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The Financial Express

Covid-19's fallout: Unemployment risks in export-oriented sector  

| Updated: June 14, 2020 21:29:54


Covid-19's fallout: Unemployment risks in export-oriented sector   

The outbreak of coronavirus disease (Covid-19) has engendered not only an unimaginable global health crisis but also an unprecedented economic crisis in the modern history. How the impacts of Covid-19 crisis in the rest of the world influence the economy of Bangladesh critically depends on the degree of integration of the country with the world economic system. The ultimate impact of these external sector dynamics on Bangladesh's economy again depends on the extent, severity and duration of the crisis in the countries that are our major export destinations, import sources, primary recipients of foreign migrants and investment sources.

One critical feature of Bangladesh's external sector is that it employs a significant portion of the labour force. As the livelihoods of a large number of people are dependent on this sector, global economic crisis instigated by Covid-19 shock has far-reaching consequences on the wellbeing of their families and the society as a whole.

EXTERNAL SECTOR UNCERTAINTIES: The evolution of the Covid-19 health crisis and its impact on an economy is full of uncertainties, which can be divided into three main categories. The first set of uncertainties is related to the nature of the disease itself and its evolution over time and across countries. The second one is related to development of therapeutic solutions and invention of vaccines and development of immunity among people. The third set is related to policy responses of a government in tackling the spread of the disease and mitigating economic crisis. The economic crisis can deteriorate further if tensions between global economic powers escalate with regard to Covid-19 leading to further uncertainties.

GLOBAL RECESSION: International Monetary Fund (IMF) has predicted a global economic contraction by 3.0 per cent in 2020 as a result of Covid-19 pandemic and the containment measures initiated by the governments across countries to reduce health risks of the populations. Though the same report projected a 5.8 per cent growth in 2021, this forecast is highly contingent upon the assumption that Covid-19 crisis will wane in the second half of 2020. The containment measures initiated by the countries from the beginning of the crisis have already halted the functioning of economic machinery or have severely slowed down such activities.

However, unlike during other recessions, these economies are expected to rebound relatively quickly with a large fraction of unemployed, it is being anticipated, would get their jobs back. That said, social distancing rules might cut the demand for workers in some sectors at least for a few years. Some countries are also worried about the second wave of outbreak within this year. Under such circumstances, the health and economic crisis can be far worse than the countries around the world are currently experiencing under the first wave.

As Bangladesh's exports are highly concentrated in the readymade garments (RMG) industry (84.0 per cent of the value of total goods exports) and are disproportionately distributed among the major industrialised countries (71.0 per cent of total goods are exported to top 10 export destinations), the sector remains highly vulnerable to economic shocks in those destinations. As of May 26, 2020, these top 10 major export destinations of Bangladesh together share 52.0 per cent of the total COVID-19 cases worldwide.

BD'S EXPORTS DURING COVID-19: Although Bangladesh's overall export earnings reduced by 5.8 percent in the first half (Jul-Dec) of FY2020 and 6.2 percent in first three quarters (Jul-Mar) of FY20, these negative changes were actually caused by downfall in global demand in 2019 due to growth slowdown in industrialised countries. The effect of Covid-19 crisis on the country's exports has been becoming visible from the month of April 2020 with a 13.0 percent decline in July-April period of FY20.

In response to the evolving situation, containment measures have been relaxed from the month of May for RMG manufacturers and the government has been negotiating with the buyers and governments of the destination countries for restoring the orders. If garments factories remain operational in the remaining two months of the current fiscal year, it can be expected that these reductions in exports earnings will remain within manageable limits.

Despite these progresses, the export prospects of the next fiscal year remain highly uncertain for several reasons. Firstly, a sharp decline in output and increase in unemployment in the major destination countries are likely to dampen the demand for the RMGs. Secondly, even though a majority of the export destinations are gradually easing their lockdowns, they are still worried about a second wave of the pandemic and therefore, can impose a strict social distancing rule in many economic activities and social gatherings at least for a few years to come. Thirdly, the retailers are likely to sell their existing stock of products before placing new orders as they have piled up unsold stock during the lockdown periods. These factors together can reduce the demand for imports in destination countries, thereby further lowering Bangladesh's export demand. Furthermore, supply side issues can play an important role in export performance as the factory workers are also at high risk of contagion and some factories in Bangladesh may need to shut down if outbreaks happen at a large scale within these factories. Nevertheless, there is also the possibility that demand for Bangladeshi products may rise in the global market if tensions between advanced countries and China escalates further regarding the Covid-19 crisis.

ADJUSTMENT AND UNEMPLOYMENT: The demand for imports in advanced economies is likely to shrink further as a result of the Covid-19-generated recession. The fall in demand in the global market will intensify competition between exporting firms leading to a downward pressure on prices of exported products. Intensified competition will force some of the small and the medium sized firms to shut down their operations. The large and technologically advanced firms will survive but may need to adjust their product portfolio. Such dynamics can result in the unemployment of a large number of garments workers. As a significant proportion of these workers are females, they will be in urgent need of support from government and non-government organisations.

The workers who would become unemployed as a result of the adjustment process discussed above should be registered at the factory level during an establishment closure. In case of a closure or a layoff, the factories should provide all the due salary and compensations as per the law. If a factory reopens or decides to recruit with the improvement in economic conditions, the retrenched workers at the time of Covid-19 crisis should be reemployed on priority basis.

If the crisis prolongs, these workers should be brought under the umbrella of social security system and emergency credit program through microfinance institutions (MFI). A special training program on income generating activities coupled with microcredit support should be offered for these unemployed workers. The newly unemployed workers should be encouraged to participate in agricultural activities including crop production, fishing and livestock rearing etc. MFI membership will not only diminish vulnerability to poverty of newly unemployed women but also reduce their risk of experiencing family violence.

The small and medium enterprises (SMEs) in manufacturing and services that target mainly the local market should be actively supported to get market access, so that they can increase output and create employment within the country. In the long run, these firms should be able to compete in the export market through better technology and higher productivity.

As a long-term economic development strategy, the government must redesign its industrial policy focusing on product diversification and technology-intensive industrialisation.

 

Dr Shubhasish Barua is Assistant Professor, Department of Development Studies, University of Dhaka. shubhasish77@gmail.com

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