Economists have demonstrated decades ago that the magic elixir to economic growth is productivity, which, however, has been slowing down since 2000s. The purpose of this article is investigating how the pandemic impacted productivity, by changing the way people approach technologies and digitalization.
Indeed, if economic growth is driven by the size of labor force and capital accumulation in the short run, sustainable economic growth can only be achieved through the non-diminishing marginal returns of productivity growth, measured by a parameter denominated Total Factor Productivity. TFP is specific for each country and it describes how efficiently countries use available inputs. Behind these findings there is Paul Romer, whose intuition was that, despite the finite number of inputs firms dispose, if they are able to come up with new ideas for arranging those resources, these can be utilized with no limits, triggering continuous growth. These new ideas seem to be enhanced by improvements in education, increases in the portion of the labor force dedicated to R&D, higher level of investments (raising the level of capital per worker) and adoption of innovation. Thereby, the digital transition is a crucial variable in triggering technological diffusion, new business models emergence, newer potential for future inventions and, in turn, productivity and economic growth.
The main issue concerning Total Factor Productivity is that its much-needed growth has been suffering a slowdown for a couple of decades. When initially observing declining TFP growth, economists attributed it to the financial crisis of 2007/2008. The subprime mortgage crisis in fact contributed to the slowdown, by causing low demand and credit constraints, increasing uncertainty and, by its transformation into a sovereign debt crisis, leading to austerity policies. However, when investigating the root causes of declining productivity more deeply, it becomes clear that the slowdown started well before the crisis, underlining how other structural drivers must have played a role. Specifically, other possible causes regard a decline in technological progress per se (as suggested by the so-called techno-pessimists), mismeasurement problems (as hypothesized by the techno-optimists), and issues with technology diffusion.
The bigger question economists wonder is why modern technologies like improved robotics, artificial intelligence and machine learning, cloud computing and others have not prompted yet more investments and higher productivity growth. Could it be the case that artificial intelligence is intrinsically less revolutionary than running water, like the first school of thought suggests? Or are artificial intelligence effects simply harder to be measured, given the myriad of possible applications it can be correlated to? This second explanation is related to the idea of General-Purpose Technologies, that could potentially boost productivity, but that will show results only once really experimented and deeply internalized in business processes, which will however take time as well as public and private effort to be done. Lastly, these lags are exacerbated by issues in the process of digital technologies diffusion, which is limited by declining business dynamism and increasing misallocation of resources. In this perspective, concerns regard the possible reduction in competition favored by digitalization, which enhances barriers of entry economies of scale and network effects, and the increasing presence of no longer productive zombie firms in most advanced economies.
Whatever explanation one might attribute to the slowdown, it is widely accepted the expectation that Covid-19, despite the certain economic damages that brought about, might also mean huge prospects in giving rise to a new productivity boom. Office closures have forced both firms and their employees to invest in digitalization and automation, or to make use of existing investments. Marketing managers had to face customers uncertainty and sales drops, due to stores closures and social distancing, designing in response new ways of online communication and digital experience. Human resources departments, together with educational institutions, had to approach job detachments and human capital detriment with online training, tutoring programs and distance learning. Supply chain managers were paralyzed by supply chains disruptions, lack of inputs from abroad, reduced labor flows and improved cross-county barriers. Executives and managers were basically required to think out of the box, coming up with innovative solutions to unknown problems, while working from home and video conferencing 24/7.
This scenario is, indeed, very promising: evidence suggests that some transformations are very likely to stick after the pandemic, especially those that have required investments in digital equipment in the first place. Working from home proved to be better than expected for most employees and experiments have proved that, differently from what was believed in the past, productivity is only slightly but significantly higher when working from home. Therefore, this process of digitalization forced by lockdowns and social distancing could translate, firstly, into a major internalization of these technologies, that can really and deeply become part of all business processes, even radically changing business models and finally bring to life Solow’s General-Purpose Technologies also in the statistics. Indeed, even those economists who used to argue that “you can see the computer age everywhere but in the productivity statistics”, will potentially be able to finally measure the impact of the digital revolution. In addition, given the wide-spread impact of the health crisis, across all regions, countries, markets and industries, it might be a realistic opportunity to see laggards learning from firms at the frontier, digital best practices spill overs, cross-pollination among fields of study and technology diffusion among the most diverse players.
To sum up, the way out the crisis might be the digital transformation, creating new value out of an obscure situation, and, accordingly, the digital revolution might truly reach its broader potential thanks to the pandemic and the related restrictions, eventually improving productivity and economic growth. Rather than waiting passively for the situation to go back to some sort of pre-Covid normality, firms, institutions and governments should embrace the current circumstances and exploit its innovation opportunities, revolutionizing their day-to-day operations and their management practices by profoundly embracing digitalization.
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