1. Economic resilience during crisis: Opportunities and challenges from COVID-19
The impacts of the COVID-19 pandemic have been far from uniform across individuals, firms, industries and countries. Understanding the factors that have underpinned greater resilience is essential for building back stronger in the recovery period and for weathering future crises. This chapter provides an overview of the report and its lessons on economic resilience for workers, firms and industries. It highlights the importance of drawing on multiple angles to assess the effects of the economic shock, by examining shifting business dynamics, the rise of digital technologies, international firm connectedness, and the disproportionate impact of the crisis across different types of workers. Following an overview of the main policy recommendations, this chapter concludes by providing a look ahead at how countries can harness the transformative potential of the recovery phase – with a focus on the digital and green transformations.
The COVID-19 crisis has had a previously unfathomable impact on every country, public and private organisation, and person in the world. Nearly two years after the emergence of the virus, its broad and all-encompassing effects can still be felt globally, even as vaccine coverage expands and the pandemic itself begins to dissipate in many OECD countries. The economic shock caused by the crisis was unlike any other the world has experienced in modern times, presenting unprecedented challenges to people, businesses and governments. This was not only due to its intensity, but also because of the nature of the required containment responses to the virus, which involved social distancing and restrictions on mobility, and consequently rendered certain types of economic activity impossible.
Though times have been difficult, important lessons have been learned about the resilience of economies and firms in periods of crisis. It is critical to harness these insights for designing policies that not only support recovery, but also enable economies to better weather future crises. The ultimate aim of this publication is to boost the evidence base that can help governments and businesses build back stronger in the recovery period, to increase resilience for the future. Through an industry and firm perspective, the analysis focuses on business dynamics, productivity, innovation and digital technology, global connectedness, and worker skills and inclusiveness. The work complements the extensive OECD analysis undertaken since the start of the COVID-19 crisis, by providing insights not only on the crisis itself, but on policy for strengthening resilience for potential future shocks as well.1 This report provides a comprehensive overview of the channels and factors through which countries, firms and people were impacted by – and reacted to – the crisis, focusing on topics related to the business sector.
This introductory chapter provides an overview of the book content for policy makers. It first provides a summary of the publication’s key messages, outlining the main factors underlying the impact of the crisis on economic outcomes at the worker, firm, industry, and country level. Because, like the world itself, the topics of this publication are interconnected and highly dependent on one another, the brief summary in this section cuts across different policy areas, highlighting the key messages emerging from the different topics covered in this publication. This chapter then provides policy recommendations and proposed support measures related to the topical chapters of this report (Chapters 4 to 7). It closes with a forward-looking section on harnessing the potential of the COVID-19 recovery phase, to meet future challenges.
Roadmap for this publication
Following this chapter, this report continues by outlining the context of the crisis, in Chapter 2. The chapter highlights the containment responses to limit the spread of the virus and the support measures implemented to mitigate the economic consequences that resulted from the restrictions on activity and mobility. It focuses on areas most relevant for the impact of the crisis across the dimensions analysed in the topical chapters that follow.
The subsequent components of this publication look at the ability of economies to weather the COVID-19 crisis. They investigate key themes and characteristics that relate to the ability of firms, workers and consumers to maintain production, employment and consumption during and after the pandemic. The analysis combines data from different sources and different time frames to provide a broad perspective on the topics (see Box 1.1 for a discussion on data).
They offer insights from three main analytical approaches:
An overview of industry characteristics, identifying the different channels through which the crisis might affect firms and workers differently.
Identification of country or firm characteristics that mediate these channels, and may mitigate or amplify the impacts of this and future crises. This analysis can inform longer-term policies and investment decisions, to enable a strong economic recovery and build resilience in the face of future shocks.
An exploration of systematic differences in the impacts the pandemic is likely to have across workers and population subgroups, to help guide policies that avoid exacerbating social disparity and ensure an inclusive recovery.
Chapter 3 sets up a framework for the topical chapters that follow it. It focuses on industries, setting out the structural characteristics that channel the direct and indirect impacts of the pandemic in different sectors of the economy. These characteristics include the ability of firms and workers in different industries to continue producing goods and services and supplying them to customers, possible indirect impacts through demand, and financial constraints faced by firms over the short and medium term.
