Authors: Jessica Shannon and Ingrid Carlson
This article appears as part of PwC's Shaping tomorrow's government series: six chapters outlining the challenges and opportunities governments will face after the pandemic. For additional insight on the future of healthcare, education, climate and more, read the whole series. Please note that the opportunities and risks identified within each archetype are representative examples and are not exhaustive.
We’re in the midst of an asymmetrical recovery. In some countries, COVID-19 infection rates have fallen significantly, while in others, the virus remains difficult to control. But whether governments are actively managing outbreaks or returning to normalcy, economic recovery is central to their forward-looking agenda. For without a broad-based economic expansion, it is difficult to address other challenges, such as education and healthcare.
The International Monetary Fund recently raised its projection for economic growth in 2021 to 6%, up from 5.5%, and projects 4.4% growth in 2022. The upgraded outlook is based on how well the pandemic continues to be controlled, the efficacy of fiscal policy in mitigating economic damage and global financial conditions. Although businesses are the engines of the economy, governments create the environment and structure that enable enterprise to flourish (see ‘Government actions that support economic recovery’). How governments create and shape the environment for economic recovery—and the opportunities and challenges they face in doing so—will depend on two decisions they make about their approach.
Governments may make different choices when prioritising between preservation of existing businesses and net new creation. However, each is likely to evaluate and deploy a combination of the following interventions to support economic recovery.
Increasing direct government spending on public-use assets, such as heavy infrastructure, facilities and climate retrofitting.
Reducing taxes on businesses and/or individuals.
Providing concessions on government services (e.g., utilities).
Serving as a convener across industries, academia, think tanks, and design and development agencies.
Creating a strong enabling environment (e.g., intellectual property protections).
All governments need to reduce debt and stimulate growth, but few governments aside from those with the largest economies have the option to simultaneously tackle their balance sheets and their economic recovery. Most will take actions that enable economic recovery by minimising expenditure or creating a positive return on investment, in ways that consider their global worldview, country context, legislative structure, political will and national ideology. Countries can make two decisions to help them understand the approach best aligned with their needs.
What will best drive my country’s immediate economic recovery—an approach that’s more locally orientated or globally orientated?
Countries that are at risk for acute and systemic insolvency, that have high levels of domestic inequality and/or disgruntled citizens, or whose supply chains for vital industries are at risk will probably prioritise local economic recovery. Countries that rely on global supply chains and financial flows, and believe global problems require global solutions, will probably lead with a globally orientated recovery.
What’s the best option for stimulating national economic growth—active involvement and oversight of issues or enablement of the private sector and local institutions?
This choice may be based on a government’s political party affiliation or structure and operating model. Other determinants include how deeply a government thinks it can trust in businesses and citizens to drive decisions, how agile it thinks public and private institutions are, and what core skill sets the government possesses.
Click on a box to learn more about the general government archetype it describes.
Centralised and local governments view a high-touch, centralised government and local empowerment as the primary drivers of economic recovery. Key questions for these governments revolve around how to best:
identify and support industries that will drive economic recovery
promote domestic spending through cash-transfer programmes
protect local businesses from foreign competitors
safeguard industries that are vital to national security
create a society that’s inclusive, more equitable and skilled for the future.
These governments have an opportunity to build their national security and resilience by revitalising local industries and, by extension, local communities. It will be important to identify ‘national champions’—industries at the foundation of the nation’s economy. Money previously spent on foreign-aid contributions can be redirected to these industries.
Large, centralised governments will have to be mindful, though, not to overwhelm small or nascent industries or communities with too much funding or regulation. These governments can take advantage of public–private–civil partnerships to understand how best to help these developing industries and communities thrive and grow. In areas of targeted investment, governments will want to monitor key indicators, such as industry growth and employment, to understand the impact of their investment. And upskilling will be vital to ensuring that local industries are staffed with people who have the know-how to help drive growth.
For instance, Japan’s Government has expanded the stimulus programmes that it initiated for small enterprises at the beginning of the pandemic to include direct government financing for medium and large entities. The programme now involves government-backed lenders in Japan providing subordinated loans and preferred shares to all pandemic-impacted companies. Interest rates are about 1%, compared with the usual rate of 5% or more, and the loans don’t have to be coordinated with private lenders, as is usually required.
Decentralised and local governments maintain light central oversight, preferring that states and municipalities manage their affairs independently. Businesses have a wide berth to operate in a way that maximises profits, under the premise that those businesses that do well also create more jobs and put more money into local economies. If there’s a significant regulatory framework, it probably pertains to national safety and security, specifically protecting national supply chains and the economy from foreign interference. These governments rely on private, civil and local organisations as governance partners. A central question concerns how to enable industries and communities to support themselves. Doing so will generally involve removing obstacles to corporate and individual economic growth, for instance by reducing taxes, introducing protectionary tariffs, promoting tax incentives and risk guarantees to stimulate investment, and creating incentives for corporations and local governments to upskill their workforce.
These governments have an opportunity to not only help local communities maximise their growth and fulfil their specific needs, but to also free up central government resources for redistribution to local institutions. This approach to governing can create thriving hyperlocal ecosystems, with cottage industries that can serve as the basis of the national economy.
Such an economy, however, depends on a central government’s strong partnerships with, and trust among, the local governments, private sector and civil society organisations that serve as a bridge to the local economies that drive national GDP growth. These decentralised and local governments will also have to manage potential social and economic disparities among individual parts of the country. The central government can help manage these disparities by coordinating the sharing of knowledge and best practices among local partners and customising the stimulus and incentives they offer to different local governments.
