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Moving forward through a crisis

The Covid 19 crisis is also an economic crisis. Marco Capasso argues that this crisis requires innovation and the development of new markets, which again leads to a need for investments in research and education.

Marco Capasso, Senior Researcher, NIFU

Double shock

Many countries in the world are facing a crisis brought on by the outbreak of the Coronavirus at the beginning of this year. The crisis has come in the form of deaths and health emergencies, as well as of a sudden darkening of economic prospects for many.

In Norway, the crisis has been aggravated by a fall in oil prices, which has brought additional doubts about the alternatives offered for the country’s economy to resist the crisis. Some sectors have been hit hard by this double shock: tourism, culture, personal services and trade retail, only to mention a few. Other industries can be affected in the near future, also because of value chain connections to the industries first hit.

To make the picture worse, there is the probability that the crisis could represent itself under new forms, because of new waves of contagion from the virus or new swings in the oil price. It is not easy to assess how many of the temporary changes in the economic activities of the country can become permanent.

Risk of procyclicality of R&D expenditure

Historically we know that such transformations can be observed first as disruptions in the supply chains and lowered demand, followed by the development of new or improved technologies and services and the creation of new markets. The economy can adapt and change into more positive scenarios through learning.

Research and development, conducted both by private and public sector institutions, are keys in these learning processes. However, it has often been observed that R&D activities can decline during periods of crisis. Firms often need to focus on debt repayment and wages, while the state may struggle with maintaining a functioning welfare system. As a consequence, R&D activities decline, because the associated budgets are cut or because resources previously occupied with R&D are reoriented towards other activities.

Uncertainty about possible future scenarios may also contribute to a lower level of investments for innovation activities. The danger is the loss, over a longer term, of capabilities for adaptation of the economy in the face of a prolonged crisis period.

Different firms, different paths

In periods of crisis, firms would normally constrain their investment to fields they feel more secure in. «Exploitation» will normally prevail over «exploration». However, a closer look at the economy reveals the heterogeneity of behaviour across firms. Archibugi, Filippetti and Frenz (2013) have shown that two different categories of firms are able, during crises, to maintain or even increase innovation rates.

On the one hand, there are «great innovators»: large firms with a high availability of capital and many resources constantly devoted to research and innovation. Their innovation capabilities are persistent over time and sufficiently resilient in the face of downturns in the economy. These firms may move slowly forward, but they never stop.

On the other hand, some smaller and/or new firms are able, in times of crisis, to contest the market shares of incumbent firms or develop and explore new markets. The firms belonging to this second category are able to grasp new opportunities given by fast changes in technologies and markets. They are also more prone to radical innovations and they can be considered good examples of the «creative destruction» described in the Schumpeterian tradition.

Crisis: cleansing or sullying?

The dynamics shaped by the crisis, at the level of industries and firms, also entail a reallocation of workers between tasks within a firm or between firms and industries. Among the many studies in the economic literature that delve into this topic, I would draw your attention to the work by Caballero and Hammour (1994) and by Barlevy (2002), titled, respectively, «The cleansing effect of recessions» and «The sullying effect of recessions».

Caballero and Hammour (1994) argue that recessions can have a «cleansing» effect on the economy in that they raise the productivity threshold needed for jobs to survive. People who, in normal times, are employed in jobs which are less productive, might be forced by a recession (we could say, more generally, by a «crisis») to find new occupations. A reallocation of workers would then take place which increases the general productivity of the economy.

The counterargument posed by Barlevy (2002) stems from the observation that, during booms, many highly productive job positions are created, which can be occupied by workers previously employed in less productive (but not necessarily the least productive) positions.

Conversely, crises limit the opening of productive jobs, so workers have a more difficult time moving into the kind of employment they are best suited for. This is the «sullying» effect of recessions on the economy.

Adaptation through learning

Far from being mere pieces of an economic puzzle, workers can acquire new competences, which add to previous experiences and generate new possibilities of adapting to existing or new jobs. The concept of «lifelong learning» acquires new meanings during a crisis, since the activities previously performed by each worker – many relatively unchanged for years – are suddenly altered or even discontinued.

The skills that the workers have acquired during previous years are not necessarily lost or useless, however, but they have to be adapted to new needs. Learning should not here be seen only as a process of substituting new skills for old ones, but rather for adapting previous skills to new goals.

Change (and prepare for change)

From the considerations above, it is difficult to land on a consistent view about how the crisis could be tackled. A first attempt on a summary can be based on the following two clauses:

The economy changes and the economy must be prepared for further changes. The economy changes because both supply and demand are likely to be affected by the crisis, in a way that is unlikely to be temporary. The crisis has brought opportunities for some firms, and the new technological and market niches occupied during the crisis represent a change in the economic landscape of the country. There is no reason to think that this change will be reversible. The creation of new jobs within these niches, or new tasks for existing jobs, can help to maintain a high productivity at country-level.

Secondly, the economy must be prepared for further changes. New waves of contagion and new swings in oil prices might bring challenges and demand subsequent phases of adaptation. The capability to adapt, for firms and for workers, will depend on sufficient investments in research, innovation and education.

– Archibugi, D., Filippetti, A., & Frenz, M. (2013). Economic crisis and innovation: is destruction prevailing over accumulation? Research Policy 42(2), 303-314.
– Barlevy (2002). The sullying effect of recessions. Review of Economic Studies 69, 65–96.
– Caballero, R. and Hammour, M. (1994). The cleansing effect of recessions. American Economic Review 84, 1350–1368.
– Filippetti, A. and Archibugi, D. (2011). Innovation in times of crisis: National Systems of Innovation, structure, and demand. Research Policy 40(2), 179-192.

Illustrasjon: Tommy.