The analysis that follows in Chapters 4 to 7 covers four topics, as they relate to the consequences of, and resilience to, COVID-19-induced shocks: Business dynamics and financial vulnerability (Chapter 4); Supporting productivity through digital technologies (Chapter 5); Industrial and international connectedness (Chapter 6); and Inclusiveness across gender and skills groups (Chapter 7). The policy recommendations that follow in this introductory chapter relate directly to Chapters 4 to 7, providing a quick reference guide to the content, which is expanded on in these chapters.
This publication provides extensive empirical analysis on the structural, long-term characteristics of sectors, firms, and workers that mediate the impacts of the COVID-19 crisis. This is made possible through custom-built datasets, containing comparable cross-country aggregated microdata curated by the OECD. Combining pre-crisis data on these main structural characteristics with what is known about how shocks propagate through the economy helps to identify areas of vulnerability and resilience.
However, the availability and collection of data remains a significant challenge, in particular for more recent data covering the crisis period. Analysing the impacts of the COVID-19 crisis on economies in a causal manner is a challenging undertaking in itself, and a lack of timely or comprehensive data represents an additional complication, even for outcomes that appear in the short term. Data are rarely collected in a standardised manner across countries, and while this is often a reflection of the heterogeneous statistical systems of countries, it also makes comparative analysis more difficult. Where early evidence is available – often in a single-country context – this report incorporates it, drawing on both internal OECD work and external studies, and links it with the structural analysis representing the core of this volume.
In many ways, the COVID-19 crisis has magnified the need for timely and systematically collected data – not only for an assessment of impacts, but also to identify the most effective policy responses and guide future strategies for similar shocks. A reliable and comparable quantitative evidence base is essential for a rapid and effective economic policy response, to identify the most affected and vulnerable groups of workers and firms; to shape a speedy, efficient, inclusive and green recovery; and to design effective longer-term policies. This is an important lesson for policy makers to take from this report: timely data and solid analytical evidence that capture the heterogeneity of different economic actors are crucial to enable fast and effective policy responses to shocks.
Identifying the factors that have helped firms and workers in different industries make it through the crisis, and those that may have created difficulties, is fundamental for strengthening resilience and addressing vulnerabilities. In addition, new challenges arise from the differential impacts of the crisis across industries, firms, and worker groups. The analysis in this volume brings together a range of firm, industry, and country-level data to shed light on factors that may have increased economies’ ability to continue operating during the initial phases of the crisis, and those that may allow them to recover more rapidly afterwards. It also helps to identify critical divides that must be factored into policy design to ensure a sustainable and inclusive recovery.
These insights are especially important given that the impacts of the pandemic – and the restrictions and supports that accompanied it – were far from uniform globally. This report encompasses a collection of factors that, considered together, capture and help explain the varying degrees of resilience of economies to the shock caused by the COVID-19 pandemic. While some of these factors are direct determinants of how well firms and workers can adapt to the crisis, others are mediating factors that interact with policies and measures taken by governments, firms, or workers, making their actions more or less effective.
The industry dimension has been highly relevant throughout the COVID-19 crisis as it directly affects the ability of firms to operate. Certain industries, designated as essential by governments, have been allowed to continue operating with few restrictions, while others were forced to shut down almost entirely (with many still yet to resume, even in the recovery phase). Some could adapt to the restrictions and operate remotely; but others that needed face-to-face interactions were forced to shut. Sectors relying on movements of people, such as aviation and tourism, were particularly hard-hit, and the retail and personal services industries were also greatly affected, given their reliance on face-to-face contact for the traditional in-person business model. A shift to e-commerce was essential for retail firms and may be a longer-lasting outcome of the crisis.
The firm perspective is equally important, as firms within different sectors were able to cope with the crisis and the associated measures to differing extents, depending on their location, their workforce, their digital preparedness and their financial health, among other things. Workers within firms were also affected differently depending on their skills, gender, and other factors. This work incorporates this granular perspective, which allows the analysis to identify some of the roots of the differences in resilience across countries, industries, firms and workers.
