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The economic outlook for the Bangladesh and other economies around the world is now being driven by the Covid-19 pandemic. The economic contraction caused by the pandemic is quite staggering. The sobering fact is that we all have to live under the necessary conditions of social distancing restrictions and other containment measure until the pandemic is brought under control. This situation will continue until an effective vaccine or treatment becomes available. Therefore, global economic uncertainties caused by the pandemic will continue to constrain global economic growth.
The latest International Monetary Fund (IMF) quarterly report has indicated that global economic growth would experience a contraction by 4.9 per cent in 2020 and the recovery in 2021 would be slower. The IMF further warned that a cumulative hit to the global economy would be of US$12 trillion over 2020-2021. The IMF further indicated that for the first time ever nearly all regions of the world are expected to experience negative growth in 2020.
This is truly a global crisis which translates into a risk of slowing down or even reversing the process of poverty reduction that has been witnessed in recent years in countries like Bangladesh. It further noted that the steep decline in economic activity had caused catastrophic hit to global labour market.
More alarmingly it is estimated that the number of people currently living with acute hunger could double by the end of 2020 raising the fear that the Covid-19 pandemic could be turning into a hunger epidemic. In a recent report by the UNICEF indicates that the lives and future of children across South Asia of which Bangladesh is a part, are being torn apart. The report further adds that due to the pandemic crisis, the number of children in poverty could rise by 120 million to more than 360 million within six months in the region
The impact of the crisis, in particular is acutely felt by low skilled workers who do not have the option to work from home. According to the Financial Express of August, 11, Bangladeshi RMG workers lost US$500 million in wages in three months from March to June this year. The paper further pointed out the take home monthly salary of a RMG worker is US$112 a month. These figures clearly point to an increased financial distress caused by the pandemic in an already awfully existing financial distress these RMG workers live even in normal circumstances.
Furthermore, according to the Bangladesh Bureau of Statistics (BBS), Bangladesh GDP grew by 5.24 percent during 2019-20 raising the per capita income by US$155 to US$2,064. This growth rate has been achieved when the global economy is contracting, in particular the whole developed world.
It is now widely believed that the pandemic is contributing to further widening of income inequality and increased levels of poverty in Bangladesh. The benefits of growth do no look like shared in any form or shape by the poor and very low wage earners like RMG workers even in this distressing time. According to the Bangladesh Institute of Development Studies 16.4 million have joined as new poor in the country due to Covid-19.
It also widely accepted view that all the growth of GDP - all the increases in national income, have accrued to the wealthiest 5.0 per cent of the population in Bangladesh, the remaining 95.0 per cent of the population hardly benefitted at all, in many cases their share has been shrinking. By 2015, the richest 5.0 per cent of the population were 121 times richer than the poorest 5.0 per cent in Bangladesh. Now the Covid-19 pandemic likely to further widen that gap.
According the International Labour Organisation (ILO), close to 80 per cent of about 2 billion workers in the informal sector have been affected. This will negatively impact low-income households leading to further significantly widening income inequality. The pandemic has transformed a vast segment of economies around the world where millions face the prospect of a permanent job loss and that will force them seek employment in new industries or in new occupations.
Also, sharp increases in unemployment will lead to a sizeable decline in the participation rate largely because of the workers who recently lost their jobs may not be actively looking for work as is reflected in a very large number of recently unemployed workers in the major urban centres in Bangladesh are trekking back to their village homes. Therefore, the effective rate of unemployment is much higher than the published data indicate.
Countries like Bangladesh also have been shaken by plummeting remittances which will severely impact on a large of number rural households who are already taking on increased numbers of local urban jobless people trekking back to rural areas. According to another Bangladesh daily (August, 13), 70 per cent of returnee migrant workers are currently unemployed and that would further add to the financial stress felt by rural households.
It is estimated that migrant remittances have declined by a quarter during the pandemic globally. Migrant remittances constitute about 9 per cent of Bangladesh GDP. Also trade volumes have been contracting with consequent flow on effects from production to the transport sector. Bangladesh as a highly trade dependent country, the current disruptions to the existing international trade patters will negatively impact the country's growth prospects. This viral pandemic will heavily weigh on world trade, investment and growth. According to the WTO, merchandise trade is set decline by 13 to 32 per cent in 2020 due to the pandemic.
