The new economy post Covid-19 – A Production Possibilities Frontier (PPF) View

Across the world, a “new economy” post the Covid-19 pandemic is the buzzword. Governments, policy-makers, scientists, researchers and other stakeholders agree that things may never be the same, at least in the short to medium term. A United Nations Department of Social and Economic Affairs (UNDESA) webinar on the 9th of April 2020 noted that restrictive measures to contain the pandemic had significantly hamstrung the extent of human participation in production and commerce – most notably in the personalized care and services sectors. The Covid-19 pandemic has brought to a standstill the restaurant, tourism, entertainment and other industries that require the congregating of people in a single venue and those that rely on face to face interaction or close contact. These industries have suffered disproportionately relative to others as a consequence of statutory restrictions because it is in close confines and personalized face to face services where covid-19 infection thrive – in the absence of precautions. However, even with precautions infection gaps may still persist and it may be harder to break-even where a restaurant owner is compelled to operate at below capacity, for example, also considering suppressed demand since, for many people, it will take time to overcome fear and resume normal life (including eating out) as they did before the pandemic. The International Monetary Fund (IMF) project that global output will contract by 3% in 2020. This translates to reduced disposable income at the household level – giving credence to the assessment that things may indeed take time to bounce back to pre-Covid-19 levels. 

Despite all the difficulty, there might be a silver lining. Mohit Joshi (president of business consulting, IT and outsourcing firm Infosys) contends that cloud-computing “will not buckle” under the Covid-19 induced economic pressure. In fact, the industry will thrive. It is projected that the global cloud-computing market will post a USD62 billion growth in 2020, up from USD233 billion in 2019. This is just one of several sectors that will record Covid-19 induced enormous growth. As different forms of business activities wane, new ways of doing business (selling entertainment etc.) will emerge while the world awaits going back to the olden days – if ever. It has to be noted though that while global income will contract in 2020 (and possibly two or three years after), there will be a lateral redistribution of income across industries. The rewards for some careers [for example in cloud-computing and other Information Technology (IT)] might increase while for others there may be a reversal of fortunes – potentially exacerbating income inequalities. Having set the background, we can now discuss these labor market dynamics using the Production Possibilities Frontier (PPF). 

The PPF is a hypothetical concept that shows combinations of two goods that an economy can produce at full employment. Let us abstract that the “new economy” will only be able to produce two goods/services namely Personalized (P) and Non-Personalized (NP) (see Figure 1). In Figure 1 (Point A), the world produced a certain amount of these two goods (10000 P & 20000 NP). Growth in production of either goods/services without sacrificing the other can only come about after a discovery of more resources/factors of production (maybe higher birth rates increasing the labor pool) or an advancement in the production technology. Without growth, production of one good has to be sacrificed in order to increase production of the other. Personalized and Non-Personalized services are at extreme ends of covid-19 risk with the former at high risk, and the latter, low risk. Therefore in the new economy (in the short to medium term) the choice to restrict economic activity in Personalized (face to face) Services may expand Non-Personalized services expand as shown in (in Figure 1 Point B). The increase in production of Non-Personalized Services at the expense of Personalized one is an important trade-off/opportunity cost that is depicted by PPF’s negative slope [also called the Marginal Rate of Transformation (MRT)].

PPF and New economy

Figure 1 PPF and the New Economy

One could assume that the workers and resources freed from the Personalized Services (restaurants, massage parlors etc.) can be employed in the expanded Non-Personalized Services thus averting unemployment and income redistribution. However, a few problems exist. The global economy does not operate at full employment. Yes, the expanded Non-Personalized Services sector can employ more workers but not necessarily those laid off from the Personalized Services sector. Some capital resources (for example factories and buildings) cannot easily be converted to serve the Non-Personalized Sector. In the current context of the Covid-19 pandemic, a massage parlor or a barber shop may not be able to all of a sudden start making Personal Protective Equipment (PPE) for front-line health personnel. In a nutshell, there is no perfect adaptability of resources between sectors. 

Regardless that there is no perfect adaptability of resources between sectors does not strictly apply in all circumstances. There are wonderful stories of human agility where automotive industries have re-purposed their manufacturing facilities to produce thousands of ventilators. In South Africa, South African Radio Astronomy Observatory (SARAO) and South African Astronomical Observatory (SAAO) engineers were mandated by Government to deploy their ingenuity and infrastructural capabilities as part of the National Ventilator Project. Even ordinary entrepreneurs have repurposed their business strategies to venture into mask production. Therefore, despite the dark and somber character of the Covid-19 pandemic both in terms of human and economic toll – there will still be growth in certain industries during and after the pandemic. To prepare for the “new economy” (even though it may be for the short to medium term given the difficulty it will be to forego the many things and activities that are part of human culture), it may be imperative to reskill or multi-skill workers in certain industries so that they can be employed elsewhere. As governments implement different strategies in their economic responses, it will also be imperative to shift capital and technological resources around a bit. In doing so, it will take consultation and modelling to minimize the economic inefficiencies that will be an inevitable consequence of the “imperfect adaptability of resources” as espoused under the PPF concept. The PPF and other economics concepts are discussed in greater detail in the OAD’s “Introduction to development economics for non-social scientists” course. Other articles in this blog series will also dissect other important economics concepts and relate them to daily challenges.

Part of a series of blogs on the socio-economic impact, implications, and opportunities for a world after COVID-19. Written by Dr. Tawanda Chingozha, development economist and OAD Fellow. Visit http://www.astro4dev.org/covid-19/