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Vladimir Knyaginin

In the digital world income fades away like the Cheshire cat

The period when we lived from crisis to crisis is over. The era of continuous crises has begun. For this time, they even made up a special name: “post-postmodern” – an instantly outdated modernity. This era does not bring anything catastrophic. Each crisis is a challenge, which devalues ​​a lot of the former achievements, and brings significant loss. But at the same time, involves the next cleansing of the system from inefficient and obsolete elements, and starts up social transformations and technology innovation. About who will have to leave the market and in what direction the surviving structures will develop, tells the Vice Governor of St. Petersburg, and the former president of the Center for Strategic Research Foundation, Vladimir Knyaginin.

Four factors will determine the state of the world in the foreseeable future.

The first of these is the acceleration of the displacement of the geo-economic centers of the world system. Asian giants – China, Japan, South Korea, Vietnam, Singapore – they have so far demonstrated the highest resistance to the global COVID-19 pandemic and the ability to take complete control of the spreading of the SARS-CoV-2 coronavirus. Their economies are claiming swift recovery and the formation of a favorable environment for investors' “green zone”, where investments are most protected from epidemiological risks. These countries have already announced that they are ready to increase funding for the reorganizational projects of medicine, pharmaceuticals, telecommunications, as for the lockdowns; nevertheless, they have shown the potential of new transport systems, reduced greenhouse gas emissions in cities and transition to the new energy and environmental standards. It is possible that these industries will be the leading sectors in the near future.

The crisis always triggers big changes. During the atypical pneumonia in 2003, the first breakthrough in e-commerce occurred. Basically, the SARS epidemic then, to some extent, converted Alibaba,, Tencent, Baidu, and others into technology giants. Now in the PRC, on the way out of the first wave of the epidemic of a new type of coronavirus, a new program of digital transformation and modernization of the Chinese economy has been adopted. The Chinese economy is shifting from integration of industrialization and informatization to integration of the digital economy and the real economy. There is an action plan in three directions: creating a low threshold for platforms, supporting the provision of mobile and contactless services, creating national productive environments for collaboration, including collaborative recruitment platforms, and digital employment platforms.

Let's see what the response of the West will be. So far, the efforts of American companies to compete with Asian giants for the main economic sectors of the future are visible. But nothing compares to the initiative, for example, of Shanghai (to make the largest city strictly healthy and sustainable by 2024) or to the Japanese plan to create supercities based on artificial intelligence which has not yet appeared in the USA or Western Europe. In Russia, Moscow has come closer than the others to a fundamental revision of its development concept. St. Petersburg, to some extent, will assess the readiness and sustainability of the city for the post-COVID “new normality”, restoring its international transport, touristic, academic and cultural communications.

The competition of global “power centers” during the COVID-19 pandemic raised one more dimension — which is ensuring the sustainability of supply chains. It is not only about the sustainability of the supply of components for traditional industries. The world has become dependent on China for the supply of essentially needed personal protective equipment (PPE), as well as basic medicines and commodities. It was almost impossible to quickly ramp up these supplies in the conditions of lockdown and disruption of transport communications during the pandemic. It turned out that the availability of the production of PPE, essential medicines, and medical equipment in its own territory is not only a political security question but also an economic and social one. It is necessary to roll out production on its own side. China is not enough for everyone, and even if it was, dependence on the one supplier makes other countries too vulnerable. The 2004 tsunami led to a change in the geography of localization of automotive component manufacturers. The COVID-19 pandemic will facilitate the migration of manufacturer's capacities in pharmaceuticals, medical equipment, and PPE, but perhaps the world will not be limited to these industries only.

America and Europe have been preoccupied with transferring production from China back to their territories already for several years. The situation with coronavirus only intensified these desires. So far, China is still a global factory, but if in the next three to four years, the leading economic powers do not agree, the usual economic map of the world will change. In what way? It's too early to make assumptions. Let's see what gets out of the “One Belt - One Way” program, and how successfully India will evolve. But that there will be attempts to strengthen economic centers outside of China and the USA — there is no doubt.

For Russia and its regions, the agenda for the relocation of a whole complex of industries is also relevant, even if it is not in the context of competition between the USA and China, the collective West and Asia. It is clear that the stability of the economy and the social system implies some self-sufficiency of the regions, and their ability to provide themselves with the essentials in the situation of a global disruption of supply chains.