One example of a lean and local government’s approach to economic recovery can be seen in Mexico. The country’s tourism industry was significantly affected by COVID-19. Although the Government mandated reduced capacity and health and safety protocols across the industry, it didn’t implement protocols that would have made visitor entry difficult. It opted not to require international travellers to be tested for COVID-19 before entering the country, nor to quarantine or restrict their movement.
Centralised and global governments foster alignment among local governments, the private sector and citizens in support of a singular set of national but globally influenced priorities and values. These governments identify, assist and incubate local industries that have a global competitive advantage, promote innovation in these industries and those aligned to a broader global agenda, and create regional supply chains to strengthen their national position and that of their neighbours. These nations’ regulatory framework is robust, aligns with international standards and norms, and balances economic and social progress. Key questions for these governments concern which industries support the global common good, how best to shape and affect the global agenda, and which partnerships—regional, local or international—are most beneficial.
Investment in national champion industries might stimulate a significant amount of innovation. These governments have an opportunity to partner with the private sector on upskilling the citizenry, helping to create social-mobility opportunities that benefit society while providing those national champion industries with a workforce equipped to compete in a digital world.
The primary challenge for these governments is ensuring that small and medium-sized enterprises, which make up a large percentage of many economies, don’t get left behind. It’s smaller companies that power most local economies and that are the foundation of a strong middle class. These large and global governments also need to have a strong, centralised communications strategy that explains how their global agenda is important to, and directly benefits, the citizenry; otherwise, they risk eroding the public’s trust in them.
Norway has invested considerable resources in a government fund called the Green Platform Initiative. The initiative is run as a competition, with state-owned enterprises evaluating project proposals that focus on research, development and innovation in green growth, and granting awards from a pool of US$120m. The objective of the initiative is to spur investments in sustainable solutions, positioning the Norwegian economy for global growth.
Decentralised and global governments often consider global issues to also be national priorities, but they believe that unhindered markets are the most efficient and balanced way to make progress. These governments set the direction and tone of their globally aligned national policy but rely on the markets to carry it out. Lean and global countries have a consistent but broad regulatory framework in place and few protectionary policies; they rely on the free-market system to check and balance itself. They use interventionist policies sparingly, primarily to reduce obstacles for the business sector or to create a more competitive environment—for instance, by injecting liquidity into the financial sector, reducing taxes, providing tax incentives and risk guarantees, and creating a business-friendly environment to encourage foreign direct investment. One key question for these governments concerns how to identify and communicate a consistent set of national priorities, because lean governments generally don’t communicate through explicit programmes and incentives but instead apply a more subtle influence. Other key questions are how to balance a light-touch approach with helping industries build resilience and strengthening national security in a fracturing global environment, and how to determine what levers should be pulled, and when, to ensure that economic growth leads to a more equitable society.
Lean and global governments, particularly those in larger, industrialised economies, can quickly create enormous growth, because their free-market economies are globally based and competitive. Industries and companies in these countries that weathered the pandemic might be poised for a windfall if they can lead in the market as global economies open up.
The challenges for lean and global governments are both economic and social. Economies that grow too quickly are susceptible to overheating, leading to a spike in inflation, among other undesirable effects. Also, free-market economies driven by a global agenda without significant regulation, such as tariff protections, or support, such as targeted upskilling programmes, might result in the loss of small or nascent businesses and industries that can’t compete without these interventions. And the loss of these businesses and industries might diminish innovation and cause long-term damage to the country’s economy. Small and medium-sized enterprises that do survive might lose out in the marketplace if there is robust overseas competition, and income disparity could be exacerbated, as evidenced by the current K-shaped recovery emerging globally.
Earlier this year, African nations illustrated how lean and global governments approach economic recovery, with their activation of the African Continental Free Trade Area agreement. The agreement removes trade barriers across the continent, reduces regulatory complexity, and paves the way for increased industrialisation at scale, jobs and global competitiveness.
Governments and businesses are facing a world that has been radically changed by COVID-19, and recovery will probably be marked by significant instability and change. But there is opportunity, too, to recouple economic growth and social progress. Four guiding principles can help governments and businesses create a more efficient working relationship to achieve this vision.
Build and communicate a national vision statement that includes roles, responsibilities and expectations for every stakeholder in society. The post-COVID world will give us an unprecedented opportunity to course correct and create stronger, better versions of our societies. Everyone has a role to play in this new vision; and businesses of all sizes should see themselves reflected in plans to rebuild the economic engine and help to create inclusive, skilled workforces and sustainable value and supply chains.
Get buy-in from the private sector on social issues. Social issues—long the sole purview of governments—have become an issue for businesses, too, as stakeholders begin to demand that businesses use their resources and clout to effect positive social change. Governments and businesses must identify new ways to work together to drive this meaningful change.
Strengthen or build communications channels. To work together, governments and businesses must reassess, then build or strengthen channels that allow them to communicate with one another. Roundtables, liaison offices, and other solutions should be considered and widely implemented to ensure open, active dialogue.
Improve mechanisms and incentives for transparency. Stakeholders are insisting that businesses take action on social issues and report transparently on those actions. As a result, businesses must re-evaluate their strategies and operating models. Governments can support businesses by providing economic incentives—in the form of increased capital support, tax breaks, preferential treatment on government bids and more—for companies that can demonstrate a sustained, good-faith effort to address social issues.
For too long, governments and businesses have operated in silos, resulting in economies that are neither sustainable nor inclusive. Getting national economies growing again, in a way that is efficient and results in more equitable societies, will require that public- and private-sector leaders work together in a more coordinated, seamless manner. Governments can create societies that are stronger, more resilient and more equitable; businesses can propel this vision by providing jobs, competitive advantage and economic growth. Together, they can create economies that simultaneously drive growth and lead to more inclusive societies that benefit all.
PwC Italy Manager Roberta Maio also contributed to this article.