Show Me the Data: Pandemic as Creative Destruction

January 27, 2021

The recent World Bank “Unmasking the Impact of COVID-19 on Businesses” paper analyzing surveys co-funded by USAID’s Center for Economics and Market Development shows that the COVID-19 pandemic has hurt all firms in developing countries, large and small. With the ebbing economic tide lowering the “boats” of so many businesses and livelihoods, governments and donors may need to reconsider previous targeting strategies for assistance, and pivot to identifying high-capability firms in sectors able to rebound.

Creative destruction, pandemic edition?

Schumpeter most famously described the “creative destruction” of business cycles, where old, unproductive firms made way for new, innovative, and more competitive ones. There is surely a lot of destruction in developing economies these days, but is it creative and meritocratic?

Before the pandemic, donors offering assistance ranging from credit subsidies to technical assistance had rightly focused on small, high-potential firms in order to maximize employment and other economic benefits. The thinking was that most large firms did not need government help. However, the pandemic and ensuing lockdowns have not discriminated by size.

Target by sector and capability, not size

With the pandemic and ensuing lockdown policies, about 84 percent of firms reported a drop in their sales. Factors such as country, size, and timing relative to the outbreak only explain about 20 percent of this drop. Other factors, mainly the firm’s management and technological capacity to adapt quickly, are much more important for explaining firms’ ability to stay afloat, and potentially, absorb donor or government assistance for long-term survival. To the extent that baseline firm size when the pandemic hit has little relationship with the firm’s competitiveness in the post-pandemic market, then, the current turmoil could be Schumpeterian.

At the same time, this global paper does show the effects of lockdown policies and consumer behavior varying across sectors. Six weeks after the outbreak peak in any given country, for example, businesses in accommodation and food and beverage had a 58- to 73-percent chance of being open. On the other hand, businesses in retail and wholesale, financial services, and agriculture and mining were about 88 percent likely to be open during the same time frame, probably because these sectors’ demand is more resilient to income drops and less impacted by lockdown policies. As pandemic waves and lockdowns continue, businesses in worst-hit sectors have had to pivot and realign their business model, such as hotels marketing to “work-from-anywhere” tourists, or face extinction. For some of the country-level detail that this paper covered, you can explore this handy dashboard.

As USAID’s new Economic Growth Policy highlights, USAID and other donor activities should focus on the resilience of economic growth to stresses such as the current pandemic. To this end, the World Bank authors rightly conclude that we must carefully consider how to “support the recovery, or even further [spur] technological adoption and productivity growth” for the post-pandemic market. We need to target the sectors most likely to recover quickly in the “new normal” and the most adaptable, innovative entrepreneurs, regardless of firm size.

An Entrepreneurial State of Mind

Sectoral growth trends are easier to identify than entrepreneurial capacity--which is one reason the latter has been seldom used as an eligibility criterion in entrepreneurship activities. Thankfully, pre-pandemic research can shed some light here. Studies such as this one in Togo show that an “entrepreneurial mindset”--looking for ways to distinguish the business, anticipate problems, overcome setbacks, and improve planning--are effective at growing businesses. These are also the same skills needed to pivot your firm’s product offering, reach new customers, and digitize your delivery. If donors and governments can identify entrepreneurs already practicing some of these skills, USAID may be able to nudge the current economic churn onto a more creative, resilient pathway. In that case, the firms emerging into the “new normal” marketplace will be the ones selling goods and services most attuned to customer needs, and providing the most stable, well-paying jobs for their workers.