Covid-19 and the response to it has left a trail of destruction. Lives have been lost or permanently altered. Economies are bruised, job losses have soared and public sector deficits are set to serve as an unpleasant reminder of the trauma for many years to come. Many are now asking what comes next, and whether life will ever be quite the same again.
But from the rubble of the destruction, opportunities are emerging to rebuild economies, industries and systems with new and innovative ways of thinking, as has been done so repeatedly in the past: towns that rebuild better after earthquakes, or Japan and Germany’s thriving post-war economies, or business innovations such as Henry Ford’s assembly line or Microsoft’s Windows operating system.
In exposing many of the weaknesses in the world’s healthcare, economic and financial systems, the virus has offered both the opportunity to build back better and a roadmap for how we may do that. Companies and countries with the nerve to take those chances and create a new and improved future are likely to be well rewarded. Destruction can clear the path to innovation.
In a new series of fortnightly features, we will be looking on a sector-by-sector basis – from healthcare to financial services – at how investors can navigate this simultaneously exciting and disruptive change that the world needs. JH
Welcome to The New Future.
A world without limits
There is an odd tranquillity about the coronavirus crisis. Quiet roads, empty skies and family bike rides have replaced the constant pounding of 21st century life. Where complaints about politics and policy, boredom and balance are overridden by an incomparable gratitude for good health.
But it’s an uneasy tranquillity. One that is disrupted with every death announcement, technological malfunction or glimpse of a shuttered shop which some fear may never reopen.
On an individual level coronavirus is having catastrophic consequences that stretch beyond the immediate health issues. In Britain, the fallout from lockdown is filtering through the economy, starting with the retail, hospitality and leisure industries and rippling up the property and banking sectors. Unemployment is rising and threatens to explode when the government’s unfathomably expensive furlough scheme is inevitably lifted. Public sector employees – among them those who are providing life-saving services at the peak of the pandemic – will pay for the spending splurge with salary freezes in the years ahead.
But just as Captain Tom battled personal challenges to walk 1,000 laps of his garden (and in doing so warmed the hearts of a nation), there are plenty of encouraging stories of fortitude in business: gyms that have gathered new members by offering online classes; restaurants offering delivery services for the first time; a return in demand for local corner shops; and the farm that made more money in April 2020 by loaning its goats for entertainment in online conference calls than it did in April 2019 when it merely offered traditional farm visits.
Covid-19 has magnified weakness and exposed opportunities. That is why this crisis could be the first since the second world war with the potential for ‘creative destruction’ – the term used by economist Joseph Schumpeter in the 1940s to describe innovation as a means of ripping up the status quo to make way for something better.
Schumpeter used Henry Ford’s moving assembly line – which resulted in a dramatic reduction in the cost of manufactured goods and laid the path towards modern consumer culture – as an example of entrepreneurship at its finest. Creative destruction has since been used to describe any innovation that paves the way for a better way of operating: Amazon (US:AMZN) and automated warehouses, for example; Netflix (US:NFLX) and the shift to content streaming; 3D printers and their potential to render global supply chains worthless.
It is true that destruction doesn’t necessarily give way to creativity and innovation. On too many occasions, policymakers and corporations have failed to constructively rebuild when weaknesses have been exposed by trauma. But sometimes trauma (such as that caused by a major pandemic) provides a much-needed catalyst for innovation.
Coronavirus has exposed gaping holes that need to be repaired. Applying the same sticking plasters used time and again to fix new wounds won’t work. To build a better world in the wake of the destruction left by coronavirus, we need a change in thinking.
Economics from history
Starting with the economy. Government responses to the Covid-19 pandemic have been monumental. The fiscal measures (government spending and tax cuts) to help businesses and families passed by US Congress will cost $2.2 trillion. Finance ministers from the European Union approved a half-trillion-euro fiscal package, bringing economic support by the EU and member states to €3.2 trillion in aggregate.
When announcing the UK government’s £330bn-worth of support for businesses, Chancellor of the Exchequer Rishi Sunak noted it was an intervention unprecedented in peacetime. The eventual cost to the UK government of all measures, including its furlough scheme to pay workers put on leave, is still to become clear. In 2020 alone, the Institute for Fiscal Studies (IFS) estimates government borrowing could be £177bn – more than treble the estimate before the crisis.
Questions are now, rightly, being asked about the source of all this capital and how long it will take to pay back. In the UK, the extraordinary spending is a worrying reminder of the 2008 financial crisis, when the government borrowed heavily and then attempted to stimulate the shattered economy by slicing interest rates and initiating a quantitative easing programme. True, the banking sector was saved and is today arguably more stable than it was prior to the crisis, but the overriding outcome of the repair was 10 years of austerity and sluggish growth.
