AFTER THE PANDEMIC · Miguel Ángel Escotet Álvarez Verónica Rego López Begoña Jamardo Suárez Spanish language supervision by Laura Gómez Lorenzo English language supervision

EDICIONES

AFTER THE PANDEMICReflections and challenges

for Galicia

This is the English version of the volume After the pandemic: Reflections and challenges for Galicia. Citations of this work must refer to the original bilingual version

https://www.ieside.edu/despues_pandemia_book/pdf/Despues-de-la-pandemia_bl.pdf

After the pandemic: Reflections and challenges for Galicia

Edited byMiguel Ángel Escotet ÁlvarezVerónica Rego LópezBegoña Jamardo Suárez

Spanish language supervision by Laura Gómez LorenzoEnglish language supervision byAlba Rodríguez SaavedraTables and figures supervision byDolores Martínez MartínezTranslation byEurolingua TraduciónsCover and layout design byJacobo Pérez-Bouzada VázquezDaniel Landesa PorrasPrinted byGráficas Bolfer, S. L.

Texts copyright © 2021 by their authorsEdition copyright © 2021 by IESIDE Ediciones Ronda de Nelle, 31 – 15007 A Coruña

[email protected] - https://www.ieside.edu

IESIDE Ediciones is part of the Intercontinental Higher Education Business Institute, which belongs to Afundación, ABANCA’s Social Responsibility Institution. Spain

ISBN: 978-84-96982-77-2Legal deposit: C 8-2021

https://www.linkedin.com/school/300500/admin/

https://www.facebook.com/iesideedu

https://twitter.com/IESIDEedu

https://www.youtube.com/IESIDE

INDEX





Prologue .................................................................................................................................................................................................................11Juan Carlos Escotet Rodríguez Chapter I: COVID-19: Circumstantial and structural action. Spotlight on Galicia 2030 ................................. 19Francisco Botas

Chapter II: Impact of COVID-19 from the perspective of European economies: A spotlight on human capital .................................................................................................................................................................. 31Alicia García-Herrero

Chapter III: Business impact of the pandemic ..........................................................................................................................43Mauro F. Guillén

Chapter IV: The e!ects of COVID-19 on the fishing sector and changes in consumer habits .........................................................................................................................................................................................53Fernando González Laxe

Chapter V: Africa: New insights and economic opportunities ......................................................................................67Ainhoa Marín Egoscozábal

Chapter VI: The cross-sectional challenge of telework .....................................................................................................79Ignacio Martín Maruri

Chapter VII: The COVID-19 pandemic and oil demand: A global and regional point of view .................................................................................................................................................. 89Pedro Antonio Merino García

Chapter VIII: COVID-19 pandemic: The answer of monetary and financial authorities ............................................................................................................... 111Soledad Núñez Ramos

Chapter IX: What can economic policy do in the face of the pandemic? ..........................................................131Carlos Ocaña Pérez de Tudela

Chapter X: China, origin and destination of the new post-pandemic world order: And Galicia? ...................................................................................................................................................................................................... 143Xulio Ríos

Chapter XI: COVID-19 and its impact on digital transformation and businesses’internationalization: A perspective on Galicia ......................................................................................................................... 153Ana Teresa Tavares-Lehmann

Basic references ...........................................................................................................................................................................................167

Authors ............................................................................................................................................................................................................... 179

PROLOGUE

Juan Carlos Escotet Rodríguez





12 | Prologue Juan Carlos Escotet Rodríguez | 13

The situation that arose as a result of the coronavirus pandemic is unprecedented in the contemporary world. No event with which we can establish any similarity, not even the so-called “Spanish flu” from 1918 to 1920, has had such a widespread impact, or threatened at the same time the lives of so many people worldwide. At that historical time, at the beginning of the 20th century, the global order was different, as were the economic and interpersonal relations, and one’s own mobility. Thus, that earlier epidemic was fought under other rules and on a different playing field.

As we write these lines, the pandemic is already responsible for millions of infections and deaths over the short period of a few months. The covid-19 wave has affected every aspect of life. It has altered and modified behaviors, actions, and methods: from the private sphere to movement in public spaces; from productive organizations to non-profit entities; and from communities of disparate character to the functioning of governments. Our world is on the verge of a new era, one marked by changes in obligations, rules, protocols, and the way we relate and interact. To this, we must add the vast imbalance in the functioning of the world economy, which, in the case of some countries, has headed to a depression. A significant percentage of the world’s productive sector has been affected, resulting in the reduction of production, and in the loss of several million jobs, entailing socioeconomic consequences. Entire economic sectors, such as tourism, travel, hotels, restaurants, and entertainment, among others, have been severely affected. It is no exaggeration to say that there is no form of human exchange nowadays that escapes the dialectic imposed by the coronavirus.






All these elements lead to a complex state of uncertainty that has overwhelmed us as individuals, families, communities, and organizations. We know that change is the only constant; however, human beings usually have trouble coping with it, as do with the uncertainty derived from it. And it is this resistance to change what, precisely, creates this crisis. Its healthy management lies in establishing a much needed dialectic between the emotional and the cognitive, so we can see it as a source for opportunities. Thus, education and knowledge are the most powerful tools that will enable us to commit to a topsy-turvy and constantly evolving reality.

We have stated on several occasions, and we would like to emphasize in this threshold to After the pandemic: Reflections and challenges for Galicia, that the organizations must continue to fulfill our duties as businesses. But, at the same time, we need to provide leadership in dealing with uncertainty. We have a responsibility not only to preserve as many jobs as possible, but we must also help define strategies and seek solutions that enable us to identify, within the crisis and the constant change, the opportunities that will allow us to grow and move forward. The commitment of individuals and organizations to the promotion of a human-centered civilization of progress is over any pandemic.

As soon as the Spanish authorities decreed a State of Alarm, abanca initiated multiple activities aimed at protecting the health of staff and clients, to contribute to the strengthening of the healthcare system of Galicia, and, in a more general approach, offer answers to many of the questions and challenges posed in these new times. In May – when we were still escalating to the peak of the pandemic – we created the abanca Observatory by ieside. Its purpose is to periodically provide current and accurate information on the economy of Galicia to companies, freelancers, smes, stores, professionals, students, the media and any citizen interested in public affairs, based on the analysis of consumption and economic interactions.

This effort in diagnosing was complemented by the iniciative presented in this volume: a cycle of online and live sessions organized by Afundación, abanca’s Social Responsibility Institution. Many prestigious specialists in diverse subjects were invited to present there their visions regarding a pressing and fundamental issue. This encompassed the present and future of the world order, including an analysis of its repercussions in Galicia, from the realities created by the pandemic, that are now compiled in the present volume. This cycle was held as part of a broader project of our foundation – a project born

in the hours of confinement aiming to continue to provide answers to citizens regardless of distance and presence. And this is how we created ieside Without Walls and Afundación At Home (now Afundación tv), two digital content platforms to continue with our activities, but by virtual means.

Those who were able to follow the entire series of live sessions could see that, although each participant focused their proposal on the topics of their own specialty, they were all fairly interconnected. One by one, they articulated a series of approaches regarding the future of Galicia and its environment, both socially and economically. They all agree on a single point of departure: acceptance of the fact that we are facing the emergence of new requirements for economic agents. All of them also share the same overriding purpose: to inspire strategies and actions that allow us to make decisions, overcome difficulties in the short and medium term, and, ultimately, outline a horizon towards which we could march in order to relentlessly move forward. The works presented here are original papers and reflect the thinking of each of the authors at this critical time.

Francisco Botas, ceo of abanca, analyzes the environment of Spain and Galicia and its future prospects; Pedro Antonio Merino García, Director of Studies at Repsol, focuses on the key aspects of the energy issue. Mauro F. Guillén Rodríguez, Professor of International Business Management at The Wharton School of the University of Pennsylvania (usa) addresses challenges to businesses. Fernando González Laxe, Professor at the University of A Coruña, describes the impact on the fishing sector and consumer habits. Carlos Ocaña Pérez de Tudela, General Director of funcas, analyses medium-term prospects. Xulio Ríos, Founder and Honorary President of the Galician Institute for International Analysis and Documentation (igadi), examines the China factor and its potential impact on Galicia. Ignacio Martín Maruri, Expert Consultant in Leadership and Professor at the Masters of Public Administration Program at Harvard University, focuses on the challenges and consequences of teleworking. Alicia García-Herrero, Senior Researcher at the European Bruegel Think-Thank, Chief Economist for Asia-Pacific at Natixis and Associate Professor at the Hong Kong University of Science and Technology, sheds light on the key factors of the new world economic order. Ainhoa Marín Egoscozábal, Senior Research Associate of the Real Instituto Elcano, reflects on the impact of the pandemic in Africa and Galicia. Soledad Núñez Ramos, PhD in Economics from the University of Minnesota, analyses the responses of economic and financial authorities to the pandemic. Finally, Ana Teresa Tavares-Lehmann, Portugal’s






former Secretary of State for Industry, examines the impact of digitalization on the internationalization of businesses and corporations in both, her own country and Galicia.

There are exceptional readings that derive from exceptional circumstances. It can be stated that this is one of them: a strategic reading profoundly rooted in the current reality of Galicia, while at the same time, outlined to open the doors for the future. After the pandemic: Reflections and challenges for Galicia will provide the reader with what we are so lacking at the moment: ideas that stimulate critical thinking and overcome self-complacency; strategic challenges that will lead us to overcome the uncertainty and complexity of today’s world; and the inspiration that will allow us to break through barriers in order to reach our deepest aspirations. Reconstruction is obligatory and must be based on analytical capacity and observation in a way that allows us to be ahead in order to continue to move forward.

Anatole France, who was awarded the Nobel Prize in Literature in 1921, once stated that “the future is hidden behind the people who make it”. I encourage each of you, the readers of these reflections on our present situation, to join us in the exciting challenge of building our future, whose outcome will exceed our greatest expectations. Such are the spirit and energy that guide these programs of abanca and its Social Responsibility Institution, formed by Afundación and its Intercontinental Higher Education Business Institute (ieside), a nonprofit entity responsible for the publication of this volume.





Francisco Botas

Chapter I

COVID-19: CIRCUMSTANTIAL ANDSTRUCTURAL ACTION.

SPOTLIGHT ON GALICIA 2030





20 | COVID-19: Circumstantial and structural action. Spotlight on Galicia 2030 Francisco Botas | 21

CURRENT SCENARIO

The present reflection on the true dimensions of the health, economic and social crisis brought about by covid-19 is being written coinciding with the peak of uncertainty: September 2020. As regards the economy, the fall in gdp during the second quarter of the year was 17.8% and 14.5% for Spain and Galicia respectively. The significance of the impact of covid-19 is so severe that it demands a profound consideration of the scenarios we are likely to encounter in the following quarters.

Figure 1. GDP for the 1st and 2nd quarters of 2020

Source: Spanish Institute of Statistics (INE) and Galician Institute of Statistics (IGE).

-5.2 % -4.9 %

-17.8 %

-14.5 %

1st quarter 2nd quarter

GaliciaSpain






We now know the global macroeconomic prospects for Europe and Spain, and, to a lesser extent, those for Galicia and the other autonomous regions. These projections, which would have seemed inconceivable just a short time ago, give rise to great uncertainty concerning the effects and length of the present crisis, of which we are gradually gaining a better understanding.

Figure 2. GDP projections for the period 2020-2022

Source: Internal estimates by ABANCA’s Area for Strategy.

With a correct definition of the strategic priorities, detailed planning, the necessary capacity for implementation, and long-term vision we will enable Galicia to mitigate the adverse effects of the current situation, and contribute to a sustainable recovery while becoming stronger in the long-term. In order to accomplish this, we need everybody’s cooperation.

In the current scenario of necessity and, more than six months after the outbreak of the pandemic – during which several measures of varying scope have been taken – it seems necessary to deepen our knowledge of the profound impacts of this unprecedented crisis so that the diagnosis enables us to swiftly accelerate and implement the most suitable measures.

The effects are and will be both circumstantial and structural. Some are directly linked to the consequences of the pandemic, and will disappear once we get back to normal. Others will linger either because they arose from previously existing situations, or because of the changes and acceleration of new social patterns.

We now need to move swiftly in defining and implementing the strategies based upon analyses that are more agile and flexible than those traditionally conducted, so that they might result in yield better knowledge of the current situation and its own course. This is how permanent and certain solutions, factors which are key in building trust in society, and, consequently, within the economy, will be provided. All this needs to be approached with the necessary flexibility and bearing in mind that lack of previous experiences in this regard could lead to drawing erroneous conclusions.

In any case, what should we do? What questions should we be wondering?

First, we should consider the current scenario as regards some of the fundamental and well-known factors that have had an impact on its course; for instance, a significant net growth in global population which increased by more than 63 million people1 during the period from January to September 2020. None of the European countries can be found among the 15 most populated or with the highest demographic rates. And neither Galicia nor Spain are expected to see an increase in their population. These trends demand attention, strategies and actions that take them into consideration. On the other hand, the use of digital means has increased worldwide: more than 50% of the global population has internet access, with the figures in Spain being considerably higher reaching 90%.2 These data show a clear competitive advantage on which we could rely. At the same time, health is and will be a key factor. Spain has one of the highest life expectancy rates, and its healthcare system has been ranked among the best ones worldwide. Yet, the impact of the pandemic has varied greatly from one region to another. Another factor that is worth mentioning is the sustainability of our society, which serves as a strategic pillar, and which we must preserve. This latter goal has also been established as a priority for the European Union. But, how do we manage the risk derived from the transition? How can we compete with other regions of the world which do not share our concerns? To these global issues, we must add other concerns that affect us locally, and which, obviously, must be interpreted and evaluated. But these concerns

1 Source: Worldometer.2 Source: World Bank.

2.0 %

-11.8 %

7.0 %

4.1 %

2019 2020 2021 2022






that we have pointed out serve as a clear example of what is happening beyond our region, and they are what we must necessarily bear in mind when identifying our own strategic priorities.

In this shared context, with trends and prospects pointing to different courses, what is going to happen? Will it be successful? Or will the figures that we have been mentioning be just the averages for the different countries? Can the figures be compared to one another? Will there be a tremendous variation of results depending on micro-geographies or economic sectors?...

It is of the essence to conduct dynamic analyses and implement cutting-edge tools, such as the case of Big Data, which helps in understanding the trends and the decision-making process. We must focus on the analysis of the geographical micro-environment, and of course understand the clear differences in behavior among sectors. In short, we must exponentially accelerate the knowledge of the macro-level and from there focus on a very active management of the micro-level. All this needs to be strategically coherent, and must include both short-term and long-term visions. For instance, we could depict the uneven behavior of payments among sectors in Galicia during the pandemic until September.

Figure 3. Observatory ABANCA by IESIDE on the uneven impact of COVID-19 on different economic sectors

These situations will affect the world’s economy, and therefore also Galicia’s. We should understand them according to a sectorial point of view, focusing on those which are already operating in Galicia or which are likely to start operating, from the territorial or spatial perspective of micro-geography, bearing in mind urban, rural and semi-urban areas, inland and coastal regions, etc., or according to the diverse measures implemented in them. By way of example, let us observe the different impacts on a quarantined and a non-quarantined area within the same territory.

Figure 4. Observatory ABANCA by IESIDE. A quarantined area is compared with the rest of the territory

-

-

100PRE-

COVID

- -

63%68%

58%

44%

42% 41%

30%

33% 33% 31%31% 19%

34%31%

24%

35%26% 28%

28%

43%

29%28%

14%20%

44%

43%47%

38%

9%

25%20%

19% 18%19% 16%

32%

30%

16%

21%13%

21%13%

20%

-60%

-50%-51%

46%42%

-38% -33% -36%-28%

-26%-26% -24%

-28%-22%

-29%

-29%-29%

-26%-26%

-30%

-30%-33%

-26%

-73%

-40%

-25%

-14%-19%

-16%

-35%

-24%-16%

-19%-20% -15%

-18%-11%

-11%-23% -19% 24% -20%

-21% -20%

-83% -80%-74%

60%55% -50%

-46%-44%

-39% -33%-33% -34% 32%28% -28%

-28% -27%

-28%

23% -28%

-31% -41%

MAY JUNE JULY AUGUST SEPTEMBER

1ST 2ND 2ND 2ND 2ND 2ND 3TH 4TH 5TH 1ST 3TH 1ST 3TH 4TH 4TH 1ST 5TH 3TH 4TH 1ST 3TH 1ST 4TH

Food Transportation Home Fashion & Accessories Enterntainment

Saturday 15th

(holiday)

PHASE 0 PHASE 1 PHASE 2 PHASE 3 NEW NORMAL

% inter-annual growth as regards of the same period last year

-21%

-30%

-29%

31% 18%

The firstweek of thenew normalis included

2ª 3ª 4ª 1ª 2ª 3ª 4ª 1ª 2ª 3ª

MARCH APRIL MAY

4ª 1ª 5ª 1ª

JUNE

2ª 3ª 1ª

JULY

2ª 3ª 4ª

100PRE-

COVID

PHASE 0 PHASE 1 PHASE 2PRE-COVID LOCKDOWN PHASE 3 NEW NORMAL

HIBERNAT

-24% -3% 4% 4% -2%

123

111

116120

104102

105108107

94

59

70

61

72 77

92

Total Galicia

Areas with mobility restrictions

Evolution of the amount of credit card payments (Base 100- pre-covid on weekly operational basis)

BEGINNING OF MOBILITYRESTRICTIONS JULY 6TH

The firstweek of thenew normalis included






With all this information it would seem necessary to conduct a profound and swift reflection, which, at the same time, may allow us to define our priorities: the most pressing ones in the short-term and those with a long-lasting trajectory.

At present, our priorities are, and should continue to be, as follows: social support in view of the current scenario, support aimed at the protection of health as the immediate priority, and the protection of employment as a guarantee of social protection. At the same time, we should address our efforts towards ensuring the protection of the current economic capacity, which took so much work and time to be achieved, and which is the foundation of our welfare state.

Guaranteeing the protection of the sustainable established capacity should be our utmost priority for the eventual normality, in order to ensure the jobs and the income that, consequently, allow us to bear the costs of our welfare state. These three levels of protection must be ensured for a period of time similar to that expected for the effects to last.

Additionally, and foremost, emphasis should be placed on communication and the provision of stability and certainty for the people and businesses affected. Secondly, but equally important, we must be able to discern at all times which effects of the pandemic are circumstantial and must therefore be mitigated right away, and which are structural, and thus require a very different approach.

In the long-term, we need to address the structural and permanent changes taking place in our society.

We must understand that the current crisis is actually the ideal time to finally redirect and promote the key transformations that our environment needs in the long-term. Some of them have been being acknowledged for a long time and have been partially addressed. Some others will arise from the new behaviors of the society in which we are living.

As regards long-term actions, this paper comprises a larger number of proposals, since it is our contention that there is still a lot of work to be done when it comes to suggesting approaches that will lead to a positive evolution through the year 2030.

In Galicia, a region that has been very active from the very beginning, we must continue to focus our efforts on the urgent and essential needs of the current

scenario at the same time that we take a resolute step forward toward the smart transformation of our environment for a new future, whose arrival we anticipate will become real once we sum up opportunities or new needs and shift our common deficits. In other words, there is still plenty of room for improvement.

In this way, with the correct management of the short-term as a starting point, we will be able to strategically design for the future wellbeing of Galicia.

It is at this time of crisis when we must consider whether it is possible for us to improve, to transcend our limitation, and swiftly adapt to new times and opportunities, all while, of course, retaining the advantages we currently have. The people of Galicia will undoubtedly be key to the success of this transformation, with their enormous capacity to adapt without losing their proud identity, just as it has been happening throughout history, and as can be seen in a number of personal and collective experiences. Now, at a time when we are integrated in a world with greater global interconnections, we must rely on the new existing mechanisms. One of them, which will undoubtedly help, is the release of the funds provided by the European Union of which we already know some of the key features, such as the Next Generation eu program: digital support, support for sustainability and support for the social area.

Below, and for the purpose of improving for 2030, some specific lines of action to be designed and implemented are proposed, in no particular order of priority.

1- Focus on digital opportunities. For the first time in history, geographical location is no longer decisive, given the sudden emergence of the digital world. From Galicia we must emphasize both the promotion of innovation in this field, and the support to the transition of the current productive sector.

2- Focus on the sustainability of our own economic proposal as a measure to provide momentum and added value. We have repeatedly seen that an essential part of the added value of some raw materials and services originating in Galicia ends up yielding dividends in other territories. We must undertake to focus on integrating the value proposition and, in some cases, seek vertical and horizontal integration at the local level.

3- Focus on stimulation of the quality of life from the social and healthcare context, understood as a service provided to a society with a greater life






expectancy, and based on the provision of quality services training and research, bearing in mind Galicia’s natural advantages and requirements.

4- Focus on our population, and on recruiting talent. Understanding how large the population will be, and where and how we will live in 10, 20, 30 or 50 years’ time, is no trivial matter. In addition to robust policies to foster population growth, it is important to promote various long-term analyses from a social perspective, with the help of mathematics and statistics, to allow to become a talent recruitment hub. A positive and integrated strategy with a long-term vision will ensure our collective future.

5- Focus on promoting the sectors where our traditional know-how can be applied with a clear and forward-looking vision: agriculture and farming, fisheries, textile, automotive and green energy, among others, and with their natural evolution food, industry, services, biomedicine, etc., placing special emphasis on their added value and sustainability, and encouraging their local roots.

6- Focus on a robust promotion of innovation, free of geographical boundaries and aimed at sectors considered as strategic (in addition to those mentioned above). We should undoubtedly enhance our innovative efforts in both public and private sectors and, of course, with a strategy and a scope that allow us to feed back this critical function, with a Galician perspective and a global vision.

7- Focus on supporting private initiatives and entrepreneurship, understood as the elements that stimulate our society, especially in strategic sectors. It is necessary to create new services or companies to adapt to the new needs, and this requires a society which is dynamic, capable and motivated.

8- Focus on quality sustainable tourism, enhancing its offer. Firm positioning regarding sustainability, an intrinsic factor of our territory, built on the basis of a diverse geography and renowned gastronomy.

9- Focus on fiscal competitiveness, aimed at stimulating private initiatives, entrepreneurship, strategic sectors, and the recruitment of entrepreneurial talent, as well as investment capacity.

10- Focus on becoming a real entry bridge for added value from America and on reinforcing links with Portugal. Implementing policies for fiscal and

economic promotion could be the strategy that differentiates Galicia from other regions, at both national and European levels.

I would like to conclude by highlighting the great competitive advantage that we have in order to develop the above factors, given the existence of a prestigious financial entity which is present throughout the region and committed to Galicia, both within the current scenario and its eventual transformation. Moreover, being aware that part of what has been suggested here is being tackled with the greatest interest by the competent professionals in charge. However, I encourage accelerating its implementation, prioritizing the short-term mitigation measures mentioned above, but bearing in mind the medium-term transformational measures which will allow us to build a much better Galicia towards 2030.





Alicia García-Herrero

Chapter II

IMPACT OF COVID-19 FROM THEPERSPECTIVE OF EUROPEAN ECONOMIES:

A SPOTLIGHT ON HUMAN CAPITAL





32 | Impact of COVID-19 from the perspective of European economies: A spotlight on human capital Alicia García-Herrero | 33

With the rapid recovery of an economic superpower such as China, covid-19 is believed by many to constitute no more than a temporary shock, at least in economic terms. But this is probably not the case. Artus and García-Herrero1 (2020) argue that the economic shock will have significant long-term effects, as the global economy becomes less productive. To be sure, production is expected to be “square root”-shaped for the next few years. The sudden fall in economic activities caused by the lockdown will be immediately followed by a rapid recovery as restrictions ease. However, potential growth will decline in the medium term. This is especially true for export-dependent economies, such as those of European countries, which have sufficient accumulated savings. The rapid recovery stems from the spending of some of the forced savings built up during lockdown, as well as the income support provided by expansionary fiscal policies. The sudden fall and the rapid recovery are already visible (Figure 1) in China as a frontrunner, and will become increasingly so for the rest of the world.

