COVID-19 as a catalyst for economic change

Covid-19 has transformed the world in two years. Apart from the unprecedented hardship and suffering it has visited on millions, it has also reshaped behaviour and attitudes in profound ways.

The spectacular rise of digital technology has been one of the most transformative changes. McKinsey & Co recently estimated that the digitization of customer and supplier interaction has accelerated by 3-4 years and the share of digitally enabled products by seven years. Customer behaviour has switched to favour flexible distance purchases.

Never let a good crisis go to waste is one of Sir Winston Churchills many memorable quips. Identifying opportunities for change is of particular importance in the Gulf where an economic paradigm shift was recognised as a priority long before the pandemic. The erstwhile comforts of secure margins underpinned by rising government spending, population growth, and input subsidies have been challenged by slower trend growth, labor market disruptions, and fiscal consolidation. Covid has highlighted the risks of the long-standing preference of investors for low-productivity activities reliant on low-cost labor: retail trade, cafes and restaurants, construction, and basic services. All of these were disrupted by restrictions on mobility but also longer-running structural changes such as the rise of e-commerce.

Covid-19 has forced companies confronted by unprecedented uncertainty to ask question and think ahead. The increased interest in technology has pushed businesses away from their traditional low-cost labor-bias and helped trigger broader reviews of business models. Embracing this global trend is critical to safeguarding the competitiveness of local businesses. Many other opportunities for change exist: digitization, automation, energy efficiency, renewables, consolidation, partnerships, new distribution channels, exports, etc. All these can boost productivity improve the top line and better manage the cost base. The result will be stronger, more dynamic businesses that can contribute to growth through increased value addition and quality job creation.

More generally, traditional assumption about capital allocation are coming into question as investors seek alternatives for the safe bets of yesteryear, such retail SMEs and real estate investments. Successful company creation will be increasingly about addressing relevant economic problems (which are more numerous than ever in the wake of the pandemic) and pooling resources through multiple founders.

Value will come from technology adoption, scalable business models, innovation, and better governance. With change the new global norm globally, business competitiveness will hinge on agility and adaptability as technology continues to reshape the global economy. But the financial sector will also have to innovate to better cater to these new needs and opportunities. The good news is that unleashing the power of productivity possesses considerable potential for substantially accelerating economic growth and delivering higher living standards.