The case for a new Marshall Plan

Alexia Delfino, Raffaella Sadun 04 May 2020

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As economies prepare to re-open after forced shut-downs, businesses all over the world are wondering what the post-Covid era will look like. Will workers’ safety necessarily come at the expenses of reduced profitability and performance? Are there ways to mitigate such a trade-off? The answer is complex (see Bénassy-Quéré et al. 2020, Baldwin and Weder di Mauro 2020), but what will happen depends on firms’ capabilities to adapt to the current challenges.

We posit that management practices can help firms adapt to the new Occupational Safety and Health (OSH) standards required by governments, while at the same time mitigating negative impacts on their productivity and, perhaps, even improving it in the long-term. First, managerial processes can reduce the cost of the adoption of new safety protocols. For instance, buying, stocking, and regularly providing Personal Protective Equipment (PPE) to workers requires good inventory management and planning. Firms endowed with such skills will be faster in incorporating new rules into their business. Secondly, management principles can help firms rethink their productive processes putting safety at their core, and facilitate the adaptation of their strategic positioning to a changing market demand. Third, managerial capabilities can equip enterprises with a mindset of ‘continuous learning’ which would reframe the current challenges as opportunities for long-term improvement.

Overall, this suggests that embedding the adoption of safety protocols within a broader set of managerial training interventions can help align private and social interests, making safety protocols privately sustainable and alleviating the burden of enforcement on governments. The design of training and initiatives to support the management of medium and small sized enterprises (MSMEs) is particularly important. In OECD countries, between 50% and 60% of employees are working in firms with less than 250 employees (OECD 2017). The high share of the population employed in these businesses makes them an extremely important target of policies aimed at improving safety in the workplace. Nevertheless, many regulatory safety protocols are formulated based on the experience of large enterprises, which makes it hard for small firms to straightforwardly implement them. Moreover, MSMEs often lack the organisational and managerial capabilities necessary to adjust their production processes and business models to the Covid-19 era (Goldberg 2020).

Some lessons from history

Across media outlets, the challenge of dealing with the Covid-19 emergency has been labelled as a ‘war against an invisible enemy’ and health workers have been nominated ‘the frontline soldiers against Covid-19’. The war analogy can be useful to think about past experiences of supporting the productivity of firms in post-war periods.

In the 1950s, as part of the Marshall Plan, the US Technical Assistance and Productivity Program (TAPP) was designed to increase the productivity of European firms during the post-WWII recovery phase. The low level of productivity of European firms and the lack of a ‘managerial mentality’ were identified as important barriers to recovery. For some US officials, management inefficiencies were even deemed a worse problem than the direct damages suffered during the war (Giorcelli 2019). The TAPP included training of European managers in modern management practices through study trips to US plants combined with consulting sessions at European firms. Managers were taught a mix of practices (e.g. in operations, human resources) to allow for constant improvements in production aimed at reaching productivity targets based on US standards (ICA 1958).

Despite being thought of as a recovery program, the performance of Italian firms participating in the TAPP increased significantly for at least 15 years after the training (Giorcelli 2019). In other words, ‘managerial capital’ helped sustain firms’ productivity when resources were scarce and over the long run.

Modern management practices, firm productivity, and workers’ safety

Decades after the TAPP, economists have shown that the adoption of effective management practices has long-term benefits on firm productivity, growth, and employment (Bloom and Van Reenen 2007; Bloom et al. 2013, 2015, 2018). In an experimental study with large Indian manufacturers, Bloom et al. (2013) found that the adoption of management practices led to productivity improvements and to the opening of more plants. Almost a decade after the program, the effects in adoption as well as in performance persist (Bloom et al. 2018). Bruhn et al. (2018) show that individualised management consulting can help Small and Medium Enterprises (SMEs) grow and limit losses during economic crises.

While these programs tend to be expensive, a few other studies propose lower-cost solutions that can lead to improvements in management practices. Cai and Szeidl (2018) show that peer-to-peer learning in business associations increases the adoption of the best management practices across Chinese firms, with subsequent better performance. Dalton et al. (2020) find that combining knowledge sharing about local best practices with experiential learning (e.g. exposure to local role models, individual assistance) leads to efficiency gains among small retailers in Indonesia. Given their contained costs, these models of diffusion are particularly relevant in the current situation of resource scarcity.

