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Creative Destruction

Whilst assessing the short term repercussions from the coronavirus is a current focus (see Contagionlast month), framing its longer term structural implications is at least as relevant. In that respect, natural disasters represent an interesting benchmark. Arguably, COVID 19 can be categorized as a one-off, catastrophic event akin to a so-called ‘act of God’ such as hydrological, meteorological, climatological and geophysical disasters.*

The most expensive disaster ever recorded is the earthquake, tsunami and related nuclear meltdown in Fukushima in 2011. 20,000 people lost their lives or disappeared, over 10 million people were evacuated, and more than 1,700 km2 were contaminated by nuclear materials. As they analyze the behavior of economic actors in the aftermath of the triple disaster, a team of researchers outline in 'Bounce Forward: Economic Recovery in Post-Disaster Fukushima' (2019) how a ‘creative recovery’ was successfully implemented as ‘the local government and companies […] use existing local resources to rebuild agriculture, manufacturing, and tourism innovatively.’ This is not an isolated case. In ‘Do Natural Disasters Promote Long-Run Growth?’ (2002), the authors demonstrate based on data from 89 countries from 1960 to 1990 that there is a positive correlation between the frequency of natural disasters and both productivity and GDP per capita growth. The explanation? The accelerated absorption of new technologies as infrastructure is being replaced.

In the case of COVID-19, there is admittedly no damage to tangible infrastructure in the strictest sense. Instead of involving the construction of new factories with upgraded technology, the rebuilding exercise will require a strategic supply chain restoration and recovery process likely to be associated with investments in more robust systems incorporating new technologies. As far as Fukushima is concerned, research shows in Supply Chain Lessons From The Catastrophic Natural Disaster in Japan(2012) that Japanese companies implemented a number of measures to de-risk and optimize their supply chain in the aftermath of the earthquake. An interesting Harvard Business Review reportrelated to the impact of COVID-19 on supply chains published just a couple of days ago highlights opportunities to make supply chains more resilient through extensive supply chain mapping (going beyond direct suppliers) associated with artificial intelligence-backed monitoring systems.

When describing this phenomenon, some refer to Schumpeterian ‘creative destruction’. In its original version, Joseph Schumpeter, an economist, argued that entrepreneurs are the vital, albeit destabilizing force behind capitalism which they make stronger by challenging, if not annihilating incumbent firms and by forcing economic actors to adopt new technologies. In the case of natural disasters and the coronavirus, nature is the driver of creative destruction.

Beyond its positive impact on supply chain systems, COVID-19 is already having an impact on health and safety through new, improved hygiene habits. It may also alter the modus operandi when doing business globally in a positive way: working from home may prove to be a lot more practical than anticipated by certain firms. By the same token, calls and videoconferences may turn out to be not only more efficient but also as effective and thus overall more productive as new communication skills are mastered alongside better IT and network equipment. The benefits from an environmental perspective would be substantial. Finally, future outbreaks will likely be better managed as the lessons from COVID-19 are learned and digested. There is a path for a better world to emerge.

This is not to say that all is well. The coming months are likely going to be destabilizing to many, with significant human, social and economic costs. When it comes to the industrial world, these times offer room for challengers to build substantial competitive advantages alongside the entire supply chain, in line with Schumpeter’s theory. As they say in Formula One, weather is a great ‘equalizer’: when it rains, performance is much less about the car than the driver.

* Note: mankind may under certain circumstances cause some ‘acts of God’

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