Economic history and COVID-19

It is without doubt that as the Great Lockdown Exit begins the next decade will certainly look different than what we were expecting to see six months ago. Many changes will simply be a precipitous outcome derived from bringing forward innovation, research, and development but what has economic history taught us and can we learn from those lessons.

The Great Depression was exacerbated by monetary and fiscal tightening in various countries around the world. Now it is generally accepted that quantitative easing on a large scale plus fiscal stimulus is the route to follow and vastly different. However, there is a real risk a downturn can exacerbate inequalities already present.

How governments exit the pandemic will be crucial. Where democracy prevails, ordinary people as well as the elite are used to democracy – when a crisis hits, such countries do not call for a strong man or anti-democratic solutions to solve problems. The short-term restriction of freedoms insisted by the democratic governments in the COVID-19 pandemic has given rise to the increased assertion of authority by political executives, and an assertion that has resulted in an erosion and weakening of democratic norms and practices in others. It has reinforced and strengthened the reliance on authoritarian politics, President Bolsonaro of Brazil brought this alive with his declaration that now, “I am the constitution!”

A spectre on the horizon is the creeping hand of digital authoritarianism. This was always on the medium/long-term agenda for the world, but the COVID-19 pandemic has thrown the privacy doors wide open. We have now seen countries in effect spying on their population to mandate quarantine laws and in effect restraining residents in their homes to stop the spread of the virus. Artificial intelligence is being used to police communities but what is important to note is that when such technologies are used in policing, they can unfairly disadvantage people based on attributes like race or gender.

A fearsome future sees these unhindered intrusions used as social scoring systems, such as one already implemented in China. This system literally tracks people and scores them as they pursue their daily life, medical treatment, car parking tickets, financial standing, and so on. A low score might lead to restrictions for citizens to travel, access credit, and more.

A longer-term and more hidden knock-on effect from this is that the school downtimes could exacerbate existing achievement gaps. Our universities and schools have worked hard with parents to keep learning current but these efforts are not likely to provide the same level of quality of education that is delivered in the classroom. Even more troubling is the persistent achievement disparities across income levels and between white students and students of other ethnic heritages. The impact of the prolonged school closures could cause disproportionate learning losses for students and compound existing gaps but also lead to a greater drop out percentage. Consequently, this leads to long-term effects on the children and long-term economic well-being on the economy.

This division can also be seen in the gulf between executives and the rank and file. Top managers are easily adapting to working from home and to flexible, ill-defined processes and ways of working, and they see it as being highly effective and, also, the wave of the future. Many people ‘in the trenches’ think it is the worst thing to happen to them (even those that are used to working remotely). Remote working is raising the divide between elites and the common man and woman. There is a real risk of serious tension in the social fabric of organisations and in local and national communities.

The pandemic will create change whether large or small and in order to combat this, resilience combined with agility must be the new focus of business leaders as we all emerge from this crisis. Agility will doubtless revolve around further robotic automation and artificial intelligence and technologies that reduce manual intervention, reducing the reliance on humans to work face-to-face. What we have seen is that government interventions around the world has accelerated this trend. The ‘Exit’ from this crisis will also cull a lot of outdated practices but many more than we might think will continue.

Returning to the Great Depression, whilst then governments argued swiftly they should balance the books and lower their debt levels, leading economists are now arguing for much more aggressive public spending. Even Mario Draghi, former President of the European Central Bank, who previously has argued too much debt leads to lower growth now supports “warlike spending”. This is similar to our very own Office for Budget Responsibility, normally conservative on fiscal spending, and is now advising our Government to spend “what you need to spend to deal with this”.

Finally, behavioural changes will lead to greater changes. An increase in working from home will reduce travel and could impact oil demand and a move to near-shoring could significantly change supply chains. Innovation has always been essential to solving big problems. The world is looking not just for new things but also for new ways of doing things; especially on the people front, where we need new behaviours (long-term rather than short-term), capabilities, and work ethics.

By Professor Mark Jarvis, former Group CFO at EY and Visiting Professor, Department of Accounting, Finance and Banking, Manchester Metropolitan University.