The publication also provides a dynamic view of the impact of the crisis on the business sector, made possible by a new, timely data collection effort.2 New firm entries slowed substantially, especially during the first wave of the pandemic, and many existing businesses struggled to stay afloat, let alone grow. Young and small firms, which are essential for a dynamic and innovative business environment, have been especially at risk, due to factors such as having smaller market footholds and fewer financial resources to weather the storm and invest in the future.
There were some bright spots, though, with new businesses forming through recovery phases. While some emerged temporarily to cater to pandemic-related market opportunities or surges in demand, others are likely to stay in the market, in part because some of the behavioural changes induced by the pandemic are expected to persist. Many firms suffered cash flow problems, though insolvency rates during the pandemic remained low due to effective government intervention that temporarily changed official bankruptcy procedures. There are also longer-term challenges related to the financing of new investments which, if unaddressed, might drag down future productivity and economic growth. If cash flow issues faced by young and small firms translate to long-term financial issues, this can also lead to adverse effects in terms of concentration, with larger firms growing and gaining market shares and smaller ones lagging behind. While many firms will require support well into the recovery period, those that are not viable must be allowed to exit the market, in order to enable productivity-enhancing resource reallocation.
There are many reasons for optimism about the post-pandemic future, however, and policies that foster and support the positive changes induced by the COVID-19 crisis have the potential to transform them into long-term benefits. Alongside the severe economic shocks, uncertainty, and disruptions to individual, social and economic life, the upheaval brought by the pandemic has the potential to usher in a new wave of innovation, opportunity, and technology development and diffusion.3 In a strong recovery, efficient resource reallocation to new firms can aid in creating opportunities for higher levels of productivity and innovation.
The speed at which technology adoption – particularly of digital tools such as telework – has progressed during the pandemic is unprecedented, and bureaucratic hurdles have often been relaxed to facilitate their use. Social distancing measures in place through the crisis have pushed people to find alternative ways of staying connected, leading to widespread digital technology uptake. This uptake has extended to industries, firms, products and activities that were previously not highly digitalised. Many firms quickly started using digital tools to stay operational, and new business models were developed that facilitated reduced physical contact and interaction. In addition, new technologies emerged, many of which supported containment and healthcare.4 While this accelerated digital transformation holds many benefits, it also requires accompanying policies to address new challenges, to sustain progress over the long term, and to prevent a further widening of digital divides across firms and people.5 The need to work remotely has clearly accelerated existing trends towards digitalisation, holds the potential for significant benefits for workers and firms in the future, and can also potentially assist in the transition towards a carbon-neutral world.
Fostering uptake by firms not only boosts technology diffusion and builds resilience, but can also help achieve other goals, including productivity growth, business dynamism, increased inclusiveness, and environmental improvements such as reducing greenhouse gas emissions. Of course, there are also policy challenges associated with this technological revolution. Digital divides – for instance between urban and rural regions, firm types or population subgroups – have become even more relevant, and addressing them even more urgent, as digital skills and technology have become crucial to navigate many aspects of life other than work. Reducing inequality in access to technology and skills for firms and workers will help with sharing the productivity gains provided by a digital world. High-speed broadband must reach entire populations, including firms and workers in rural areas. Reducing inequality in digital skills via up- or reskilling is key to increasing the resilience of the business sector, as a growing number of jobs can be conducted remotely. During the pandemic, workers who did not have the necessary digital skills to telework, or whose jobs could simply not be done remotely due to tasks of the job or a lack of firm infrastructure, were more at risk of job and income loss. These workers are often from population groups that also face additional challenges on the labour market, such as women and older people. Creating a digitally inclusive recovery must be a priority for governments as the digital transformation unfolds.
The impacts of the pandemic – and the restrictions and supports that accompanied it – were far from uniform. Besides digital skills, the pandemic laid bare other pre-existing divides. Women were affected differently by the COVID-19 crisis, and faced a disproportionate burden as a result. They have been less exposed to job loss during the crisis, due to making up the majority of the workforce in primarily essential – but also “teleworkable” – industries. However, mothers were often hit hardest by lockdowns due to increased childcare obligations, forcing some women to drop out of the labour force, or to reduce working hours. The ability to telework also critically hinges on having the skills to do so, and women possess lower average digital skills than men. A truly inclusive future for women must include policies to address these issues.
