Business started to adapt to new processes and technologies.
Against the backdrop of a worsening coronavirus pandemic, the prospects for productivity recovery may seem bleak. After all, the past decade has had many “technological fatalisms”, but even in times of crisis and pessimism, people have found opportunities for further development. Perhaps the Coronavirus pandemic will also cause a productivity spike in many areas of human life, The Economist writes.
However, some research into past pandemics and an analysis of their economic impact suggest that COVID-19 is likely to exacerbate the current productivity picture. According to the World Bank, countries affected by pandemic outbreaks in the 21st century (excluding COVID) experienced a 9% drop in productivity after three years compared to other countries.
And yet, very often “strange things” happened. After the hard 1930s, there was the highest economic recovery in history. A generation ago, economists almost gave up hope of ever matching post-war performance, but over time there was a performance explosion accompanied by computers.
That’s why today there are hints again that the economic and social traumas of the first two decades of this century may soon give way to a new period of economic dynamism.
Productivity is the magic elixir of economic growth. Increasing the amount of labor or capital can increase output, but the effect of such contributions is diminished unless effective ways are found to use these resources. Productivity growth is the main source of long-term income growth.
Increasing productivity is often accompanied by improvements in education, investment and innovation. An increase in overall factor productivity – or the efficiency with which an economy uses its production resources – can trigger the discovery of new ways of producing goods and services.
Globally, productivity growth slowed dramatically in the 1970s after extremely high rates in the postwar decades.
Finding the cause of the slowdown is not an easy process. The World Bank believes that a slowdown in trade growth and fewer opportunities to adopt and adapt new technologies in rich countries may have triggered lower productivity growth in developing countries.
In all economies, “sluggish investment” in the aftermath of the global financial crisis seems to be the cause of all the problems, as does aging and shrinking labor. However, while these “side winds” are certainly important, the main question is why seemingly powerful new technologies – such as advanced robotics, cloud storage and artificial intelligence – have not triggered large investments and high levels of productivity growth.
Three hypotheses can explain this. The first hypothesis insists that with the enthusiasm with which new technologies are changing the world, recent innovations will not have a strong transformational effect. Artificial intelligence may not have transformed the world economy at such a rapid pace as expected five or ten years ago, but it has become a significant achievement of humanity.
Despite the fact that the Internet’s ability to support the economy has not surprised anyone for a long time, cloud storage and videoconferencing have confirmed their economic value over the past year. Obviously, new technologies can do more than what was required of them.
The second theory explaining slow productivity growth: chronically weak demand. From this perspective, it appears that the failure of governments to direct sufficient spending constrains investment and growth.
It takes more public investment to unlock the economy’s potential. Chronically low interest rates and inflation, sluggish private investment and fuzzy wage growth suggest that demand has been insufficient for much of the past two decades.
The third hypothesis gives a high argument for optimism: it takes time to determine how to use powerful new technologies effectively. Artificial Intelligence is an example of what economists call “general-purpose technology”, such as electricity, which has the potential to increase productivity in many industries. But the best use of such technologies takes time and experimentation.
The role of investment in unlocking the potential of new technologies may also mean that the pandemic, despite all the economic damage, will cause productivity gains. The closure of offices has forced firms to invest in digital and automation, or better utilize existing resources. In 2020, leaders around the world invested in the “organizational renovations” needed to make new technologies work effectively. Not all these efforts will result in increased productivity. But when COVID-19 pulls back, companies that have reorganized are likely to continue to thrive.
Usually it is crisis situations that become the biggest catalysts of change. It is already possible to assume that some transformations are likely to take place, because the pandemic has accelerated the pace of technology implementation. A survey of companies around the world, conducted this year by the World Economic Forum, showed that more than 80% of employers intend to accelerate plans to digitize work processes and provide more opportunities for remote work, while 50% plan to accelerate the automation of production tasks. Such changes will reduce the workforce: the competition that may arise in the labor market will also lead to increased productivity.
In addition, it is likely that moving large amounts of work into the “digital space” may have an effect that will increase productivity at the level of national economies or around the world.
However, none of this can be taken for granted. Using most new private sector investment in technology and know-how, national governments will require a rapid recovery in demand and a focus on addressing the educational deficits that have affected many students as a result of the quarantine of educational institutions during the pandemic. But the “space” for new productivity growth seems set to begin to expand soon. Darkness can actually mean that dawn is just beyond the horizon, the magazine concludes.
Recall that on January 30, WHO recognized the Coronavirus as a problem of global scale. Later, the EU authorities launched the Horizon 2020 innovation program to study coronavirus.