
By Paul Conway*
The global economy is staggering under the weight of the COVID-19 pandemic. Consumer spending has slumped, world trade has shuddered, and the global labour market has lost half a billion jobs in just a few short months. With the notable exception of China, most economies on the planet went into recession in the first half of 2020.
Before the pandemic, the International Monetary Fund forecast the global economy to grow by 3% in 2020. They are now forecasting a 4% contraction, making the estimated economic cost of the pandemic about 7% of global GDP and counting.
This is by far the biggest shock to the global economy since World War Two. In comparison, the Great Recession in 2009 shrank the global economy by just 0.1%.
Notwithstanding recent news on a possible vaccine, we still have a long way to go before the global economy is out of the COVID-19 woods. Parts of Europe are back in lockdown while the United States confronts the perfect storm of health and economic crises on top of political and human rights crises.
As the pandemic grinds on, it is becoming abundantly clear that there is no going back to the economies of the pre-COVID era. Spending patterns have drastically and permanently changed. Instead of restoring yesterday’s economy, our challenge is to adapt and build for the future.
This means changes in economic structure, with some industries growing and others shrinking. Structural change is difficult and costly, as skills and ways of working developed for the old economy become less relevant in the new. But it is also a critical aspect of recovery. Without it, we risk ending up with a plethora of ‘zombie firms’ out of place and unable to survive in the new economy.
Policy should not get in the way of structural change. As the recovery deepens, government support should not tie workers to certain jobs but encourage them out of shrinking industries and into areas of growth. Business assistance schemes should support firms that may be vulnerable now but stand a strong chance of being viable once the recession is behind us. By the same token, the process of going out of business should not be overly difficult or punitive.
As well as changes in economic structure, the pandemic is also changing the way many of us work. Most obviously, it has accelerated the digital transformation, with the sudden shift to remote working. This massive silver lining of the pandemic is to be welcomed – digital technologies have the potential to lift productivity and reduce the negative environmental impacts of economic activity.
Much less welcome is the impact of the recession on inequality. Unfortunately, recessions usually hit low-paid workers the hardest and the current one is an extreme case of that. These workers are unlikely to be able to work remotely and therefore more likely to lose their jobs. In contrast, workers with digital skills will probably weather the pandemic with their livelihoods intact.
The pandemic is also changing the shape of cities, which are de-densifying as workers work from home in the suburbs and businesses reduce the size of their central-city offices. This is also increasing inequality by concentrating job losses in low-wage industries that support office workers, such as retail, transport, cleaning, and food.
The increasing inequality playing out before our eyes highlights the pressing need to invest in worker skills, with a focus on improving digital capability. This was already important prior to COVID-19 but is paramount now and with no time to lose. We need to get radically better at upskilling workers for the digital age.
As well as making economies more digitised and less equal, the pandemic may also be making them less globalised. Widespread and repeated lockdowns are disrupting international supply chains and some governments are reaching for protectionist policies in misguided efforts to revive their economies.
On the flip side, the fact of being able to work remotely – thanks to digital technologies – means that we can now work anywhere. This implies huge potential for cross-border digital trade. The recent signing of a Digital Economy Partnership Agreement between New Zealand, Singapore and Chile is a welcome harbinger of a new form of globalisation.
Over recent decades, big economic shocks have not really led to any fundamental changes in economic policy or in how economies operate. These were missed opportunities and raise serious questions about our ability to undertake fundamental economic reform.
This time around, the risk is that policymakers once again fail to embrace change and to adapt our economies. Change can be difficult and deeply unsettling. But that does not mean we try to avoid it. Instead, we need to adapt in ways that are effective and protect vulnerable people.
In the case of New Zealand, our public health response to the pandemic has been among the best globally and our economy is performing much better than anticipated coming out of lockdown. This makes a mockery of arguments that an effective health response comes with higher economic cost.
In part, New Zealand’s strong economic performance relative to expectations is due to the Government’s stimulus package, which has been suitably large and speedily deployed. However, to achieve our potential and drive the New Zealand economy forward over the longer term, we need to add a microeconomic reform agenda into the mix.
