11 minute read 7 Dec 2020
Aerial view of wind farm on the coast on a misty morning

How global recession can turn into sustainable growth

To foster sustainable and resilient growth, governments need to reimagine their role in the economy.

In brief
  • The economic impact of the COVID-19 pandemic is likely to bring consequences that will last generations.
  • Governments should think strategically about their expanded role in the economy.
  • Growth strategies should complement other policy priorities, such as tackling inequality and climate change.

It is hard to overstate the scale of disruption the COVID-19 pandemic has brought to our economies and communities. The crisis is fundamentally reshaping society. And, it is hastening the transformation of government itself.

It is no surprise that, around the world, countries are viewing this as a moment to reimagine the future of government.

EY has identified four strategic priorities for governments as they seek to reimagine their future:

  • Regenerating economies
  • Reshaping public services and revitalizing local communities
  • Retaining and extending innovative ways of working
  • Repairing public finances

Here, we look at the task of regenerating economies.

During the course of the pandemic, the economic outlook in most countries has changed fundamentally. So profound have these changes been, that the consequences are likely to last several generations. Here are four key considerations for governments as they seek to manage this challenge.

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Chapter 1

Create a new growth strategy

Demand- and supply-side measures.

A new strategy for growth is urgently needed. Governments will play a central role in enabling an economic recovery after the pandemic. Making the right choices now will boost future productivity and long-term economic competitiveness.

Many governments have chosen to support some companies and sectors where it yields economic or social benefits during the pandemic. For example, governments in 57 countries have committed almost US$159 billion in relief measures for airlines.1 Governments will also have a critical role to play in developing competition, skills and innovation policies to equip businesses with the confidence and resources they need to invest and grow. A strong focus on job creation in hard-hit regions is important, given the very high unemployment rates caused by the COVID-19 pandemic.

Likewise, it is vital to provide support for R&D in key sectors that are likely to provide long-term employment and growth opportunities. Start-ups, for example, have emerged as important drivers of growth and job creation, and are often a catalyst for radical innovation; many governments have responded with measures to support them through the crisis. R&D in the area of technological innovation, including green technology, is likely to be a central plank of economic stimulus plans. For example, Germany’s €130b economic rescue package earmarks €50b for future-oriented projects, including the promotion of electric cars and the rollout of e-charging points; the modernization of transport fleets and infrastructure; and the implementation of a national hydrogen strategy.

In addition, countries and cities of all sizes also have an opportunity to increase their own attractiveness by refreshing their foreign direct investment (FDI) policy. For example, the Malaysian Government attracted US$1.6b of FDI in the first quarter of 2020. It has actively courted investment through a stimulus package featuring tax breaks for companies relocating operations to the country, and faster approval processes for manufacturing licenses.

Governments have a critical role to play in developing competition, skills and innovation policies to equip businesses with the confidence and resources they need to invest and grow.

The pandemic has also led to a demand-side shock as the ongoing economic uncertainty and fear of job losses has dampened consumption. Stabilizing aggregate demand will be an important policy priority as governments kick-start their economies. Many countries have offered financial support to households through measures, such as direct cash transfers and tax payment deferrals. Some have also attempted to boost consumption through temporary reductions in value-added tax (VAT) rates.

Rebuilding consumer confidence in spending decisions will also be critical to recovery. Despite a large part of government stimulus so far being focused on maintaining household incomes, according to the EY Future Consumer Index (June 2020), 78% of consumers feel somewhat or extremely concerned about the impact of the pandemic on their finances. Sixty-seven percent are thinking more carefully about what they spend their money on and 20% think it will take years to regain financial stability. Some governments have kick-started recovery by encouraging a targeted surge in spending on particular sectors. For example, China Mainland, Taiwan, South Korea and Malta have handed out “consumption vouchers” – cash for each adult to spend in shops and restaurants.

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Chapter 2

Update resilience plans

Removing weaknesses that leave economies open to shocks.

