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Searching for silver linings

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Jock Finlayson and Ken Peacock on COVID-19, 'creative destruction,' and what the post-pandemic world may look like.

Amid the human carnage and economic pain caused by the COVID-19 calamity, it is tempting to search for silver linings. One that is attracting interest among some economists is the prospect of a productivity resurgence once the pandemic is firmly in the rear-view mirror.

At first glance this may seem unlikely. Among the casualties of the economic slump of 2020 and the ongoing challenges posed by rising global infection rates has been a drop in business investment and a related slowdown in capital formation. This trend will dampen upside growth potential as the recovery from COVID-19 unfolds.

Because investment in many categories of capital has fallen in 2020, two and three years from now the economy will be operating with a smaller and less up to date “capital stock” than if COVID-19 had never happened. Productivity growth is essential to delivering sustainable increases in real incomes and living standards over time. Reduced investment and slower capital formation due to the pandemic will serve as a headwind to these gains.

But adopting a longer-term view may suggest a more hopeful scenario.

History furnishes numerous examples of job-destroying economic shocks that — eventually – help to lay the foundations for significant advances in productivity and business innovation. The latter years of the long Depression of the 1930s saw an impressive surge in economy-wide productivity growth in both the United States and Canada.  What the great economist Joseph Schumpeter called “creative destruction” plays an important role in this process by fostering the rise of new firms and reallocating resources from declining to expanding industries. Creative destruction tends to be most visible in the aftermath of extended periods of economic dislocation.

Certainly, a great deal of change is afoot in today’s economic environment. As the pandemic rages, the pace of digitization has accelerated as workers, consumers, and organizations have quickly turned to digital platforms. New and improved digital communications tools and other technologies are allowing firms to serve customers in different ways and enabling many employees to remain productive, connected and engaged without the need to congregate at central work sites. By the end of 2020 hundreds of millions of people were toiling remotely. In most cases, they and their employers have learned to adapt and even thrive in an increasingly digital world.

McKinsey estimates that once COVID-19 is under control, 15-20 per cent of employees will continue to work remotely at least half of the time, a dramatically higher share than in pre-pandemic times. This should generate sizable cost savings for businesses that want to scale back their real estate footprint. Savings on physical space can then be redirected toward more useful productivity-enhancing investments.  The spread of remote work will also make it easier for companies to access dispersed pools of talent – which should provide a further productivity boost.

Beyond remote work, the pandemic also looks to be speeding the development and take-up of new technologies and innovations more broadly.  This can be seen in the progress being made in fields like AI, robotics, data analytics, new materials, 3d/4d printing, genomics, biotechnology, and low-carbon energy.  In addition, the COVID-19 crisis has led to the production of multiple targeted vaccines in record time. Advances in all of these areas hold the promise of faster productivity growth in the coming decade and beyond.

There are forces that could militate against a productivity revival, however. One is deglobalization – a mix of mounting trade restrictions, slower growth in international commerce, thicker borders, and less travel. Some re-calibration of far-flung supply chains makes sense given the need to lessen reliance on China and to respond to the difficulties many countries encountered in securing key inputs as COVID-19 took hold. But a widespread retreat from participation in international markets would not be positive for productivity.

Another development that could undermine a hoped-for productivity rebound is bigger and more intrusive government. Governments have had a central role in battling COVID-19, and in the post-pandemic era they may assume a larger place in economic and social affairs. Huge public sector deficits incurred in 2020 suggest that governments will be hungry for new sources of revenue once the virus fades.

Going forward, the risk is that policymakers will lose sight of the necessity of creating the right conditions for businesses, entrepreneurs and innovators to invest in assets and activities that are critical to building a high-productivity economy. We judge this risk to be significant in the Canadian context, especially given the political and policy orientation of the current federal government.

Jock Finlayson is the Business Council of British Columbia’s Executive Vice President and Chief Policy Officer; Ken Peacock is the Council’s Chief Economist.

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