Once again, monetary and fiscal measures are not the answer to the country’s economic challenges. Central bank base rates were already so low before the pandemic that further cuts aren’t expected to provide much stimulus. Quantitative easing is also not the solution when demand has fallen just as rapidly as supply – there is no point in making it easy for people to spend their money if they are in lockdown. Meanwhile, austerity might succeed in bringing down the national debt, but it won’t help stimulate growth.
There is also an individual economic fallout to consider. Base rate cuts and quantitative easing won’t help the millions of workers who are facing job losses as the companies they work for scramble to save cash, or the private business owners who have had to close for good. Talk of V-shaped or U-shaped economic recovery is futile if continued austerity stunts consumer spending and cannibalises growth for another decade.
Ministers can learn a lot from the UK’s post-war economic boom. In the late 1940s Britain’s debt to GDP ratio peaked at over 230 per cent. But rather than clamp down on spending, investment increased in the post-war years, catalysed by the formation of the welfare state and the National Health Service (NHS). And as government spending as a percentage of GDP rose steadily, national economic growth went with it. The same was true in the US where the benefits of President Roosevelt’s ‘New Deal’ helped drag the country out of the Great Depression.
Perhaps the most obvious examples of post-war economic creative destruction come from Germany and Japan – two countries severely shaken by the fallout of war. Without the burden of policymakers or lobbyists, entrepreneurship and innovation thrived, leading to two of the strongest industrial economies of the post-war world.
The Green New Deal
But innovative industrialisation isn’t the answer to the economic concerns of the 21st century. Today, economists are troubled by uncontrollable population growth, resource competition and their role in exacerbating inequality and damaging the environment. It has taken a global pandemic and strict lockdown measures to reveal just how fragile the global economic system is. The threat of repeated virus outbreaks in a world where frequent international travel has become the norm raises questions about the role of globalisation and international supply chains.
The response, argues economist Joseph Stiglitz, should be greater investment in green initiatives that not only help rebuild, but “transform the economy into the 21st century kind of economy that we need”. Mr Stiglitz is a strong advocate of a Green New Deal, which aims to address the issues of climate change and inequality to help stimulate the US economy, just as Roosevelt’s New Deal did after the War. Closer to home, climate ministers from several member countries (now including France and Germany) are calling for the EU-wide stimulus packages to emphasise the transition to clean energy in a post-coronavirus world.
But perhaps policy is not as crucial in the war on climate change as we once thought. The rapid mobilisation against the coronavirus certainly raises questions about the lethargy in action against rising global temperatures, which the World Health Organisation links to an estimated 150,000 deaths per year. If governments are willing to leave themselves further indebted to the tune of hundreds of billions of dollars, in what amounts to a war effort against Covid-19, why has the possibility of a climate Armageddon been met so meekly by comparison? The difference is summarised by EDHEC-Risk Institute finance professor Riccardo Rebonata: “Covid-19 is a very ‘clear and present danger’, and this creates a dynamic of strong and ready political acceptance, very different from a ‘slow-burning’ problem such as climate change.”
Urgency, therefore, rather than policy is crucial to shifting the trajectory of global temperatures. Research from the London School of Economics argues that we should be moving away from the narrative of hardship and disaster that has dominated climate talks for several decades and instead focus on innovation, growth and investment opportunities. Emphasis of the universal benefits of green initiatives beyond climate impacts could also help shift behaviour: reduction in emission of air pollutants to improve respiratory health, more green space in cities and better walking and cycling routes for fun and commuting.
Coronavirus has highlighted that we can exist in a world that is more carbon friendly. Sure, we’re not going to be maintaining all the same behaviours that we have during lockdown, but demand for travel, especially for work, could reduce significantly in the ‘new future’. Global populations might be more open to new work and travel solutions in the post-coronavirus world. The opportunities for innovation in the war on climate change is arguably more exciting than it has ever been.
And recent co-operation between governments and companies in the war on coronavirus is encouraging in terms of what is possible. The social impact finance team at legal firm Reed Smith note how the likes of home appliance maker Dyson and the Mercedes Formula One team have helped design and manufacture ventilators to treat Covid-19 patients. Diageo (DGE) has used its expertise in alcohol to increase supply of antiviral hand wash. Burberry (BRBY) has been producing gowns for nurses and doctors. This collaboration could set a precedent for dealing with climate change.
Viruses can spread west
It’s not just the health of the planet that has been thrown into sharper focus by the coronavirus. Human health has unsurprisingly become a central concern as, for the first time in over a century, the western world faces a brand new medical threat.