Traditionally, many national governments have prioritized economic efficiency over resilience. But the COVID-19 pandemic has exposed global supply chain vulnerabilities. It has demonstrated the importance of flexible and agile supply chains, and of relationships with highly trusted traders, most obviously for the supply of health and pharmaceutical products.

In the aftermath of the crisis, reshoring has emerged as a strategy for building resilience. Some governments have responded by mandating onshore R&D, and manufacturing and stockpiling of pharmaceuticals, medical gear such as ventilators and test systems, and personal protective equipment (PPE), as they place greater emphasis on self-reliance. In May 2020, for example, the US Government authorized the US International Development Finance Corporation (DFC) to issue loans and encourage the reshoring of strategic sectors, such as medical goods, digital health, life sciences, data science and advanced technology.

Such measures are a sensible response to the crisis, but we also need to guard against overshoot. There is limited economic evidence that reshoring bolsters domestic growth and security.2 On the contrary, it can come at a high cost, posing a threat to global economic growth and international trade. The unwelcome consequences include a rise in protectionism, border closures and the increased vulnerability of low-income countries that rely heavily on exports for development. Sustainable economic growth depends on healthy and open competition. Domestic duplication of production may create local jobs in the short term, but may also erode competitiveness if countries lack the skills and resources to produce goods as efficiently as their former trading partners.

Supply chain resilience may be better served by a blend of measures. First, diversification of local suppliers and markets for end goods, to spread risk across production networks and create more dynamic resiliency. Second, regionalization to help reduce risks from diffuse trade networks and limit environmental footprints. Third, stockpiling of critical supplies, to allow the efficiencies of global value chains to continue, while maintaining a strategic reserve of essential goods for use during a crisis.

There are other upsides to maintaining efficient global supply chains, including providing access to a diverse range of products at an affordable cost. Governments will want to avoid intervening in nonessential sectors and resist lobbying that uses the COVID-19 crisis as an excuse for unnecessary protectionist measures.

It is also important that resilience plans be reflected in infrastructure priorities. Even before the crisis, the infrastructure investment gap was significant – predicted by the World Economic Forum (WEF) to reach US$15t by 2040. But in the wake of the COVID-19 crisis, there are concerns that a persistent lack of investment will threaten future growth, undermine our resilience to climate change and eventually reduce our quality of life. To help address these issues, new value-adding and strategically important projects can be prioritized, such as digital infrastructure, including broadband connectivity and 5G for mobile services, vertical farming, social housing, hospitals and care homes.

Workforce resilience is another vital consideration. The pandemic has demonstrated the value of “ready to go” reserve forces for health care, social care, delivery, transport and security. In the UK, final-year medical students graduated early, and National Health Service retirees invited back to work, to help treat the sick. But more workforce planning is needed to prepare for the next crisis. The use of predictive analytics and resource simulations — involving everyone from food producers, medical suppliers and health care providers, to defense, law enforcement and emergency-management agencies — will help ensure that delivery systems and infrastructure are response-ready. And, an agile approach will be required to shift resources and skills to where they are most needed.

Finally, the pandemic has shown us how reliant we all are on essential workers to feed and protect us in times of adversity. Paradoxically, while the status and risk involved with being a key worker have never been higher, low pay and lack of benefits continue to be hallmarks of these professions.

Physical safeguarding will be a basic priority, along with new reward structures, such as minimum living wages, bonuses, priority access to services and corporate discounts. Job quality and status should be center stage, along with stronger employment rights and policies to empower working people.

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Chapter 3

Prioritize sustainability

Engineering a greener economy.

Before the pandemic, concern about the environment was at the forefront of citizens’ minds. During the outbreak, mandatory changes to the levels of remote working, coupled with increased use of online delivery services, led to major reductions in pollution and congestion, as well as cutting the economic and social costs of travel. As people were confined to their local areas, taking daily walks and runs, they became more attuned to the value of nature, clean air and open spaces. 