The author is grateful to Junyu Tan, economist at Natixis, for his contribution.






Figure 1. China: Composite PMI (CAIXIN index)

Source: WIND, Natixis.

However, such speedy recovery does not come without a cost. The ultra-expansionary policies in response to the crisis may actually be irreversible. The rapid increase in debt levels will make it impossible to raise interest rates, and this will probably discourage the accumulation of savings.

More importantly, potential growth will inevitably trend downwards in the medium term due to the covid-19 shock. This results from the loss of capital as investment falls and bankruptcies are declared (Figure 2). In addition, the crisis involves a loss of human capital, due to the rise in unemployment, the persistent problems for some sectors (such as airlines, tourism, traditional retail, etc.), and restrictions of access to education. Furthermore, on-the-job training will be much less efficient as workers work from home and companies may not be able to afford investing in the improvement of their human capital in the face of continuing accumulation of corporate debts.

Figure 2. OECD*: Total real corporate investment (2002: 1 = 100)

* United States + United Kingdom + euro zone + Japan

Sources: Datastream, BEA, ONS, Eurostat, CAO, Natixis.

This is particularly worrisome for the small open economies of Europe, given their aging population and a falling labor productivity that predated the pandemic. In fact, this is not the first time that potential growth has fallen because of a crisis. The same thing happened during the subprime crisis (Figure 3) but the effects resulting from covid-19 are likely to be far more dramatic. Therefore, governments enacting policies for these economies must figure out ways to prevent potential growth from falling further.

25

30

35

40

45

50

55

60

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

90

100

110

120

130

140

150

160

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

(*) United States + United Kingdom + euro zone + Japan






Figure 3. OECD*: Real potential growth**

* United States + United Kingdom + euro zone + Japan** Per capita productivity smoothed over the last 5 years + labor force (Y/Y as %)

Sources: Datastream, BEA, BLS, ONS, Eurostat, CAO, Natixis.

Given such foreseeable developments, the losses of human capital must be reduced in the short run. Pelinescu (2015) has highlighted the role of human capital in growth, arguing that it could influence the sustainable development of the State. In the case of the covid-19 shock, this will require efforts at preventing not only bankruptcies (which destroy productive capital), but unemployment (which destroys human capital and weakens productivity). In addition, the deterioration of the financial situation of corporations should also be prevented, because poor financial health leads to lower corporate investment and therefore lower potential growth. It would therefore be preferable to temporarily subsidize struggling companies, instead of allowing them to continue to add to their debt burden.

Artus (2020) also proposes that investment on human capital be scaled up to accommodate the rise in structural unemployment and concomitant fall in productivity. In the short run, the government should increase its spending on vocational training in order to facilitate the transition of jobless workers from struggling sectors to sectors where workers will be in demand (e.g., it, online retail, health care). Meanwhile, the government should also improve the quality of human capital by encouraging higher levels of enrollment in education programs. Most of the key economies in Europe lag behind Korea in terms of higher education enrollment (Figure 4). In the case of young dropouts, apprenticeship programs or vocational training would provide support in developing competencies.

Figure 4. School enrollment, higher education (% gross)

Source: UNESCO, Natixis.

covid-19 cannot be dismissed as a temporary shock, but must instead be seen as a phenomenon that will have a lasting impact on potential growth. The economic policies of aging European nations should have a twofold focus: the preservation human capital (to accommodate the structural shifts in sectors), and the accumulation of human capital (to address falling productivity).

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

02 04 06 08 10 12 14 16 18 20

0

10

20

30

40

50

60

70

80

90

100

Korea Spain Germany France China






ANALYSIS FOR GALICIA

As regards of its human capital, Galicia is facing an enormous challenge: the total of its active population is been heading towards a negative evolution for the last seven years, especially in the age group between twenty and twenty nine years old, where the decrease reaches 5%. The economic recovery recorded in the years prior to 2020 is not implying a shift in the trends regarding the active population evolution, whose ageing since 2014 is very relevant, with serious increases in those people active who are more than 40 years old and dramatic reductions between 20 and 39 years old, namely, in the age group between 30 and 34 years old.

The demographic data available for Galicia and published by the ige (Galician Institute for Statistics) reflect an increasingly low birth rates and a rise in mortality, which leaves us with a negative net population growth, as it can be seen in chart 5. Galician population sums up 2.7 million people, 15% youngsters under 18 years old, 3.6% lower than the Spanish results as a whole. Galicia faces a serious problem of losing young people. Its average age is 47.2 years old. Its life expectancy is 83.52 years old, lower than the Spanish average life expectancy, which rises up to 83.59, the highest within Europe. There nowadays 653,554 individual older than 65 in Galicia, 24.2% of the whole population. At a Spanish level this percentage is 18.5%. The ageing of Galician population is a fact that can be dated back to 1975, because the cohort of the population older than 65 have been constantly growing for the last 40 years, while the birth rates follow a continuous decrease.

If we establish a relationship between education and unemployment rate, the latter decreases in all education levels, with a more intense reduction in the higher education stages, as it can be observed in all of our neighbor economies. A clear decision in favor of promoting education and adjustment of its offer, in both higher education and vocational training, to the new needs of the labor market are compulsory measures to be developed by the Government.

Figure 5. Evolution of the total number of births, mortality and net population growth. Galicia 1975-2019

Source: IGE.

As regards of higher education as a key element of the human capital accumulation, the total number of university students is not the most relevant figure. On the contrary, in order to be able to see the whole image, we should observe the competence accumulation variable, especially within the stem field (Science, Technology, Engineering and Mathematics), which can provide us with a clearer notion of what is happening. In Galicia, the number of stem graduates has been dramatically reduced for the last 20 years. In the academic year 1999-2000 the total of the university population reached its peak with 98,691 enrollments. In 2019 the number of all the students enrolled in Galicia’s University System (sug) rises up to 61,029, of which 28,761 signed for stem degrees (10,629 in Health, 5,572 in Science and 12,560 in Engineering and Architecture), 47.13% of the total amount. Also, in 2019, 10% of university candidates chose to conduct their higher education degrees outside Galicia, mainly in Madrid (6%). This fact is chiefly determined by two factors: high cut-off marks to entering the programs within the stem field in the Galician region and a limited offer of new degreers linked to science and technology.

-20.000

-10.000

0

10.000

20.000

30.000

40.000

50.000

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

MORTALITY fertility BALANCEMortality Births Net population growth






As regards of foreign investment expected to be driven to creating job opportunities to prevent young talent emigration, the total amount of fdi received in Galicia in 2019 (722.9 million Euros) has barely impacted the real economy, since an important part of this whole is due to internal transactions within the Brazilian group, focused on the concrete sector, Votorantim (formerly known as the Portuguese multinational Cimpor). Although it is true that in 2019 Galicia was ranked sixth in the Spanish Autonomous Communities with more fdi, right after Madrid, Catalonia, Castilla y León, Andalucía and Valencia, it is also true that there is a considerable gap in between. For instance, when regarding the amount received by Madrid (61% of the whole). In conclusion, and in order to promote a competitive Galician economy, we should focus on developing long-term policies aiming to strengthen and retain our human capital, targeting the youngsters. In addition, we should ease our appeal for productive fdi in order to create technologically innovative projects that help industrial and service sectors to be seen as real options. R&D&I are crucial in this process. Both are the two main challenges that Galicia must face in the future.





Mauro F. Guillén

Chapter III

BUSINESS IMPACT OFTHE PANDEMIC





44 | Business impact of the pandemic Mauro F. Guillén | 45

The market economy is constantly flowing. This is what Joseph Schumpeter used to say when describing the phenomenon of “creative destruction”, the real driving force for innovation and for the unprecedented ability of this economic system to provide ever higher standards of living. However, besides the continuous economic evolution and the many technological, and otherwise, disruptions, the market economy also faces crisis periodically. Most crises are originated by the financial economy and the real economy infecting one another in a downward spiral. The current crisis, unlike other crises that we have been experiencing for the last one hundred years, is different in its origins. A sharp downward turn in the economy and a rise in unemployment are due to the response in the face of a public health emergency. For now, the financial system has not been affected by the crisis, although it is still too early to know to what extent a financial meltdown can be avoided.

The ups and downs of the economy have immediate repercussions on the business world, one of them being company bankruptcies, highly reported among small businesses. Besides, there are many other effects both inside and outside the company environment. In order to survive this crisis and take adequate steps to recover from it, companies will have to closely study the nature of the new trends emerging from the crisis, as well as those accelerated by it.






CHANGES IN THE SUPPLY CHAIN

Companies’ relationships with suppliers, employees and customers have been undergoing an accelerated transformation since the beginning of the crisis. Starting with the supply chain, this crisis has challenged the reliability and continuity of the traffic of intermediate goods (i.e., spare parts and components) from the origin of the chain, which is often thousands of miles away from the place where the company actually makes use of these supplies. Many companies have been forced to halt production, not due to a lack of demand, but because they could not procure the necessary supplies starting with the sudden disruption in the Chinese economy early this year. Delays in delivery times have slowed down operations of numerous companies. These problems have led companies to reconsider the structure of their supply chains, rethink their geographical distance and the degree of diversification.

Friction and disruption in global supply chains are by no means a new phenomenon. For instance, some of the problems related to their lack of diversification were pointed out in 2011. That year, an earthquake and a tsunami hit Japan, causing the Fukushima nuclear accident, provoking very serious consequences for the shipment of components manufactured in Japan that supplied automobile manufacturers all over the world, including those located in Galicia and the rest of Spain.

Trade frictions have historically caused disarray in supply chains. The trade war between the United States and China during 2018 and 2019 is the most recent example. Due to rising tariffs, many companies decided to diversify their suppliers, especially in sectors such as clothing, footwear, electronic components, and an endless number of other sectors. As expected, companies decided not to look for suppliers in the United States. Instead, they found alternatives in countries such as Vietnam, Taiwan, Mexico and some Eastern European countries, whose costs were fairly similar to those of Chinese firms. Companies are expected to restructure their supply chains in the medium and long term in order to become more resistant to adverse events, such as earthquakes, trade wars or pandemics. This requires not only diversifying the origin, but also increasing their level of stock in order to avoiding shortages. This second step involves the partial abandonment of the just-in-time

principle as regards supply. The main consequence of these transformations will be raising costs. Predicting whether these additional costs of increased robustness in supply chains will be borne by companies or consumers becomes an essential consideration for the future. On the one hand, companies might be expected to pass on the additional costs to the end consumer. However, in the long term, competition in consumer markets might reduce this negative effect on the end consumer.

This crisis also encourages companies to invest in automation along the supply chain and in internal operations. The reason is not only the need to reduce costs, but also the new importance placed on continuity, which is threatened during a pandemic that prevents staff from going to work. Automation will also increase in all activities requiring employees to come into physical contact with customers.

EMPLOYEES AND REMOTE WORK

The second major transformation is the relationship between the company and its employees. Remote work is the most relevant effect of the crisis. Up to 40% of the jobs in the current economy can be carried out exclusively from home or elsewhere. This means that many of the employees will not have to return to the workplace on a full-time basis. In all likelihood, mixed work schemes combining onsite and remote models will be put forward as a solution involving certain compromises, given the advantages and disadvantages of working remotely: flexibility on the one hand, but isolation and difficulties in coordinating tasks on the other.

However, there are other consequences, if remote work becomes widespread, that should also be borne in mind. If a certain job can be carried out from home or elsewhere, the company can actually hire anyone in the world for that position. In other words, remote work creates a potentially global labor market, with a considerably fierce competition for talent. This trend would benefit workers with unique knowledge or skills, but it could also bring wages down to a level of efficient equilibrium in a context that is global, rather than national or local.






RELATIONSHIPS WITH CUSTOMERS AND CONSUMERS

Lastly, relations between the company and its customers are also changing rapidly. E-commerce boom aside, this crisis has also altered the composition of demand as well as consumer behavior. Essential goods and services are known to have been in unusually high demand since the beginning of the pandemic. However, the definition of the concept of essential demand in this crisis is very different. In addition to the essential goods and services that meet vital needs and make it possible to have a pleasant and healthy home, essential demand also includes goods and services linked to e-commerce, telework and distance learning. Even goods and services aimed at home entertainment could well be classified as essential items.

Perhaps the most important and lasting changes will be those regarding consumer preferences. Among the physical attributes of the product, consumers will probably place more emphasis on safety and reliability. This aspect requires the company to explain, among other things, the origin of the components or ingredients used for its products. As for social attributes, consumers are already tilting towards attributes related to the experience of the good or service. And regarding the self-expressive attributes, consumers are increasingly turning, due to the pandemic, to products and services that provide psychological comfort at a time when we are all re-examining the meaning of life and the opportunities and threats it implies. In general terms, consumers will be drawn to goods and services that contribute to physical and mental well-being, quality of life and safety.

In terms of distribution and sales channels, there is no doubt that e-commerce has received a huge boost as a result of the lockdown at home and social distancing due to the crisis. Some consumers who were not used to e-commerce have been forced to make frequent use of it. Many small companies have also set out to create a sound digital presence and, in the case of tangible goods, to develop a whole system of electronic sales and subsequent delivery.

IN THE FACE OF SO MUCH CHANGE, WHAT IS THE BEST STRATEGY?

There is always the temptation to want to change before events take place in order to be ahead of them and gain a strategic advantage. There is much debate in the media, for example, about whether this is the end of retailing, the age of telework, or the reversal of globalization. In a crisis such as this one, where short and long term effects are definitely uncertain, nothing can be taken for granted and therefore no drastic decisions should be made about the future of companies in terms of strategy, positioning, products and market approach.

This is why it is important to think not in terms of great transformations within companies, but in terms of pivoting towards a position that favors: (1) adjustment in company approaches to the trends revealed during the crisis; (2) effective deployment of resources and capabilities; and (3) contribution to a company’s financial sustainability and to the strengthening of its brand image in the market. This means to swing towards a new positioning, or way of conducting businesses, but maintaining the current consumer base or with other new groups of consumers. For example, many restaurants have developed a take away or delivery system, and some have proposed some kind of subscription service whereby the customer receives a complete meal at home several days a week. Small-scale farms have seen some of the demand for restaurants disappear, but have managed to restructure their packaging, distribution, and sales strategies in order to reach the end consumer directly.

In the field of digital platforms, Spotify, the leader in music streaming services, has pivoted towards the creation of contents as podcasts, something that will surely contribute to greater profitability. Airbnb, in turn, has launched a program of digital experiences which are directly created by the hosts within the Airbnb platform as videos or podcasts. Thus, the company would become a lifestyle platform rather than a mere intermediary between hosts and guests.






CONCLUSION AND OPPORTUNITIES FOR GALICIA

Every crisis presents an opportunity for a company to reconsider its strategy. The aim should always be to find a positioning and use of resources and capabilities that favor greater sustainability and financial success as well as a strengthened brand image. The effects of the recession are certainly unbearable for many companies, especially for the smaller ones, and many larger businesses would be unable to weather the crisis without fiscal or monetary assistance. It is always worth remembering the maxim that a crisis is an opportunity too good to miss.

In the case of Galicia, there are several circumstances resulting from the pandemic that are conducive to innovation and transformation according to the new scenario. The automotive sector, extremely important in the region, could evolve towards shorter supply chains, allowing greater value creation within the vicinity of the assembly plants. The clothing sector vertically integrated towards the end consumer could take advantage of the crisis to intensify its digital transformation, consolidating and restructuring its onsite store network, as is already the case of leading companies. In the era of distance and caution, rural tourism could acquire new enthusiasts, as it offers a less crowded experience, creating higher quality jobs, and contributing to the recovery of the “emptied regions” – inland areas sparsely populated due to massive migrations to more industrialised destinations – of Galicia and Spain. Finally, small-scale agriculture, specialized in high quality at an affordable price, will also be strengthened in the present circumstances, given the frequent problems of infection in mass food processing facilities. In short, this is a crisis that presents tangible opportunities for an economy like Galicia’s, which relies not only on large-scale industrial activities such as automotive and clothing, but also on smaller-scale production sectors such as rural tourism and organic farming.





Fernando González Laxe

Chapter IV

THE EFFECTS OF COVID-19 ON THEFISHING SECTOR AND CHANGES IN

CONSUMER HABITS





54 | The effects of COVID-19 on the fishing sector and changes in consumer habits Fernando González Laxe | 55

The effects of covid-19 are taking their toll on all economic activities, affecting both production and consumption at the same time, while also affecting the personal safety and health of seafarers. The repercussions of this pandemic are palpable, not only when it comes to boarding fishing vessels but also as regards ensuring the supply of fish products for the food industry. There is little doubt that, after the period of lockdown and restrictions on economic activities and on the free movement of fishermen, the situation will change and there will be a significant shift in positions. Our purpose here is to analyze these changes.

If we take the time to consider our immediate future, right after the period of lockdown brought about by covid-19, we will first appreciate the revaluation of certain consumer goods and foods as compared to previous times. Fish products will continue to be an essential product for shoppers, although we may see changes in both the presentation of those products, in consumer preferences and in fluctuations in seasonality. Secondly, new services linked to






innovative technology, detection, logistics it and tertiary knowledge systems will be gradually incorporated into the market. All of these will help provide guidance, while also reinforcing demands from both consumers and producers. Consequently, new global supply and support chains will be established for producers, resulting in two different dynamics working simultaneously: one sustained by relationships of proximity and another that reinforces decentralized trade flows. Thirdly, we will witness a process of “de-commodification” of certain primary goods as a result of the new procedures that differentiate fish products. This process will occur as a result of a combination of technical advance and the issuing of new certificates for denomination of origin and sustainable fisheries.

Given these considerations, the repercussions of covid-19 on the fishing sector impel us to address these new concerns. The discussions that, until recently, used to be focused on certain goals will be shifting due to the pressing issues arising from the new circumstances. By way of example, we will outline four relevant topics. First, there will be a delay in reviewing and approving international conventions and guidelines on environmental matters. Thus, the expected initiatives in this regard will be halted or put on hold for a while. Secondly, there will be a shift in political priorities, with certain objectives being shelved indefinitely. We should not lose sight of the fact that some of them, such as social goals and sustainability indicators, are essential, and must not be forgotten. Thirdly, if the goal is to maintain the whole economic activity, steps should be taken in order to focus on how to attempt to subsist until we are completely back to normal. Fleets could be provided with incentives and measures of adjustments and adaptation. Lastly, the current situation must not serve as an excuse to avoid initiating or updating fishery management periods. Similarly, initiatives promoting ecological transition, food sovereignty, and sustainable fisheries should not be postponed. In sum, now is the time to take action in order to ameliorate the negative effects.

Fishing is one of the most complex activities to study and to regulate. It depends on operations derived from a defined strategy and daily management. However, there are external factors which escape human control almost entirely, making it difficult for fishing conditions to remain invariable over time. Some of them arise from changes and fluctuations in currents, salinity or water temperature,

factors affecting stock recruitment, the impact of pollution, or the alteration of ecosystems. This is why fishing resources are depicted as fleeting, mobile, and depletable, failing to consistently produce at the same rates or under the same conditions. In addition, seas cannot be purchased, leased or inherited. Having taken all these reasons into consideration, the 1984 fao conference on fisheries management declared that “fishing management is an art.” This statement highlights the complexity of its regulation, as well as the great difficulty inherent to implementing measures that would be conducive to sustainable and effective regulation.

The above description suggests that analyzing the impact of coronavirus is a challenging task. On the one hand, we see extractive activities halted and suspended while, on the other hand, there is a reduction of the demand, caused by the lockdown of most of the world’s population. These are two facts of the fishing sector that lead to a high degree of uncertainty when planning and acting within the fishing sector (Figure 1).

Any partial or total suspension of fishing activities means that vessels remain docked, which results in the reduction of supply. This creates financial problems for companies, who find themselves unable to cover their overheads because their financial resources are too fragile. At the same time, such circumstances cause a decrease on working incomes, and thus affecting the living conditions of coastal communities that serve as the base of operations for fishing units. Seasonal fisheries, whose operations are exclusively confined to a specific time of the year, are also severely affected. Finally, the supply of aquaculture products is reduced, because their distribution channels are not fully operating.

The lockdown leads to a reduction in demand. On the one hand, we should take into consideration the effects directly derived from confinement, namely the restriction of free movement, the difficulty in maintaining distribution channels fully operating, the complications involved in full-availability of all fish species, or the reduction in export levels, since many countries lack suitable transport and distribution conditions for the product. On the other hand, consumer habits shifted from the necessity factor to the leisure factor during lockdown, meaning that nourishment needs varied accordingly.






Figure 1. Disruptions in the fishing sector caused by COVID-19

Once both situations are combined, two direct impacts can be observed: the first one being instability of prices, and the second one being changes in consumption patterns. As regards the former, a fall in prices at fish products auctions is being recorded, going against the logical expectation stated by the law of supply and demand, according to which a scarce good would draw a higher price. However, this valuation does not reach the consumer; conversely, distribution channels manage to place the fishing products at higher levels than those they would have attained in pre-covid-19 circumstances. With regards to the second impact, consumer habits have been heavily altered as a result of lockdown, and consumption outside the home has been significantly reduced within what is known as the food service industry (Horeca channel in Spanish). Consumer current preferences target both supermarkets (rather than larger retail

outlets during the first weeks of lockdown) and, unexpectedly, other products such as meat and legumes over fresh fish products.

Table I. Trends in amount of fish products consumed in Spanish households, from January to May, 2020 (% change compared to the same week of the previous year)

Week (2020)Total Fish Products

Fresh Fish Products

Frozen Fish Products

Canned Fish Products

Week 1 (January 6-12) 29.9 7.5 23.9 23.2

Week 2 (January 13-19) -13.0 -18.8 -14.5 -4.5

Week 3 (January 20-26) -5.8 -21.4 12.0 8.9

Week 4 (January 27-February 2) -6. -15.1 3.6 4.5

Week 5 (February 3-9) -4.6 3.6 -14.3 -5.8

Week 6 (February 10-16) -0.9 0.2 -4.7 4.7

Week 7 (February 17-23) -9.5 -14.3 1.1 -2.3

Week 8 (February 24-March1) -0.8 0.1 -6.3 6.0

Week 9 (March 2-8) -1.9 -8.9 1.8 11.3

Week 10 (March 9-15) 0.6 -4.3 13.3 6.0

Week 11 (March 16-22) 21.2 7.2 38.1 82.1

Week 12 (March 23-29) 4.5 1.1 33.2 4.7

Week 13 (March 30- April 5) -4.0 -1.5 17.8 -1.3

Week 14 (April 6-12) 0.8 -4.4 37.9 -0.7

Week 15 (April 13-19) 19.6 4.3 39.5 18.6

Week 16 (April 20-26) 35.5 57.1 55.4 15.5

Week 17 (April 27-May 3) 18.5 21.4 25.8 3.0

Week 18 (May 4-10) 31.7 33.0 40.9 13.2

Week 19 (May 11-17) 38.7 32.4 67.0 33.4

Week 20 (May 18-24) 28.3 25.9 37.7 35.3

After the first week of the year, in which a significant increase regarding the previous year can be observed, the subsequent eight weeks, until mid-March, fish products consumption in Spain decreased in comparison with that same week of the previous year. From week 11 onwards, consumption increases although continuously fluctuating in demand. The most significant rises occurred during the last weeks of the month of May.

Both vessels and fishers remain at port.

Total or partial halt of activity and businesses.

Capture of seasonal species as a whole is affected.

Staggered supply of aquaculture products in

order to cover the costs of managing stocks.

Restrictions on free movement as a result of lockdown.

The halt to the activity results in a more limited supply volume.

Points of sale, markets and distribution channels close.

Supply chains become more complex and vulnerable.

Fishing and aquaculture operators (normally micro-

businesses) do not have financial reserves to cover their overhead.

Unstable price fluctuations.

The fall in oil prices impacts product demand in oil-producing

countries.

EFFECTS1. Considerable impact on artisanal and coastal fishing, which adversely affects employment in local communities.