Many of the policy measures and solutions implemented during the crisis were developed and implemented rapidly, to address the new challenges posed by the crisis, such as the need for social distancing. Governments have been continuously learning how to best support workers and firms, through the recovery period and in potential future crises, and can gain further insight from the outcomes of various policy measures around the world. The importance of international co-operation for policy and resilience has been highlighted in the COVID-19 crisis. The interconnectedness of countries and industries is a source of incredible value creation, knowledge sharing, and productivity growth. This was made abundantly clear during the crisis as borders closed, the movement of goods and services stopped, and economies suffered the results. At the beginning of the crisis, certain global value chains (GVCs) were disrupted; this had immediate implications for the supply of some essential goods, but GVCs later contributed to satisfying the demand surges related to the pandemic (e.g. the supply of personal protective equipment). While bringing production back to home countries may be a tempting solution, it is in fact not the best answer for long-term resilience and growth. Instead, co-operation and communication between countries and the diversification of supply chains hold the key.
The transition to a greener world is a global effort, and the opportunities for increased global co-operation in the low-carbon transition must not be lost. The crisis has created openings for significant advances on this front, for example from lower rates of commuting and decreases in air travel. While some of these changes – such as the very high rates of telework observed in some countries, or the collapse of travel – are likely to be temporary, some of the induced changes are likely to stay. Even though they might make a relatively small impact on overall environmental outcomes, the successful navigation of transitions, such as to a greener and more digital society, may become a lasting positive legacy of the COVID-19 crisis.
The pandemic has undoubtedly accelerated the digital transformation of economies and societies. Yet, the very nature of digital technologies – in particular their reliance on complementary intangible assets characterised by high scalability, and the resulting increase in concentration – may increase divergence between high- and low-performing firms and dampen the impact on growth. To counteract these effects, policies need to support innovation by both top-performing firms and start-ups, and boost technology diffusion to the rest of the business sector.
The COVID-19 crisis also highlights the incredibly globalised and interconnected nature of economies. Some argue that the multi-decade expansion of international trade and international supply chains may have come to an end – and may even recede – as the crisis brought attention to perceived vulnerabilities of GVCs. In contrast to the trends in green and digital, which will indisputably continue to transform the economy in the coming decades, the structural nature of a slowdown in international trade and economic interconnectedness is still in question. In the hopes of building more resilient production systems and strategic autonomy in key products or technologies, some governments are discussing investing in the re-shoring of parts of their manufacturing value chains. It is important to acknowledge that such interventions may increase production costs, reduce competition and jeopardise the rule-based global trade and capital flows system. Rather, policies aiming to strengthen the resilience of GVCs, diversify risk, and increase international co-operation are likely to be better solutions in the long term.
In the recovery period from the crisis, governments must design and implement policies to help economies rebound strongly, inclusively, and with more resilience against possible future shocks. The following guide provides a concise summary of the key policy implications and recommendations arising from the analysis in the four topical chapters of this publication (Chapters 4 to 7).
Business dynamics and financial vulnerability (Chapter 4)
The crisis had implications for many aspects of business dynamics, including firm entry, exit and bankruptcy rates. Small and young firms appeared to be particularly vulnerable to the crisis, especially through liquidity shortfalls. The risk of debt overhang is generally higher for these firms in the recovery phase than it is for large firms, which has implications for business dynamism as well as innovation, increasing divides across leader and laggard firms, resource allocation and, ultimately, economic growth. Thus, going into the recovery phase, effective policy design and implementation is especially important.
Financial support to firms must strike a balance between phasing out support too early – risking failures of viable businesses – and maintaining it for too long, thereby propping up unviable firms and preventing necessary firm exit and efficient resource allocation.
Stimulating new firm creation is key to foster reallocation and business dynamism. Suggested policies include decreasing barriers to entry through simplifying and reducing administrative procedures and red tape, lowering the cost and complexity of product market regulation and ensuring access to finance.
Support measures should ensure that small and young firms can access programmes and benefit from policies to the same degree as their larger counterparts. This is also important in light of the potential adverse effects of the crisis itself on market structure and concentration, as well as the dynamics of recovery, requiring a careful analysis of the potentially anti-competitive effects of support policies.