This is easier said than done. For some time now, structural policymaking in New Zealand has been stuck in a rut and done little to improve New Zealand’s economic performance. This needs to change. We need innovation and new thinking on the policy front if we are to emerge from this crisis with a more productive, sustainable and inclusive New Zealand economy.
*Paul Conway is an economist working with the Bank of New Zealand. He was previously Director of Economics & Research at the New Zealand Productivity Commission. Paul has also worked internationally at the OECD and with the World Bank.
48 Comments
all will be just well if only just keep the inflow of migrants, tourists, and.students coming.
@Xing. Go hardarse on restricing immigration. If we did that well population would drift downwards to our great economic, social andenvironmental benefit
If people can just work remotely, they don't even need to live in NZ, our remote working economy can be based overseas. It's the next wave of globalisation. I don't really understand how digilitisation is going to improve productivity, nor do I know many people who can work from home but if I could run a business where nobody needed to turn up to work, I would surely outsource all my labour to India, which would massively increase productivity because costs are so much lower there.
Paul perhaps you could elaborate on the high value/high wage economic activities that would stay here? What are the "right bits"you speak of and why, given NZs sluggish and laggy internet connections, high cost of living and housing, comparatively drab and staid cities and 3rd world infrastructure would people either immigrate or stay here?
Yes, if we want to magnify the already serious problems of housing, unemployment, pollution, transportation, water etc then returning to a policy of bringing in swarms of low skilled migrants, low budget tourists and worthless foreign students sounds just the ticket.
Much less welcome is the impact of the recession on inequality. Unfortunately, recessions usually hit low-paid workers the hardest and the current one is an extreme case of that.
A document co-written by CIA InQTel Luciana Borio, recently appointed to Biden's Covid-19 taskforce, recommends linking Covid-19 vaccination with food security and rent assistance.
Want to not be homeless or feed your family? Guess you'll have to get an experimental vaccine Link
I see nothing here that identifies any specific policies. Terms such as 'micro-economic reform' don't lead me to any specific actions.
KeithW
Agreed Keith. I note he was a Director of the Productivity Commission so had ample opportunity to advance his ideas and yet NZs productivity keeps dropping. There has been a flood of articles recently calling for transformation, innovation and novel policy making, yet not a single one of them have come out with any concrete suggestions - just more waffle
There has been a flood of articles recently calling for transformation, innovation and novel policy making, yet not a single one of them have come out with any concrete suggestions - just more waffle
Yes. 'Digital skills' and 'working remotely' are hardly what I would call 'new ideas'. These have been commonplace for 20-30 years. Things might look different if you've been working for a bureaucracy in Wellington.
NZTE came out with a new digital platform during Covid. In essence, this platform is to 'help exporters enter new markets.' This is possibly what Paul is referring to in terms of innovation, etc. Nevertheless, I don't really see what has been achieved beyond a souped-up communications tool where you can basic information about different markets. As far as I'm concerned, this is not 'transformation' at all. NZTE hires many people so we're pouring a lot of resources into this govt function.
Paul,
I have gone back to your previous article. Apart from digital technologies, the other recommendations seem to be about the need to 'strengthen' and 'improve' various aspects of the economy. The need to 'improve' and strengthen' has been around for a long time. The change relates to the specifics.
In relation to digital technologies, of course that has to be a focus, but it is not apparent that NZ has a natural competitive advantage to take a world-leading position. The people who make a lot of profit from the digital economy tend to be those who are close to the market and can see the market opportunities - the Jack Ma's and similar. The people who do the detailed software development are the wage slaves who can be anywhere in the world and they are paid at international rates set by countries such as India and China.
The key measure of innovation within the NZ formal R&D system, and the associated reward system, is academic papers. The links through to industry are tenuous. I say that as someone who works at the interface.
KeithW
Government needs to lead strategic, open cheque-book, initiatives to create environment for innovation that leads to value-added goods/services away from commodity driven trade. Not easy given our track record.
Where's our education system in supporting this? How can we do better? What can we do to encourage more R&D? Can we bring back 'brain-drain'? What can be done to make entrepreneurship, green-field manufacturing more enticing.