2. No demand in hospitality and catering services.3. Reduced exports.

4. Presence of competitors offering lower prices. 5. Product prices are negotiated in a bear market.

6. Households reduce consumption.7. Increased uncertainty, increased capacity, and increased recovery time.

Swift drop in supply

Progressive reduction of

demand






Table II. Evolution of the consumption and price of fresh fish products, and comparison of the trends in fresh fish products consumption and food consumption as a whole in Spanish

households (%)

Total foodconsumption

Consumption of fresh fish products

Price of fresh fish products

Week 11 (March 16-22) 29.8 7.2 0.9

Week 12 (March 23-29) 10.9 1.1 8.9

Week 13 (March 30-April 5) 17.6 -1.5 7.5

Week 14 (April 6-12) 22.2 -14.4 10.0

Week 15 (April 13-19) 36.3 4.3 14.9

Week 16 (April 20-26) 50.6 57.1 3.6

Week 17 (April 27-May 3) 23.4 21.4 6.1

Week 18 (May 4-10) 27.0 33.0 0.6

Week 19 (May 11-17) 30.6 32.4 1.2

Week 20 (May 18-24) 27.0 25.9 3.0

Sources: MAPA (2020). Análisis de los consumos alimentarios. Government of Spain, Ministry of Agriculture, Fisheries and Food (MAPA).Martín Cerdeño. V. J. (2020). La cadena alimentaria en tiempos de la COVID-19. Distribución y Consumo, Vol. 2, pp. 24-42.

This table shows relevant changes in shopping and consumption habits. Qualitative differences can also be observed depending on the different levels of confinement during lockdown periods. In this way, for the first weeks of lockdown, less fresh fish products were consumed. However, as restrictions on free movement limitations were eased, the demand for fresh fishing products experienced an intense and rapid increase. Consequently, the prices began to adjust to the potential levels of demand, overcoming the fluctuations that characterized the strictest periods of lockdown.

This remarkable change in behavior is to be stressed because the consumer surveys conducted every year by the Spanish Ministry of Agriculture, Fisheries and Food had been showing that the elderly and the unemployed (who spend more time at home and have more free time) were the groups consuming more fresh fish products. In short, neither of these two direct impacts is consistent with what had been the dominant hypothesis until recently in studies prior to the pandemic.

A third element in the analysis is the opportunity for imported products with lower prices. Local producers have already started to sound the alarm,

since the growing presence of imported products contributes to destabilizing the positioning of certain specific products and their markets. Likewise, the current exceptional and temporary circumstances make it possible to violate the principles of equivalence and homogeneity, so emphasis should be placed on actions aimed at ensuring that imported products abide by the same control and phytosanitary safety standards as those produced in the European Union. In other words, we must adapt globalization to our current new circumstances.

Faced with this situation, both the Spanish Government and the European Commission have reacted swiftly. The agreement approved on the adaptation of the emff (European Maritime and Fisheries Fund) regarding subsidies for specific treatments and campaigns to promote the consumption of fish products is a reliable indicator of heightened institutional sensitivity regarding the issue. However, there is still a long path ahead and much work to be done if we are to revert to the conditions that prevailed prior to the outbreak of covid-19.

Within this scenario, there are a growing number of studies dealing with the theory of real investment options. Several factors encourage the use of this approach when making decisions for the present and, specially, for the future. I tackle three of them as examples. First, the costs of investing in fisheries are irrecoverable (that is, the investment made in a fishing vessel cannot be used in a different activity). Secondly, there is a high level of uncertainty regarding the abundance and price of fishing resources. And thirdly, the decision-making process as to whether or not to continue to exploit a certain fishing ground or invest in it may be delayed or halted altogether. If we review the conditions of the current scenario, we can see that we are in an increasingly volatile position, with constant restrictions on fishing activity. Consequently, the choice to suspend activity depending on product price seems possible. This would mean that if the price becomes lower than the variable costs, in all likelihood the activity will be interrupted. It is not difficult to deduce then that the price of fishing products is not appealing for investments. Hence the need to accept and adapt to the possibility of making fishing processes more flexible in order to prevent opportunity costs and the reduction and diversion of investments. Recent studies on the topic show that there is a close relationship between profitability and risk, meaning that the more volatile the price of the asset is, the greater the likelihood of movements which may favor the value of the options, ultimately resulting in lower relevance of the sector.






Consumer habits evolve according to times. Changes are assumed, as are adaptation to new situations and accommodation to new social customs. Currently, the so-called consumption-oriented society is the combined outcome of decades of mass consumption, the introduction and application of progress and technological innovation, and the advent of innovative social changes. Five major periods can be discerned as regards the consumption of fish products. These phases are linked to different socioeconomic and political events which have contributed to modifying consumer habits and behaviors (Table III).

First phase: the arising of modern consumers (1950-1970). After World War II, technical progress paved the way for new and more automatized means of production. Markets made it possible for the supply to reach the consumers, and the supply exceeded the demand. In these circumstances, producers focused on being involved in promoting and highlighting their products through differentiation strategies. To this end, the phase of advertising started, revolving around food products and their marketing. As far as distribution is concerned, at this time large retail outlets emerged, and women entered the labor market. Both trends contributed to modifying the structure of household incomes, and had an impact on the time available for cooking.

Second phase: consolidation of the agro-food industry (1970-1985). This is the golden age of the food industry. The economic growth of that period, commonly known as the “glory years”, is to a large extent connected to citizens’ increased acquisitive power, mainly represented in a more generalized consumption. During this period, emphasis was placed on product diversification, and mass consumption was cast aside. The freezer was the great innovation, which came hand in hand with new ways of preparing and preserving food and led to the advent of new products and the reduction of the time devoted to cooking. Economic prosperity accelerated foreign trade. Imported products flooded large retail outlets, and the globalization of the food market put an end to the seasonality of certain products. Consumers gradually grew away from their appreciation of and links to their sense of territorial commitment and belonging for their nearest and most traditional products. Eventually, consumption was no longer tied to seasonality, global supply became standardized, and thus fresh products consumption decreased significantly.

Third phase: distrust of food products (1985-2000). The 1980s were a turning point and saw a shift in the consumer/industry relationship. Technical progress, initially conceived and appreciated as something positive, was hard hit by the change in consumer perceptions during this period. The main reasons for these changes were a series of food crises affecting various species and products (e.g., mad cow disease, mercury poisoning), ultimately extended to all markets. Countries that have not experienced these phases of uncertainty and distrust are rare. Scandals continued to occur and had an impact on consumption patterns. Habits and customs were altered, followed by a phase of suspicion and food crises, to which the agro-food industry responded with modified strategies, coming to rely on the establishment of a closer link between health and product. Light, organic and natural products emerged as the new trends in consumption, and the industry called on scientists to play a more prominent role in order to spur innovation. There were a wealth of regulations on food safety, and a revival of territorial considerations by means of trying to highlight certain traditional and well-known products.

Fourth phase: shift in consumer approach (2000-2008). This is a period of great transformation concerning the speed of change and versatility of consumer habits. On the one hand, food expenditures were reduced; on the other, new changes in household structures became apparent, affecting either family structure, commuting, or requirements of workforce mobility. The field of nutrition embraced several new key concepts by insisting on certain nutritional characteristics (e.g., omega-3), with an emphasis on all health-related issues. Information for consumers was made available in a larger scale, free of charge and world-wide (via Internet, smartphones and apps). These changes affected consumer habits and the ways in which fishing products were purchased (e.g., the advent of e-commerce). Distribution brands gained market by being globalized and, given the enormous promotion they underwent, we became a world of global consumption. However, at the same, three important factors continued to stand out: local, organic, and exotic.

Fifth phase: from crisis to recovery (2008-2020). The crisis of 2008 had a considerable impact on consumer habits. During this period, significant changes occurred that gained enhanced traction with the emergence of new ways of life that demanded a more intense pace, better facilities and a high






level of “destructuration” of food products. Current social behaviors are characterized by an increasing workforce mobility and nomadism as regards not only people’s but also business’ demography (e.g., foundation, continuity, termination and relocation). New opportunities on the job market show that the workforce is widely distributed and, consequently, food demand is very specific and atomized.

Table III. Comparative analisys among the phases of the fish-food industry and consumer habits of fish products

Phases Characteristics Generation Periods

Modern consumer Technical progress. Supply exceeded demand.

Generation of scarcity 1950-1970

Consolidation of the agro-food industry

Glory years. Remarka-ble growth in product consumption.

Generation of refrige-rators

1970-1985

Distrust of food pro-ducts

Food crises. Natural products emerge, linked to health: “or-ganic” and “light”.

Generation of the large retail outlets

1985-2000

Consumer shift Versatility and new customs. New purchasing chan-nels (e-commerce). Nutritional products and predominance of distribution brands.

Generation of food services

2000-2008

From crisis to reco-very

Intensification of the pace of life. Atomi-zed and very specific demand. Ecological conscience and tra-ceability.

Low-cost generation 2008-2012

Nomad generation 2012-2020

Internet generation 2008-2020

Post COVID-19 A!ected by lockdown. Demand for enhanced safety standards. Co-llapse of distribution channels. Promotion of local-based rela-tionships.

New generation 2020-…

Source: Author.

A new ecological conscience has been born, one that is based on modern consumption systems, such as the advent of foods which are different, specific, peculiar, customized and in which producers, industry and distributors exploit the product to the fullest. Expenditure on food is reduced and price becomes a factor in food choices. In short, a great divergence in habits and behaviors has occurred, one which widens the consumption gap among different consumers and different consumer stereotypes. Lastly, consumers require greater transparency in product labelling, and also demand traceability in order to guarantee food safety.

We are now entering a new phase, the post-covid phase, whose characteristics, as yet unknown, will undoubtedly be influenced by our life experiences and by expectations that are very different from those we had beforehand. Therein lies the choice between progress and deceleration for this sector. We will be paying close attention in order to contribute to the strengthening of our legacy, our advantages, and our strategic decisions.





Ainhoa Marín Egoscozábal

Chapter V

AFRICA: NEW INSIGHTS ANDECONOMIC OPPORTUNITIES





68 | Africa: New insights and economic opportunities Ainhoa Marín Egoscozábal | 69

INTRODUCTION

In the last years there has been a growing economic and political interest in African countries. After decades in which a pessimistic view of the situation on the continent held sway, recent years have seen the great world powers – especially China – set their sights on Africa. African countries are no longer attractive just because they are rich in raw materials (e.g., oil, uranium, iron), but also as rising consumer countries and markets that offer business opportunities. With a growing population, an upwardly mobile middle class and a slow but inexorable democratization process, Africa has increasing international value as both a strategic ally and an investment market. Spain is no stranger to this new interest for the continent. In 2019, the Spanish government approved the Third Africa Plan (iii Plan África) and in July 2020, the new guidelines for the African Outlook (Horizonte África) strategy were submitted. The main objective of these strategies is to strengthen the Spanish presence in Africa on the basis of national interest and they also envision higher levels of political and economic involvement with the continent. The European Union (eu) is also creating during 2020 a new eu-Africa strategy with the same objectives, namely strengthening ties – especially business and investment ties – with African countries.






AFRICAN ECONOMIC OUTLOOKS AND A NEW SCENARIO

In economic terms, Africa is no longer the hopeless continent it was two decades ago. Since the year 2000, African countries have been taking over, year after year, the international economic institutions’ list of countries with the highest economic growth. In 2019, for example, of the 10 fastest growing economies in the world, six were African nations (Table 1):

Table I: Ten countries with the highest growth in 2019

GDP variation in %

Dominica 9.4

South Sudan 7.9

Rwanda 7.8

Bangladesh 7.8

Côte d’Ivoire 7.5

Ghana 7.4

Ethiopia 7.4

Nepal 7.0

Cambodia 6.9

Mauritania 6.6

World average 2.4

Source: Author, based on data from the International Monetary Fund (2020).

Several African countries, including some oil exporting nations (e.g., South Sudan, Ghana) and also others that are in the process of industrialization (e.g., Ethiopia) experienced considerable growth in 2019, as well as in prior years. These countries, together with some others such as Côte d’Ivoire or Mauritania, had better growth forecasts than emerging countries such as China or India, and they have been in the midst of a long period of economic prosperity. In continental terms, Africa would have doubled its gdp (i.e., the size of its economy) in little more than a decade.

The outbreak of covid-19 in Africa brought all this positive economic growth to a screeching halt, and Africa is now experiencing its first recession in 25 years. Although the health impact is not being as severe as expected (except in countries with a high transmission rate, such as South Africa and Egypt), the economic impact is being serious, especially on three fronts: (i) countries

highly dependent on oil exports (e.g., Nigeria, Angola, Libya), (ii) countries highly dependent on tourism revenues (e.g., Seychelles, Cape Verde) and (iii) a fall in diaspora remittances from foreign countries (The Comoros, The Gambia, and Senegal suffering the most due to their high dependency).

According to Africa s Pulse, a report from the World Bank, the decline in economic growth in sub-Saharan Africa’s countries in 2020 will be within the range of -2.1% and -5.1%. Africa is a continent highly dependent on exports to foreign countries - a key element in the long period of economic prosperity prior to the pandemic. With the decrease in global demand and in crude oil prices, recession is thus unavoidable, especially given the fact that regional African markets are barely dynamic. As soon as lockdowns began, for example, tons of flowers destined for export to Europe had to be disposed of in Kenya.

The covid-19 pandemic has exposed two essential questions. The first of these is the excessive dependency and vulnerability of many African countries on oil exports and fluctuations in crude oil prices. The second is the fact that value chains can be disrupted, something that happened for several months during 2020. Without regional African markets to make up for the sharp fall in international demand, many African countries cannot sustain stable growth rates.

Furthermore, although Africa has experienced rapid growth, its transformation has been slow. African economies are still very dependent on the production and export of primary goods (e.g., oil, coffee or cocoa). Many experts, such as Carlos Lopes, state that a comprehensive industrialization program is needed to transform that gdp growth into real advances. On the other hand, “Africa is barely trading with Africa”, and the pandemic has proven that it is necessary to strengthen economic ties among these countries, which have since the colonial era been stuck in an economic model based on exports to third countries (especially European countries, and increasingly also China). One of the main economic objectives of the newly established African Continental Free Trade Area is to strengthen African supply chains and “made in Africa”.

THE AFRICAN CONTINENTAL FREE TRADE AREA (AfCFTA)

The creation of the afcfta area was the key project of the African Union, the main institution in the continent. The treaty was signed by 44 of the 55 African






countries in Kigali (Rwanda) in March 2018, and represented an unprecedented success. In spite of the fact that the two main continental powers, South Africa and Nigeria, were not initially parties to the treaty, the fact that so many countries joined afcfta constituted a milestone in the economic integration of this continent, and was a great step forward for Pan-Africanism.

Essentially, afcfta consists of an agreement to eliminate barriers to international trade of goods and services (mainly tariffs). The goal of this measure is to increase intra-African trade to 52% of the total by 2022 (now it stands at below 20%). In addition, afcfta seeks to achieve goals such as the promotion of sustainable and inclusive socioeconomic development, gender equality, and structural transformation. Other goals of this initiative are the facilitation of personal mobility, the promotion of competitiveness of economies, and the implementation of a system aimed at solving trade disagreements.

afcfta therefore constitutes a landmark project. Its expected launch – as regards the elimination of tariffs – is January 1, 2021. The expected socioeconomic effects of afcfta are highly ambitious: according to the most optimistic projections, this initiative would not only promote intra-African trade and industrial exports, but would also increase investment and employment. afcfta could also support diversification of African economies, and help promote industrialization, economic growth, and sustainable development.

As regards the positive effects of a political nature, it is common to attribute to regional economic integration schemes the ability to promote peace and stability among nations. As economic dependence and commercial links develop and diplomatic relations grow stronger, the costs of a potential conflict are higher and therefore less likely. That is what happened in Europe. Thus, afcfta could also serve as a political tool in this sense.

The effects of afcfta will not be immediate and will depend on several factors besides the elimination of tariffs. For instance, an increase in trading among African countries can only be achieved in the future by enhancing infrastructures and by removing other barriers to trade (e.g. customs autocracy, differing national technical and health regulations, and domestic regulations that designate the national origin of certain products). In order to carry out this transformation and industrialization, it will also be necessary to diversify African exports (as suggested by Lopes) so that mutual needs of partners within afcfta can be satisfied.

STRATEGIC INTEREST OF AFRICA FOR SPAIN AND GALICIA: ECONOMIC OPPORTUNITIES 1

Although the African continent certainly continues to have significant problems (poverty, armed conflicts and diseases, among others), these are ongoing challenges that have often silhouetted an unfair image of the continent. It is a heterogeneous continent, and includes some countries that are very stable both economically and politically. As noted above, most such countries were in an expansive economic cycle prior to the outbreak of covid-19 pandemic, and it is expected that, once the pandemic subsides, they will resume their paths of growth.

The great world powers have shown increasing levels of involvement with and interest in Africa as both a market and a strategic area, which points to an incontrovertible truth: Africa is a continent full of opportunities. In general terms, Africa’s greatest assets are, of course, its natural resources. However, it is also important to take note of the continent’s growing middle class, young population, and improvements in the business environment. For example, Rwanda has the same score as Portugal in the World Bank Doing Business 2020 ranking. Also worthy of mention are Africa’s increased levels of democratization and stabilization.

The Spanish government has jumped on the bandwagon of international interest in the continent. The Third Africa Plan establishes a number of priority countries for Spain: South Africa, Nigeria and Ethiopia are viewed in the plan as anchors of stability, regional growth and economic projection, while Ghana, Kenya, Mozambique, Côte d’Ivoire and Tanzania are identified as preferred partners (Figure 1).

1 The author would like to thank Professor Javier Moreno for his help securing and analyzing data for Galician business operations in Africa.






Figure 1: Priority countries for Spanish foreign policy in sub-Saharan Africa

Source: Third Africa Plan. España y África: desafío y oportunidad (Spain and Africa: challenge and opportunity).Ministry of Foreign Affairs, European Union and Cooperation (2019).

Spain’s trade and financial strategy with respect to the continent is presented in the 2020 document African Outlook of the Ministry of Industry, Trade and Tourism. Information in the document was obtained from questionnaires completed by companies and economic and trade offices, and points to Algeria, Egypt and Morocco as priority countries, while identifying Côte d’Ivoire, Senegal and Kenya, as well as Tanzania and Uganda, as favorable business environments. Furthermore, the strategies identify investment, water and sanitation, transport (especially rail) and energy infrastructures as key sectors.

Trade flows between Galicia and the countries of sub-Saharan Africa constitute an exceedingly modest proportion of Galician trade as a whole: 0.06% of imports and 0.33% of exports.

Table II: Trade balance of Galicia with the sub-Saharan Africa as proportion of total trade

Galician Trade Balance (In millions of Euros)

YEAR 2015 2016 2017 2018 2019

IMPORT

SUB-SAHARAN AFRICA 774.3 565.7 707.1 957.9 953.9

Inter-annual increase % -16.5 % 37.7 % -18.8 % 5.5 %

WORLD 274.772 253.393 302.431 319.647 322.068

Inter-annual increase % -7.8 % 19.4 % 5.7 % 0.8 %

Sub-Saharan Africa % of total balance 0.28 % 022 % 0.23 % 0.30 % 0.30 %

EXPORT

SUB-SAHARAN AFRICA 203.3 169.8 233.8 189.8 200.3

Inter-annual increase % -26.9 % 25.0 % 35.3 % -0.3 %

WORLD 249.794 273.778 276.142 285.260 290.089

Inter-annual increase % 9.6 % 0.9 % 3.3 % 1.7 %

Sub-Saharan Africa % of total balance 0.08 % 0.06 % 0.08 % 0.07 % 0.07 %

Source: Author, from DATACOMEX Ministry of Economy.

We can see how the trade balance between Galicia and Africa is clearly negative, with exports reaching only 21% of the imports (i.e., imports valued at 953.9 million euros, compared to exports of 200.3 million euros in 2019).

As regards of the countries with which Galicia has more trade exchanges, they are as follows:

Table III. Trade balance for Galicia in 2019 by country

Country EXPORT(in millions of euros)

Country EXPORT(in millions of euros)

388 South Africa 13.60 389 Namibia 95.88

288 Nigeria 6.64 260 Guinea 78.30

366 Mozambique 6.21 388 South Africa 55.44

389 Namibia 5.36 288 Nigeria 53.16

355 Seychelles 4.00 228 Mauritania 21.85

310 Equatorial Guinea 3.74 366 Mozambique 21.84

248 Senegal 3.51 318 Congo 17.97

274 Côte d’Ivoire 3.10 247 Cape Verde 17.10

228 Mauritania 3.07 248 Senegal 14.81

302 Cameroon 2.87 355 Seychelles 12.19

247 Cape Verde 2.70 373 Mauritius 11.97

Source: Author, from DATACOMEX Ministry of Economy.

Priority countries

Anchor countries

Senegal

Ghana

NigeriaEthiopia

Kenya

Tanzania

South Africa

Mozambique

Angola

Côted’Ivoire






The most frequently imported products are from the fishery sector, whereas most of the exports are items related to transportation (i.e., vehicles).

Galician fishing companies have traditionally had an important presence in the region, drawn by the abundant fishing grounds of a number of its countries. Thus, Namibia and South Africa on the Atlantic Coast and Mozambique on the Indian coast, have fishing vessel bases and fish processing factories with Galician investment (Grupo Pescanova, Mascato). Construction companies and environmental management companies have also been operating in this part of Africa for some time now, especially as regards water treatment operations. On the other hand, some shipyards (Cardama) have been working on a regular basis over the past few decades in order to renew the fleets of some of the countries in this region. As regards equipment goods, the exports of vehicles (psa-citroën) are worth mentioning, although some Galician smes have also penetrated this sector.

Currently, a newly emerging middle class in the countries with the highest per capita income opens the way for new opportunities in sectors previously closed to foreign companies, such as consumer goods and food, which Galician companies should seize.

In conclusion, the covid-19 pandemic has caused economic forecasts to change for African countries, and has made it clear that they need to transform their economy and become industrial countries, and that they need to generate regional value chains in order to reduce their vulnerability. However, it is no less true that the achievements of these countries during the past 20 years, and recent initiatives such as the afcfta, which will create a free trade market of 1.2 billion consumers, represent a firm commitment to the generation of more dynamic markets and more opportunities for investment, which Spanish and Galician businesses should not miss.





Ignacio Martín Maruri

Chapter VI

THE CROSS-SECTIONAL CHALLENGEOF TELEWORK





80 | The cross-sectional challenge of telework Ignacio Martín Maruri | 81

THE CHALLENGE OF TELEWORK

The covid-19 pandemic has led to a proliferation of telework as a common practice. During the lockdown, many businesses decided to encourage teleworking, an option that they had previously been reluctant to offer. According to Eurostat data, in 2018 only 4.3% of workers in Spain teleworked on a regular basis, compared to 14% in the Netherlands, and 13.3% in Finland.1 The pandemic has driven 34% of Spanish employees to swiftly adopt this option.

Even though it is expected that most employees will return to onsite working after the lockdown, at least for a transitional period, it is highly likely that, for the next few years, teleworking will remain far more common and frequent than it had been prior to the pandemic. The reason for this normalization of teleworking is that many of the assumptions that had previously limited its development have been challenged by this startling test. Once these barriers are fallen down, it is likely that in the mid-term a growing number of usual teleworkers could be registered. According to the consulting company Global Workplace Analytics (gwa), the percentage of teleworkers who work from home at least two days per week is expected to increase up to 30% in all developed countries by the end of 2021. This entails potential benefits of all kinds, for workers as well as for businesses, but also important challenges that we should properly analyze and face.