That’s not to say that pandemics are a new concept. Indeed, epidemiologists have been warning that international travel and global supply chains have threatened to facilitate the spread of an infectious disease for many decades. We have also had plenty of warning – swine and bird flu hit western shores in the mid-2000s, and the catastrophic consequences of Ebola in western Africa in 2014 captured global attention. The question is therefore pressing: why were we not better prepared?
Perhaps the containment measures of recent virus outbreaks lulled western populations into a false sense of security. Accusations of unnecessary panic in the wake of swine flu and bird flu might explain why government responses in both the UK and US were delayed and confused. Control and containment measures have often felt sudden and reactive rather than carefully planned. Poor availability of personal protective equipment (PPE) and ventilators for hospitals has revealed how reliant some western healthcare systems are on global supply. Coronavirus has offered those systems an opportunity to reassess their operations. One thing is clear, rainy day preparations need a complete rethink.
It’s no accident that some of the best responses to Covid-19 have come from countries in Southeast Asia, where the Sars and Mers outbreaks are a recent and painful memory. Local populations were quick to heed their governments’ warnings about hygiene and social distancing. Testing and tracking – the two measures the British government is scrambling to put in place – were already in use in regions such as Hong Kong and Singapore and have helped to control the infection and death rate. And that has added a new dimension to the argument about use of personal data.
The changing face of big tech
When 2020 started, the biggest cloud hanging over the US tech sector was potential regulation. Alphabet executives were expected to spend most of the year answering questions about how they use people’s data (in the same way Mark Zuckerberg did in 2019). Amazon was being hammered for monopolising industries and consumers were worried about Alexa listening to conversations. Social media sites were being criticised for using individual data to make money and failing to clamp down on the spread of misinformation.
Much has changed in a few short months. We’re now talking about Google’s increasing role in education, Amazon delivering vaccines, Microsoft and Apple tracking the spread of coronavirus around the world. Meanwhile, these companies aren’t taking a penny from embattled governments. Their cash position means they can give freebies to struggling customers and money to help the coronavirus effort. In a crisis, cash-rich, data experts are the type of companies we want. The pandemic therefore offers an opportunity to reset how we think about technology and the responsible use of data.
Personal, anonymised data tracking is currently being used predominantly by advertisers, but its potential use stretches far beyond its current capacity. Data will help us reopen economies faster in the wake of coronavirus, keep tabs on future surges, and help distribute PPE and ventilators better. It is true that we need to be very careful about putting our data in the hands of a few conglomerates. But, rather than regulate it, perhaps we should be spending money protecting it – better telecoms networks which don’t rely on Chinese state-funded companies and government-funded cyber security could ease the concerns surrounding company data use.
The response of big US tech companies during the coronavirus has also added a new dimension to the debate around monopolistic powers. Amazon, Alphabet, Apple and Microsoft have all faced regulatory pressure in the past few years for their dominant roles in their respective industries. But no one is complaining about how those dominant roles have allowed them to generate such lofty profits that they are able to support us all in times of catastrophe. Meanwhile, companies across many tightly regulated industries including telecoms and airlines, have relied on taxpayer-funded support to help them through coronavirus and the subsequent economic fallout.
Schumpeter argued that monopolies were a way of emboldening innovation. Amazon, Microsoft and Alphabet provide clear evidence of that. All three have monopolised their own industries and the retail, software and advertising markets respectively have provided them with extraordinary profits. Those profits have in turn been ploughed into innovation. Amazon, Alphabet and Microsoft are therefore going toe-to-toe in some of the most creative areas of technology – cloud computing and artificial intelligence, for example. Their profits have allowed them to compete fiercely for a breakthrough in ‘the next big thing’.
Thus, in the wake of coronavirus perhaps we should all be focusing on the new rather than desperately trying to protect the old. The breadth of industries that could benefit from creative destruction is reflective of the scale of the damage caused by coronavirus and the number of industries whose imperfections have been magnified by a major trauma.
The world that is waiting for us on the other side of coronavirus could be very different to the one we have left. But that doesn’t have to be a bad thing.
More from the series
Over the next century – assuming the species makes it that far – human civilisation will undergo a technological leap equivalent to the changes seen from the birth of agriculture to the birth of the internet. Alex Newman has examined how to think about that prospect in this feature.
Britain’s response to the coronavirus pandemic has been repeatedly compared with the second world war. Perhaps the metaphor has been overworked, but in drawing comparisons with wartime Britain, policymakers can learn a great deal about rebuilding in the wake of catastrophes. And nowhere is that more pressing than in the healthcare industry.
Climate change is arguably the number one threat to our species but, although some governments were talking a good game before Covid-19, nothing like the level of spending that we have seen to combat the pandemic has been enacted. Could the virus prove a tipping point which sees greater investment in green initiatives?