Paul,
The traditional economics concept of comparative advantage is not enough when it comes to innovation. In areas of innovation one also has to have a competitive advantage to be at the absolute forefront. You have to get there first and push back the frontiers of knowledge. And that is very hard to achieve in isolation from an innovation hub to provide the critical mass. Silicon valley is one well known example .These issues have been studied primarily from the perspective of strategic management rather than from within the economics profession. New hubs can and do emerge but there are no signs of this happening in NZ. It is very hard to find areas where NZ innovation is at the global forefront. NZ would need to find one or more very specific niches to focus on and it would be very high risk. I invite you to idenitfy such a niche, which has to be much more specific than simply 'digital technology'.
KeithW
Good luck Paul! People have been talking about this stuff for years, status quo vested interests won't budge!
Paul, what do you mean ... Delivers to everyone? That the owners of potentially zombie companies will have debt forgiven? That those chasing the share market money go round will be guaranteed say a +5% margin indexed to cpi? That all those engaged in the throw away economy will be able to keep importing cheap crap because that keeps people employed?
If we are serious about waste reduction (as just an example to focus thought), we'd require the end of life cost to be charged at first sale and have manufacturers funding end of life recovery. But that will hike retail prices massively, so consumers will buy less, and staff will be laid off, and companies will go belly up. There will be pain.
The call for change you voice, will be painful. Along with new innovative policy, there needs to be thoughtful initiatives to ease that pain for the lesser priveleged (unlike the Rogernomics reforms).
Paul, forcing retailers to cost the full "life cycle" price of any product is likely to be either a commercial lame duck (if placed at point of sale) or in contravention to WTO rules (if you're considering a tariff) The "just transition" you speak of is a political soundbite - it certainly won't work in New Plymouth where the Govt has commited millions to turn a finite source of natural gas into hydrogen. To even consider such a project, let alone fund it, shows the desperation and cynicism of the current Govt.
This country needs to pursue new industry, not some hairbrained feel good sound good reiterations from overseas. Becoming a Pacific wide electronics recycler, all type plastics recycler,large scale lactoferrin producer - these types of things. Employment intensive industries is what we need, not remote working data centres
The danger of remote working is that the jobs will end up in India or the Philippines, if there's no need for any physical presence.
Exactly - my son works remotely for a World Bank entity in London as an IT contractor from Wellington.
Paul you seem to be particularly enamoured by digital expansion. two things - not everyone in NZ wants to drive a keyboard for a job and secondly most of the worlds best developers are in India, not here. I read your previous article and you also seemed to encourage the Govt to attempt to pick sectors and support them - are you serious?? Successive Govts in NZ couldn't pick a bunch of grapes let alone which sector or industry will flourish. Sure support industry but leave it to the private sector when picking winners
Governments have no business picking winning and losing sectors.
Reforming tax & education, building first-world infrastructure, targeting high-wage workers for permanent migration, simplifying R&D credits, providing more research funding to CRIs and unis/polytechs - that's the role our government should be playing in supporting a more productive economy.
Which ironically drives inequality in exactly the wrong direction, those with a high level of education get all the benefits.
WJ the world cannot be driven by pure equality - it's impossible and impractical. There will always be some who are more equal than others and attempting to artificially alter that is fraught.
Paul I disagree regarding digital - it's something that can be (and is) successfully incubated in far greater scale elsewhere. Market niches have a habit of either being copied or subsumed by larger better resourced players. We do have potential in agritech but until the moratorium on GMOs is addressed we're being left behind there too - Agriseeds(?) low emission ryegrass had to be trialled in the US and will not come back. PGW Seeds division was sold. Companies such as Pacific Edge and AFT Pharmaceuticals are showing the way forward. RocketLab was a loss and the Govt should have backed them (it was Callaghan and private investors that supported it initially not the Govt directly). Our one true leading edge company and it slipped through our fingers. MPI is more of a hindrance than a help so I wouldn't hold them up for accolades. In my view the NZS fund could do more in supporting NZ companies - Sanford and it's foray into collagen extracts springs to mind as a starter. If NZ is to succeed it needs patentable protectable exports not niche copies of something being done elsewhere in the world.
Working from an equity rather than an indebted position would turn New Zealand on it's head. In a good way.
Ownership rules.