1 Whereas European average was 5.8%.






MENTAL MODELS

The benefits of teleworking have been studied and reported for many years. Companies would supposedly benefit from savings amounting to more than 9000 euros per year for every employee who teleworks, plus the costs of travel and accommodation to attend meetings and events in person that could be joined virtually. In addition, when properly implemented, telework leads to an increase in productivity, to talent attraction and retention, and to a rise of worker satisfaction. For employees, the possibility of teleworking means crucial savings in travel time and fuel, as well as greater degrees of flexibility and autonomy that could potentially improve their work-life balance. Regardless of all these advantages, only 12.9% of company managers and directors teleworked in 2019, when, virtually, all of them were supposed to have this option. Out of a total of 59.9% of technical staff and professionals who could telework, only 13.8% worked from home on a regular basis.

The explanation of these data is not due to economic reasons, but is instead to be found in deeply rooted mental models. According to gwa, problems identified in implementing telework had to do with managers being suspicious of the productivity of their employees if they were not directly supervised. As regards workers, the main fear was the loss of visibility, that is, the chance that they would not be professionally valued if they were not seen in the workplace. These fears have been largely overcome over the course of these past months of social isolation, even though it is true that working conditions during the pandemic have been much harder than they would have been under normal teleworking schemes, because what was lived during these months was an improvised and precarious teleworking implementation. On the one hand, in many cases, workers did not received the required technical training and equipment, such as computers, programs and applications, sufficient broadband, workstations, etc. But, mainly, due to the extraordinary circumstances involved in teleworking during this period: lockdown, stress, families sharing a limited space, children out of school and in constant need of support and attention, professional uncertainty, fear for the health of our loved ones and ourselves’, etc. All of these factors have made teleworking during these months much more difficult and demanding than it would have been under normal conditions. And, in spite of all this, the outcome has been sufficiently positive so as to be able to predict a substantial increase of this working system.

MUTUAL BENEFITS

Even though regulation of all legal and labor aspects of telework is crucial, this is only the first step. A legal framework and a series of tools that enable telework are only two elements within a far more complex challenge. But they are the two first elements that, hopefully, will receive the greatest possible support from all the stakeholders involved. What is really important is to clearly define what we want to achieve with the implementation of telework, given that it could simply be used to search for an enhanced efficiency of our current models, or to establish new strategies for innovation and generation of higher added value.

If teleworking is only imposed to save on costs by reducing facilities or as a way to indefinitely extending working hours – while retaining the same processes, team dynamics and traditional leadership implementation – the most likely outcome would be an increase in job insecurity and stress, and a decrease in performance and productivity. Therefore, teleworking should not be chiefly seen as an instrument for increasing efficiency of the current productive patterns, but as a mechanism to open new strategic possibilities, to encourage innovation and to attract and retain the best talent. Especially the talent of the younger generations, for whom remote, asynchronous and online connections are part of their day-to-day lives, and who are likely to feel more comfortable in a working space that meets these criteria. This is, therefore, a cross-sectional challenge in which companies should be involved, but also public authorities.

BUSINESS CHALLENGE

A business mindset designed to attract the best talent and to promote innovation based on generalized telework requires a complete revision of the current paradigms and productive processes, and their adaptation to remote work. Currently, companies tend to essentially focus on the tasks that need to be carried out, setting aside dynamics and collective purposes. And it is exactly these last two aspects which take on a special relevance in teleworking, because human beings, as the gregarious animals that we are, need to feel as part of a group to which relate ourselves and commit. An individual job without a sense of belonging and sustained bonds can result in unmotivated workers, a lack of commitment, and emotional stress.






Working onsite, sharing a space and a common schedule, being together and interacting, even while having coffee, generates bonding dynamics which help maintain a certain collective spirit. In spite of that, and according to a study conducted last December by Boston University, 76% of the executives were already experiencing problems when it came to feeling connected with their work group. If those same methods that generated distancing and lack of motivation were to be maintained in a telework scheme, the outcome would probably be much more negative.

In fact, during the period of social isolation, teamwork has already started to show signs of weakening. According to a study published last May in hbr, out of 250 American executives interviewed, the majority stated that the coronavirus situation was negatively impacting teamwork and innovation. Furthermore, and as a recent study by Circular hr points out, the engagement and the ability to concentrate have decreased substantially, while burnout is increasingly being experiences by workers.

The lockdown has forced us to pay more attention to our individual and family circumstances, resulting in a gradual deterioration of team connections and collective commitment to the company. Even in the new normal without the extreme factors of the confinement, the risks for teamwork and innovation will be just as high. For this reason, it will be crucially important to encourage strategies to maintain working links, by promoting bonding, exchange and cohesion spaces among team members and between them and the company.

POINTS TO BE REVISITED

In order to achieve all this, companies should focus on, at least, three essential points. First, we should start by carefully analyzing current operational and administrative processes, considering whether they are suitable for remote and flexible environments, and removing unnecessary obstacles limiting flexibility and autonomy, the main benefits for employees. Furthermore, it would be necessary to carry out a deep revision of the current regulations and incentives and adapt them to a space of greater autonomy, freedom, responsibility and empowerment for workers, because this is the first cornerstone of teleworking: a greater trust in employees. Without a higher level of trust it is impossible to generate collaborative, creative and innovative spaces necessary to create a higher added value.

In this way, workers could effectively manage their working hours, adapting them to their personal and family needs in order to achieve a proper work-life balance. This requires the offer of different schemes of total or partial telework – only a few days per week or spending a few hours a day in the office. The important thing is to allow employees to select among different modalities in a flexible and dynamic way according to the demands daily reported at work or within personal or family contexts.

A second point to consider would be the development of strategies to keep working groups united and motivated in this new, more dynamic and flexible scenario, with fewer meetings based on a shared physical space. In the absence of that physical space that summons and connects us within the online space this factor should be strategically intended. This task should be assumed directly by team leaders. Above and beyond merely reviewing the performance of assigned tasks, the role of the team leaders should focus on maintaining the collective spirit, motivation, commitment, and bonding among their own teams and among them and other areas within the organization. To this end, it is important to clearly define and convey the sense of purpose of both the organization and the team. Any style of leadership focused on micromanagement and performing traditional command and control would probably end up cancelling the advantages that teleworking might have for workers. This is why it is necessary to develop new ways of exercising leadership within teams.

The third point to consider is that teleworking is inextricably tied to family challenges. The fact of taking work to home vanishes completely the line, hardly perceptible lately, between both spheres. Thus, the family, as an agent present at the workplace, cannot, therefore, be the sole responsibility of the employee. The company should also assume an active role in ensuring that these two worlds do not merely coexist, but are positively empowered. Otherwise, it will negatively affect the employee performance in the long term. Moreover, if the great incentive of teleworking for employees is precisely the flexibility and the consequent possibility of striking a better work-life balance, the company should set the stage for this benefit to actually come true. Otherwise, commitment and productivity are likely to be affected.






PUBLIC CHALLENGE

The points mentioned above are essential not only for keeping current employees and teams united and motivated, but for attracting new talent as well. Given the increasing prevalence of teleworking, one of the possible effects might be that people may choose their place of residence according to reasons not exclusively related to proximity to the office. As we have seen, the way in which companies implement telework will be crucial, but also other factors, such as quality of life, education, health services, connectivity, environment, or housing prices, will become more important criteria as telework spreads. For this reason, many regions which are far from current economic nodes will be able to compete in recruiting talent, something that, until now, was far more determined by the geographical workplace. This new dynamic is opening an enormous opportunity for Galicia to offer new spaces for professional development with a high level of well-being.

In order to achieve it, it will not suffice to ensure communication services and broadband access in all villages, including rural ones. A series of public administration policies and reforms are also necessary to consolidate the benefits of teleworking and the efforts of companies. Especially, public services should be able to offer individuals and families the same principles of flexibility and virtual contexts that we propose for companies. In this sense, it would be necessary to promote reforms which allow all public services to be managed remotely and flexibly, in order to avoid commuting and limited working hours. The services of greatest relevance to family life, such as health and education, should also move towards mixed models, combining onsite and online, but especially flexible and independent from the place of residence. This represents an important shift of paradigm, since public services are often determined by people’s place of residence. A profound change in public administrations would support the efforts of the private sector to generate an attractive environment for talent, resulting in a higher level of progress in Galicia.

CROSS-SECTIONAL CHALLENGE

The pandemic has toppled many of the mental barriers that for many years have limited the development of telework. It seems clear that we are facing a new scenario and that teleworking, whether it is total or partial, is definitely going to be part of the new normal. Nevertheless, this way of working requires

much more than finding answers to a technological challenge. It necessarily demands a revision of the traditional paradigms for private and public spheres in order to get this working pattern to effectively offer actual possibilities for progress both to companies and workers. Attempting to introduce teleworking without reviewing the traditional paradigms may lead to a decline in quality of life and working performance. If we are to take advantage of the opportunities offered by telework, we must, therefore, be impelled to outline new cross-sectional strategies and dynamics based on the principles of ubiquity, flexibility, responsibility and autonomy.





Pedro Antonio Merino García

Chapter VII

THE COVID-19 PANDEMIC AND OILDEMAND: A GLOBAL AND REGIONAL

POINT OF VIEW





90 | The COVID-19 pandemic and oil demand: A global and regional point of view Pedro Antonio Merino García | 91

INTRODUCTION

The crisis generated by the covid-19 pandemic is the most severe since the crisis of the Spanish flu of 1918. In the particular case of oil, the crisis is the largest in its history if we focus on the imbalance created between global supply and demand. It cannot be compared to previous crises in terms of the severity of the isolated drop in demand, although it remains to be seen whether it will endure longer than the oil crisis of the late 1970s and the financial crisis of 2008. The effects on prices and on demand have been dramatic. For the first time in history, the price of us benchmark crude, West Texas Intermediate (wti), was a negative number.

However, talking about the impact in global terms obscures important regional details. Among its neighbors, Spain is one of the countries that is suffering the most adverse health and economic impact, with the implications that this entails for energy demand in general and fossil fuels in particular. Regarding the differences of these effects within Spain, the situation of each autonomous community varies depending on its particular economic and urban structure, and the dynamics of mobility and confinement, past and present.

In this sense, this document aims to tackle the impact of the covid-19 pandemic on oil demand and prices from a global context to national and regional ones.






THE GLOBAL OIL MARKET

The covid-19 pandemic has led to an unprecedented crisis in the history of oil. The coexistence of a demand shock and a supply shock during the first four months of 2020 caused crude oil prices to fall to levels not seen in 20 years, and even the American benchmark wti to quote in negative numbers for a few hours.

The demand shock came from the repercussions of the pandemic, as governments limited social interactions with important restrictions on mobility affecting entire populations in order to prevent the virus from spreading. The prohibition of leaving the house meant a drop in demand for gasoline and diesel, among other petroleum products. The travel ban and the closure of borders meant a drop in the demand for air travel. Consequently, jet kerosene became the fuel that was hardest hit by the crisis. The heavy fall in international trade meant a drop in the demand for marine fuels. All these dynamics together led to the greatest decline in oil consumption in history. Estimates of the International Energy Agency (iea) indicate that, during the peak of global confinement, around the month April, oil consumption fell by almost 25 million barrels per day (bbl/d) on a global scale, a reduction of 27% compared to 2019 levels. It should be remembered that, during that same month, around 4 billion people – almost 70% of the world population – were in confinement.

Figure 1. Trend in world demand by quarters

Source: International Energy Agency (IEA).

The supply shock – increased production – arose as a result of disagreements between Saudi Arabia and Russia about the strategy to follow in order to contain the obvious drop in demand explained above. These disagreements led to a price war, which began after Russia refused to increase the production cuts that had been agreed on by opec+ in December 2019. Saudi Arabia wanted to cut production even further in order to balance the petroleum market after the fall in demand due to the coronavirus, and thus assure that oil prices were maintained around the reasonable level of $50 per barrel ($/bbl). However, Russia claimed that further cuts would lead to us production gaining market share at the expense of opec+ members, so its position was to extend the agreement until June or, ideally, until the end of 2020. When Russia walked out on the emergency meeting on March 6th, Saudi Arabia retaliated by increasing production by an additional two million barrels per day, thus reaching 12.3 million bbl/d, while its Gulf allies, the United Arab Emirates and Kuwait, increased production by another million barrels. In short, they flooded the market with more than 3 million bbl/d of crude oil that no one was going to consume, and that was directly stored as inventory.

The conjunction of both shocks focused the discussions on oil inventories, which resumed the prominent role that they have always had in situations of extreme oversupply, such as in 2015 and 2016, only this time the rate of stocks exceeded any historical record. So much so that global stock capacity was literally pushed to the limit and, in mid-April, the rate of accruable inventory suggested that the world would run out of capacity to store crude between May and early June. Being able to store in order to obtain a higher price in forward sales could sustain prices, but if there is a suspicion that it will not be possible to continue storing, prices can go into free fall with zero or negative price risks.

In fact, for the first time in the history of the oil financial markets, a situation was reached in which the seller “would pay” whoever “would buy” a barrel of wti crude grade. The us wti crude futures market closed on Monday, April 20th at $-37.63/bbl. This paradoxical situation was contextualized within the supply-demand imbalances, as well as on the peculiarities of the wti futures contract in the Chicago Mercantile Exchange (cme), which provides that, upon expiration of the future contract, in case of not liquidating by differences (i.e., the monetary difference between the future price at the time of purchase and at the expiration date) the physical delivery is to take place in Cushing, Oklahoma, a hub in the south-central usa where oil pipelines are found and crude oil is stored in tanks. These tanks were already few weeks away from reaching

105

100

95

90

85

80

75

Q4

-00

Q2

-01

Q4

-01

Q2

-02

Q4

-02

Q2

-03

Q4

-03

Q2

-04

Q4

-04

Q2

-05

Q4

-05

Q2

-06

Q4

-06

Q2

-07

Q4

-07

Q2

-08

Q4

-08

Q2

-09

Q4

-09

Q2

-10

Q4

-10

Q2

-11

Q4

-11

Q2

-12

Q4

-12

Q2

-13

Q4

-13

Q2

-14

Q4

-14

Q2

-15

Q4

-15

Q2

-16

Q4

-16

Q2

-17

Q4

-17

Q2

-18

Q4

-18

Q2

-19

Q4

-19

Q2

-20

Q4

-20

Q4-19 101.0

Q2-20 83.0






their maximum operating capacity, which made it quite impossible to set new volumes if such capacity had not been previously agreed. Thus, as the maturity date of the future contract approached (Tuesday, April 21) the imperative need to settle by difference in order to eliminate the obligation to carry out the physical delivery of crude oil that nobody wanted, and that was impossible to store, made companies with available capacity to charge much more than expected for keeping of the oil. At the same time, the seller of oil futures – usually a non-commercial agent or financial investor who was assuming that prices would rise, and who by definition never enters the market of actual crude oil – would have to pay whatever it took to get rid of the contract that, upon expiration, assumed physical barrels of oil would be delivered. In addition, automated decision-making also intervened. Thus, if a very pronounced loss is experienced, the machine operated algorithm leads to more sales to liquidate the position, with a subsequent acceleration of the price drop and massive losses in those financial investments. Outside the us market, this phenomenon did not occur, mainly because, in the Intercontinental Exchange (ice) market, the possibility of physical delivery of Brent benchmark crude upon expiration is limited, and ship delivery is scheduled well in advance.

Figure 2. Trend in the price of one-month future delivery of Brent and WTI crudes

Sources: Thomson Reuters and Research Dept. at Repsol.

Beyond this circumstantial phenomenon that led to wti crude being quoted at negative values, prices have continued to be damaged by balance sheet imbalances, and have only recovered thanks to the following three dynamics:

First, the opec+ agreement to enact the biggest price cut in its history. In mid-April, Saudi Arabia and Russia finally set aside their differences and reached an unprecedented agreement as regards volume and duration. The reason was clear: crude prices below $20/bbl and rather unfavorable prospects in the short/medium term due to the pandemic.

Opec+ agreed to cut its joint production by 9.7 million bbl/d in May and June, by 7.7 million bbl/d during the second half of 2020, and by 5.8 million bbl/d from January 2021 to April 2022. In theory, the cuts seem to be having the effect that was expected, and crude oil has managed to recover to the level of $45/bbl lost in early March. The opec+ has shown more dynamism and resolution than in March, and prove of that is that the cut of 9.7 million bbl/d was extended in July, after opec+ concluded that this was required in order to retain global equilibrium. However, not all countries have strictly complied with what was agreed, and opec+ has called upon all its members to resolve this situation and, in addition, to compensate for the deviations that have accumulated from previous periods. Everything seems to indicate that, unless the health situation worsens, thus adversely impacting consumption again, the opec+ agreement would serve to prevent further imbalances in the market.

Second, the decline in production in countries outside opec+. The balance sheet has also been regaining stability in response to the production adjustment of countries outside opec+, due to both scheduled closures as a result of the fall in demand, and the natural decline due to the sharp fall in investment, which is estimated to correct this year by around 30%. The most important example of this dynamic in action is the United States, where production fell by more than 2.5 million bbl/d from March levels to 10 million bbl/d at its lowest point in June. However, the us has not been the only country outside opec+ to experience this impact. Canada, Norway and Brazil are among the countries that have cut their production, taking almost another 2 million bbl/d off the market.

Third, the recovery of demand resulted from the plan to ease lockdown. Since the April lows, global oil consumption has been on an upward trend, as expected, given that, once restrictions on the population are lifted, mobility increases. According to iea data, the demand for fuels for private transport was slightly

-40

-30

-20

-10

0

10

20

30

40

50

60

70

-40

-30

-20

-10

0

10

20

30

40

50

60

70

US

$ /

Bb

l

Brent

1-1-20 2-1-20 3-1-20 4-1-20 5-1-20 6-1-20 7-1-20 8-1-20 9-1-20

WTI






higher than expected during the first half of 2020. In the case of diesel, there is evidence that recovery in business and industrial activity, combined with continued growth in e-commerce, is driving increased trucking activity, as more products are delivered to customers. Demand for aircraft fuel, however, is still a weakness. In April, the number of aviation kilometers traveled was almost 80% lower than last year. In July, the deficit was still 67%, with no real prospect of a significant improvement in the short-term.

Although the data for total oil consumption are positive, caution is eminently advisable, because the pandemic continues, and available data provide no indication that it is tailing off. After a steady increase since late May, new confirmed covid-19 cases appear to have stabilized at around 300,000 a day globally, the highest rate since the early days of the pandemic. The easing of the first wave of lockdown measures has undoubtedly led to a second outbreak, as people returned to normal activity. Social distancing measures are being reintroduced in many countries alongside some localized lockdowns, and it remains to be seen whether the increase in cases will lead to a remarkable reduction of activity and mobility.

OIL DEMAND IN SPAIN AND EUROPEAN COMPARISON

Spain

Oil demand in Spain has suffered from one of the most important setbacks in its history, just when it was beginning to display a sustained growth trend following the ravages of the 2008 financial crisis. During that crisis, demand fell from historical highs of about 1.6 million bbl/d to a 2014 low of 1.2 million, a reduction of ~400,000 bbl/d over a period of about six years. The covid-19 pandemic has caused a remarkably similar contraction, but within the space of just a few months. This has caused demand during Q2-2020 to fall back to levels of the late 1980s (i.e., around 900,000 bbl/d). However, it must be recognized that this fall did not last longer than a single quarter.

Figure 3. Comparison of the trends of product demand in Spain during two contexts of crisis

Sources: International Energy Agency and Repsol Research Department.

Compared to the crisis of 2008, the current crisis has had a more widespread and immediate impact on the demand for crude oil in Spain, even falling in Q2-2020 by 35% from the levels of Q4-2019. However, demand is expected to recover to 93% of its previous level before the end of the year. In other words, if we do not consider other existing dynamics, the effect of the pandemic on oil consumption should be temporary, with more structural dynamics affecting some products such as jet fuel (the demand for which is obviously linked to air travel and international tourism). For 2020, the iea estimates that the average Spanish demand for oil products will be at 1.1 million bbl/d this year, a decrease of 227,000 bbl/d compared to the average for 2019, which would represent a drop of around 17%.

As noted above, jet fuel has experienced the greatest degree of contraction, and has not yet recovered. The explanation for this lies in the fact that international tourism is the sector that has been most adversely affected by the pandemic.

65

70

75

80

85

90

95

100

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

Ind

ex=

100

in 4

Q in

th

e ye

ar b

efo

re t

he

cris

is

Crisis 2008-2009 (4Q-2007=100)

Crisis 2020 (4Q-19=100)

number of quarters






It would suffice to point out that the entry of international tourists by airport into Spain fell to zero during the months of April and May, and by July (i.e., the last month for which data are available) it was still 80% below the levels of July 2019.

Figure 4. Link between the consumption of jet kerosene and the entry of international tourists by airport into Spain

Sources: International Energy Agency and Repsol Research Department.

Comparison with surrounding countries

But how does the trend in our data compare with that of other European countries? We have conducted a comparative analysis involving Spain and the following countries: Germany, France, Italy and Portugal. Figure 5, which deals with total products, indicates similar trends among the five nations, except in Germany, where the reduction of consumption has been lower given the lower incidence of covid-19, less severe lockdown measures, and protections afforded to German economic activity. In jet kerosene, the magnitude of the reduction in demand in Spain, compared to Germany, France, and Italy, is shocking. In fact, while the demand trend for total products has a V shape, in the case of jet kerosene, the trend line resembles the letter L.

Figure 5. Comparison of European countries in terms of demand for jet fuel and total products

Source: International Energy Agency and Repsol Research Department.

The fall in demand for kerosene is not only more acute, but has a much greater impact on our economy than on that of Germany, France, or Italy. The contribution of international tourism to our gdp is much higher than in that of those three countries (Figure 6), and has resulted in a greater fall in gdp.

Annual variation of international tourist arrivals by airport

Annual variation in demand for jet kerosene

Correlation coe!cient 0.89

Jul-

06

Jul-

07

Jul-

08

Jul-

09

Jul-

10

Jul-

11

Jul-

12

Jul-

13

Jul-

14

Jul-

15

Jul-

16

Jul-

17

Jul-

18

Jul-

19

Jul-

20

-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

50

60

70

80

90

100

110

50

60

70

80

90

100

110

Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20

Italy

Portugal

France

Germany

Spain

TOTAL PRODUCTS

0

10

20

30

40

50

60

70

80

90

100

110

0

10

20

30

40

50

60

70

80

90

100

110

dic-19 ene-20 feb-20 mar-20 abr-20 may-20 jun-20 jul-20

Italy

Portugal

France

Germany

Spain

JET KEROSENE

Ind

ex=

10

0 in

Dec

-20

19In

dex

= 1

00

in D

ec-2

019






Figure 6. Weight of international tourism income in GDP (2019 data)

Sources: Eurostat and Repsol Research Department.

The figure that probably best reflects the severity of the lockdown and the reduction in mobility in Spain is the drop in gasoline consumption (Figure 7), since it only affects people, and not goods. This comparatively severe impact, together with the weight of international tourism, explains the steep drop in Spanish gdp during the second quarter of 2020.

Figure 7. Comparison of European countries in terms of gasoline demand

Source: International Energy Agency and Repsol Research Department.

Figure 8. Apple Mobility Index (rescaled to 100, first week of February)

Source: Apple and Repsol Research Department.

The problem is that it is hard to have a positive outlook in light of either recent – month of August – or projected trends. If we look at the high-frequency data, shown in Figure 8, mobility since mid-August has declined due to new outbreaks and seasonal factors.

1.1

5.7

2.4 2.5

Germany Spain France Italy0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

20

30

40

50

60

70

80

90

100

110

120

20

30

40

50

60

70

80

90

100

110

120

Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20

Ind

ex=

100

in D

ec-2

019

Italy

Portugal

France

Germany

Spain

GASOLINE

0

20

40

60

80

100

120

140

160

180

200

Feb

-8-2

0

Feb

-18

-20

Feb

-28

-20

Mar

-9-2

0

Mar

-19

-20

Mar

-29

-20

Ap

r-8

-20

Ap

r-18

-20

Ap

r-2

8-2

0

May

-8-2

0

May

-18

-20

May

-28

-20

Jun-

7-20

Jun

-17-

20

Jun

-27-

20

Jul-

7-20

Jul-

17-2

0

Jul-

27-

20

Au

g-6

-20

Au

g-1

6-2

0

Au

g-2

6-2

0

Sep

-5-2

0

Sep

-15-

20

Spain Germany

France Portugal

Italy






COMPARATIVE ANALYSIS OF FUEL DEMAND BY AUTONOMOUSCOMMUNITIES: GALICIA

Focusing on Galicia, we first need to show that the differences that we have briefly noted among European countries are much greater than those that exist among Spain’s autonomous communities, although we will briefly make mention of the latter. These differences within Spain have to do with the severity of the lockdown, the importance of Galicia’s agricultural and fisheries sector, the lesser importance of international tourism, and the mobility response among autonomous communities during the summer months.