Strengthening innovation and technology diffusion is important, especially in smaller and younger firms. Direct government financing of research and development (R&D) is more effective than tax credits, which are less suited to support innovation spending in cash-strapped or profit-losing firms. Alternative methods of financial support should be provided, such as equity and quasi-equity (especially for small and young firms) injections, and allowance for corporate equity and debt-equity swaps. These may also play a longer-term role in recapitalising firms while minimising the negative impacts of debt overhang.
Measures to support debt restructuring, such as granting priority over unsecured existing creditors for new financing and promoting pre-insolvency frameworks, may also help to reduce default and enable distressed firms to invest during the recovery.
To speed up the reallocative process and foster re-employment, ensuring efficient exit of unviable firms is equally important. For this, bankruptcy procedures should be simple, fast and efficient.
Supporting productivity through digital technologies (Chapter 5)
The crisis saw the rapid uptake and diffusion of digital technologies, driven by social distancing restrictions and a sudden need for telework and e-commerce. These technologies support productivity, and can have wide-reaching positive effects societally over the long term. Policies should harness the potential of the digital transition while also working to minimise potential increases in inequalities.
Ensuring digital access for all firms and workers is key to ensure broad productivity benefits and a smooth transition to new forms of doing business, including via telework and e-commerce. Upgrading and maintaining communications infrastructure – which is a prerequisite for the use of digital technologies – is fundamental. Investments in rural areas, which often lag behind urban areas in their availability and quality, can be particularly effective in increasing digital uptake. The same is true for digital skills.
Among the digital technologies that flourished during the crisis, telework has been particularly pronounced. Policy makers should ensure that it can be continued after the immediate crisis, on a voluntary basis, to reap its beneficial productivity effects, as well as to improve worker satisfaction.
Governments can facilitate the use of telework with supportive legislation and regulation on workplace health and safety, and by providing workers with the right to telework or work under flexible conditions (e.g. choice of start and end times). Uptake can also be fostered by addressing legal or cultural hurdles (e.g. established protocols for presence in the workplace), and through tackling barriers to uptake of telework such as digital security and data protection concerns.
Some reasons for telework not being feasible, such as inherent task-related features of jobs, will persist. Ensuring and supporting the flexibility and upkeep of digital skills for workers who are not able to telework should therefore also remain on the policy agenda, to ensure equality and inclusion across worker groups.
Policy makers need to ensure that the gap in digital technology use between the “best” firms and “the rest” is not exacerbated at a time when shifts to digital modes of production are becoming more and more important. Because firms that can adopt digital technologies more easily are often large and well established, policies should specifically target small and medium-sized enterprises (SMEs), to support them in innovating and adopting new technologies.
Similarly, boosting digital technology diffusion can help ensure an inclusive digital transformation across firm types, and increase competition, which will raise incentives for firms at the frontier to innovate. It will also support productivity growth, including across industries and firms that were less digitalised before the crisis and therefore hold a large potential for catch-up, with additional positive implications for wage inequality.
The diffusion of improved information and communication technology (ICT) infrastructure within firms can be accelerated through financial support for upgrades aimed at performing a number of functions online, including to work remotely.
The policy mix that harnesses the complementarities between the green and digital transformations must reflect the multi-faceted nature of the underlying processes and requires financial support for innovation, the development of innovative ecosystems, intellectual property rules, and a strong public research system.
Industrial and international connectedness (Chapter 6)
Restrictions on personal mobility and economic activity during the pandemic laid bare both the challenges and benefits of international connectedness. Though some GVCs were initially disrupted by these restrictions, the crisis also showed them to be crucial to ensure the provision of essential goods. Their resilience should therefore be an important goal, and should be tackled with international co-operation and diversification in supply chains rather than on-shoring. Many industries, such as aviation and tourism, are also highly interconnected and dependent on global co-operation. Policy must aim to mitigate and manage the risks associated with international and industry interconnectedness.
Ensuring the transport of goods and services across borders is a precondition for maintaining the functioning of globalised production networks and the movement of goods and services. International co-operation and policy coherence – for example to establish travel corridors, including for immunised people – will also be crucial to allow the travel and tourism industries to recover.
Measures to make GVCs more robust to production shocks, such as those caused by lockdowns due to COVID-19, include diversification of suppliers at the firm level, and co-ordination and information networks to foster transparency and the provision of backup options at the macro level.