I have some concrete suggestions to rescue the economy. Issue daily doses of 2000IU of vitamin D to all NZers over 65 and open the borders. Don't bother with vaccination because the vitamin D will be less expensive and more effective. After we get tourism up and running we can focus on progressing mercantile policies.
Vitamine D efficacy links https://youtu.be/kJ1l0gLTjXQ and https://covid.us.org/2020/09/03/new-study-vitamin-d-reduces-risk-of-icu-...
(blah blah blah this week's theory)... open the borders.
Vitamin d now? What happened to herd immunity and the virus becoming less virulent and I can't remember the rest. Changing your theory in response to new evidence is no bad thing, the problem is that somehow the end prescription is always the same.
If you bothered to follow the literature you'd already know about Vitamin D, the attenuating lethality of COVID ie. the low and declining infection fatality rate. When I make posts here I always try to back them up with peer reviewed literature. But you're not really interested in logical reasoning are you because you're ideologically driven. You respond with the full spectrum of logical fallacies, false dichotomies, straw man arguments, ad hominem etc. try raising the bar.
Your way is failure Pat, unnecessary economic destruction and putting the population at risk of early death and lifelong health issues. Give it a rest, you're sounding like a conspiracy theorist.
There's plenty of examples of that failure out there. Step outside your echo chamber. We're doing pretty good thanks.
Ahhh.. the great youtube encyclopedia - font of all knowledge. If Vit.D is so effective why is this not being trumpeted from the roof tops? Big Pharma conspiracy??. The sample size was miniscule (75 patients) so hardly comprehensive nor conclusive. When a publication like Lancet, or the WHO starts talking about Vit.D is the time to take heed not before.
I did a quick scifinder search with the terms "COVID vitamin D" found 372 article references, 34 in MedRxiv. Also 368/372 were from 2020 so this is very new and It appears that scientific & medical community is taking vitamin D seriously. It's not reasonable to disregard everything but BMJ or Lancet, but here are two recent publications that came from the Harvard Medical School, if you think that's a decent institution?
Commentary. Eliminating vitamin D deficiency during the COVID-19 pandemic: A call to action, Metabolism, Clinical and Experimental (2020), 112, 154322.
Vitamin D to prevent COVID-19: recommendations for the design of clinical trials, FEBS Journal (2020), 287(17), 3689-3692.
fun fact - vitamin D is made from sheep's wool by saponification of lanolin to cholesterol + 4 more steps.
Fat pat, you really do need to get out more.
Lets hope the vaccine works eh... else there may need to be a revised position taken given the key drivers of 'wealth/wellbeing' is the free movement of man.
If Sweden emerges from a northern hemisphere winter with little to no excess deaths then it will be obvious that NZ made a catastrophic wrong turn. Countless jobs will have vanished, capital destroyed, government debt:GDP gone from 20->50% with no income streams from the debt, and all for nothing. That will be the greatest financial disaster in New Zealand's history and it will resonate for decades. In the meantime you can follow excess deaths in Europe from this site. https://www.euromomo.eu/
Maybe I was a bit harsh with my drop the vaccine comment but my point is that we shouldn't be relying something which may or may not come to fruition. You're saying we've invested so much and have done sooo well, but have we? has the economy? That's also essentially the sunken cost fallacy. The evidence is mounting now that the virus is not too dissimilar from the flu in terms of lethality, and there are less expensive more effective mitigation strategies. You wrote a good article on productivity and sustainability which I'm all in favour of, but how on earth is what NZ's doing sustainable or productive? It's the opposite.
> If Sweden emerges from a northern hemisphere winter with little no excess deaths
Good luck to them, but very few here would want to swap places and find out.
By the way "none" is no longer an option. What, 100 in the past week?
nz, and.....the rest of the world supporting lockdowns? Which work? Yes, given that Sweden have admitted they have clearly got it wrong, you stick to your guns.
https://www.businessinsider.com.au/sweden-herd-immunity-second-wave-coro...
deep sigh... look at Sweden's low death rate on the euromomo site! Re: lockdowns even the WHO now recommend against it, but what the heck lets learn nothing and have nationwide lockdowns for everything. Conjunctiveitis? - national lockdown, arthritis? national lockdown! tree falls in the woods? national lockdown! yeah that makes about as much sense as the Labour parties policy.
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