As regards the trend in consumption of oil products, data are available for gasoline and diesel oil through July. In order to extrapolate estimated data for August and September, we will use the high-frequency data from Apple and Google, which will prove to be consistent with tthese consumptions, and we will advance some ideas.

Fuel consumption

During the confinement period, the differential trend in petrol and diesel consumption in Galicia is moderate and derives from a lower reduction in mobility during the months of May and June in Galicia than in other autonomous communities. The figures, considering the period from March through July and comparing with the same period in 2019, of the total consumption of automotive fuels, fell by 30.1% in Galicia, in line with Andalusia and Catalonia, and notably less than other autonomous communities, such as the Balearic Islands (-41.5%), and below the Spanish average.

But this trend does not allow us to draw conclusions. This is because, of the total consumption of fuels, the part corresponding to goods varies greatly among the autonomous communities. We estimate that it is responsible for 70% of total consumption in the Basque Country, 60% in Catalonia and 50% in Andalusia and Galicia. For this reason, it works best to use only gasoline consumption as an indicator of personal mobility and real lockdown, and to serve as a proxy for the operation of the service sector, which is the most important component of the gdp. As shown in Figure 9, the Basque Country and Galicia suffered the least adverse impact on consumption, thus reflecting a less restrictive lockdown.

Figure 9. Inter-annual variation of gasoline consumption: March-July 2020

Sources: INE (Census Bureau) and Repsol Research Department.

The time profile of this improved trend can be seen in Figure 10. The temporal evolution of this gasoline consumption would indicate a clearly less severe lockdown in Galicia during the months of April and May, and a gradual recovery of the rates during the month of July.

-50.0 -45.0 -40.0 -35.0 -30.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0

BalearicIslands

Catalonia

NATIONAL

Andalusia

Galicia

BasqueCountry






Figure 10. Inter-annual variation of gasoline consumption


This trend correlates, approximately, with indicators of high frequency of mobility, which until July displayed a similar trend, and which was more positive in Galicia than in other autonomous communities. These indicators suggest that this behavior has been modified in August, with a rise of this behavior in Galicia, although we will have to wait for the final data.

Figure 11. Car mobility(rescaled to be 100 = first week of February and applying a weekly moving average)

Sources: Apple and Repsol Studies Department.

Consumption dynamics and covid-19

To a large extent, this better behavior of the demand for gasoline is explained by trips to vacation and recreation areas. This can be explained to some extent by the lower incidence of the pandemic in Galicia, which would relate to a lesser degree of fear to engage in certain activities among the local population and/or a softer fall of tourism.

-90

-70

-50

-30

-10

10

30

Jan

-20

Feb

-20

Mar

-20

Ap

r-20

May

.-20

Jun

.-20

Jul.-

20

Inte

r-an

nu

al v

aria

tion

(%)

Catalonia

Andalusia

Galicia

Basque Country

Balearic Islands

10

30

50

70

90

110

130

150

170

190

210

230

Feb-

9-2

0

Feb-

19-2

0

Feb-

29-2

0

Mar

-10

-20

Mar

-20

-20

Mar

-30

-20

Apr

-9-2

0

Apr

-19

-20

Apr

-29

-20

May

-9-2

0

May

-19

-20

May

-29

-20

Jun-

8-2

0

Jun-

18-2

0

Jun-

28-2

0

Jul-

8-2

0

Jul-

18-2

0

Jul-

88

-20

Aug

-7-2

0

Aug

-17-

20

Aug

-27-

20

Sep-

6-2

0

Spain Car. Weighed by GDP

Galicia






Figure 12. Fortnightly incidence of the pandemic per 100,000 population

Source: Apple and Repsol Research Department.

In any case, in addition to the lower incidence of the pandemic, another factor in Galicia that helps explain the reduced economic impact of the pandemic is the lower relative importance of international tourism.

Figure 13. Proportion of local residents’ overnight stays in hotels over the total of overnight stays (%)

Source: INE (Census Bureau) and Repsol Research Department.

The higher dependence on local tourism in Galicia has led Galician touristic sector to suffer less than this sector in the rest of Spain. The total of overnight stays in Galicia fell by 50.9% annually in July, while those in the rest of Spain fell by 74.0%.

Figure 14. Trend in hotel overnight stays


Although these data might lead us to think that Galicia’s fuel consumption profile should be above the national average, and especially the average of autonomous communities that heavily rely on international tourism, the data presented above point to a rather modest difference. One reason for this could be the high synchronicity of activity in much of Spain, as demonstrated by the similar profile of industrial production across autonomous communities during the pandemic. The other relevant factor in this regard has already been mentioned: the greater relative weight of diesel consumption for goods in certain autonomous communities. Although industrial production fell by 20%, personal mobility fell double at least. We also need to consider the delivery of goods purchased online in very urban areas which would partly explain the lower reductions in diesel consumption in regions that have suffered greater reductions in industrial activity and tons transported than has Galicia. Further analyses in this regard can only be conducted when additional data are available.

0

25

50

75

100

125

150

175

200

225

250

May

-11

May

-16

May

-21

May

-26

May

-31

Jun

-5

Jun

-10

Jun

-15

Jun

-20

Jun

-25

Jun

-30

Jul-

5

Jul-

10

Jul-

15

Jul-

20

Jul-

25

Jul-

30

Au

g-4

Au

g-9

Au

g-1

4

Au

g-1

9

Au

g-2

4

Au

g-2

9

Sep

-3

Sep

-8

Spain

Galicia

70

80

60

50

40

30

20

10

0Galicia Andalusia Catalonia Balearic

-120

-100

-80

-60

-40

-20

0

20

Feb

-20

Mar

-20

Ap

r-20

May

-20

Jun

-20

Jul-

20

Catalonia Balearic Andalusia Galicia

Inte

ran

nu

al v

aria

tion

rat

e (%

)






CONCLUSIONS

What the world is experiencing is an extraordinary event. The foremost conclusion that we must draw is that the economy and the demand for fossil fuels is subject to the course of the pandemic. It is also clear that stronger confinement processes have resulted in less activity, lower demand, and lower oil prices.

Thus, following the end of the lockdown, the price of oil gradually increased until it reached almost $46/bbl at the end of August. However, the worsening of the pandemic in September has contributed to a setback of prices in prices from those levels.

Also, we have seen that the economic structure and the management of the pandemic are crucial to the most exposed sectors. Spain’s greater dependence on international tourism, as well as a greater severity in confinement measures – clearly visible in the higher reductions in fuel consumption in Spain compared to the rest of the large countries in the Eurozone – explain the greater fall in Spain’s gdp during the second quarter of 2020.

In the particular case of Galicia, the data indicate a lower drop in fuel consumption during the March-July period. This reflects a better situation in terms of the severity of lockdown, and less exposure to non-resident tourism. There are some issues to be analyzed once more data become available. For example, high-frequency data from Apple and Google would lead one to predict stronger recovery of fuel consumption in Galicia. In addition, data as regards tons transported, as well as Google data as regards visits to leisure centers, should translate into greater diesel consumption than in other autonomous communities, which is not happening. One hypothesis to be tested once more data become available is the notion that the penetration of e-commerce has not been as strong in Galicia as in areas with larger urban centers. This urban transport should have helped slow down the fall in diesel consumption in certain autonomous communities.

In conclusion, we hope that the improvement in the consumption of oil products, so closely linked to economic growth, will not stagnate in the coming months, which will clearly be linked to the evolution of the pandemic and the measures to be implemented.





Soledad Núñez Ramos

Chapter VIII

COVID-19 PANDEMIC: THE ANSWEROF MONETARY AND FINANCIAL

AUTHORITIES





112 | COVID-19 pandemic: The answer of monetary and financial authorities Soledad Núñez Ramos | 113

INTRODUCTION

In addition to the high toll it has taken in human lives, the covid-19 pandemic has led to a disruption of economic activity that is unprecedented in times of peace. The necessary measures restricting people’s mobility and the activity of numerous productive sectors that were introduced to fight the pandemic have had highly adverse effects on the production of goods and services, as well as on the employment and income of households and businesses.

The severity of the economic disturbance, both at a national and a global level, has demanded swift and decisive action via economic policies (fiscal, monetary and financial), with the aim of reducing negative impact in the short-term, supporting the income of households and businesses, and paving the way for a rapid and robust recovery.

As regards monetary policies, central banks in both advanced and emerging economies have lowered reference interest rates when possible, and have deployed a set of unconventional policy tools via long-term financing and acquirement of assets. Similarly, authorities responsible for micro- and macro-prudential supervision and regulation have relaxed certain regulatory requirements in order to facilitate the private sector’s access to credit.






At the national level, the Spanish economy, as is the case in other countries, has seen the launching of guarantee programs and loan moratoria with a view to supporting the income of companies and households, and facilitating access to credit and liquidity for companies and freelancers who are coping with the economic and social impact of covid-19.

Overall, these measures have served to ease tensions in financial markets at the beginning of the crisis caused by the pandemic and to avoid an even more marked and prolonged recession, and avert an even bleaker outlook as regards inflation. Injections of liquidity, along with guarantee programs, have promoted a credit flow for the real economy. In addition, assets acquisition programs in particular have provided national authorities with access to the necessary funds to finance the support measures launched to assist households and companies in coping with the crisis caused by the pandemic.

This chapter describes the main economic and financial policy measures that most directly affect the Spanish economy: those deployed by the ecb and other European financial authorities, as well as the guarantee programs and loan moratoria launched by the Government of Spain. Next, the evolution of financial markets and credit to companies and families will be analyzed in order to shed light on the effects of these measures.

THE RESPONSE OF ECB’S MONETARY POLICY TO THE CORONAVIRUS PANDEMIC

The ecb’s reaction to the economic crisis caused by the pandemic has been significantly quicker and firmer than its response during the global financial crisis that began in 2008. The president of the ecb, Christine Lagarde, said, “Extraordinary times require extraordinary action. There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.”1 The general objective of the ecb measures is to ensure that the credit flow continues to reach the real economy, thus guaranteeing a proper transmission of monetary policies and a reduction in systemic risk. The measures focused on the provision of long-term liquidity to organizations, and on the acquisition of assets.

1 Christine Lagarde tweet sent on March 18, 2020.

In connection with liquidity injection measures, the ecb has increased the amount of money that banks can request on loan in more favorable conditions, so that they can offer financing to those most affected by the pandemic, particularly small and medium businesses. Specifically:2

• The ecb decided on March 12 through its Governing Council to conduct weekly financing operations (Bridge-tltro) in order to offer immediate liquidity under favorable conditions to banks before the fourth long-term financing operation (which had previously been scheduled) tltro-iii,3 which occurred on June 24, 2020. Altogether, these operations to be due on June 24, 2020 have been granted at a rate equal to that of the deposit facilities, -0.50%, and the allocation has amounted to 100% of what had been requested (full allotment). Thirteen operations have been carried out with an allocated amount of 389 billion euros.

• The ecb decided on March 12, 2020, also through its Governing Council, to apply considerably more favorable conditions to all tltro-iii operations in force between June 2020 and June 2021. These conditions were the subject of further improvement at the ecb meeting on April 30.4 The established improvements have contributed to the loan request by entities in the tltro-iii operations on June 24, reaching 1.3 trillion euros, considerably above previous applications. After subtracting the maturities and early repayments of previous tltros and the Bridge tltro-iii, the net injection of liquidity into the system by the ecb amounted to 548 billion euros.

2 See the ECB’s press releases on monetary policy decisions from March 12, March 18, April 30 and June 4 as well as other decisions from March 15 and April 7.3 TLTROs or targeted longer-term refinancing operations, are one of the unconventional monetary policy tools used by the ECB. Through these operations, long-term loans are offered to banks at a lower interest rate than normal in order to promote borrowing for businesses and consumers in the Eurozone. These are unconventional operations: first, because they are long term - four years - and second, because the amount of money that the banks can obtain and the cost of financing depend on the volume of loans to the real economy. That means that the entities which give more loans to the real economy can secure more financing and a better interest rate. The first series of TLTRO started in 2014, the second, TLTRO-II, in March 2016, and the third in June 2019.4 Thus, after this improvement, the maximum applicable rate is 50 bp lower than the average rate of the main financing (MRO), currently at 0%, while for previous operations dated before June 2020, it was the average of MRO. For entities that maintain their credit provision levels, the interest rate will be 50 bp lower than the deposit facility, currently at -0.5% (for previous operations, this credited rate was the average of the deposit facility and it was applied if the entity had increased its credit provision by 2.5%). In addition, for these operations, the limit for requesting funds per entity has been increased to 50% of the outstanding balance of its eligible loans (30% in previous operations).






• On April 7, the ecb announced a series of temporary measures that aimed at increasing the flexibility of the assets accepted as collateral for financing operations. These measures aimed at increasing the capacity of banks to request funds in Eurosystem financing operations, and to prevent a possible shortage of assets in guarantee connected with the pandemic from reducing the capacity of entities to obtain liquidity. At the same meeting, the ecb also decided to reduce the haircuts applied to both marketable and non-marketable assets and presented as collateral in financing operations by percentages ranging between 20% and 36%.

• In addition, at its meeting held on April 30, the ecb introduced new pandemic emergency ltros (peltros) to support liquidity conditions in the financial system, and to contribute to the proper operation of the monetary market. Specifically, a total of seven operations will be carried out, beginning in May and concluding in December, with maturities which are gradually reduced starting at a period of 16 months for the first operation and ending with a period of eight months for the last one. These operations are conducted through tender procedures at a fixed interest rate with full allotment, at an interest rate 25 bp lower than the average mro rate in effect for the life of each peltro - currently 0 %. By the end of August, the injection of liquidity belonging to the three operations carried out had reached 1.38 trillion euros.

As regards the acquisition of assets, the ecb, at its meeting held on March 12, committed to buying net assets within its Assets Purchase Program (app for an additional 120 billion euros until the end of 2020. This was an amount that the market deemed insufficient. On March 18, with a view to reducing the cost of financing to companies and public administrations, and increasing the extension of credit in the Eurozone, the ecb announced a new asset purchase program, the Pandemic Emergency Purchase Program (pepp), valued at 750 billion euros, to be in effect until at least December 2020. On June 4, the ecb decided to extend the amount of this program to 1.35 trillion euros, and its effective period until at least June 2021, and to also reinvest maturing securities until at least December 2022. In the framework of this program, Greek debt and non-financial commercial paper are accepted as eligible assets for purchases, and flexible criteria are applied regarding their temporal distribution, by asset class and by jurisdiction. However, in the case of the purchases of public bonds, distribution by jurisdiction continues to be

guided by the capital key of 9.69 % in the case of Spain, without affecting the aforementioned flexible application of the program in the short-term.

The pepp, together with the new app purchases, will increase the portfolio of the Eurosystem’s securities purchase programs, which will reach approximately 4.4 trillion euros in June 2021. As at August 27, the outstanding balance of the pepp portfolio is 497.11 billion euros. According to data from the end of July, the composition of the portfolio is as follows: 87.3% public bonds; 7.9% commercial paper; 4% of corporate bonds; and 0.7% bank bonds. The public securities portfolio contains 12% Spanish public securities. This represents a percentage slightly above Spain’s capital key, and is similar to the case of Italy and its public securities, whose capital key and portfolio weight are 13.8% and 15.4% respectively.

Furthermore, the ecb together with the central banks of the United Kingdom, Japan, usa, Canada and Switzerland agreed on March 15 to strengthen the currency swap lines that exist among them, with an interest rate reduction of 25 basis points and weekly operations in dollars at 84 days - in addition to the existing seven-day term.5 These lines represent an important liquidity support to relieve tensions in global financing markets, and this contributes to mitigating the effects of such tensions on the supply of credit to households and companies, both nationally and internationally.

Similarly, the ecb has activated a series of bilateral swap and repo lines with other central banks, and in June launched the Eurosystem Repo Facility (eurep), which can be accessed by a broader spectrum of central banks. These measures have helped stabilize markets, especially in countries where the euro is used as an international currency.

In short, the action of the ecb during these months has been decisive, and it is estimated that the effects of all these measures will increase the size of the Eurosystem balance sheet to at least two trillion euros in 2020 - slightly above the increase of just over 500 billion euros that constituted the ecb’s initial answer to the 2008 financial crisis. In addition, the Governing Council of the ecb has reaffirmed on numerous occasions its commitment to doing everything that is necessary to support the economy in this difficult situation, and has shown a willingness to adjust both the amounts and maturity dates of its purchasing programs and, in general, to explore all possible options.

5 The goal of these swap lines is to allow the central bank of the country to exchange reserves in national currency for the currency of another central bank and ensure that central banks can satisfy the demand of the entities within their jurisdiction.






THE ACTIONS OF SUPERVISORY AND REGULATORY AUTHORITIES

The supervisory and financial regulatory authorities have also enacted several relaxation measures, in both macro-prudential and micro-prudential accounting areas. The common goal is for entities to continue to provide loans in order to support households and companies in mitigating the effects of the economic crisis arising from the pandemic.6

Thus, the ecb announced on March 12 that it would allow entities to temporarily operate at levels below the Pillar 2 Guidance (p2g), the Capital Conservation Buffer (ccb) and the Liquidity Coverage Ratio (lcr), which are buffers accumulated by entities precisely for the purpose of absorbing losses in adverse scenarios. It also temporarily allows for the partial use of capital instruments not classified as Common Equity Tier 1 (cet1) for the purpose of meeting Pillar 2 Requirements (p2r).

This set of measures provides substantial relief to banks in terms of capital requirements (it is estimated that around 120 billion has been released for entities supervised by the ecb). These measures have also been promoted in the expectation that banks will take advantage of this freeing up of capital in order to support the economy.

In addition, many European macro-prudential authorities that activated the Countercyclical Capital Buffer (ccyb) in the past, generally due to excessive credit growth, have now set its value at 0%. In Spain, the ccyb had already been set at 0%, given the absence of warning signals for its activation. Following the outbreak of covid-19, the Bank of Spain has anticipated the ccyb will be inactivated for a prolonged period of time, at least until the main economic and financial effects of the current crisis have been overcome.

In accounting matters, initiatives have been taken to improve the distinction between temporary and permanent deterioration in credit quality. Their purpose is to consider the value of the public guarantees granted, irrespective of the fact that entities continue to apply appropriate standards in measuring actual losses, and providing reasonable coverage for credit risk. This accounting adaptation seeks to avoid an excessively pro-cyclical and mechanical behavior

6 For a more detailed description, see Bank of Spain (2020). Annual report 2019, section 3. https://bit.ly/2HNQujw

of provisions, limiting their growth rate and moderating their negative impact on the profitability and supply of bank credit.

At the micro-prudential level, operational, prudential, and regulatory flexibility measures have been promoted in order to support the proper functioning of the banking system and facilitate the maintenance of credit flow. Calendars have therefore been adapted and adjusted; deadlines and processes have been extended with regard to on-site inspections, corrective measures resulting from recent inspections, supervisory measures, and non-critical information requests; the flexible application of the ecb’s guidance on doubtful assets has been allowed; and the European Banking Authority (eba) has postponed the eu-wide stress tests scheduled for 2020.7 In addition, the ecb has urged entities to include the risk of a pandemic in their contingency schemes, and to review their business continuity plans.

The European financial authorities (ecb, eba, European Systemic Risk Board esrb) have also issued recommendations to entities to refrain from distributing profits before January 2021, and to be extremely cautious in their variable remuneration policies.8 The Bank of Spain has extended this recommendation to Spanish entities under its supervision. All the Spanish entities that were legally in a position to suspend or postpone the dividend on 2019 results have followed the eba’s recommendation to do so. These temporary and exceptional measures are required in order to preserve the capacity of entities to absorb losses and provide credit to households and families.

The European Commission has also adopted a few measures, like those proposed by supervisors and other financial authorities. These are measures aimed at promoting the provision of credit to the economy, and at mitigating the impact of the pandemic. One of these measures was an April directive that encouraged banks to make use of the flexibility offered by current accounting and prudential rules. Its purpose is for banks to support the real economy during the exceptional circumstances of the covid-19 pandemic. With the same goal in mind, it promoted a series of amendments to the Regulation on Capital Requirements (rcr), which was called “a quick fix”. These amendments

7 However, this entity has published a sensitivity analysis to assess the impact of COVID-19 based on the information collected in the 2018 stress exercise. See ABE (2020, May). Thematic note - Preliminary analysis of impact of COVID-19 on EU banks. EBA/REP/2020/17. https://bit.ly/3jFtu3a8 See ECB (2020). Recommendation (ECB/2020/35) and Bank of Spain (2020 July 28). Recommendation on dividend distribution. https://bit.ly/34IkSnS






were approved by the European Parliament on June 18 and,9 in general terms, entailed a reduction in capital requirements.

THE GOVERNMENT’S FINANCIAL MEASURES TO SUPPORT BUSINESSES AND HOUSEHOLDS

In Spain, as in other European economies, the Government, supported by Parliament with the approval of the relevant royal legislative decrees, has promoted a series of measures. The purpose of these measures is to mitigate the economic and social costs of the crisis caused by the covid-19 pandemic, alleviate the pressure on the healthcare system, and guarantee the income of households and businesses. In addition, it aims to prevent this temporary crisis from causing long-term damage to the potential for economic growth, and to prevent any destruction of viable businesses and jobs that would hamper the economy’s eventual recovery.

In the financial area, the main measures have consisted of the launch of a guarantee program for loans to companies and the self-employed, and of legislative loan moratoria. Thus, royal legislative decree 8/2020 of March 17, in its chapter iii.i, section 1, establishes a line of state guarantees of up to 100 billion euros. Its purpose is to facilitate access and liquidity for companies and the self-employed, in order to help them cope with the economic and social impact of the pandemic. The line of guarantees is managed by the ico through the financial entities and are applied to new loans and renewals granted by the entities. In the case of freelancers and smes, the guarantee will ensure 80% of the principal of new financing operations and renewals. For the rest of the companies that are not smes, the guarantee will cover 70% in the case of new loan operations, and 60% for renewals.

So far, a total of 95.5 billion euros have been activated 10 and distributed as follows: smes and self-employed workers, 67.5 billion; non-sme companies, 25 billion; tourism sector and related activities, 2.5 billion, and acquisition

9 Among other measures, this change in the RCR advances the entry of the favorable treatment of exposures to SMEs and infrastructure, advances the date of application of the exemption of certain software assets from capital deductions of banks, delays the effective date of the leverage ratio buffer for global systemic entities, introduces a favorable treatment of publicly guaranteed loans granted in the context of COVID-19, and extends for a period of two years the RCR’s transitional provisions that mitigate the impact on equity of the introduction of IFRS 9. See European Commission, 2020, April 8, Coronavirus Response: Banking Package to facilitate bank lending- Supporting households and businesses in the EU. https://bit.ly/37WpGYP10 In the Agreements of the Council of Ministers of March 24, April 10, May 5, May 19, and June 16.

or financial or operational leasing of motor vehicles for road transport for professional use, 500 million. In the first two sections, the guarantee is provided in order to finance routine operations. But for the tourism sector, the purpose of the financing may be to both cover liquidity needs and finance investments.

On July 3, the Council of Ministers approved a new line of guarantees worth 40 billion euros, which has not yet been released. These monies are aimed at promoting new business investment projects in the areas where the greatest added value is generated, along two main lines: environmental sustainability and digitalization.