Transparency and predictability should also be promoted through clear decision-making processes and regulation and the lowering of trade barriers via harmonisation of standards and norms, striking a balance between fostering integration and consumer and environmental safety.
Other suggested areas for government action to help make GVCs more robust include regular stress tests, and international co-ordination to avoid unilateral actions such as export restrictions, which may trigger harmful effects on other countries through globalised production networks.
Inclusiveness across gender and skill groups (Chapter 7)
Certain population subgroups in the labour market were affected differently by the pandemic and the restrictions put in place to contain it. Women faced many disproportionate burdens related to childcare and job types, and workers across different skills groups saw differing levels of job security and differences in the ability to telework. Policies such as those below are important to minimise adverse effects on inequality caused by economic shocks like the COVID-19 crisis.
Immediate support measures and recovery policies must incorporate a gender perspective to avoid risking the inversion of pre-crisis progress towards gender equality on the labour market. The crisis impacted women differently, forcing some of them to take over additional care responsibilities at home. Enabling women, and especially mothers, to uphold their labour supply during crises is crucial and will also help preserve job matches, which will be beneficial for a stronger recovery.
Support policies targeting working parents should take into account not only mandatory school closures, but also periods of reduced working hours due to quarantines of children or other care obligations. When providing emergency childcare facilities, these should be extended to women in non-essential jobs who are unable to continue working due to childcare obligations.
Special consideration and financial support should be granted to self-employed single parents, and in particular female entrepreneurs, who were unable to work in the COVID-19 crisis due to childcare obligations. Prioritising the reopening of childcare services, and the provision of affordable and universal childcare during the recovery, are important to keep the disruptions on the labour supply of parents and carers as small as possible.
A more equal division of unpaid home and care work can be fostered through incentives at the firm level (e.g. well-paid parental leave for fathers, or offering more flexible working time arrangements), as well as removing disincentives such as excessive overtime or those inherent in the tax structure for second earners.
Employment support measures introduced during the crisis should be extended to cover atypical forms of employment, such as temporary or agency work, self-employment and part-time work. Not covering these types of workers will deepen pre-existing inequalities, further penalising worker groups that were already in more precarious forms of employment before the crisis.
The ICT and digital skills gap has become even more relevant during the crisis, underscoring the need for digital upskilling, especially for low-skilled workers and older parts of the population, as well as for women to help close the digital gender gap.
Providing training, skill upgrading, or fully-fledged career change programmes to workers whose jobs are at risk over the longer term, for example due to pre-crisis trends in automation, can help accelerate structural change and efficient labour market reallocation more generally.
The COVID-19 crisis has unleashed an unprecedented and extraordinary period in economic history, and its impacts on countries, industries, firms and workers have yet to be fully seen. At the same time, the global economy, and individual countries and societies, will continue to face both new and existing challenges, some of which have been amplified by the crisis. As vaccine coverage expands collective immunity against COVID-19, and lockdowns and restrictive measures are progressively lifted, the focus of policy action is shifting from crisis management to reigniting growth. The challenges ahead go beyond just economic recovery; the world is facing transformative megatrends, entailing complex economic and societal challenges that demand action on several fronts. New policies must promote more inclusive and environmentally sustainable economic progress. The following sections present some suggestions on how countries can harness the transformative potential of the recovery phase for the post-COVID future.
From cyclical to structural policies
Without effective policy interventions, market forces are unlikely to enable economic growth by themselves, as pre-crisis trends were already indicating. Before the crisis, the already-existing slowdown in productivity and investments was expected to continue through the 2020s. The November 2019 OECD Economic Outlook (OECD, 2019[1]) already predicted potential output of OECD countries to grow by only 1.8% in 2020 and 1.7% in 2021 – the slowest pace in over 40 years, apart from the global financial crisis (GFC) period. According to the May 2021 OECD Economic Outlook (OECD, 2021[2]), the COVID-19 crisis is profoundly affecting the economy, and potential output is now expected to grow at an even slower rate: 1.4% in 2021 and 1.5% in 2022.
