How the COVID-19 pandemic will boost digitalization

Article By Thieß Petersen, Senior Advisor, Global Economic Dynamics Project, Bertelsmann Stiftung, Germany and Lecturer, European University Viadrina

The corona crisis has the world in its grip. The extent of the social upheavals and the long-term consequences of this pandemic are not yet foreseeable. However, there is some evidence that it will further accelerate the use of digital technologies. The associated economic transition needs socio-political support.

The economic aspects of COVID-19

The global economic crisis triggered by the spread of the coronavirus COVID-19 is not only an economic demand crisis, but at the same time, a supply crisis.

Previous global economic slumps — such as the global economic crisis in 1929 and the recession following the Lehman bankruptcy in 2008 — were the result of bursting speculative bubbles. The resulting uncertainty abruptly reduced demand for consumer and capital goods. This caused a massive economic slump (Petersen 2018). However, production capacities were not affected: Companies could have produced if there had been a demand for their products.

The current situation is fundamentally different. A rapidly spreading infectious disease initially has a dampening effect on demand. For fear of infection, people avoid transactions. They refrain from visiting restaurants, cinemas, theatres, sports events and cancel holiday trips. The drop in demand is particularly high when state authorities prohibit such activities for reasons of prevention.

In addition, a pandemic reduces the production potential of an economy. If employees are absent because they are ill or are not allowed to appear at work for fear of infection, the production capacities of companies are reduced. In the worst case, companies are completely closed down. Thus, a supply crisis is added to the prevalent demand crisis (Petersen 2020).

These real economic effects change macroeconomic developments and entrepreneurial decisions — both in the short and in the medium term.

Short-term boost in digitalization by COVID-19

The decline in consumer demand caused by COVID-19 can be compensated, at least in some areas, by switching to online trading. Online purchases replace purchases in stationary trade. The same applies to delivery services that replace restaurant visits.

The trend towards greater use of these types of consumption is already becoming clear. In mid-March, Amazon announced the hiring of 100,000 additional employees in the USA to handle the higher amount of online orders in the wake of the corona crisis (Mattioli 2020).

These developments could permanently change the structure of retail trade. If the closure of stationary stores continues, it will unavoidably lead to high losses for them and could cause bankruptcy. As a result, many stationary shops could completely disappear and be replaced by large online providers.

Medium-term boost in digitalization by COVID-19

A tool that is already being intensively implemented to reduce health-related absenteeism among employees is the use of home office. This decreases the risk of infection and prevents the absence of employees who do not want to enter the company for fear of infection. In the future, companies are likely to intensify this form of working — at least in those areas where the use of home office is possible — in order to be better prepared for a future pandemic.

Another reaction to the experience of the corona pandemic is that companies are increasingly using machines, robots and other digital technologies in the production of goods and services. This amplified tendency towards automation replaces human labour and thus reduces the dependence on labour in the production process.

The increased use of digital technologies instead of human labour requires extensive investments. However, it is yet not clear to what extent the private sector will be able to finance such investments after the end of the corona crisis.

New social conflict lines

The technological answers to the question of how companies or entire economies can better prepare for future pandemics show that the response options are unequally distributed within the economy —

(1) While manufacturers of physical goods can fall back on online trade, this is not possible with many forms of so-called social consumption — above all, tourism. The suppliers of such social consumption activities (i.e., not only the owners of the businesses but also the people employed there) bear a greater risk of losing income in the event of a future pandemic.

(2) The opportunities to carry out professional activities in one’s own home are also unequally distributed within society. Especially in the area of personal services, this form of work is simply not possible.

(3) Not all companies will have the financial scope to achieve a greater degree of automation and digitalization. This is likely to be particularly true for small and medium-sized enterprises, which have less access to credit than large companies.

The digitalization accelerated by COVID-19 and the associated economic transition can also lead to tensions between economies —

(1) The increased use of capital and technology means that many emerging and developing countries are losing their most important international competitive advantage — cheap labour. As a result, the poorest countries may remain disconnected from global economic growth.

(2) Many industrialized countries will consider whether they will produce particularly important inputs and final products domestically (especially in the medical sector, but not only there) in order to reduce their dependence on imports.

The trend towards so-called reshoring (Petersen 2019) is likely to accelerate: Industrialized countries will relocate production steps that they originally had shifted to low-wage countries. For these low-wage countries, reshoring leads to losses in jobs and income.

Outlook

The economic impact of a pandemic will cause many companies to adapt their medium and long-term strategies to make greater use of digital technologies. The associated economic transition implies economic disadvantages for certain groups of people and regions.

However, we should not prevent this technological development because it improves resilience in situation of crisis. The boost in digitalization caused by COVID-19 should be accompanied by appropriate social policies. Both, within and between countries, we need mechanisms that allow the potential losers of the economic transition to get a share of the benefits of digitalization. This in itself is ethical and fair.

Furthermore, the support of those losing employment and income is also in the interest of those who are financing this support. Without compensations, social tensions and political polarisation will increase — both within and between countries. This hampers the national and international division of labour, and is thus at everyone’s expense.

References

Mattioli, D. (2020). Amazon to Hire 100,000 Warehouse and Delivery Workers Amid Coronavirus Shutdowns. The Wall Street Journal.

Petersen, T. (2011).10 Years after Lehman – Does another Economic Crisis loom? (Part 1). Global Economic Dynamics. Bertelsmann Stiftung.

Petersen, T. (2020). What does the coronavirus outbreak mean for the global economy? Global Economic Dynamics. Bertelsmann Stiftung.

Petersen, T. (2019). What Is the Impact of Reshoring? Global Economic Dynamics. Bertelsmann Stiftung.


Note: This article is a reworked and modified version of a post published in German on the blog Zentrum Liberal Moderne: That post can be accessed here.