Measures to support workers, families and vulnerable groups include moratoria on loan repayment obligations. These include the legislative moratorium on mortgage debts on primary residences, properties utilized for commercial activities and rental housing, and the temporary suspension of obligations arising from non-mortgage credit contracts for individuals who are in a situation of economic vulnerability as a result of the health crisis caused by covid-19. Furthermore, to encourage the deferment of credit and loan payments with a broader scope than that provided for in the legal moratoria, a special regimen has been established for sectorial moratorium agreements, covering both mortgage and non-mortgage credit, reached between lenders and their customers through their representative associations. Finally, at the beginning of July, two new moratoria were approved, referring to the tourism sector and to the public transport sector of goods and non-essential passenger transport by bus for both individuals and legal entities.

THE IMPACT ON FINANCIAL MARKETS

Figures 1 show the trend in financial markets thus far in 2020. Specifically, Figure 1.1 depicts the trend of different stock market indices from the end of 2019. Figure 1.2 shows the trend of sovereign debt yield spreads in relation to German sovereign debt, of the 10-year bond, and of the yield indices of higher-risk corporate bonds (i.e., the “high yield bonds”) in relation to lower-risk bonds (i.e., bonds with an investment grade rating, i.e. bbb or higher). Figure 1.3 shows the trend of two volatility indicators: the vix, which is an indicator of






equity volatility, and the gvi,11 which is an indicator of general volatility, and reflects the volatility of global equity and fixed income markets.

It can be seen that, with the outbreak of the covid-19 pandemic, the financial markets experienced moments of great tension, reflecting the fact that investors anticipated that the pandemic itself and the measures that would be taken to contain it would have serious economic consequences. In fact, the disruptions observed in the markets during the pandemic’s time frame (second half of February, and especially the beginning of March) were even more intense than those experienced during the crisis caused by the bankruptcy of Lehman Brothers in 2008. Thus, by mid-March, the SP500 had fallen 28% from the beginning of the year, and the ibex 35 and Eurostock had fallen 32%.

Figure 1.1. Stock Indices. Base 100 = 31.12.2019

11 The GVI is a global volatility indicator obtained from a set of implied volatility indices covering different asset classes (stock exchanges, fixed income, and currencies) and jurisdictions (USA, Europe, Japan). By applying the dynamic factor methodology to these indices, the indicator derives a factor common to all of them.

Figure 1.2. Sovereign and Corporate Debt Spreads

(*) German debt spreads(**) Differential between highest (“high yield”) and lowest risk bonds (“investment grade”)

Figure 1.3. Volatility indices

Source: Bloomberg and Bank of Spain.

January February March April May June July August60

70

80

90

100

110

0

100

200

300

400

0

100

200

300

400

500

600

700

January February March April May June July August

Spain (*)

Italy (*)

corporate bonds (**)

Greece

0

20

40

60

80

-3

-1

1

3

5

7

January March May July

IVG (left axis)

VIX (right axis)






In the debt markets, the differential of the sovereign spreads with respect to German bonds increased from the beginning of the year until March 17 as follows: by 81 basis points (bp) in the case of the Spanish bond; 108 bp in the case of the Portuguese bond; 119 bp in the case of the Italian bond; and 244 bp in the case of the Greek bond. High-risk corporate bonds increased their interest rate differential with respect to investment grade bonds by 348 bps. Market volatility also increased very sharply.

The measures announced by the ecb at its March 12, 2020 meeting, including the purchase of 120 billion euros in bonds through the end of the year, did not seem to satisfy the market, which judged this purchase to be insufficient, leading to an even greater increase in spreads and a more pronounced drop in European stock markets (Figure 1.1).12 On the contrary, the announcement on March 18 of an asset purchase program (the pepp) for 750 billion euros (extended on June 4 by a further 750 billion), did cause the markets, particularly in Europe, to react very positively. Thus, within one week after the decision, the Spanish bond differential was reduced by 54 bp, and those of Portugal, Italy, and Greece by 63, 120 and 213 bp, respectively (Figure 1.2). The stock markets also began to recover, as can be seen in Figure 1.1, although in the corporate debt market, the recovery had to wait a little longer. In general, volatility indices also experienced a marked improvement (Figure 1.3).

Since mid-March, specifically since March 18, the general trend in the markets has been one of recovery, although levels have not attained the heights seen at the beginning of the year, except for the American stock market and China. An elevated level of volatility continues to be experienced, reflecting uncertainty about the end of the pandemic and economic recovery.

CREDIT EVOLUTION

Figures 2 show credit evolution, at an annualized rate, for credit extended to households and non-financial businesses through July 2020. It can be seen that total household financing (Figure 2.a) was in negative territory in September 2020, with an annualized growth rate of -0.9%, with growth of -1.5% in credit for house purchases and -1.8% in consumer credit, which plummeted after

12 In all Figures 1, the vertical lines correspond to the ECB’s decision-making dates for asset purchases: March 12, March 18, and June 4, 2020.

March 2020 following growth at rates above 10% during the last two years. In contrast, credit to the self-employed, which until March 2020 had rates of -2%, has experienced remarkable growth since then, climbing to a rate of 3.1% in September, although this rate is somewhat lower than that experienced in the last four months.

Figure 2.a. Financing for households(Deriving year-on-year rates, %)

Figure 2.b Financing for non-financialcompanies (Deriving year-on-year rates, %)

Source: Bank of Spain.

Total financing to companies (Figure 2.b) has also experienced a remarkable increase since April 2020, with a growth of 4.4% in September 2020 and a growth of credit entities and cfe’s credit to companies of 8.2%.

The driving force behind this positive trend in credit to companies and the self-employed has most assuredly been the measures taken by the ecb to inject liquidity; and the measures of the financial authorities to facilitate credit - especially the covid-19 ico guarantee lines.

FIXED-INCOMESECURITIES

Jan-18 Jan-19 Jan-20-5,0

0,0

5,0

10,0

15,0

20,0

Jan-18 Jan-19 Jan-20

-0,8

CREDIT FOR HOMEPURCHASES

CREDIT OFENTITIES-1,7

CREDIT FORCONSUMPTION

-0,3

CREDIT FOR REELANCERS

LOANS FROMABROAD

4,3 5,6

7,2

5,3

0,1

TOTAL FUNDING

TOTAL FUNDING

-5,0

0,0

5,0

10,0

15,0

20,0






Through October 15, 2020, a total of 842,614 operations conducted by 539,287 different companies have been guaranteed.13 The total amount guaranteed is in excess of 79 billion euros. This has allowed companies to receive 103.9 billion euros in financing for the purposes of guaranteeing their liquidity and covering their working capital needs. Some 88% of the companies with formalized operations are directly managed by freelancers and micro-smes (less than 10 employees). Overall, smes and freelancers have obtained 73.1% of the guarantee granted and 69.5% of the financing granted.

In the case of Galicia, the financing obtained by Galician companies was in excess of 5 billion euros, which represents 4.85% of the national total (see Figure 3), a percentage somewhat lower than the weight of the Galician gdp in the national gdp, which is around 5.2%. The number of Galician companies that have been granted guarantees is 33,324, 6.18% of the total number of companies, a higher percentage than the financing granted, possibly as a result of the proportionally greater presence of smes in Galicia than Spain as a whole.

In short, the role of the credit extended to businesses during the current crisis has served as a vital support to the economy. It contributes to reducing the risk of bankruptcy of viable companies which face temporary liquidity problems, with the negative implications this would have in terms of job destruction and the productive fabric, and on the process of economic recovery.

In the upcoming months, it is estimated that the entire program of public guarantees, which amounts to 140 billion euros following the latest extension, could cover about 75% of the financing needs of companies.14 In order to cover the remaining 25%, companies will have to resort to self-financing or to taking on new debt without a guarantee. In this context, the results of the last Bank Loan Survey, corresponding to the second quarter, anticipate the possibility of restricting conditions for granting credit to European companies during the third quarter of this year. If this happens, an extension of the liquidity support measures through the guarantee lines would appear to be advisable.15

13 See ICO (2020). Fortnightly report on COVID-19 guarantee line. https://bit.ly/2HNEjTP14 See, R. Blanco, S. Mayordomo, Á. Menéndez and M. Mulino (2020). The liquidity needs and solvency of Spanish non-financial companies after the COVID-19 disruption. Occasional Documents, 2020, Bank of Spain. https://bit.ly/3mD8Wdn15 See speech by the Governor of the Bank of Spain at the closing of the seminar “The financial system in the crisis COVID-19. Challenges and commitments”, by the International University Menéndez P. Hernández, P. (2020). The impact of the COVID-19 crisis on financial stability, September 1. https://bit.ly/31Vrk9B

Figure 3. Distribution of Bank Guarantees ICO COVID-19 per autonomous community (%)

Source: ICO. Data through August 31, 2020.

FinancingGuarantees grantedNumber of companies






Regarding legislative and sectoral moratoria, which, while not constituting credit operations, have alleviated liquidity needs, until August 2020, the number of requests accepted under the terms of the legislative moratorium has been 226,644, collectively representing an outstanding balance of more than 20.3 billion euros.16 The total number of requests accepted for the legislative moratorium on non-mortgage guaranteed loans was 391,904, representing an outstanding balance of 2.88 billion euros. The accepted requests for sectorial moratoria reached 666,699, with an outstanding balance of suspended loans of slightly more than 25.7 billion euros.

For all three types of moratoria, about 30% of the debtors are freelancers. The main sectors benefiting from the moratorium for freelancers are commerce, hotels and restaurants and other services, followed at some distance by professional, scientific, and technical activities; transport; and construction. Together, these sectors of activity account for almost 80% of the total moratoria for the freelancers that have thus far been implemented.

CONCLUSIONS

The impact of the covid-19 pandemic on the world economy has been severe. In the Eurozone, gdp in the first quarter fell by 3.6% from the same quarter of 2019; and during the second quarter (when the most restrictive containment measures were instituted) by 12.1%. In the case of Spain, the corresponding numbers were 5.2% and 18.5%, respectively. The Bank of Spain forecasts a drop for the year as a whole of between -9% in the most favorable scenario and -15.1% in the most adverse one, with -11.6% constituting a mean projection. It is foreseeable that the Galician economy will decrease in any scenario – more than the Spanish economy as a whole, given its sectoral composition and the greater presence of smes.17

The forceful response of economic, fiscal, monetary, and financial policy, and at the European, national, and regional levels has been crucial in mitigating the economic and social costs of the pandemic. In addition, this response has helped avert an even greater recession, calm the financial markets, and provide liquidity to viable companies experiencing difficulties.

16 See Bank of Spain. (2020). Information note on the application of the legislative and sectoral moratoria until August 31st, 2020. September 4. https://bit.ly/3e8QnLb17 Thus, E. Prades and P. Tello estimate that if the national GDP were to fall by 9.1% by 2020, Galicia’s GDP would drop by 10%. See E. Prades and P. Tello (2020). Heterogeneity in the economic impact of COVID-19 between regions and countries of the euro area, Economic Bulletin, 2/2020. Bank of Spain.

Since the end of the second quarter, a certain gradual recovery of the economy can be observed. But this recovery is very incomplete and it will be many quarters before we reach the activity and employment levels of the end of 2019. The recovery is uneven, both by sector and by agent. For some sectors and agents, the effects will be persistent, with damage to the productive fabric in terms of businesses and employment. In addition, the recovery is subject to a high degree of uncertainty, which makes it difficult for agents to make investment and consumption decisions.

In this context, economic policy at European, national and regional levels must continue to act with the aim of supporting the most affected companies and households, fostering recovery and ensuring movement in the direction of a more solid and sustainable growth model.

At the European level, the action of the ecb, which has repeatedly reiterated its commitment to supporting the euro economy in this very adverse situation, and the approval in July of the European recovery plan, which includes the creation of a fund worth 750 billion euros, are unprecedented responses that have provided vital assistance.

For this common European response to yield the desired results, national and regional economic policies must be up to the challenges facing our economy. They need a design that allows the necessary structural adjustments to be made, which includes a medium-term fiscal consolidation program and which takes European funds and utilizes them to support the restructuring of our production networks, and in this aspect, each of Spain’s Autonomous Communities can highly contribute.





Carlos Ocaña Pérez de Tudela

Chapter IX

WHAT CAN ECONOMIC POLICY DO IN THE FACE OF THE PANDEMIC?





132 | What can economic policy do in the face of the pandemic? Carlos Ocaña Pérez de Tudela | 133

What can economic policy do to minimize the impact of the coronavirus pandemic? The initial response to the pandemic focused on maintaining employment and the business network through public subsidies aimed at guaranteeing the income of employees and freelancers, mainly. As the pandemic continues, these policies became untenable - due to their high cost, and their effectivity diminishes because the jobs and companies these policies were designed for are themselves no longer viable. As an alternative, the eu is implementing public investing programs in order to reactivate and modernize the economy. These investment programs can helpthe reactivation if they are aimed at socially profitable projects. Experience over the past twenty years with European funds shows that some of the investments proved useful, whereas others did not. However, the magnitude of these funds cannot make up for the slump in employment and economic activity that is expected in the coming years. Since maintaining current public expenditure is impossible, in order to improve the Spanish economic outlook it is necessary to enact structural measures that can bring stability to public finances, and that can create a predictable environment suited to both investments and job creation.






TWO VIEWS ON WHAT ECONOMIC POLICY CAN DO TO MINIMIZE THE IMPACT OF THE DOWNTURN CAUSED BY THE COVID-19: A ROUGH PATCH OR A CHANGE OF TIMES?

What economic policy is best suited to minimize the impact of the current downturn caused by covid-19? From the beginning of the pandemic, it was widely accepted that we needed to make up for the enormous decrease in activity and employment by implementing an expansive macroeconomic policy. Thus the vast majority of developed countries have moved in this direction. However, it is less clear which should be the micro content of these macro measures. Let s examine the debate with regard to this question.

For the most part, those responsible for economic policy, economic agents, and scholars agree that it is necessary to implement highly expansive fiscal and monetary policies in order to compensate for decreases in economic activity and employment during the year 2020. The ability to implement such policies varies from country to country. Those countries in a better financial situation will have more room to maneuver - as reflected in the number of resources allocated to mitigate the impact of this crisis. This resource allocation varies widely among countries, as it can be seen in Table I. Spain ranks among the countries that have allocated the fewest resources to addressing the pandemic.

Table I: Fiscal measures enacted to cope with the pandemic (in % of 2019 GDP)

Immediate tax relief

Deferment Other measures (liquidity/guarantees)

Updated

France 4.4% 8.7% 14.2% 06/18/2020

Germany 8.3% 7.3% 24.3% 08/04/2020

Italy 3.4% 13.2% 32.1% 06/22/2020

Portugal 2.5% 11.1% 5.5% 05/04/2020

Spain 3.7% 0.8% 9.2% 06/23/2020

United Kingdom 8.0% 2.3% 15.4% 07/16/2020

USA 9.1% 2.6% 2.6% 04/27/2020

Source: Bruegel (https://bit.ly/3mUD5VN).

There is unquestionably broad agreement about the steps that governments and central banks need to take regarding macroeconomic policy during these times

of pandemic.1 The next question is: What should these incentives consist of? Regarding this matter we can, at the risk of oversimplifying, talk about two (non-mutually exclusive) views that offer different visions for overcoming the current economic crisis caused by the 2020 pandemic.

SAFEGUARDING COMPANIES AND EMPLOYMENT (BRIDGING)

The first view – one that inspired the first measures adopted by government and central banks – is based on the idea that we are currently experiencing a temporary situation, a “rough patch” that we will be able to leave behind in a few months. This view seeks to “[…] preserve the economic value of what we already have, leveraging the available resources and capacities as soon as possible, and return to the activity trend we were used to […]” (Salas, 2020; also Hassler, Krusell, Ravn and Storesletten, 2020). The role of economic policy would, according to this view, consist of bridging the gap between the pre- and post-coronavirus economies; preventing the destruction of the business sector and employment for as long as health-based restrictions on economic activities remain in effect. The economic situation will be restored as soon as such health-based restrictions are lifted. The financial support measures (guarantees, loans, grants, deferments, etc.) aimed at companies and people, and the changes in labor legislation, and in regulations pertaining to company closures, that we have seen since the beginning of the pandemic in the vast majority of the developed countries, all are in accordance with this view.

Although they are necessary to reduce the impact of the crisis, these anti-cyclical policies carry with them some important disadvantages that need to be managed. On the one hand, in many cases, they require massive public funding: in order to recapitalize companies, to finance temporary layoffs, etc. These policies therefore give rise to a substantial increase in the public debt that will place future constraints on many countries, especially those, such as Spain or Italy, which already had high debt levels. Ensuring the sustainability of the public debt in indebted countries will in the future require implementation of tax consolidation measures – such as cutbacks in public expenditure or higher taxes – that will reduce growth within the current context of recession and high unemployment. The intervention of central banks buying public and private debt bonds on a large scale constitutes a 1 The consequence of this highly expansive outlook is a significant deterioration in public finances from a baseline that in many countries, including Spain, was already untenable. This gives rise to the question of how to reallocate public finances after the pandemic – a subject on which there is little agreement. But this paper is not tackling this matter.






decisive support for ameliorating and delaying an adjustment that, nevertheless, will eventually occur.

On the other hand, anti-cyclical policies create distortions in the incentives of economic agents. Thus, support for companies can create “zombie companies” (i.e., those that would close unless bailed out), and can distort competition in a way that favors the least efficient and most prestigious companies. This is a problem that has already been detected in some countries. In addition, financial support aimed at preserving employment can end up in the hands of employees that work in companies that really do not need that support, and in some cases they might be used to preserve jobs that, nevertheless, are going to disappear.

The longer such support goes on, the worse these distortions will become. A temporary layoff plan that can be implemented over the course of two or three months, during the period coinciding with the compulsory standstill of economic activity, can save jobs. But such a plan may be ineffective if it is unnecessarily prolonged, especially if applied to companies that are still not operating when activity resumes. This same scenario can be applied to support for companies. The longer the anti-cyclical policies go on, the lower their effectiveness. And following the same logic, the more selective the continuation of these policies is, the more higher their effectiveness. Thus, the challenge, once these company and employment preservation measures are implemented, is to ensure that they are gradually withdrawn.

Despite these drawbacks, the measures that have been implemented since March 2020 were, in my opinion, the most sensible answer to the scenario we were facing in March, when it was expected that the compulsory standstill of the economic activity would only last a few months.

THE SECOND WAVE

The reality has proven to be more adverse and the standstill, especially in certain sectors such as tourism, leisure, or transport, has continued through the third quarter of the year, and will likely extend to the fourth quarter and the beginning of 2021. What was expected to be a rapid recovery (a V curve) seems instead to be taking the shape of a slow recovery.

The economic scenario has deteriorated after a summer that was worse than expected. The exponential increase in infections, with its deterrent effect on foreign tourism and negative impact on business and consumer confidence, have together

hampered recovery. We anticipate a 13% drop in gdp in 2020, and only a partial recovery of about 7 or 8 points in 2021. The activity levels of 2019 are unlikely to resume until 2023. If we compare these forecasts with what is happening in the rest of the eu, we can see that the contraction of activity in Spain is one of the most pronounced in Europe (Figure 1). This is a concern, because it points to the risk that Spain’s economic gap with the rest of Europe will widen, thus reverting the convergence advances previously attained, with enormous effort, over the last decades.

Figure 1: Impact of the crisis in Europe(% difference from Q4 2019)

Source: Eurostat.

This change of scenario forces us to reconsider the response to the crisis. This reconsideration has, in fact, already occurred. The cost in public treasury increases in proportion to the duration of the pandemic and, therefore, budgetary restrictions will increasingly limit the possibilities of governmental action. In addition, the ability of businesses to maintain and revive employment diminishes the longer the economic hibernation continues. This situation of even more prolonged crisis and increasing constriction of the sphere of action of public policies makes it necessary for spending to be carried out selectively, reserving the increasingly scarce public resources for those companies, jobs and sectors that have greatest potential to survive a prolonged crisis. The diminishing of public finances will make it increasingly difficult to implement horizontal policies (A. Nadal, 2020;

-25

-20

-15

-10

-5

0

-2.0 -2.2

-22.2

-11.5

Q1-20

-22.7

SpainGermany France Italy United Kingdom

-5.9-5.2 -5.5

-18.9

-17.1

Q2-20






Torres, 2020). Managing targeted policies is not easy, but as resources become increasingly scarce, there is no alternative.

The prolonging of the pandemic has given rise to a second vision of what the response to the crisis should be, based on the idea that we are experiencing a profound structural change, a change of era, within which the coronavirus crisis (the pothole) is just another episode, although one of very considerable magnitude. The climatic challenges and the technological revolution that digitization entails force all economies to make unprecedented investment efforts. Therefore, if a recession caused by the coronavirus forces us to spend, this view holds that there needs to be a commitment to accelerate the structural changes that were already taking place in the economic fabric. We must invest more and faster in digitalization, in renewable energies, in sustainable mobility, in health and, of course, in education. All of these investment efforts would have to be made even if there were no pandemic, according to this view. Thus, we should take advantage of the present historical moment and, as a consequence of these investment efforts, more sustainable jobs and activities will be created to replace those that are going to disappear as a result of the crisis in sectors such as tourism, traditional automobiles and non-renewable energy. In short, government spending on production is preferable to spending on transfers to workers and businesses, especially when the effectiveness of the latter diminishes, as it is already happening.

EUROPEAN FUNDS

The recovery fund proposed by the eu Commission and endorsed by the eu Council last July is the paradigmatic example of this view. This fund will make available to Spanish companies 140 billion euros for investments during the period 2021-2027. These resources will be available mainly from 2022 to 2026. Although these are indeed significant sums, they do not come close to compensating for the collapse in consumption and investment that occurred in 2020.

Like everything in economics, this option, in addition to possible benefits (in this case, especially in the long-term) has costs (especially in the short-term). The most obvious cost is that much of these investments are financed with public resources, further eroding public debt balances. In addition, out of the European funds that Spain will receive, almost half are loans, and the rest will have to be partially financed through the eu budget.

Other drawbacks have to do with the cost of the transition to the new economy, which increases with speed of implementation (Hassler et al., 2020), and with the asymmetric distribution of investment among countries. The most technologically advanced countries, such as those in Northern Europe, will suffer less during the transformation than countries like Spain.

There is also a risk that funds may be allocated on the basis of political rather than economic criteria, thus investing resources in sectors or regions where they will not serve to modernize economies or make them more productive. Some analysts point out that there are signs that this could be happening in Germany and France, countries that have progressed farther than Spain in defining the second wave of anti-crisis policies (Eurointelligence, 2020). This risk also exists in Spain. Nevertheless, we still have a chance to do it right.

This balance of costs and benefits suggests, on the one hand, that Spain has an opportunity to promote a modernization of its economy that needs to be seized. On the other hand, it also shows that it is necessary to invest wisely, given the high opportunity cost of the resources that are going to be dedicated to modernizing the economy. For an investment to be productive, it is not enough for it to be allocated to a productive sector; it is also necessary that the project targeted be viable and profitable. Spain’s experience with European funds over the last 20 years offers an excellent illustration of the importance of distinguishing between sectors and projects. In a twenty-years-ago scenario, Spain needed to develop infrastructure. Thus, European funds were used to invest in them. However, it could also be seen that not all kinds of infrastructure were necessary. Along with successful projects, types of infrastructure that were useless or underutilized also ended up being developed. The examples of this linger in Spain’s national memory. In short, the implementation of the European investment program will require an unprecedented management effort. It is not just about spending; it is about selecting projects that will truly drive productivity. It is not about distributing funds (i.e., between administrations and sectors). The investments must be selected judiciously.

In short, can these European investment programs promote recovery of the economy? The answer is that increased public investment efforts will help stimulate economic activity, but the effect will be limited in time and will by no means offset the collapse in activity caused by the pandemic.






