Acting Now While Preparing for Tomorrow: Competitiveness Upgrading Under the Shadow of COVID-19

This paper aims to provide policy makers, especially those focused on the longer-term growth potential of their countries, with an initial framework to think about their action priorities in the context of the overall COVID-19 response. Our focus is on the supply-side, microeconomic, and firm-centric response to the virus and its economic repercussions, a dimension that, in our view, needs to be added to the public health and macroeconomic issues currently dominating the debate.

We argue that for the approach towards partial re-opening of economies to be effective in reviving economic activity, public health measures need to be accompanied by a microeconomic toolkit. China’s economic data suggests that a full recovery is not automatic even when 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 large set of microeconomic barriers, from disrupted supply chains to weakened balance sheets to the need to establish new safe operating procedures, will need to be addressed as well to get closer towards economic normality.

We argue that, in the approach to post-pandemic recovery, macroeconomic policies need to be accompanied by upgrading microeconomic competitiveness to ensure sustained, robust growth. The microeconomic factors to address include 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 global financial crisis (GFC) showed how even successful macroeconomic stabilization can result in lower long-term productivity and prosperity growth. We outline a set of key factors to consider as countries develop a post-COVID plan for competitiveness upgrading to achieve a sustained and healthy recovery.

The paper focuses on identifying key policy issues governments will have to address, without being overly prescriptive on the specific actions to take. While providing specific answers will obviously be important, past crises have shown that countries tripped up not only because they provided the wrong answers but also because they failed to focus on the right questions.