3.3.3. Supply chains, digitalization and investment

cyclical effect, exemptions to fiscal rules may be necessary during a crisis. In Johannesburg, for instance — hit, like many other cities, with significant economic contraction during 2020 as a result of the pandemic — the national government’s relaxation of some spending restrictions allowed local authorities to reallocate some of their budget to meet their most pressing needs. However, for many subnational governments, especially in developing countries, even this is not a legal possibility. National governments should consider relaxing rules on earmarked national transfers and possibly local borrowing, while bearing in mind the common risks inherent to subnational borrowing in many developing countries.

In some developed countries with a unitary government structure, the expansion of local government powers took the form of more borrowing and funding as well as greater fiscal room to address the immediate socio-economic effects of the pandemic. In Denmark, fiscal rules were temporarily relaxed to allow municipalities to go beyond their normal spending limits, while in Spain local governments were authorized by decree to use surplus funds to support social services. This approach — granting more borrowing to subnational levels of government to cover COVID-19-induced expenditures — was also employed by developed countries with a federal government structure. The Municipal Liquidity Facility was established by the US Federal Reserve to provide up to US$500 billion in loans to states and municipalities. In Canada, similarly, the Ontario government partnered with the federal government to deliver Can$4 billion in one-off assistance to the province’s 444 municipalities.

3.3.3. Supply chains, digitalization and investment

The pandemic has disrupted value chains (the steps in the production of good and services) and supply chains (the physical integration of production at a spatial level) across the world, interrupting production and trade. Not only global manufacturing, but also tourism, restaurants, hotels and aviation will need to readjust, change and consolidate their production platforms. Before the pandemic, the global supply chain was already affected by increasing tensions between the US and China. Though companies are expanding their platforms to low-cost locations in Mexico (car parts and computers) and Vietnam (clothing, shoemaking, smartphones and other electronics), China still accounts for a large share of global manufacturing exports and will remain a formidable production hub.

It is difficult to foresee the consequences of disruption in value chains, but given the central role that cities play in regional and national economies, the true impact of shutdowns and other shocks can extend well beyond the immediate impacts to the affected urban economy. For instance, one study published in the first weeks of the pandemic hypothesized the indirect effect of locked down supply chains on other regions would be double that of the direct effects in Tokyo itself. On this basis, a month of lockdown in the capital could create a total production loss of ¥27 trillion in Japan as a whole, amounting to 5.2 per cent of the country’s annual GDP.50

Besides increased online and remote working in some sectors, the pandemic has also accelerated the development of e-commerce. In the European Union, retail sales via mail order houses or the Internet in April 2020 rose by 30 per cent compared to April 2019, at the same time as retail sales fell by 17.9 per cent, with similar increases evident in the UK, the US and China.51 Furthermore, a survey by UNCTAD of some 3,700 consumers in nine developed and emerging economies found that over half reported shopping online more frequently (Figure 3.6).52

While the COVID-19 crisis has encouraged the development of a dynamic, wide-ranging e-commerce industry, many shops and stores — already threatened by the increasing tendency for consumers to use online shopping, even before the pandemic — are now facing considerable hardship in the face of physical restrictions. Quarantining reduces consumers As national governments themselves end up in a fiscally restrained position due to the crisis, transfers to subnational governments are in some cases decreased and payments delayed