GALICIA

The economic trend in Galicia during the first twenty years of the new century has been positive in many fields. It is the autonomous community with the largest gdp per capita growth since 2000 and the one which has ascended most in the gdp per capita ranking (climbing from 15th in 2000 to 10th in 2018). Productivity has also increased significantly (it grew by 6.3% between 2014 and 2018, Galicia thus becoming the autonomous community with the largest growth, compared to the national average of 2.6%). Nevertheless, Galician productivity still lags behind the Spanish national average by 3.2% (although it should be noted that this reduced productivity is largely the result of sector specialization). Exports are also one of this economy’s strengths, as the exports of goods reached 35.5% of the gdp compared to an average of 23.7% at the national level. The contribution of exports to Galician gdp has increased by 10% since 2000.

The impact of the crisis in Galicia will be below the Spanish average because its economy is not as reliant on the sectors that have been affected the most by the pandemic (i.e., tourism, transportation, etc.) Nevertheless, the impact will be significant, and will entail considerable pressure on social expenditure, just as in every other area of Spain.

What advice would help Galicia cope with this crisis in the best possible way? Economic growth largely depends on a fragile balance among various factors of a social, institutional, political and economic nature. Many of these factors are not exclusively Galician. For example, Spain as a whole needs to improve its educational system, find a solution for the untenable financial imbalance of its Social Security system, and reduce the duality and instability of its labor market.

If we take a moment to consider Galicia’s distinctive features and try to identify the obstacles to its growth and prosperity, we will see that human capital is a key concern. At present, Galicia is simultaneously faced with two important challenges: an aging population and the difficulty in attracting and retaining its best and brightest young people. This is a problem that was not created by the pandemic, although it may have been exacerbated by it, but it is very important and it is likely to last longer.

Reverting these demographic trends is not an easy task. However, there are some initiatives that might make a difference. It is interesting to note that these initiatives do not always involve massive, expensive and cross-sectional programs. Sometimes, it suffices to develop projects of limited cost and scope that are

committed to excellence. There are two spheres of action especially important. First, it is essential to maintain and strengthen the educational system, particularly as regards higher education and vocational training, in order to attract and retain population. Secondly, it is important to engage businesses from high (or at least not extremely low) added value sectors in order to attract and retain population. These two areas require a developed educational and R&D system.

Other autonomous communities have been successful in creating business attraction hubs. For instance, Catalonia has made great strides in attracting talent and jobs through their system of public and private universities, and through their institutions devoted to R&D. The Basque Country has also succeeded in creating technological clusters based on advanced R&D, resulting in a dynamic business network capable of attracting population in general and professionals in particular.

Galicia has also an opportunity to strengthen all levels of its educational institutions as well, rather than giving up on them and letting them decline as the numbers of their students fall. The private initiative now emerging in the sector of higher education should be allowed to grow and to consolidate in order to promote R&D, a field in which Galicia lags behind both the Spanish and European averages.

Therefore, it is advisable to invest more in human capital (i.e. education, R&D and other forms of productive investment). What are needed now are no macro-projects but unique and high-quality projects.

CONCLUSION

In conclusion, the policies aimed at preserving jobs and companies that have been implemented since March 2020, as well as the investment policies to be implemented by the second half of 2021, will help mitigate the impact of the economic crisis, but are severely constrained by the paucity of public resources available to fund them. Thus, it is necessary to find a way to manage them differently from how it has been done. The lack of resources renders cross-sectional measures unfeasible, and forces the policies to become selective, and thus to take account of the merits of each individual case.

Measures which merely reactivate policies will not be enough. For this reason, it is now more pressing than ever to design reforms aimed at improving the economic system. Failing to do so would distance us from Europe again, after 20 years of convergence.





Xulio Ríos

Chapter X

CHINA, ORIGIN AND DESTINATION OF THE NEW POST-PANDEMIC WORLD

ORDER: AND GALICIA?





144 | China, origin and destination of the new post-pandemic world order: And Galicia? Xulio Ríos | 145

A recent forecast conducted by the International Monetary Fund (imf), prior to the pandemic, depicted estimated figures reflecting the importance of gnp in terms of purchasing power parity for 2024. According to these estimates, China would represent 21.4% (18.7% in 2018) compared to 13.9% for the us (15.2% in 2018). The eu, India and Japan would come to represent 14.6%, 9.58% and 3.5% respectively (16.3%, 7.74% and 4.13% in 2018). This trend is well-acknowledged, and appears to be unstoppable. But to what extent could covid-19 influence its future course?

Against this backdrop, it is possible to elucidate the future of the current international system: from the decline of the us, to the rise of China, to the dreaded political dismemberment of the eu. It is also possible to see the future of globalization and the extent of its correction, as well as the future of the multilateral system, and whether or not a hypothetical multipolarity could become a reality. Nothing is certain yet, but the trends seem to point that way. China was able to weather the global crisis of 2008 thanks to an ambitious modernization program. Since 2009, the Chinese Government has invested more in current dollars than the United States. Under present circumstances, China is also likely to make great progress as regards new technological infrastructure, including the Industrial Internet. The Chinese economy remains strong, while the us economy is slowly recovering from the crisis.






Measured in terms of purchasing power parity, the gnp of China exceeded that of the us in 2014. This resulted in a true “sputnik effect” (i.e., referring to the space race myth recently resurrected by Trump) that shocked Washington. In an effort to slow the rise of China, Barack Obama promoted, along with New Zealand and Singapore, the creation of the Trans-Pacific Partnership (tpp). This treaty proposed an economic integration based on trade, social and environmental regulations that Beijing found difficult to accept. The partnership would later be abandoned by Obama’s successor. One year into office, Trump began to wage a battle against China to ruin the dream of Xi Jinping, who seeks to bring China back to the center of the international system.

The offensive tackles several fronts: increases in tariffs to levels unseen since 1993; the technological rivalry that blocked purchases of us companies and restricted exports of sophisticated products to China; and, at the same time, the highest pressure is being put on us’s allies to prevent them from adopting Huawei technology. All of this happened within the framework of the National Security Strategy that was adopted at the end of 2017, a key document depicting China as the main threat to American supremacy. It is clear to everyone that the trade truce agreed on January 15, 2020, did not imply a cessation of hostilities, exacerbated as covid-19 deaths increase and the us presidential election approaches.

Have we reached the point of no return in the deterioration of bilateral relations? Are we heading towards a cold war between two economies that are still heavily interconnected despite the reduction in bilateral trade and the decline of Chinese investment in the us? According to Lawrence Summers, disconnecting China from America would lead to a mutual assured destruction that would prove devastating for these two countries and the rest of Asia. In an article published in Foreign Affairs, Singapore’s Prime Minister, Lee Hsien Loong, reflects on the danger of us’s decision: “The United States is not a declining power. It has great resilience and strengths, one of which is its ability to attract talent from around the world; of the nine people of Chinese ethnicity who have been awarded Nobel Prizes, eight were us citizens. On the other side, the Chinese economy possesses tremendous dynamism and increasingly advanced technology, which the Soviet Union lacked. Any confrontation between these two great powers is unlikely to end as the Cold War did, in one of these two country’s peaceful collapse. Neither Beijing nor Washington would benefit from the confrontation between their interconnected economies.” And he continues: “The prospect of an Asian century will depend greatly on whether the United States and China can overcome their differences, build mutual trust, and work constructively to uphold a stable and peaceful international order. This is one of the fundamental issues of our time.”

FACTORS FOR AN OUTCOME

As regards China, the factors that could influence the outcome of this complex development would be, at minimum, as follows. In the first place, there is the economic recovery within the expected “new normal” framework. China has a head start but, even though its enormous domestic market offers important advantages, its dependence on foreign trade raises important concerns about China’s stability, especially as regards its internal labor market. Secondly, this is a crucial year for the future of several cooperation and economic integration agreements among important actors. At the regional level the Regional Comprehensive Economic Partnership (rcep) and the Free Trade Agreement among China, South Korea and Japan should be settled. The growing regional economic integration serves as a valuable safety net in the event of any actual possibility of stopping China’s growth. Some 60% of the trade in Asian countries is carried out at a regional level, a level similar to that of the eu. Moreover, China’s exports within Asia are growing at a higher rate than its exports to the us, which have remained stagnant since 2014. By offering its neighbors a path to prosperity, the Pentagon’s offensives are unlikely to succeed. In a different sphere, the investment agreement with the eu should be issued under the German presidency during the second half of this year. Even though certain reservations persisted, the link Berlin-Washington was made obvious during the pandemic by the recurrent phone calls Merkel-Xi.

A third important factor is political stability, with different open fronts. The strength of the Chinese political system is relatively fragile. The creation of the “xiaokang”, a modest middle-class society, soon to be officially announced with much fanfare, as well as the eradication of extreme poverty bolster the legitimacy of a Chinese Communist Party about to celebrate its 100th anniversary. Yet much remains to be done. Prime Minister Li Keqiang said at a press conference in Beijing on the occasion of the closing event for the two parliamentary sessions that the average annual income per capita in China is 30,000 yuan ($ 4,236), and he added that more than 600 million Chinese had annual earnings of little more than 1000 yuan, not enough to rent a room in a medium-sized Chinese city. How can it be that 43% of the 1.4 billion people in China, the second largest economy in the world, with a gnp per capita of approximately $10,000 in 2019, have such paltry earnings? Some 75% of these 600 million people live in rural areas, and around 70% of them live in the central and western regions of the country. This means that, despite China’s unquestionable progress, many Chinese continue to have difficulty in finding jobs and relying on an incomeand wealth inequality is rising due to the effect of the pandemic on the economy.






In addition to the challenging management of this complex reality – a difficult task – there are political tensions of a diverse nature whose impact on stability could assume critical importance in the near future. Such is the case of the current crisis in Hong Kong, the heart of the us geopolitical strategy in the first chain of islands, as it is also the deterioration of the relationship with Taipei. On the other hand, Xi Jinping’s highly personal style of leadership, very distant from Deng Xiaoping’s sage counsel, which seems to have been swept away by the rising tide of nationalism, impatiently displaying its power, will face important challenges at the 20th Congress of the cpc in 2022, a highly symbolic event for the Communist China collective imagery, that could increase the risk of exacerbating internal conjectures.

As a fourth factor, as regards the geopolitical tensions with the us, several fronts will remain open, in a constant rivalry to be disputed inch by inch. It remains to be seen how the anticipated degradation and consequent vulnerability of the supply chains wrought by the pandemic will evolve, and how Chinese initiatives for industrial relocation abroad will turn out. Anything is and will be permitted to sabotaging Chinese ambitions. The Western world has realized that it is heavily dependent on the industrial capacity of the Asian giant, and will attempt to set limits according to its interests. To the extent possible, obviously. In the current scenario, the fact that China has surpassed the industrial production of the us led to serious concerns, because this production constitutes the foundation of formidable military might and, consequently, the capacity to compete for global hegemony.

In this regard, Europe’s decision to reinforce its strategic autonomy is of great importance. A change can be perceived in geopolitical approaches, which could be accelerated depending on the results of the us elections in November. In the new post-pandemic context, Europe might win again a major key role. Especially if the Trump Administration continues to ignore the fact that it has overestimated its own capacities when confronting China without previously consulting its allies.

China remains a strategic competitor and systemic rival of the eu, but this fact will neither hinder the Asian giant’s advance nor put an end to bilateral cooperation. Europe plays a key role in preventing that a reediting scenario of a new cold war could become a tangible reality. It is not a question of choosing sides, but it is worth acknowledging who abandons unesco or the who;

who withdraws from both the Paris Climate Pact and Iran Nuclear Deal; and who jeopardizes European security by withdrawing from the Intermediate-Range Nuclear Forces Treaty and the Treaty on Open Skies. The pandemic presented China with an opportunity to help affected European countries, especially Italy and Spain, but also many others, and thus demonstrate its efficacy while revealing a contrast between its well-organized potency and the debacle observed in the us.

As a fifth factor there is the One Belt, One Road Initiative, China’s most ambitious foreign policy project, and which establishes the coordinates for its own world map. The outbreak of covid-19 and its effects will impose new adjustments and perhaps a revision of the priorities, and more comprehensive approaches should not be entirely dismissed. The Indo-Pacific Strategy, which was conceived as an example of international programing that would compete with Chinese proposals, and highly promising at first, could suffer severe damage as it faces the expansionist drive of a Chinese economy within the region by mechanisms that are currently under negotiation.

ACCELERATION OF THE COMPETENCE

The pandemic has strengthened us’s resolution to maintain its global hegemony, and to face China as a competitor. Nonetheless, the country has seen its soft power and international luster diminish under the Trump Administration.

The unfathomable isolation of the us and the increased capacity of China to impose its own agenda in international politics constitute a threat to the privileged position of the Western countries’ vision. They also threaten the ability of Western countries to organize global industry, trade, finance – as well as the global system that shapes public opinion and the interpretation of our own reality. Facing these trends, China, increasingly involved with multilateral approaches, is designing a foreign policy based on high-profile initiatives such as brics, the Shanghai Cooperation Organization, and the Asian Infrastructure Investment Bank. At the same time, the country spreads its presence in the boards of directors of multilateral organizations of all kinds. This process is still in its nascent stage, and is slowly taking shape based on cooperation rather than on the convergence of alliances that are clearly antagonistic.






The main area of competence will continue to shift during the next technological generation. At first, the strict control exercised by the People’s Party, in the ideological and general contexts, was expected to limit its systemic capacity for innovation. It turns out that nothing could be further than the truth. China is the leading power in vital sectors, and it seems that us pressures on its allies to ban the use of Chinese equipment are destined to fail, given the economic advantages involved and the diplomatic efforts aimed at deflecting accusations of jeopardizing national security. As of today, the us does not have any alternative technology to compete with China in key areas such as 5G.

The Chinese and global economies, especially the us’s, are interconnected and interdependent. Therefore, it might seem that any calls for disengagement will have limited practical effects, due to their unsustainability. In a market economy, the political approach will hardly impose on considerations of a purely corporate nature in the long term. Some analysts estimate that approximately 5 million jobs will migrate from China over the next few years. That might be true. Between October 2018 and October 2019, the countries which benefited the most from companies leaving China were Vietnam (26) and Taiwan (11), but also Japan (5) or Mexico (6). Out of 50 documented cases, only three companies relocated to the us. China will continue to be an essential partner that no economy can afford to disregard, especially at a time when the global economy is faced with unprecedented pressures as a result of the covid-19 pandemic.

GALICIA AND CHINA

Galicia also had to look to China during the current pandemic. In the new scenario ahead, complementing our Atlantic and continental inclination with establishing an important trade relationship with China would be of the highest importance. Over the past few years, despite our having high-valuable assets to issuing an ambitious and coordinated relationship with China, we have been giving it up. Certain tactics, our peninsular context, and the poor sensitivity towards foreign affairs of our public institutional leadership have demoted our region.

A small nation such as Galicia needs to be wide open in order to prosper. If we are to seize the opportunities ahead, it is essential to have a clear understanding of our role within the region and the world. This is the only way to take optimal advantage of the great shift expected in the international system. We do not need brilliant heads of state with a more or less developed common sense, what we

do need is an institutional mechanism to plan, coordinate and monitor strategic priorities. That is how we will succeed as a region, and especially, with China.

In order to approach China, we need to focus with a far-reaching perspective, to persevere, and to identify assets and to plan accordingly, by promoting ties and relationships that remark our uniqueness. If we concede that an institutional approach is essential to establishing a relationship with China, we may find an opportunity to create a vast network with great potential, given that our distinctive political and territorial structure is highly valuable for China. We can succeed in this purpose, but we need to tackle it with confidence in our abilities and with an open mind. We currently lack both qualities. Hopefully, the pandemic will serve as a vaccine that might immunize us against these afflictions of the soul that have been the bane of our existence over the course of centuries.





Ana Teresa Tavares-Lehmann

Chapter XI

COVID-19 AND ITS IMPACT ON DIGITAL TRANSFORMATION AND BUSINESSES’

INTERNATIONALIZATION:A PERSPECTIVE ON GALICIA





154 | COVID-19 and its impact on digital transformation and businesses’ internationalization Ana Teresa Tavares-Lehmann | 155

INTRODUCTION: THE CONTEXT

The covid-19 pandemic sneaked up on all of us at a time when the global economy was already undergoing significant changes: techno-economic (i.e., digitalization), geopolitical (i.e., a slowing in the intensity of globalization) and social (i.e., a growing awareness of the sustainability imperative).

The pandemic caused major disruptions in all spheres of the economy, leading to a near standstill and putting companies’ growth and internationalization plans on hold. A significant contraction in global gdp, global trade and global foreign direct investment (fdi) is expected (unctad, 2020). The pandemic highlighted the structural weaknesses of countries and firms, emphasizing the need to reconfigure and develop value chains that are more resilient and marked by greater proximity (Gereffi, 2020).

This chapter focuses on a discussion of the role covid-19 had in accentuating and accelerating the impact of digitalization on internationalization strategies, highlighting the qualitative and quantitative changes involved, with special reference to Galicia.






There is no doubt that covid-19 represented a shock to economy and society. However, our main argument is that – focusing on the economic angle – rather than changing the nature of processes under way, it simply accelerated those processes. What precisely were these processes? In other words, what was the pre-covid context?

The first group of trends relates to digital transformation, contemporary innovation, and the platform economy.

Digital transformation (the integration of digital technologies in all business areas) has been spreading to all sectors and types of human interaction, and has had a significant impact on the ways value is added, on business models, and on how International Business (ib) is conducted. This process represents one of those rare moments in which we are experiencing a change in the techno-economic paradigm (Freeman and Pérez, 1988), with the advent of the Fourth Industrial Revolution – more commonly referred to as Industry 4.0. This new paradigm essentially consists of the digitalization of firms and of the economy at large, and has benefited from major breakthroughs in technologies such as Artificial Intelligence, Internet of Things (iot), and quantum computing, among others.

Microsoft’s ceo, Satya Nadella, recently said that covid-19 was a major accelerator of the uptake of digital technologies, arguing that two years of digital transformation happened in two months (between January and March 2020).

Another related trend reflects changes in the way innovation occurs. Today, innovation is a complex phenomenon, involving the convergence of different stakeholders, types of knowledge and technologies. We live in an increasingly democratic era of Open Innovation (Chesbrough, 2003) and User Innovation (von Hippel, 1986, 2005). It seems an obvious point that no one innovates alone, and this points to the need for collaborative approaches and an ecosystem view, as well as involvement and input from a new breed of consumer. This “New Consumer” is crucial to the innovation process, as he or she aims not only to be a user of the good or service, but also to be a co-creator, and often even co-producer and co-distributor. This more interactive innovation process, with an ever-more demanding consumer, reclaiming new and personalized features without wanting to pay a premium

price for that, increases the need to have more agile and smaller operations closer to the user. This challenges ib networks, making them more diverse and unpredictable.

The exponential growth of digital platforms and of the business models supporting are hallmarks of the last decade. Digital platforms are disrupting a vast range of sectors and capturing a growing share of markets for goods and services (e.g., retail, mobility, entertainment, tourism/hospitality, etc.). The platform economy brought new and unexpected actors/protagonists to the fore, notably gigantic companies with global reach such as Amazon, Uber and Tencent, among others.

A platform is a business that creates value by facilitating exchange between two or more interdependent groups – often consumers and producers. User-centeredness is a defining characteristic of successful platforms, and is part of the contemporary perspective on innovation previously described, one in which the consumer tends to become more closely involved in the increasingly open innovation process. The importance of platforms has become even more evident during the pandemic crisis, with the pervasive concern over minimizing physical contact, and has acted as a catalyst for “Low Touch Economy” (Board of Innovation, 2020) – especially during the “last mile delivery” phase (i.e., the end point where the final consumer receives the goods). The crucial role of platforms is also evident in terms of workplace relations, where they allow more remote work than ever before. As we will shortly discover, these are changes that have important consequences for internationalization processes and strategies.

When it comes to internationalization, a platform-based economy (i.e., one that externalizes most activities) is not necessarily conducive to considerable amounts of fdi. Furthermore, a platform-based economy, in which borderless platforms are the relevant markets, challenges the traditional view of markets as territorial entities, and thus calls into question the wisdom of investing in a certain territory/geography. covid-19 reinforced platforms more than ever, as the latter enable the transactions to be made without physical contact, something that confined or socially distant consumers need.






The second trend is geopolitical. The growing importance and market power of digital mnes, as well as the changes in technological leadership brought about by digitalization, have geopolitical implications of the highest order. In a digital world, the quest for technological dominance is key. This is an issue of national security and sovereignty, affecting not only political relations, but also attitudes towards trade and investment. covid-19 has heightened the importance of this dynamic, and has increased the general salience of geopolitics. A good example of this technological race is the battle for 5G. Another is the search for the much-needed covid-19 vaccine.

Geopolitics and digitalization are linked to new strategic threats (e.g. cyberattacks), which result in significant regulatory and security-related challenges at both the national and supranational levels. All of this is occurring within a context where traditional geopolitics – which relies on national states maintaining centrality of action and control – does not suffice. Digital activities create a new type of space (just as, in economic terms, these activities lead to new type of markets). This space within the digital domain is defined by the major roles held within it by private, non-State, non-traditional digital players.

Given this state of affairs, economic actors, including mnes, cannot make decisions without according to the geopolitical context the prominent role that it warrants, and without factoring this context into their risk assessments. covid-19 is of course a key risk factor that tends to lead to increased fragmentation and strained relations.

A third trend relates to the sustainability Imperative. Environmental degradation and resource depletion due to human action, phenomena often cited as causes of current and future pandemics, led to a growing awareness of the need to embrace a more sustainable pattern of production and consumption. Industry 4.0 (by enabling the optimization of resource use, preventing unnecessary waste, and promoting the circular economy) and the new techno-economic paradigm, together provide an opportunity for promoting increased sustainability (unctad, 2020). Recently, there has been a growing sense of nationalism and protectionism in several countries. During a pandemic, there is a need to keep the specter of nationalism at bay and reinforce cooperation. And the circumstances call for different and more sustainable (i.e., economically, socially and environmentally – in a “triple bottom line” holistic view) business models and strategies, such as adopting more regional supply chains and minimizing reliance on more

remote supplies, decreasing risks of supply disruption, and reducing negative environmental impact. covid-19 made all these different dynamics even more pertinent than they had been before.

COVID-19 AS AN ACCELERATOR OF DIGITALLY BASED INTERNATIONALIZATION STRATEGIES

Digital transformation, accelerated by the pandemic, is expected to bring about major changes in the nature and speed of internationalization. The platform economy increases the ability to reach a huge number of consumers in a short time and across a wide geographic spectrum. And, by using massive amounts of data and analytics to process them, allows to find a better match between supply and demand, enables identification of more clearly defined niches, and even stimulates new kinds of demand, given the tools available for mass customization and remote co-creation. Our key argument is that the pandemic in just a few months overcame resistance and precipitated changes that, while already underway, would have taken many years to materialize, were it not for the outbreak of covid-19. This fast change may have important long-term repercussions – both quantitative and qualitative - on international production and value chain strategies.

While it is true that the gigantic platforms dominating a vast group of markets worldwide involved massive investments (i.e., in the technologies underlying such platforms), it is no less true that digitalization allows for less costly strategies, thus extending platform-related opportunities to smaller firms. In that sense, digitalization would seem to constitute a force that promotes democratization of both entrepreneurship and internationalization.

Digital technologies help promote the international expansion of smes, allowing internationalization using fewer resources, and propelling an increase in the number of startups (which for the most part are born as global companies), and scale-ups – and benefitting from the exponential growth possibilities offered by platforms. Digital platforms provide access to international market knowledge, facilitate interaction with partners/customers, access networks, ease entry barriers, and help overcome resource constraints. They may also promote fruitful relationships between large corporations and smes (established and startups), potentially stimulating closer linkages between






multinational (mne) subsidiaries and local firms. Even for established mnes, the expansion of e-commerce is leading to divestment in brick-and-mortar retail (see, for example, the recent announcement by the leading clothing retailer Inditex, which will close 1200 physical stores and invest us$3 billion in further development of their online business and their “integrated store concept”).

covid-19 was a factor that helped drive these major changes, in order to address two important consumer concerns: physical contact and the “last mile delivery.” These developments reinforce the notion that platforms are compatible with the pandemic-fueled “low-touch economy”. In addition, 3D-printing and other 4.0 technologies allow for more efficient production of smaller series closer to the client, with much less investment than the large factories of an earlier era. This is crucial in a covid-19 and post-covid-19 world, where proximity and more predictable sourcing are of critical value, and where investments must be cautious.

