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The Financial Express

Growth and poverty reduction: Will Covid change the positive links?


Poor people waiting for food in Dhaka	—UNB Photo Poor people waiting for food in Dhaka —UNB Photo

During the last few decades, the linkage between economic growth and poverty decline has been usually positive. Both cross country and time series data for individual countries supported this observation. This has encouraged developing countries to pursue policies for acceleration of growth to achieve the goal of poverty reduction simultaneously.

During the last two decades Bangladesh's success in poverty reduction has been lauded internationally. The acceleration of economic growth played a significant role in this success. However, as Covid infections affect lives and livelihoods in Bangladesh, the past trends of success of poverty reduction is threatened. Economic slowdown has already set in although the extent of slowdown may be subject to controversy. The combined effect of lower economic growth and loss of livelihood among the lower income groups is a rise in the poverty incidence. Researchers' estimates show that poverty incidence may have risen by 50.0 per cent or may have even doubled due to shutdown implemented to fight Covid-19.

In fact Bangladesh is not the only country experiencing increase of poverty due to the virus. Many other countries including some more affluent countries will see increase in poverty incidence. According to a new study by researchers in UK and Australia, the Covid can push 8.0 per cent of world's population below the poverty level. Low income countries will be the major victims.

Short term measures have been adopted to halt the process of poverty deepening and it may be expected that when the spread of infections is contained and usual economic activities are revived, poverty will come down. Whether poverty incidence will be close to the benchmark of 2019 will depend on many forces. Effective implementation of the cash transfer schemes and the support to MSME is expected to counteract the forces accentuating poverty. Still, the entire set of new-poor may not immediately come out or poverty due to reasons discussed below.

At this moment one should also start to think about how far economic growth can again help reduce poverty in the post-Covid phase. It is apprehended that the growth-poverty linkage may change in the coming days. The following discussion elaborates on the reasons. The change is likely to be caused by the routes available for growth acceleration immediately after reopening the economy.

In fact in the post-Covid period or even before that Bangladesh may feel the urgency to restore the growth path on which it has been moving during the last decade which earned it the title of "development surprise". The sequence of reconstruction of the economy will possibly include the following:

  1. a) Acceleration of the activities of the large projects implemented with public funding will be undertaken. However, these projects are mostly capital intensive and thus will not offer much employment to the workers who lost livelihoods.
  2. b) Large-scale industries experienced high growth rate during the last decade and will receive preferential support from the government in the attempt to regain the growth momentum. This applies especially to export oriented RMG sector. The entrepreneurs will try to manoeuvre the policies in their favour and use the argument that they have foregone profits during the Covid period and lost markets during the time of shutdown. Using the policy support, they may resort to higher capital intensity and exploitative term of employment of unskilled and semi skilled labour. In fact RMG units have reopened during the period when virus spread has been rising, accentuating the health risk of the workers which raises the risk of poverty deepening in the absence of healthcare benefits from the employer.
  3. c) Domestic market oriented MSME industries will suffer setback because of lack of working capital due to loss of revenue during the shutdown and also because of shortage of demand from low income groups who lost income earning opportunities.
  4. d) Modern service sector, including education and health will be slow to recover because of deficiency in demand due to the income foregone by the users of these services. ICT, hospitality services which are labour intensive but are linked to global demand are also likely to recover slowly.

The above observations tell us that employment growth will be slow if the traditional route to acceleration of economic growth is pursued. Without growth of employment and wage, poverty reducing impact of economic growth is likely to be small. Those who are unable to find regular employment will resort to marginal activities and poorly paid informal employment. Thus there is a threat of entering into the low employment -- low income poverty trap during the period of spread of infection as well as after it is contained.

Therefore some of the following policies should receive attention. These should be initiated in the coming financial year and most of these will have relevance over the next two years.

Some positive forces may be operating through growth of agriculture and related forward and backward linkage industries. Therefore, the priorities during the coming year and also in the medium term will be to adopt policies for accelerating agricultural growth so that the country is self reliant in food. Agriculture will of course include non crop sub-sectors as well. This will require attention to backward linkage industries, like inputs, implements and machinery. Related food processing industries may also receive a boost with accelerated growth of agriculture.  All these are expected to be labour intensive sectors leading to growth of both self employment and paid employment enhancing income of those who would otherwise have lost livelihood. Thus a focus on agriculture can be pro-poor in this phase.

In addition, strategies must also be adopted to make the growth of large industries and modern service sector pro-poor. Support provided to RMG and other large industries should impose a condition that there will be no immediate labour shedding. With the opening up of RMG, health risk of workers rises and health expenses must be borne by the employer.

Government must accept that during the next two to three years economic growth cannot be relied upon as the major route to poverty reduction. Other policies must be actively pursued. The social protection schemes already initiated should continue. Free health care for the vulnerable and poor households can be effective strategies for preventing poverty accentuation.

 The above discussion does by no means imply that economic growth cannot help reduce poverty. But the process will not be an automatic one but will require conscious policy interventions to make growth pro-poor in new ways in the post-Covid period.

In the coming days there will be increased competition for international assistance for poverty reduction since most of the low income countries are facing the crisis of poverty accentuation. Therefore, Bangladesh cannot expect a large support from external resources and must use its own resources for the purpose. Hence, the success of poverty reduction will depend on a judicious use of resources for providing incentives for acceleration of growth and reduction of poverty.

 

Rushidan Islam Rahman, PhD is Executive Chairperson, Centre for Development and Employment Research and former Member,

Board of Directors, Bangladesh Bank. rir1312@gmail.com

 

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