The second factor is a change in the economic model. The situation with COVID-19 almost instantly forced us to switch to the so-called “stay-at-home economy” based on contactless services and replacement of the real goods with cheaper (or even free digital) ones, as well as on remote work and study. The consumer economy in recent decades was growing not due to an increase in the supply of durable goods, neither due to the expansion of “the experience economy”, medicine, wellness and education, that is, those industries and markets where the main object of investment was human assets and the channel for promoting products on the market was “contact services”. So then at the moment of the pandemic, these drivers of economic growth were under attack and were the first to be blocked by the governments of all countries in the framework of measures for the non-proliferation of coronavirus. The “stay-at-home economy” instantly transformed into a “stay-connected economy”; contact services, as far as possible, were replaced by digital ones — distance education, distance “experience economy”, etc. At the same time, with this shift to digitalization, a huge number of employees have been freed, and the cost of a digital product turned out to be significantly lower than in the real contact world.

The process of integration with the digital world will only deepen. However, not all professions and companies will survive. Estimates by the European Business Conferences Group and McKinsey show that with “digital” migration, about a third of the product cost disappears. Economists say that, in fact, the cost does not disappear — it fades away like the Cheshire cat, moving from the seller to consumer. This is a beautiful picture, but it will not console those who lose a significant part of their cash flows. Many of them will have to rebuild their business models, learn to live in a world where people pay less for each seller. It is unlikely that the entire business will go online — for example, in education, most likely, hybrid forms will evolve. But, while they will be established, many of them will have to leave. Markets will be dried up a bit, overinvested companies and industries will be blown away — this always happens after crises.

The digital economy turned out not to be a supplement to the traditional economy but an independent thing with its organizational and business models, critical infrastructures, and requirements for the competencies of employees. Now the digital economy remade creative industries and educational system. In the future, it will inevitably restructure transport, logistics, and finance. Everyone is waiting for what happens with the automation and robotization of the key processes. What the adherents of the digital economy warned us about finally happened, but this did not happen quite as it had been recently seen: there was not such a breakthrough in new technological developments as a mass implementation of already found solutions. Most of the ideas that seemed promising remained unclaimed, while others, on the contrary, were good shots.

Today’s economic crisis — sometimes it is said that it has surpassed the crisis of 2007-2009 in the depth of the market decline — and still will not lead to technological and social regression. Most likely, in the next year or two, there will be solutions to get the most affected sectors, and the contact services sector, out of the harmful impact. The salvation of human assets, freed up in them, is becoming one of the most important tasks of these countries and regions. It is set not only for the tourist areas of the planet but also, for example, for Russian megacities — Moscow, St. Petersburg, Kazan, Yekaterinburg, etc. I think that a solution will be found by the efforts of the whole world since this problem is typical for so many countries. It is not only about achieving a sustainable economic structure but also about finding a new consumer model.

The third factor is the significant changes that await the medical industry. The pandemic showed the vulnerability of the total transfer of medical services to market rails. Countries that advance further in this direction are paying for their success with tens of thousands of lives and a political crisis. The merging of interests of pharmaceutical companies, pharmacy chains, and private clinics, as well as the emphasis on commercialization, led to the system being unable to cope with the coronavirus crisis. It can be seen in the comparison between China and the USA. China, with its state health system, emerged from the crisis earlier than others. The others will have to change if they want it or not. But the quality of medicine is becoming a factor in national and regional competitiveness.

The fourth factor is the development of the green economy, a change in the social attitude to climate, and the development of new energy. They say a lot about this, there are many doubts that such a transformation will happen, but it is unavoidable. This process has also begun before COVID-19. Even Asian consumers were concerned about the environment — and this, for example, had a bad influence on the launch of General Electric locomotives, on the business of the largest engineering conglomerates that produced high-power gas turbines, in shipbuilding, which was experiencing the impact of new environmental standards, etc. Sales of “green” electricity have been growing steadily for several years. Another question is that there are also many overvalued and overinvested companies. At a time when there is less money, “green” markets will also be cleared of “bubbles”. Hence released funds will flow to the effective market participants and, in many ways, to the innovation development system — to mathematicians, biologists, chemists, and engineers. Funds will flow along the chains of creating innovative solutions, perhaps even reaching general-education schools.

It is not necessary to think that these four factors will present itself in some distant future. They are already running. The main contours of the restructuring of the world system and individual industries will appear within two to three years. The main question for us is what place Russia and her companies will take in this new system. I think nothing is predetermined here yet. And how elaborated our actions will be in changing business and economic models we use will depend only on us.