The IMF and World Bank hold their annual meetings this week. The greatest focus is naturally on the pandemic and the prospect for recovery from the deep economic downturn it has caused. But in the long term, both economics and politics may depend as much on how the composition of the economy changes as its aggregate ups and downs.
So it is good to see that many top policymakers are taking the challenge of restructuring as seriously as the imperative of recovery. In her "governor talk" at the meetings this week, European Central Bank president Christine Lagarde gave a clear-eyed explanation of how the economy was likely to change, with some telling examples.
We are, in her words, likely to see a permanent shift in the ways we work, shop and pay — with greater use of digital solutions in each case. Lagarde said that in Europe, 50 per cent of employees worked from home in the deepest lockdown, and of those only 10 per cent "have the urge to go back to office work". Physical retail is being significantly replaced by ecommerce, which in Europe has increased by one-fifth in volume since February, and she thinks that is also likely to stay with us. And cash is giving way to digital payments. Lagarde confirmed the ECB was "looking very seriously" at a digital euro, the topic of our previous Free Lunch.
Lagarde also predicts "a new wave of service-driven globalisation", giving the example of an oncologist in her family who carried out remote consultations during the lockdown, a practice both the doctor and patients would like to stick with when possible. The pandemic, in short, vastly accelerates deep structural shifts already in train — including, one hopes, the carbon transition — and may add some new ones.
It is vital that economic policymakers develop policies to actively manage these shifts. The first necessary step is to map, to the best of our ability, which jobs, functions and roles are likely to be made obsolete by the shifts, and which are merely temporarily hit by the pandemic.
An extremely important contribution to this effort comes from the RSA (The Royal Society for the Encouragement of Arts, Manufactures and Commerce), which has developed a typology of different types of work depending on how exposed they are to Covid-19 risks, automation risks, or both. As its chart below illustrates, on the whole, the jobs more at risk of being automated are also those most likely to have been shut down during the pandemic — which stands to reason because they often constitute manual services.
But there are many exceptions. A lot of activities in arts and culture, for example, are badly hit by Covid-19, but are likely to be as viable as before — and will not be automated away — if a vaccine finally keeps the disease at bay. As governments weigh how and whether to extend or end furlough schemes, drawing this distinction is essential.
Elsewhere, restructuring is inevitable. An important message of the latest IMF research is that countries need not sacrifice growth to fight the pandemic and green their economies, and the same may be true for shifts in the composition of economic activity. Indeed, the jump in remote working and online retail could be productivity-enhancing, as the IMF's World Economic Outlook suggests, but may have needed a shock to be collectively adopted.
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Still, there will be winners and losers. The RSA's full report highlights how the most exposed sectors are also often those with lower pay and worse working conditions as it is. So policies to smooth an economic restructuring must also be policies which ensure that those most at risk are not left behind but rather made to benefit as much as possible.
There is, fortunately, increasing clarity and agreement on the range of good policies for a beneficial economic restructuring. The first chapter of the IMF's WEO argues for better frameworks to restructure debt on corporate balance sheets, competition policies to help start-ups against incumbents, stronger welfare spending and social insurance, and training and education to boost human capital. Lagarde also calls for efficient regulatory frameworks that help start-ups, and for education and training — she argues that we have a good sense of what skills will be needed for the green and digital sectors — as well as greater public investment.
The RSA emphasises more differentiated pandemic support schemes, to keep supporting jobs that are viable in the long term while helping people move out of those that will not be. It also calls for "personal learning accounts" to let people acquire skills needed in "future-proofed" jobs, and urges Swedish-style "transition services for workers at risk of Covid-19 and automation" coupled with a transitional basic income.
We are, in sum, blessed with a lot of knowledge both about the long-term economic challenge facing us and about policies that should help address it. Now what we need is the determination to apply it.
- Financial Times