More importantly, in the Covid-era management practices also have the potential to support workers’ safety. Practices in operations, such as the application of lean principles, can help firms efficiently revise productive lay-outs to obey social distancing rules.1 Practices in monitoring help track the implementation of safety protocols and quickly detect/solve problems, for instance by collecting in real time metrics for safety, quality, and costs. They might also help keep track of workers’ productivity when adopting flexible arrangements for the first time (Morikawa 2020). This evidence suggests that compliance with regulation and management practices are likely to be complements, and creates room for policy interventions that support the diffusion and adoption of management practices. This may also be an opportunity to help sustain firm productivity. For instance, managerial principles useful for the adoption of occupational safety and health can be applied more broadly beyond safety, as the same ideas can be used to observe and improve other aspects of the firm.

Designing the next Marshall Plan

In the following paragraphs, we outline a few principles that we believe a successful post-Covid Marshall Plan should follow, with the hope to offer policymakers some useful guidelines for the design of re-opening plans for (small) businesses.2

Share a basic and timely set of managerial practices with firms

Training in a basic set of management practices can help firms establish safety cultures and limit negative impacts on productivity.3 Such a set of practices should be chosen to address time-specific needs and incentivise employees’ return to work. For instance, practices related to operations, monitoring, and planning are of foremost importance in the current situation. Practices can be taught with the main goal of keeping workers safe. Nevertheless, businesses should learn also how to use them in other areas to limit future possible productivity losses. For instance, principles in the ‘kaizen method’ can provide firms with a framework of continuous improvement focused on small, ongoing positive changes achieved through cooperation and commitment by all parties involved.4

Delivery is as important as contents

Standard classroom training is not a feasible delivery model for the current situation, but simply replacing the classroom with online group meetings is also undesirable. Low take-up and usage are indeed common issues for online programs (Cusolito et al. 2020).5 Supporting standard delivery methods with add-ons such as one-to-one online mentoring, virtual visits to local firms which are elected ‘champions of safety’ or conversations with role models seems crucial to encourage take-up and effective learning (Cai and Szeidl 2018, Bruhn et al. 2018, LaFortune et al. 2018, Dalton et al. 2020).

Smart incentive systems and leadership are crucial

The situation we are living is uncharted territory for most governments and businesses. Incentive systems should reflect this, both at the business and regulatory levels. Harsh incentives that punish mistakes in implementation hinder individual willingness to share information and thus future learning. In the short term, incentives should better target managers’ and workers’ feedback, in order to learn of implementation issues and discover quick solutions. This type of learning is critical but can happen only in organisations with a psychologically safe and transparent environment (Bohmer et al. 2020).

Leadership is another important way of creating an organisational culture that puts workers’ safety first (Schein 1985). The behaviour of bosses, from CEOs to middle managers, can inspire workers’ actions and reinforce that the priorities stated in safety protocols are reflected in shared values and daily operations (Martinez et al. 2015). Occupational safety and health can easily decay in the business system of beliefs if leaders do not preach.

Build feedback that includes the community

Businesses are now more than ever called on to ‘lead by example’ in their communities, setting standards of workers’ safety as well as fairness. Internalising the externalities that employer’s behaviour has on the overall community can act as an additional motivation for doing better. For instance, the creation of systems of feedback that include the community (e.g. workers’ families, firms in the value chain) can give entrepreneurs an idea of what people fear or value the most around safety, while acting as reminders of the interconnectedness of everyone’s actions. Short messages and nudges that make salient the shared community purpose of worker’s safety can also be used in order to sustain workers’ and entrepreneurs’ daily effort on the job (Jordan et al. 2020).

Conclusions

As the 1918 Spanish Flu, the pandemic we are currently going through may only happen once in this century. However, a crisis is also an opportunity for managers and owners to rewrite their business models. Beyond short-term compliance and survival, businesses should also think about long-term productivity. Training in basic modern managerial practices can be a promising tool to achieve this systematically, across firms and geographies.

References

Baldwin, R and B Weder di Mauro (2020), Economics in the Time of COVID-19, a VoxEU.org eBook, CEPR Press.

Bénassy-Quéré, A, R Marimon, P Martin, J Pisani-Ferry, L Reichlin, D Schoenmaker and B Weder di Mauro (2020), “Repair and reconstruct: A Recovery Initiative”, VoxEU.org, 20 April.

Bloom, N and J Van Reenen (2007), “Measuring and explaining management practices across firms and countries”, The Quarterly Journal of Economics 122(4): 1351-1408.

Bloom, N, B Eifert, A Mahajan, D McKenzie and J Roberts (2013), “Does management matter? Evidence from India”, The Quarterly Journal of Economics 128(1): 1-51.

Bloom, N, A Mahajan, D McKenzie and J Roberts (2018), “Do Management Interventions Last? Evidence from India”, World Bank Policy Research Working Paper 8339.