LOW-COST INTERNATIONALIZATION (AND A REDUCTION OF FDI?)

Digital transformation gives rise to a new breed of low-cost internationalization that has profound implications for business models, and for the use of distinct entry modes and internationalization strategies. It may be conducive to a decrease in relevance of fdi, due to the reduced need to set up physical stores and large factories. Conversely, digital transformation may increase exports as well as contractual forms (i.e., digitalization makes it easier to connect and contract). In short, it is likely that models with less associated costs/investment/risk will be favored. And covid-19 is very important here, as an accelerator of trends and also as firms fear risky strategies amid current and future uncertainties. Moreover, many firms are struggling financially as a result of the shockwaves caused by the global pandemic, leading to greatly reduced investment capacity. Many companies are going through radical restructuring processes, implementing leaner/less costly strategies – reducing numbers of employees and other fixed costs (e.g. real estate) due to new (especially remote) work schemes that were proven effective during the covid-19 period. This may lead to increases in efficiency and in the overall competitiveness of businesses of all sizes, including established smes as well as startups, because of their being better able to respond better to demand and supply challenges. It may allow better access and integration in gvcs, even if disruption may also occur

in all value chain activities. This is because digitalization has an impact not only on the factory, but also on the whole value creation process, as noted above.

In an era where platforms generate more turnover than any traditional competitor in certain sectors, digitalization will reduce the importance of geography, challenging and de-territorializing the very concept of markets. Markets are now platforms, gvcs, and tenders of multilateral institutions (which are also platform-based). Due to digital technologies, such markets are more easily accessible than before: to the titanic multinational, to the sme or to the individual entrepreneur, across all sectors. This new world is full of opportunity but also of challenging side effects – e.g., the future of work, upskilling/reskilling, unemployment, inequality, and others.

POLICY IMPLICATIONS

Given the foregoing analysis, and considering the causal linkages between covid-19, on the one hand, and digital transformation, internationalization and fdi attraction, on the other, it is recommended that policies emphasize the following features:

• Digital Transformation – which increases investment attractiveness, and which makes it possible to thrive in the platform economy. Specifically important are those initiatives aimed at promoting the development and deployment of Industry 4.0-related technologies.

• Open innovation (in line with the collaborative approach advocated above, and recognizing the complexity of innovating in an environment of complex and converging technologies).

• Sustainability (including criteria for Sustainable Development Goals (sdgs), and requirements for receiving support for sustainability).

• Ecosystem-based measures (including support for entrepreneurship and startups), for the purpose of stimulating linkages between actors, notably large corporations, startups and smes). Foreign multinational players are very relevant in this regard, as they are often flagship companies in ecosystems.






• Openness of markets – Protectionist measures (aggravated in part by covid-19) may in the long run lead to zero-sum games. Countries should therefore try to see beyond their short-term interests.

• Internationalization and fdi attraction (i.e., calibrating incentives to national priorities and linking them to domestic players; creating incentives for the development of closer, more resilient and sustainable value chains – i.e., what unctad (2020) calls resilience-seeking fdi.

These recommendations would necessitate certain changes in current policies, which tend to be more focused on the short term, and more defensive in nature. Although the panic induced by covid makes the current approach understandable, it would behoove policymakers to shift their focus to long-term competitiveness if their economies are to remain prosperous in a digital era.

GALICIA

Galicia is no exception to the above-described trends and patterns, opportunities and challenges. A territory with a strong industrial tradition, and one comprising diverse sectors, Galicia is now facing the need to adapt to a new techno-economic paradigm that requires the digitalization of processes and business models. Galicia as a region is a “moderate” innovator, according to the Regional Innovation Scoreboard of the eu (European Commission, 2019), lagging behind the European average in most variables. While it is true that Galicia’s innovation indices have improved over time, intensifying innovation efforts remains a major priority.

As is the case with similar territories in Europe, the Galician economy consists overwhelmingly (over 90%) of small and medium enterprises (smes), and also includes large numbers of microbusinesses. Hence, the growth of the region depends largely on the performance of these firms. Such smes experience additional difficulties when embarking on digital transformation, as they have fewer resources (i.e., financial and human capital) than their larger counterparts. Often, they lack funding and their equity structure is weak, especially at times of a severe crisis like the one occurring now.

The Xunta de Galicia (the governing body of the Autonomous Community of Galicia) has recognized the need to promote the digital transformation of local

businesses, and toward this end has launched a series of public policy measures and support initiatives.

That includes supporting Digital Innovation Hubs (dih), collaborative initiatives that act as centers for sharing and disseminating knowledge and resources concerning specific areas. For instance, ceaga (a grouping of automotive companies in Galicia), focused on the Internet of Things and Artificial Intelligence, two technological areas that are crucial for Industry 4.0. The objective of this dih is to promote the “Factories of the Future” initiative, and has objectives in line with several eu projects in this same area. Another dih is bioga, focused on the life sciences and big data. These collective initiatives are crucial, given that they aim to acquire critical mass in priority areas for advanced manufacturing. These initiatives seek to offer a wide array of services and resources in order to promote the digital transformation of companies, with hoped-for spillover and demonstration effects on the economy at large. Smes are potentially the main beneficiaries of these projects. This is because they would never be able to access these resources if they each acted individually. The dih are very much at the center of the Digital Europe Program 2021-2027, helping the region to attract important funding for digitalization and innovation.

Other relevant areas being promoted are inter-cluster collaboration and cooperation among companies, universities and other research centers. The purpose of this would also be to have a significant impact on smes, and to help promote the culture of innovation that is vital to competitiveness in the global economy.

More specifically, and partially in response to the pandemic, the Xunta de Galicia launched the Plan for Digital Transformation of smes and for the Digitalization of Commerce. These initiatives recognized the particular difficulties of such actors, and the need to change approaches vis-à-vis commercial channels – in order to boost online sales, in a way that is in line with what was noted above about the “low-touch” economy. These measures represent steps in the right direction, in their promotion of internationalization, new trade channels, and the use of innovative digital tools.

A paramount challenge highlighted by the pandemic crisis relates to the future of work. In this connection, public policies were also implemented to support technological solutions for facilitating remote work arrangements. Training programs (i.e., upskilling/reskilling, so central for digital transformation) were also put in place.






Other relevant initiatives involve the digital transformation of the social economy and the promotion of entrepreneurship in rural areas (where the pandemic has actually led to opportunities for positive change).

A key argument of this paper was that internationalization of smes can be significantly helped by digital transformation, as the costs of internationalizing decrease (notably through the use of digital platforms). In this regard, the program “Galicia Exporta Dixital” aims precisely at helping companies to develop the following activities: diagnosing their export potential; preparing and implementing multi-channel internationalization plans; creating – or improving - their digital marketplaces and online catalogs; and also supporting the software acquisition needed to undertake digital transition.

All these measures supportive of internationalization and innovation involve a collaborative and partnership approach, and truly do represent the best path forward, allowing increasing numbers of Galician firms to thrive in the ever more competitive and volatile global economy. Apart from the cost/risk reduction in internationalization, companies – after suffering from lack of demand – may, in the medium- to long-term, benefit from the shortening of global value chains generated by the pandemic shockwaves. This is something that raises the need for more local supply, and redundancies in value chains in order to decrease risks of supply shortages. This is a change that will in turn create an opportunity for more linkages between large multinationals and local companies, and that will lead smes to adopt a more cooperative stance, in order to be viable and effective suppliers.

In sum, Galicia faces the same challenges as other similar regions in Europe and is taking measures aimed at effectively meeting those challenges: human capital training; cooperation; inter-cluster linkages; technological upgrading, etc. The adoption of similar measures by the private sector will help determine the ultimate success of such policies. The banking sector, and groups like abanca, are also launching several instruments to support the Galician entrepreneurial fabric – particularly smes. This is of crucial importance, given that funding is indispensable for making possible significant investments in digital and international expansion.





BASIC REFERENCES





168 | After the pandemic: Reflections and challenges for Galicia Basic references | 169

CHAPTER I

abanca (2020). abanca by ieside. Informes.https://tinyurl.com/yy9phcow

Consejo Europeo (2020). covid-19: la respuesta de la ue a las secuelas económicas.https://tinyurl.com/yynaycx9

European Comission (2020). Shaping Europe’s Digital Futur.https://tinyurl.com/y38of5an

Instituto Galego de Estatística (ige) (2020). Producto interior bruto.https://tinyurl.com/y5tnoqzr

Instituto Nacional de Estadística (ine) (2020). pib y sus componentes.https://tinyurl.com/yyf8xrkh

The World Bank (2020). Informe anual 2020 del Banco Mundial: países de apoyo en tiempos sin precedentes: informe principal.https://tinyurl.com/y3464spz

CHAPTER II

Artus, P. (2020). Given its already low level, potential growth must be prevented from falling further. Natixis Research, August 7.

Artus, P. and García-Herrero, A. (2020). The defining features of post-covid econo-mies. Natixis Research, August 25.

Artus, P. (2020). France: How to avoid zero growth in 2021 and 2022?, Natixis Re-search, August 31

Ministerio de Ciencia, Innovación y Universidades (2020). Datos y cifras del siste-ma universitario español. Publicación 2019-2020.https://bit.ly/3oM2eDI

Ministerio de Ciencia, Innovación y Universidades (2019). Datos y cifras del siste-ma universitario español. Publicación 2018-2019, 11 de diciembre.https://bit.ly/34Qj8ZS

Pelinescu, E. (2015). The Impact of Human Capital on Economic Growth. Procedia Economics and Finance, 22 (1), pp. 184-190, May 26.https://tinyurl.com/y42uohml

CHAPTER III

Guillén, M. F. (2020). How Businesses Have Successfully Pivoted During the Pan-demic. Harvard Business Review, July 7.https://bit.ly/34Hd6L8

Guillén, M. F. (2020). 2030: How Today’s Biggest Trends Will Collide and Reshape the Future of Everything. New York: St. Martin’s Press.

Quartz (2020). The New Normal: How Coronavirus Will Change the Next Five Years.https://bit.ly/34G8gOf





https://tinyurl.com/y5tnoqzr


CHAPTER IV

Clavelle, T. (2020). Global fisheries during covid-19. Global Fishing Watch, May 12.https://bit.ly/2TEqaKS

fao (2020). How is covid-19 affecting the fisheries and aquaculture food systems, April 10.https://bit.ly/31Xh2Wq

fao (2020). The impact of covid-19 on fisheries and aquaculture: A global assess-ment from the perspective of regional fishery bodies, May.https://bit.ly/3oCCvNX

mapa (2020). Análisis de los consumos alimentarios. Gobierno de España, Ministe-rio de Agricultura, Pesca y Alimentación.https://bit.ly/3kIfpTU

Martín Cerdeño, V. J. (2020). La cadena alimentaria en tiempos de la covid-19. Distribución y Consumo, vol. 2, pp. 24-42.

oecd (2020). Pêche, aquaculture et covid-19: Enjeux et réponses politiques, June 4.https://bit.ly/2GbPkgR

CHAPTER V

African Union (2020). Conditions for Success in the Implementation of the African Continental Free Trade Agreement.https://bit.ly/3mUos4W

International Monetary Fund (fmi) (2020). World Economic Outlook.https://bit.ly/3jWvnbP

Lopes, C. (2019). África en transformación: Desarrollo económico en la edad de la duda, Catarata y Casa África.

Ministerio de Asuntos Exteriores, Unión Europea y Cooperación (2019). III Plan África. España y África: desafío y oportunidad.https://bit.ly/3kXfeEr

Ministerio de Industria, Comercio y Turismo (2020). DataComex: Estadísticas del comercio exterior español.https://bit.ly/2TSFxQ1

The World Bank (2020). Doing Business.https://bit.ly/2I0CkeL

The World Bank (2020). Africa s Pulse.https://bit.ly/2HU5BYT

CHAPTER VI

Circularhr. (2020). Encuesta “Engagement y Teletrabajo en contexto covid-19”: Un 40 % de las personas señalan que están cumpliendo sus tareas laborales de peor forma que antes. CircularHR por Fundación Chile.https://bit.ly/3jIdA7W

Eurostat (2020). Digital Economy and Society. Database. European Commission.https://bit.ly/3kNlf6A

Gascueña, D. (2020). El teletrabajo: ¿la nueva normalidad pos covid-19? bbva, 7 de mayo.https://bbva.info/37T0Bhv

Global Workplace Analytics (2020). Work-At-Home After Covid-19 – Our Forecast.https://bit.ly/34CCHoy

Global Workplace Analytics (2015). Advantages of Agile Work Strategies for Com-panies.https://bit.ly/3edPxwz

Instituto Nacional de Estadística (ine) (2020). Encuesta sobre el uso de tic y comer-cio electrónico en las empresas. ine: Instituto Nacional de Estadística.https://bit.ly/2TBcbWr






Instituto Nacional de Estadística (ine) (2020). Encuesta sobre equipamiento y uso de tecnologías de información y comunicación en los hogares. ine: Instituto Nacional de Estadística.https://bit.ly/3mzVXcn

Lapuente, B. (2020). La incidencia del teletrabajo en España pasa del 5% al 34% durante la pandemia. Cinco Días – El País Economía, 5 de mayo.https://bit.ly/3jD2TDT

Larson, B. Z., Vroman, S. R. and Makarius, E. E. (2020). A Guide to Managing Your (Newly) Remote Workers. Harvard Business Review.https://bit.ly/2HIx2nU

Neely, T. (2020). 15 Questions about remote work, answered. Harvard Business Review, March 16.https://bit.ly/35I1NSe

Observatorio Nacional de Telecomunicaciones y de la si (ontsi) (2020). Dossier de indicadores de teletrabajo y trabajo en movilidad en España y la ue. ontsi: Observatorio Nacional de las Telecomunicaciones y de la si.https://bit.ly/387eeKn

Williams, J. C. (2020). The Pandemic Has Exposed the Fallacy of the “Ideal Wor-ker”. Harvard Business Review, May 11.https://bit.ly/3kIvqsK

CHAPTER VII

Apple Maps (2020). Informes de tendencias de movilidad (Dataset).https://apple.co/3ktLOwq

cores (2020). Consumos de productos petrolíferos por cc. aa. y provincias (Dataset).https://bit.ly/38FLAA3

Energy Information Administration (eia) (2020). Short-Term Energy Outlook (steo), September.https://bit.ly/2Uk3O1R

Google (2020). Informes de Movilidad Local sobre el covid-19 (Dataset).https://tinyurl.com/tvkeeuk

Instituto Nacional de Estadística (ine) (2020). Pernoctaciones hoteleras (Dataset).https://tinyurl.com/y4oeok2w

International Energy Agency (iea) (2020). Oil Market Report, September.https://bit.ly/3lrOg7R

International Energy Agency (iea) (2020). Oil 2020, Analysis and forecast to 2025, September.https://bit.ly/36AwWro

Ministerio de Sanidad, Gobierno de España (2020). Resumen de la situación enfer-medad por sars-cov-2 (covid-19) (Dataset).https://tinyurl.com/y674ouvz

Organization of the Petroleum Exporting Countries (opec) (2020). Monthly Oil Market Report, September.https://tinyurl.com/y8bylv3x

CHAPTER VIII

Banco de España (2020). Informe anual 2019, parte 3.https://bit.ly/2HNQujw

Banco de España. (2020). Recomendación sobre distribución de dividendos, 28 de julio.https://bit.ly/34IkSnS

Banco de España (2020). Nota informativa sobre la aplicación de las moratorias legislativas y sectoriales hasta el 31 de agosto de 2020, 4 de septiembre.https://bit.ly/3e8QnLb

Blanco, R., Mayordomo, S., Menéndez Á. y Mulino, M. (2020). Las necesidades de liquidez y la solvencia de las empresas no financieras españolas tras la pertur-bación del covid-19. Documentos Ocasionales, n. º 2020. Banco de España. https://bit.ly/3mD8Wdn






European Banking Authority (eba) (2020). Thematic note - Preliminary analysis of impact of covid-19 on eu banks, May. Eba/rep/2020/17.https://bit.ly/3jFtu3a

European Central Bank (ecb) (2020). Recomendación (ecb/2020/35). https://bit.ly/34IkSnS

European Commission (2020). Coronavirus Response: Banking Package to facili-tate bank lending - Supporting households and businesses in the eu, April 8.https://bit.ly/37WpGYP

Hernández de Cos, P. (2020). El impacto de la crisis del Covid-19 sobre la esta-bilidad financiera, 1 de septiembre (conferencia de clausura). El sistema fi-nanciero en la crisis covid-19. Retos y compromisos (seminario), Santander, Universidad Internacional Menéndez Pelayo.https://bit.ly/31Vrk9B

Instituto de Crédito Oficial (ico) (2020). Informe quincenal línea de avales covid-19.https://bit.ly/2HNEjTP

Prades, E. y Tello, P. (2020). Heterogeneidad en el impacto económico del covid-19 entre regiones y países del área del euro, Boletín Económico, 2/2020. Banco de España.

CHAPTER IX

Bandrés, E., Gadea, L., Salas, V. and Sauras, Y. (2020). Spain and the European Recovery Plan, July- Funcas.https://bit.ly/3l5qnmr

Eurointelligence (2020). Beware of the Pork Barrel, September 18.

funcas (2020). Previsiones económicas para España 2020-2021, 15 de septiembre.https://bit.ly/3oZO2am

Hassler, J., Krusell, P., Ravn, M. and Storesletten, K. (2020). Economic policy under the pandemic: A European perspective, July 7. Vox eu.https://bit.ly/3k8duXw

Nadal, A. (2020). Ha llegado el momento del ajuste fino. El Economista, 27 de agosto.https://bit.ly/2TZhHSL

Torres, R. (2020). Precisión quirúrgica para los presupuestos. El País, 13 de septiembre.https://bit.ly/38lbTLI

CHAPTER X

Lee Hsien Loong (2020). The Endangered Asian Century, America, China, and the Perils of Confrontation. Foreign Affairs, July/August.

Porretti, J. (2019). Qué países podrían beneficiarse con la guerra comercial entre Estados Unidos y China. Infobae, 9 de junio.https://bit.ly/2GbWRMN

Ramonet Míguez, I. (2020). La pandemia y el sistema-mundo. Le Monde Diploma-tique, 25 de abril.https://bit.ly/3kKFaCX

Ríos Paredes, X. (2018). China moderna. Tibidabo.

Summers, L. H. (2020). How to Fix Globalization-for Detroit, not Davos. The Ame-rican Interest, May 22.https://bit.ly/34FO0wc

Toro Hardy, A. (2020). China versus the us: Who Will Prevail? wspc.





176 | After the pandemic: Reflections and challenges for Galicia

CHAPTER XI

Board of Innovation (2020). The New Low Touch Economy: How to Navigate the World Post-Covid-19.https://bit.ly/34EmzCP

Chesbrough, H. (2003). Open Innovation: The New Imperative for Creating and Profiting from Technology. Harvard Business School Press.

European Commission (2019). Regional Innovation Scoreboard. European Union. https://bit.ly/2GaS8La

Freeman, C. and Perez, C. (1988). Structural Crises of Adjustment, Business Cycles and Investment Behaviour. In G. Dosi, et al. (Eds.), Technical Change and Economic Theory, pp. 38-66. Francis Pinter.

Gereffi, G. (2020). What does the covid-19 pandemic teach us about global value chains? The case of medical supplies. Journal of International Business Poli-cy, 3, pp. 287-301.https://bit.ly/3jHk33h

Hippel, E. von (1986). Lead Users: A Source of Novel Product Concepts, Manage-ment Science, 32 (7), pp. 791-805.

Hippel, E. von (2005). Democratizing Innovation. mit Press.

unctad (2020). World Investment Report 2020: International Production Beyond the Pandemic.https://bit.ly/3oHUcvN

AUTHORS





180 | After the pandemic: Reflections and challenges for Galicia Authors | 181

Juan Carlos Escotet RodríguezPresident of abanca. Master of Management Sciences from the University of Miami and graduated in Economics from the Universidad Católica Andrés Bello at Caracas

Francisco BotasChief Executive Officer (CEO) of ABANCA. Postgraduated degree in International Business Finance from the University of California at Berkeley and graduated in Economic Sciences, Business Administration, and Law from the Universidad Pon-tificia de Comillas at Madrid

Alicia García-HerreroSenior Researcher at the European Bruegel Think-Thank, Chief Economist for Asia-Pacific at Natixis, and Associate Professor at the Hong Kong University of Science and Technology. PhD in Economics from the George Washington University, BA in Economic Sciences from the Università Bocconi at Milan and graduated in Economic Sciences and Business Administration from the Universidad de Burgos





182 | After the pandemic: Reflections and challenges for Galicia Authors | 183

Fernando González LaxeProfessor of Applied Economy and Director of the Maritime Studies University Institute of the Universidade da Coruña. Former President of the Xunta de Galicia (1987-1990). PhD and graduated in Economic Sciences and Business Sciences from the Universidade de Santiago de Compostela

Mauro F. GuillénProfessor of International Business Management at the Wharton School of The University of Pennsylvania and Adviser to the World Economic Forum. PhD from the University of Yale and graduated in Sociology and Economic Sciences from the Universidad de Oviedo

Ainhoa Marín EgoscozábalSenior researcher of the Real Instituto Elcano and lecturer in the Department of Applied and Structural Economics and History at the Universidad Complutense de Madrid. PhD and graduated in Economic and Business Sciences from the Universidad Complutense de Madrid

Ignacio Martín MaruriSpecialist in Adaptative Leadership and Organization Transformation, lecturer in several university postgraduate programs. Senior Telecommunications Engineer from the Technische Universität Darmstadt (Germany), Executive MBA from Instituto de Empresa at Madrid and MPA from Harvard University

Pedro Antonio Merino GarcíaDirector of Research and Economist Chief at Repsol. MBA from the Instituto de Administración de Empresas (IADE) at Madrid and graduated in Economic Sciences from the Universidad Autónoma de Madrid

Soledad Núñez RamosMember of the General Council and Executive Commission of the Bank of Spain. PhD in Economics from the University of Minnesota and graduated in Economic Sciences from the Universidad Complutense de Madrid

Carlos Ocaña Pérez de TudelaGeneral Director of funcas. PhD in Economics from the Northwestern University at Chicago and graduated in Economic Sciences from the Universidad de Zaragoza and the Universidad Autónoma de Barcelona

Xulio RíosDirector of the Galician Institute for International Analysis and Documentation (IGADI), member of the Advisory Board of the Casa Asia, and Director of the Chinese Politics Observatory. Graduated in Law from the Universidade de Santiago de Compostela

Ana Teresa Tavares-LehmannProfessor of Economics of the Universidade do Porto at Portugal, business manager and consultant and Former Secretary of State for Industry of the Government of Portugal. PhD and MSc in Economics from the University of Reading of UK and Postdoctoral Studies in Internationalization of Foreign Direct Investment from the University of Strathclyde of UK





184 | After the pandemic: Reflections and challenges for Galicia Bibliographic cards | 185

Escotet, M. A., Rego, V. and Jamardo, B. (Eds.) (2021). After the pandemic: Reflections and challenges for Galicia. A Coruña: IESIDE Ediciones, 281 pages (bilingual edition).

Botas, F. (2021). COVID-19: Circumstantial and structural action. Spotlight on Galicia 2030. In Escotet, M. A., Rego, V. and Jamardo, B. (Eds.). After the pandemic: Reflections and challenges for Galicia. A Coruña: IESIDE Ediciones, pp. 21-39 (bilingual edition).

Citation of this volume An example for citation of a chapter

Website for downloading the electronicbooks in different versions





https://www.ieside.edu/despues-pandemia