipment.”
Increased Digitization
As Rahm Emanuel famously said in a 2008 interview: “You never want a serious crisis to go to waste.” In that spirit, how should companies take advantage of the Covid crisis to accelerate their journey toward what most everyone agrees will be an increasingly digital future?
Digital infrastructures have kept nations and economies going during the pandemic, - the biggest shock the world has experienced since WWII. Covid-19 has now made the case for accelerating the rate and pace of a company’s digital transformation. Enterprises will likely embrace and scale the changes they were forced to make to help them cope with the crisis.
For years, companies found all kinds of reasons not to embrace virtual meetings, work from home, telemedicine, and other online applications. But, not only have these online applications worked remarkably well, but they offer a number of important benefits, - like not waiting for a doctor’s appointment in a room full of sick people, and not having to travel for hours to participate in a 45 minute meeting.
The pandemic has created a very interesting experiment, notes The Economist. “In a matter of weeks professional workers abandoned their offices en masse in favour of working from home. Meetings were replaced with Zoom calls, and commutes with longer hours at the desk… That firms and workers have suddenly discovered the benefits of remote work seems counterintuitive. The technology allowing it is not new.”
Remote work has been around for decades, but took off in the mid-late 1990s with the explosive growth of the Internet. Some even argued that the Internet would lead to the decline of cities, because technology was making location ever less relevant to our business and personal life. But, instead of declining, economic activity has been concentrated in the superstar cities that have attracted the most talented, ambitious knowledge workers, whose agglomeration then led to increased productivity, innovation, entertainment and educational opportunities, thus attracting even more knowledge workers.
The pandemic has spurred firms to invest in the technologies and applications needed to make remote collaboration possible. “American firms forecast that the proportion of days worked at home will jump from 5% before covid-19 to about 20%, a number that chimes with the average desire of workers. It seems likely that many firms will adopt a model in which large numbers split their working hours between solitary work at home and collaboration in the office.”
“That will hardly kill off superstar cities or end agglomeration effects. Companies need offices to integrate recruits, monitor performance, build relationships and spread knowledge. Many people, especially the young, still want to cluster together and party,… And people still need to meet in person. Nonetheless, the shift will lead to significant structural changes.”
Rising Inequality
“Could the pandemic leave markets more concentrated?,” asks the special report in another one of its articles. “The growth of remote working is the latest iteration of a decades-long technology shock… It has contributed to two features of the world economy: the dominance of superstar firms that have amassed valuable know-how, data and intellectual property which is hard to replicate; and an associated decline in the share of gdp accruing to workers in wages (a trend that is most evident in America).”
Covid-19 is likely to increase market concentration. The greater dependence on technology will generally benefit larger companies who can better afford to make the necessary investments in automation, skills, and workforce training. And, the pandemic is disproportionately hurting small and mid-size firms, many of which don’t have the financial capabilities needed to survive. The ensuing wave of small and mid-size business closures will accelerate the rising dominance of large firms across numerous industries.
This reallocation of economic activity to large firms will reduce the labor share of national income, and lead to greater income concentration, and rising inequality. Large firms tend to pay a smaller share of their earnings in wages and salaries, while paying a larger share to owners and investors.
“Every few decades in the 20th century the relationship between the state and the individual was reforged in the fire of crisis,” said the final article in The Economist’s special report. The 1930 depression led to the New Deal; World War II was followed by the expansion of social services for citizens and employees; and in the 1980s, Ronald Reagan and Margaret Thatcher reversed these post-war trends with their neoliberal philosophy of market supremacy and small government.
Before Covid-19, the big economic shocks of the 21st century, - technological advances, the outsourcing of manufacturing jobs, and the 2008 financial crisis, - led to a wave of angry politics. “In many countries older voters are nostalgic for an economy that, whatever governments do, is never coming back. Young people are frustrated by declining social mobility and high asset prices, and fear the effects of climate change. Though there is fierce debate about how much they have changed over time, almost everyone laments inequalities of income, wealth or opportunity.”
“Rather than trying to restore yesterday’s economy, governments must adapt to change, ensure it does not expose people to outsized losses, and seek to share the fruits more widely. A global digital labour market, spurred by firms’ investments in technology, might unleash a new wave of innovation… 2020 could be the start of an era in which populism wobbles while economic policymaking escapes from a rut.”
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