Bloom, N, R Sadun and J Van Reenen (2015), “Do private equity owned firms have better management practices?”, American Economic Review 105(5): 442-46.

Bohmer, R, G P Pisano, R Sadun and T C Tsai (2020), “How Hospitals Can Manage Supply Shortages as Demand Surges”, Harvard Business Review, 3 April.

Boudreau, L (2019), “Multinational enforcement of labor law: Experimental evidence from Bangladesh’s apparel sector”, mimeo.

Bruhn, M, D Karlan and A Schoar (2018), “The impact of consulting services on small and medium enterprises: Evidence from a randomized trial in Mexico”, Journal of Political Economy126(2): 635-687.

Cai, J and A Szeidl (2018), “Interfirm relationships and business performance”, The Quarterly Journal of Economics 133(3): 1229-1282.

Cusolito, A, E Dautovic and D McKenzie (2020), “Can Government Intervention make firms more investment-ready? A randomized experiment in the Western Balkans”, Review of Economics and Statistics, forthcoming.

Dalton, P, J Ruschenpohler, B Uras and B Zia (2020), “Curating Local Knowledge: Experimental Evidence from Small Retailers in Indonesia”, The World Bank Policy Research Working Paper 8933.

Distelhorst, G, J Hainmueller and R M Locke (2017), “Does lean improve labor standards? Management and social performance in the Nike supply chain”, Management Science 63(3): 707-728.

Giorcelli, M (2019), “The long-term effects of management and technology transfers”, American Economic Review, 109(1): 121-52.

Goldberg, P (2020), “Policy in the time of coronavirus”, In R Baldwin and B Weder di Mauro (eds.), Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, a VoxEU eBook, CEPR Press, pp. 197-201.

ICA - International Cooperation Administration (1958), European Productivity and Technical Assistance Programs; A Summing Up, 1948–1958. Paris: Technical Cooperation Division.

Jordan, J, E Yoeli and D Rand (2020), “Don’t get it or don’t spread it? Comparing self-interested versus prosocially framed COVID-19 prevention messaging”, Working paper.

Lafortune, J, J Riutort and J Tessada (2018), “Role models or individual consulting: The impact of personalizing micro-entrepreneurship training”, American Economic Journal: Applied Economics 10(4): 222-45.

Martinez, E A, N Beaulieu, R Gibbons, P Pronovost and T Wang (2015), “Organizational Culture and Performance”, American Economic Review P&P 105(5): 331-35.

McKenzie, D and C Woodruff (2014), “What are we learning from business training and entrepreneurship evaluations around the developing world?”, The World Bank Research Observer 29(1): 48-82.

Morikawa , M (2020), “COVID-19, teleworking, and productivity”, VoxEU.org, 10 April.

OECD (2017), “Enterprises by size”, in Entrepreneurship at a Glance 2017, Paris: OECD Publishing.

Politecnico di Torino (2020), “Emergenza Covid-19: Imprese Aperte, Lavoratori Protetti”, Rapporto, April.

Schein, E (1985), Organizational Culture and Leadership, San Francisco, CA: Jossey-Bass.

 

[i] For instance, Distelhorst et al. (2017) show that the adoption of lean manufacturing facilitates compliance with labour standards among apparel suppliers of Nike. Boudreau (2019) shows that compliance with workers’ safety regulation does not create a trade-off with productivity in firms with better managerial practices, as measured by the frequency of production-related meetings between managers and workers.

[ii] Within a country, we expect business training offerings to skyrocket in the next months. Training programs will be heterogeneous, probably even within industrial sectors and geographies. We hope these guidelines will help policymakers and national business associations set some key principles and standards for training contents and delivery.

[iii] The diffusion of managerial mechanisms has been cited among the necessary conditions to support the Italian re-opening in recent policy publications, such as the report “Imprese Aperte, Lavoratori Protetti” by the Politecnico di Torino (chapter 4, page 123).

[iv] This method has been extensively applied to occupational safety and health situations in Japanese firms such as Toyota and Panasonic, with practices that include communication with and between workers, use of visualisation tools to alert dangers and remind rules, training and monitoring.

[v]A rich literature on business training for MSMEs in developing countries teaches us that demand for training and take-up tends to be low, participants’ attrition rates are high, and effects on performance are mixed (see, for instance, McKenzie and Woodruff 2014).

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Topics:  Covid-19 Industrial organisation

Tags:  COVID-19, coronavirus, Management, productivity, occupational safety

PhD candidate in Economics, London School of Economics

Thomas S. Murphy Associate Professor of Business Administration in the Strategy Unit at Harvard Business School.

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