The COVID-19 epidemic has in a short amount of time upended much of the reality around us. The human and economic costs have been grave already. And all of it happened in the course of a few weeks, if not days.

Governments had to quickly focus on bending the curve of infections, treating the sick, keeping the broader economic system intact, and softening the immediate social and economic impact of the public health measures and their repercussions on individuals and firms.

In terms of economic policy, a quick ramping up macroeconomic action was needed: Monetary action to safeguard the financial system and support demand. Fiscal action to keep companies afloat, employment relationships intact, and finance social measures to help those hit the hardest.

This was, and to a large degree still is, the time of the nation state. This is where the power and the political authority rests to take the necessary policy action.


Adding a long-term perspective to short-term action

We are now entering a new phase; the curve of new infections has been bending, and health care systems are in full swing to provide care to the high but for now stabilizing number of patients. We now can, and need to, think beyond the short-term: first about the period ahead where we have to live under ‘pandemic conditions’ while there is no cure available. And then about how to get back on a robust growth path in the post-COVID world.

Policy choices will have to focus more on what is sustainable, not just what is effective. The public health measures, in particular the lockdown, needs to be adjusted for societies to be able and willing to live by those rules. The economic policy response will need to start focusing more on what the best use of resources is, how they can be financed in a way that minimizes long-term costs, and how negative incentive effects can be kept under control.

Policy choices will also have to become more de-averaged by groups in society, by geographies, by sectors, and by types of companies. The public health measures will need to differentiate by individuals’ and entire locations’ risk profiles and COVID-19 infection status; testing and contact-tracing will play a key role. The economic policy response will need to consider the long-term viability of individual firms as well as the sector-specific costs of extended disruptions in operations, value chains, and employment relationships.


Adding a microeconomic pillar to the macroeconomic policy response

The inclusion of a longer-term perspective for policy action has also consequences for the type of economic policy action required: there is a need to add more microeconomic, supply-side elements into the policy mix. (1)

For partial re-opening of economies to be effective in reviving economic activity, it will need an unblocking of both supply and demand side problems. China’s economic data suggests that a full recovery is not automatic even when public health restrictions are removed, and the US evidence suggests that the degree of economic slowdown by state is not simply a function of the public health restrictions put in place. A macroeconomic stimulus will be needed to provide both purchasing power and a willingness to consume. But to be effective, microeconomic actions are needed to remove the large set of supply-side barriers that have emerged, from disrupted supply chains to weakened balance sheets to the new need for establishing new safe operating procedures.

In the approach to post-pandemic recovery, macroeconomic policy is critical to avoid a decent into a self-sustaining depression. But the global financial crisis (GFC) and its aftermath showed how even successful macroeconomic stabilization can come with lower long-term productivity and prosperity growth. What is needed for robust post-COVID growth is a clear plan to upgrade the microeconomic dimensions of competitiveness, including the quality of institutions, the quality of factor-input conditions, the openness of markets, the rules and regulations affecting businesses, and the presence of dynamic clusters and the sophistication of companies.


The role of regions

There is already a growing amount of data that shows how the pandemic is playing out differently across regions within countries (2). Initially, the most competitive, globally connected, and dense locations where hit the hardest. But over time those most reliant on particularly exposed sectors like tourism could be the main victims, and more generally regions that are less competitive and thus often less resilient.

Regions have already taken a wide range of actions, often being at the forefront of delivering health care, providing critical public services, and delivering emergency support to firms and individuals (3).

The role of regions is going to evolve as we are now entering a new phase of the pandemic. Adding a microeconomic pillar to the broader COVID-19 economic policy response gives regions new and more central roles. Regions are key in identifying the set of microeconomic actions critical for their specific context, including the specific set of sectors and companies that shape their economies. Regions control some of the core levers in this context, from the quality of local infrastructure to the engagement with clusters and SMEs to the efficiency with which local public services are being provided. Regions have unique access and trusted relationships to the business community, especially SMEs, enabling them to identify quickly what microeconomic barriers exist and how policy measures are working. And regions are critical in orchestrating the collective action without which competitiveness upgrading fails to gain momentum (4).

Regions need to mobilize and supplement national policies, applying them in a de-averaged, context-specific way. This requires close collaboration with national policy makers. Especially now in a period of significant uncertainty, regional governments need to quickly communicate what they hear from local firms about disruptions along global value chains or difficulties in accessing capital to national governments. Cluster organizations and regional economic development organizations can be a key asset in the rapid alert function the European Commission introduced in its road map to lifting the containment measures (5).

Nations were critical to mobilize the emergency response to COVID-19. Regions (and cross-country collaboration) will play a growing role alongside them as the world slowly emerges from the pandemic. In this regard, you can read reflections by F.Alburquerque and E.Magro in their respective blog post.

 


  • (1) Ketels, Christian, J. Peter Clinch (forthcoming 2020), Acting now while preparing for tomorrow: Competitiveness upgrading under the shadow of COVID-19, HBS Working Paper, HBS: Cambridge, MA.
  • (2) See, for example, Brookings (2020), Which City Economies Did COVID-19 Damage First, The Avenue, blog post, April 29, 2020. https://www.brookings.edu/blog/the-avenue/2020/04/29/which-city-economies-did-covid-19-damage-first/
  • (3) OECD (2020), The territorial impact of COVID-19: managing the crisis across levels of government, OECD: Paris.
  • (4) Ketels, Christian (2017), Upgrading regional competitiveness: What role for regional governments?, in: Huggins, Robert (ed.): Handbook of Regions and Competitiveness, Edward Elgar Publishers: Cheltenham.
  • (5) European Commission (2020), European Roadmap to lifting coronavirus containment measures, EC: Brussel.

Christian Ketels

Christian Ketels

Christian Ketels is a Harvard Business School Visiting Executive at Professor Michael E. Porter’s Institute for Strategy and Competitiveness. He holds a PhD (Econ) from the London School of Economics and an Honorary Phd from Lappeenranta-Lahti University of Technology LUT. He is Chair of the TCI advisory board, a global network of professionals in the field of competitiveness, clusters, and innovation, and also chairs Orkestra’s Advisory Board.  

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