Analysis
3 years ago

Rethinking the stimulus packages for CSMEs: A labour market analysis

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For the endurance of Covid-19, the government announced 23 stimulus packages (until March 2021) worth of Tk 1,240.53 billion which accounts for almost 4.40 per cent of the country's Gross Domestic Product (GDP). Furthermore, in January 2021, two new stimulus packages worth Tk 27.00 billion were approved to boost the cottage, small and medium enterprises targeting the low income and poor people in distinct parts of the country. An important question remains-- to optimise the impact of these stimulus packages for Small and Medium Enterprises (SMEs), Micro, Small and Medium Enterprises (MSMEs) and Cottage, Micro, Small and Medium Enterprises (CMSMEs) what did we learn from the previous year regarding stimulus packages as a tool of fiscal measures in response to Covid-19's economic crisis? First, the distribution of the stimulus packages to the micro, small, and cottage enterprises has been complex and hard to reach. Second, if stimulus packages are instrumented as a supply side tool alone (with only supply of credits) ignoring the demand side push factors such as employment creations, job retention, wage distribution and gaining back unemployed workers, the economic recovery will not reach even the point of the partial equilibrium.

The economic crisis of the pandemic is the result of both the aggregate supply side and aggregate demand side crises. Due to pandemic investment and money supply in businesses will be less, the reduced investment will reduce jobs, low level of jobs and increased unemployment in the businesses will result in an increased number of people without any wages, increased number of people without having any income sources will eventually lower the aggregate demand (consumption). This is the "cycle" of the economic chain that follows the pandemic effects in our country likewise every other country in the world.

Why employment and labour market issues are more crucial to have a default place in the stimulus packages for SMEs, MSMEs and CMSMEs in Bangladesh compared to any other countries? For three reasons. First, the SMEs, MSMEs, and CSMEs consist of the largest part of the workforce in our country that captures the informal sector employment (informal sector is responsible for more than 85 per cent of employment in Bangladesh). Second, there is a dominance of low skilled, semi-skilled and unskilled workers in these small, micro and cottage industries that makes this sector more fragile in terms of job losses compared to any other sectors in the economy. Third, in the micro and cottage industry, there is a large dominance of women's employment and labour force participation that makes this sector highly sensitive as a superior employment basket for women in the face of the country's decreasing rate of women's labour force participation. According to the estimation of International Labour Organisation (ILO), Bangladesh is the lowest in the real wage growth index among the 22 Asia-pacific countries. We have been trailing by a negative real wage growth index of - 5.29 per cent that is also one of the lowest in the world. What is surprising is that despite the low wage growth we have a productivity growth of 5.8 per cent which reflects a high labour productivity almost close to China that has a 6 per cent productivity growth rate. The real wage is going to face a harder hit in the pandemic given reduced wages, working hours, loss of jobs,  shut down of various enterprises, and an overall reduction in investment in the span of one and a half years. In the light of the circumstances, we should not view the stimulus package as a mere financial aid, rather as a package of multiple services and tools for reviving and reopening the SMEs, MSMEs and CMSMEs instilling business-related soft and managerial skills, and retaining employees who lost jobs. In other words, the stimulus packages should include active labour market policies such as skills development for better productivity, some sort of employment protection legislation, some form of job search assistance, unemployment benefits, and some form of minimum wages possibly in established and robust businesses who absorbed the hit of pandemic well.

Financial literacy is one of the important tools to be included in the stimulus packages as a default. There needs to be a financial literacy programme designed to be distributed coupled with the stimulus packages for supporting the optimum use of credits and working capital by the enterprises. This programme can train the employees and the owners running the SMEs, MSMEs and CMSMEs in availing digital credit, mobile financial services as well as reaping the benefits of agent banking. As much as Covid-19 disrupted markets, it also opened opportunities for online-based businesses. Branding and enhanced market penetration are crucial in this regard. Through proper branding and the right digital literacy for use of social media, and an effective marketing strategy, small and micro-businesses of the rural area can be connected to the higher stage or value chain in markets of Dhaka through digital market spaces. This will create increased wages and employment opportunities. To sum it up, the stimulus package needs to have the tools so that the micro, small and cottage enterprises can face the labour market challenges.

Another thing that must be kept in mind is that a vast number of jobs that have been lost during the pandemic and the vacancies for new jobs are shrinking and less likely to increase soon. These lost jobs are not coming back anytime soon if active labour market programmes are not designed and incorporated coupled with the expansionary fiscal measures such as stimulus packages for enterprises. It is going to be difficult to retrieve the lost jobs or even find new employment opportunities for a lot of people. Many might get discouraged in the process of searching for jobs and stop searching for jobs after some time due to frustration. This will create pressure in the labour force participation rate as discouraged workers will pull them out from the labour market participation and become inactive. Those who remain inactive in the labour market for a longer period (one-two years) will eventually fall into the trap of long-term unemployment crisis. Hence, employment and social security benefits should be incorporated into the stimulus packages to protect the increased labour force participation rate. Furthermore, the stimulus package should include subsidies for SMEs that retain their employees and re-employ the people they fired. Policy enforcement such as easy credit access without much legislation and reduced tax incentives for enterprises who retain employment and re-employ people who lost jobs can be a big push factor to generate wages and employment in the small, micro, and cottage industry.

Another crucial policy challenge needs to be taken under serious consideration. Urban-to-rural migration has increased drastically in the pandemic. People are leaving the cities due to job losses and the inability to meet the daily expenditure of life. It is hard to tell when will they come back. So, this is a very good time to focus on the rural economy and decentralised development. The stimulus package should prioritise rural SMEs, MSMEs, CSMEs, and agriculture-based businesses. We can use this urban-to-rural migration as an opportunity to dislocate our economic concentration from Dhaka and decentralise our economic activities, employment opportunities and growth.

One last thing that needs to be mentioned is that there are limited scopes and huge challenges of integrating labour rights and decent work in the informal sector. Labour market institutions such as minimum wage and social security are also nonexistent in the small, micro and cottage industry. This is an opportunity to enforce a few labour market regulations to this sector, at least to those that are doing comparatively well. By enforcing these regulations these small and micro enterprises will get business registrations, some legal documents, and achieve some sort of compliances which in turn will enable them to get financial access and credit supply from the banks easily as the economic shock continues and arrives next time. By promoting decent work agendas like minimum wage, occupational safety etc, and incorporating them at the policy frontier to make the stimulus package more comprehensive we can pave the way with some background work for formalising the informal sector that will eventually help the government in the long run to earn revenue from this big sector. To conclude, I must say stimulus packages with only supply side tools ( supply of capital) and without measures for job creation and wage generation can only solve half of the problem of economic crisis leaving aggregate demand side and increased consumption for enhanced growth untouched. 

Mohammad Nazmul Avi Hossain, Development Professional Working for the International Labour Organization and PhD researcher in Economics, Universite Libre De Bruxelles.

[email protected]

[This is a personal analysis and opinion of the author, does not represent any organization's perspective.]

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