Covid-induced economic crisis and the world of work | The Daily Star
12:00 AM, March 31, 2020 / LAST MODIFIED: 01:01 AM, March 31, 2020

Covid-induced economic crisis and the world of work

Is the government response adequate?

The coronavirus disease (Covid-19) that started in China has now become a global health crisis which, in turn, has caused an economic crisis. The global economy is now bracing for a deep recession. In recent days, several financial institutions, including Morgan Stanley, Bank of America and Deutsche Bank, have forecast a global recession for 2020. And now the IMF Managing Director has also announced that the global economy is in recession.

Countries putting restrictions on travel and gatherings, airlines stopping flights, and people cancelling holidays are adversely affecting a number of service industries, such as hotels, travel, trade etc. Restrictions on public life are also having a negative impact on internal trade, transport, restaurants and hence, on the demand for goods and services. The global economy is in a demand-deficient recession which is going to jeopardise jobs and create an adverse effect on the lives and livelihoods of people.

The economic downturn is affecting the world of work in various ways. Layoffs resulting in unemployment is an immediate outcome of recession. The International Labour Organization (ILO) has projected that open unemployment may rise by 25 million (in the "high" scenario). Compared to the total global unemployment figure of 188 million in 2019, this represents about 13 percent increase. Even in the "mid" scenario of the ILO, unemployment is likely to increase by about 13 million.

Reports of massive layoffs and a sharp rise in jobless claims are already coming from countries like the USA. One projection from the New York Times mentions that the rate of unemployment is set to rise from the current level of 3.5 percent to 6 percent by 2021.

Apart from outright layoffs, labour markets could adjust in other ways, such as through short term work (meaning, in effect, sharing of the reduced amount of work that is available among existing workers), wage reduction, etc.

When the virus hit China, it was thought that Bangladesh would face disruptions in its supply chain which, in turn, may affect production in different sectors. However, the situation changed rapidly, and now the major markets of Bangladesh's export goods, mainly the USA and European countries, are facing recession due to shrinking demand.

Take the case of ready-made garments (RMG). As country after country go into lockdown mode, demand deficiency has already hit the industry. Likewise, the demand for other export items like jute and jute goods, and frozen foods, may also falter.

During this recession, demand deficiency will not remain confined to export oriented goods alone. Measures taken to fight the health crisis are having a dampening effect on a wide range of economic activities including manufacturing, trade, transport, education, etc. The shut-down that started in Bangladesh on March 26 has led to the closure of large swaths of economic activities throughout the country.

How is the labour market going to be affected? In the RMG industry, layoffs may not result immediately because the government has announced a package of assistance aimed at covering wage payments. But the same cannot be said about other sectors that are facing business closure and uncertainties.

In situations where layoffs are caused only (or primarily) by deficiency in external demand, the tendency usually is for the retrenched workers to crowd into informal sector trade and service type activities. But in the present situation, with all economic activities coming to a standstill, where are they going to go? There are not many alternatives. In fact, those who are engaged in multitudes of micro and small enterprises in the informal sector are already facing difficulties in maintaining their livelihoods.

Both monetary and fiscal policies may be used to fight recession. Central banks can provide guidance by lowering the indicative rate of interest and if necessary, by adopting quantitative easing. This is done to make credit cheaper and more easily available so that businesses can tide over the difficult period. On the fiscal side, measures may be taken to provide stimulus to economic activities, to bail out targeted sectors/activities, and to strengthen social protection. Both types of policies have already been announced by various countries including the UK, US, Germany, Switzerland etc. 

What has the Government of Bangladesh done? First, Bangladesh Bank announced a few "policy support" measures to protect exporters and importers. What these would imply in reality remains to be seen. Then, on March 25, the Prime Minister announced a set of policies that include the following: (i) a package of Tk 5,000 crore for export-oriented industries, with a stipulation that the money would be used for providing salaries and wages of workers and employees; (ii) provision of assistance through the "Return-to-Home" programme for homeless and landless people under which there would be homes free of cost, six month's food and cash assistance; (iii) continuation of the Vulnerable Group Development (VGD), Vulnerable Group Feeding (VGF) and rice for Tk 10 per kg programmes; and (iv) accommodation in Bhashan Char island to provide shelter for 100,000 people.

What do all of the above imply—especially if one looks at the overall magnitude of the problem? Let's look at the Tk 5,000 crore package first. It may be recalled that during the global economic crisis of 2008, fiscal stimulus was provided to export-oriented manufacturing industries with the objective of preventing a major decline in the growth of exports. The assumption perhaps was that if the flow of exports could be maintained, jobs in the industry would also be protected. Whether the expectation was met is a question that was never fully evaluated.

This time also, the declared purpose of the package is to provide wages and salaries to the workers and employees of the factories that are in danger of having to close down. Given the timing of the crisis (especially, the advent of Ramadan and Eid), it may appear to be a good idea to provide support to the industries so that they can in turn, pay their workers. But it may not be inappropriate to ask why the four-decade old RMG industry needs assistance from the government every time there is a crisis. Couldn't the industry itself devise some built-in mechanism, for example, by creating a reserve fund with contributions from members during periods of growth which could be used at times of crisis to tide over the difficult period?

It's true that the RMG industry employs about four million workers and is also the major source of foreign exchange for the country. But consider the following numbers. Outside agriculture and the RMG industry, there are some 5 million more in various manufacturing industries and another 13 million workers in other sectors, of whom 85 percent are in the informal sector. Many of the five million non-RMG industrial workers are also in micro and small size enterprises. With all economic activities shut down for nearly two weeks (as of now), workers engaged in them, and the self-employed who run many of them, must be struggling to make ends meet. And who knows when economic activities will start again?  Shouldn't there be some measure to extend support to them?

Then look at the other measures mentioned, e.g., the return home programme and VGD, VGF, etc. The former is basically an ongoing programme targeted at the homeless and destitute—not an economic activity-based measure. Can that be expected to accommodate the millions who had to leave the urban areas during this period of shutdown? Also, there are many who couldn't leave and are facing joblessness and precarious situations in the cities.

Likewise, VGF and VGD represent targeted programmes—identified with cards given to the target households. Can those programmes be expanded rapidly, with new beneficiaries included for support? And finally, Bhashan Char, where 100,000 people can be accommodated. Are we expecting that those who are facing a jobless and income-less situation in urban or semi-urban areas will apply for relocating to Bhashan Char?

In the absence of real automatic stabilisers like unemployment benefits, measures are needed to provide income support to workers, the self-employed in small businesses and owners of micro and small enterprises. Some innovation would be needed to develop a package of support to such workers and businesses. The possibility of support in the form of food grains also needs to be considered. It is important to formulate a comprehensive package of measures that could simultaneously provide stimulus to economic activities and protection to those who require it. This task is urgent.

The fiscal cost of a stimulus package of the kind mentioned above can be met by a reallocation of the present budget and by tolerating a temporary increase in budget deficit. The rest of the world is doing it that way.

 

Dr Rizwanul Islam is an economist and former Special Adviser, Employment Sector, International Labour Office, Geneva.

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