As the economy recovers, governments will gradually phase out emergency support measures to firms and employees. This phasing out will require some sectoral differentiation, given that some sectors are recovering faster than others. It is of course necessary to ensure continued support to sectors for which demand can be expected to only gradually return to pre-crisis levels, such as tourism or aviation.
As in most times of economic crisis, one of the main challenges for policy makers is to disentangle the cyclical component from structural demand changes, to avoid slowing down efficient resource reallocation by supporting unviable business models (for example, restaurants located in business districts that may face structurally lower demand due to sustained teleworking). The structural impacts of the COVID-19 crisis can be pervasive, requiring tailored policies at a very granular level and a deep understanding of the systematic consequences of the pandemic.
One way to approach the immense challenge of identifying which businesses to provide with continued support is to progressively change the paradigm by supporting technologies and workers, rather than individual firms. This means fostering and steering structural changes in the long run, and advancing the transition to a digital and green economy, through support for innovation and technology diffusion, upskilling, productivity growth and adaptability of workers. Accounting for this long-term structural transformation of the economy implies that bringing workers back to jobs in industries that are likely to soon become obsolete (e.g. in carbon-intensive energy) is not a good long-term investment for governments. Directing funds to support the transition of these workers, for instance by retraining them for work in the green and digital economy, should be a priority in any recovery package.
A focus on the green and digital transitions
The COVID-19 crisis influenced structural megatrends in digitalisation and decarbonisation. The pandemic has also reminded us about the vulnerability of our societies to severe global shocks, and in many ways made a further case for the need for immediate and decisive climate mitigation actions. This structural transformation, which will take several decades, now seems truly underway, as illustrated by commitments of many governments towards a green recovery, and carbon neutrality at the 2050 horizon.
Importantly, digital technologies can be a key enabler of the green transition, suggesting that these two ongoing shifts, which are fundamentally transforming the economy, need to be addressed jointly in the recovery phase and beyond. There are synergies and opportunities for double-dividends in policy implementation. For example, digital technologies such as artificial intelligence (AI) can help reduce energy demand and associated greenhouse gas emissions, catalyse smart grid management, and save fuel thanks to autonomous vehicles and connected smart sensors. Adoption of digital solutions can improve environmental performance while at the same time raising productivity, thereby ensuring that the green transition goes hand in hand with economic growth and shared prosperity. Nevertheless, there are concerns about the carbon and material footprints of some digital technologies themselves. Despite ongoing efficiency improvements, the large amount of energy consumed by digital solutions such as data storage and high-capacity computing can imply high related carbon emissions. Rising demand can also diminish energy savings. This will require careful consideration and the right policies going forward.
The rise of automation is another long-term, transformative trend affecting both the green and digital transitions, as well as industry and the demand for skills. Automated technology can increase energy efficiency (thus potentially reducing greenhouse gas emissions), provide new solutions to complex problems and contribute to worker safety, increasing well-being and quality of life. Importantly, it reduces the need for physical contact among workers, and hence has an important role for robustness against health-related shocks such as the COVID-19 pandemic. However, alongside tremendous positive contributions to productivity, daily life, and the climate emergency, automation also poses a threat to certain jobs, particularly those involving mainly routine tasks such as those in manufacturing, agriculture and certain service positions. Governments must ensure that policy keeps up with the changing future of work, focusing on skills and employment, while also harnessing the potential of automation.
Looking to supply-side measures
Actions to harness the recovery to speed up and manage the transition to a more green and digitalised world must take into account lessons learnt from previous recovery packages, such as those adopted following the GFC. For example, industrial policies adopted during that time as part of green recovery packages were clearly focused on the demand side, with measures such as vehicle scrappage schemes to subsidise the adoption of electric or energy-efficient cars. While these measures are useful to encourage adoption of market-ready low-carbon technologies, targeted policies need to carefully take into consideration a multitude of other factors, such as talents and skills, firm and industry structure and infrastructure. Importantly, they also need to complement instruments targeted at the supply side, which can redirect economies and societies onto a greener path in the long run. Suggested supply-side measures to achieve this include:
support to research and development (in the form of R&D tax credits, targeted research subsidies or prizes)
education and lifelong training to ensure an adequate supply of green skills
competition policies to level the playing field for young firms and SMEs
investment to encourage funding for green start-ups (particularly through venture capital)
public infrastructure programmes (e.g. for the transportation of electricity and hydrogen, or charging stations for electric vehicles)
defining new product standards (e.g. in terms of minimum recycled content).