The flipside of remote working, however, has been empty city centers and a threat to the ecosystem of businesses that rely on commuters and lunchtime trade. The challenge for governments will be to secure the environmental benefits seen during lockdown, while at the same time ensuring cities and high streets still remain busy and vibrant.

Annual change in global energy related co2 emissions over years in gigatons

Governments can prioritize the green economy as a vehicle for recovery, implementing projects designed to stimulate economic growth, create jobs and spur innovation, while also accelerating decarbonization. This means mobilizing private capital, and creating new policy and regulatory frameworks to boost sectorial transitions, for example, in the areas of clean energy, sustainable mobility, biodiversity and food production.

Local government can play its part by constructing more sustainable public transport infrastructure and cycle lanes, reducing air pollution on high streets and around schools through low-emission zones and traffic restrictions, and creating new public open spaces.  

The leading G20 economies have allocated US$3.7t of stimulus directly into sectors that have a large and lasting impact on carbon emissions and nature, namely agriculture, industry, waste, energy and transport. However, this represents just 30% of the total stimulus allocated.3

The European Union (EU) is leading the way in targeting climate-change goals, announcing the €750b (US$830b) Next Generation EU recovery package focused on delivering economic growth through investment in environmental protection and the digital economy. The initial announcement, in May, included a large renovation program of buildings and infrastructure; investment in renewable energies including hydrogen; electric vehicle infrastructure; and green public transport for cities. Together, with additional budgetary funds earmarked for 2021–27, this would bring the total EU recovery armory to €1.85t.

Public-private partnerships are a useful lever for developing innovative solutions and decarbonizing the economy. Governments can incentivize participation in green infrastructure projects thereby reducing the associated risks; they can also deploy tax incentives, favorable lending and forms of sustainable finance, such as green bonds or sustainability-linked loans.

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Chapter 4

Be an active investor

How stakes in the economy can be an opportunity not a burden.

Many governments will emerge from the COVID-19 crisis holding a large portfolio of loans to businesses, equity stakes and newly state-owned assets, as they step in to fill the gaps left by private financial institutions and help companies survive to the other side of the pandemic. These investments can be viewed as an opportunity, not a burden, if governments actively manage assets to serve the long-term public interest and boost economic growth, employment and resilience. It will also be vital to undertake a “first principles” review of whether to unwind or hold the positions over time.

Some governments may seek to manage investments to maximize long-term returns. Where industry support is provided in any format, however, there is a good opportunity to insist on structural reforms that improve services, boost efficiency and productivity, and contribute to longer-term policy objectives. Governments have several tools at their disposal to achieve different social or environmental policy objectives. Targeting support and devising measures with “smart conditionality” – linking investment to activities that align with climate and environmental goals, improved employment standards, better corporate governance or longer-term resilience – can be a way to improve long-term value.

In addition, governments are putting in place arm’s-length governance arrangements to avoid conflicts with ongoing regulatory roles. Appropriate care will be needed to ensure that any financial support provided does not create conditions that could lead to enduring trade or market distortions. Greater transparency over support packages will also help build public trust, as will increased government accountability and oversight of the measures adopted.

The Organisation for Economic Co-operation and Development (OECD) has suggested that more emphasis should be placed on support measures that benefit smaller enterprises, including those operating in service sectors. It also recommends investing in strengthening broader health care and social safety nets from which everyone benefits, to help kick-start demand after the immediate crisis, reduce excess savings and rebalance the global economy.

Governments can also think creatively about managing their portfolio. One suggestion is to take all the loans, convert them into equity and create special purpose vehicles through which they manage investments for the public’s benefit. In this way, all citizens would have a collective stake in the domestic economy.

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The COVID-19 pandemic has brought a seismic shock to the global economy. By taking a strategic approach to recovery, governments can restore sustainable growth while advancing longer-term goals such as building a greener and fairer economy.