Importantly, demand- and supply-side policies for a green recovery complement each other. There is evidence, for example, that green stimulus investments adopted after the GFC were most effective in communities that had workers who already possessed the skills required for green jobs.
Supporting skills and human capital
Support to human capital accumulation, be it through on-the-job training, formal education or other means, is likely to have multiple benefits. It will help stimulate innovation and technology diffusion, and – by equipping workers with skills demanded by employers – promote growth. This is particularly important at a time when the simultaneous transitions of green and digital are heavily changing the skills demanded in the labour market. While human capital is in essence multidimensional, the following three considerations are especially important:
Rapid technological change, and in particular the increasing pervasiveness of advanced digital technologies (including AI) has the potential to significantly affect labour demand. Policy makers need to boost lifelong learning and workplace training and adapt the curricula, so that skill upgrading can match the pace of technological change.
The same applies to skills necessary for green jobs, and support to R&D in green technologies, particularly for technologies further from the market (e.g. green hydrogen or energy storage).
To enable and steer the digital and green shifts of firms, and to ensure they can make the most of new business opportunities provided by the digital and green transformations, particular attention must be paid to the skills of managers and top executives. Over the last decade, a host of studies have shown that managerial and organisational capabilities are important determinants of productivity across countries, industries, and firms. Policies to support this may directly target skill accumulation through measures such as public support for training and access to resources, and adapting tertiary education curricula, but should also entail incentives to select better managers. This can be achieved by increasing competition and removing frictions that prevent firms from replacing less productive managerial structures.
As the world emerges from a deep economic crisis, countries are facing major long-term economic, social, and environmental challenges that need to be addressed decisively and on a global scale. The extent to which policy makers will be able to firmly commit to address these challenges, and the degree to which they will be able to collaborate and coordinate their efforts internationally, will ultimately determine whether steady, inclusive, and sustainable growth can be achieved in the near future.
References
[4] OECD (2021), OECD COVID-19 Hub, OECD Publishing, Paris, https://www.oecd.org/coronavirus/en/.
[2] OECD (2021), OECD Economic Outlook, Volume 2021 Issue 1, OECD Publishing, Paris, https://doi.org/10.1787/edfbca02-en.
[3] OECD (2021), OECD Science, Technology and Innovation Outlook 2020, OECD Publishing, Paris, https://doi.org/10.1787/75f79015-en.
[6] OECD (2021), OECD Skills Outlook 2021: Learning for Life, OECD Publishing, Paris, https://doi.org/10.1787/0ae365b4-en.
[5] OECD (2020), OECD Digital Economy Outlook 2020, OECD Publishing, Paris, https://doi.org/10.1787/bb167041-en.
[1] OECD (2019), OECD Economic Outlook, Volume 2019 Issue 2, OECD Publishing, Paris, https://doi.org/10.1787/9b89401b-en.
Notes
← 1. Data, analysis and recommendations are delivered via the OECD COVID-19 Hub (OECD, 2021[4]). In addition, flagship OECD publications such as the OECD Economic Outlook (OECD, 2021[2]), the OECD Science, Technology and Innovation Outlook (OECD, 2021[3]), the OECD Skills Outlook (OECD, 2021[6]), the OECD Digital Economy Outlook (OECD, 2020[5]) and numerous working and policy papers from across the Organisation, have provided analysis and evidence to support governments in their efforts to design and implement policy supports and coordinated responses across countries.
← 2. The DynEmp website (http://oe.cd/dynemp) provides recent evidence on firm dynamics during the crisis period alongside different long-term indicators related to business and employment dynamics, as well as additional reading on the topic.
← 3. For more detailed OECD analysis of some of the areas for opportunity emerging from the crisis, alongside guidance for policy-making approaches, see the OECD Science, Technology and Innovation Outlook (OECD, 2021[3]).
← 4. See https://www.covidinnovations.com/home for examples.
← 5. In-depth analysis and policy guidance on this topic, including on digital divides, can be found in the OECD Digital Economy Outlook (OECD, 2020[5]).