The important policy issues resulting from the pandemic crisis is now to contain the virus and how best to limit the economic fallout. Most governments have now mostly abandoned, decades long held belief in fiscal prudence or spending restraints. This neo-liberal economic doctrinaire view which has been in dominance since the early 1980s, but blossomed in the 1990s.But the wheels began to fall off the neo-liberal paradigm when interest rates dipped to zero or even below zero in the wake of the Global Financial Crisis (GFC) of 2007-08.
In effect, unprecedented fiscal stimulus measures are being undertaken to mitigate the economic and social effects of the pandemic. Such a policy reversal was guided by Keynesian ideas which were the dominant policy tools for macroeconomic management from the 1940s through to the early 1970s. The current fiscal stimulus is largely directed at households and businesses to stimulate private expenditure but public demand is also expected to grow strongly in line with increased expenditure on health care necessitated by the pandemic.
The Keynesian paradigm is also backed by the modern monetary theorists who argue that a government with its own central bank (by implication also with a printing press) has the ability to create (i.e. print) and spend as much money as it wants. They also like Keynes argue government spending and taxation are the best tools to manage the economy. But they diverge from Keynes on the issue of balancing the budget over the longer term. They think that is not necessary. No wonder, central banks are aggressively monetising public debt and there is an expectation central banks will continue to do so as governments can not recoup tax revenue foregone due to the pandemic.
But even before the Covid-19 pandemic, the world economy was reeling from the after-effects of the GFC, the levels of debt were dangerously building up. Now according to the International Monetary Fund (IMF) global public debt alone, not to speak of corporate and household debt, is forecast to exceed 100 per cent of Gross Domestic Product (GDP) this year, up by 20 per cent relative to the previous year, 2019. Now the debate is ongoing regarding the consequences of the current fiscal expansion and public debt monetisation within the dominant mainstream thinking.
The current mainstream economic thinking has its roots in the 1980 and went into full operational mode in the 1990s. The paradigm that has taken hold since then is popularly known as "neo-liberalism' also described as the ''Washington Consensus" which has been widely doled out to the developing countries over the last three decades or so to undertake structural reform to be eligible for IMF/World Bank loans.
This dominant paradigm dictates that governments only intervene in abnormal times or more precisely to external shocks like the GFC or the current pandemic. But history tells us economic crises are not truly abnormal, even the current economic crisis can not be solely attributed to the pandemic. The current economic crisis has been in the making for quite some time caused by economic austerity measures since 2010, the virus just exacerbated that crisis, more precisely worked as a catalyst.
It is quite well recognised that economic crises are an inherent feature of market oriented economies or capitalism. Yet the dominant paradigm survived and lauded for much success in enabling millions to escape poverty. But in the shadow of that success also the system engendered persistent income and wealth inequality which resulted in the concentration of vast wealth in the hands of select few individuals, insecure employment, market concentration by oligopolists, rising corporate and household debt to mention just some major failures.
The mainstream narrative's focus is only on the 'external shock' that causes an economic crisis, nothing is mentioned about the structure and functioning of the economy. The increasing dominance of the financial sector discouraged investment in the real economy. The continuous flow of money out of the real economy in the form of interest and rent payments into the financial sector further adds to increased dominance of the sector. More and more efforts are directed at economic rent seeking activities rather than activities that help generating profits and wages. Keeping inflation in check has become the economic mantra which relegated issues of social justice and equity to the background.
More ominously, many both in developed and developing countries hold that the economic and political capture, corruption, associated erosion of democratic and accountable government quite often lead to policy making that goes against public interest. Such a policy orientation only created an enabling environment for the wealthy to be able to concentrate ever-more wealth in their hands to the exclusion of the masses.
The current economic crisis is more than a viral pandemic induced crisis and attempts to fit it into the mainstream narrative of crises caused by an external shock and to deal it with counter cyclical economic measures unlikely to resolve the crisis except giving it a band aid. In fact, the continuation of current policy framework will only lead to the secular stagnation combining low growth, low inflation and low interest rates.
Many analysts now believe a post Covid-19 world will be poorer and disorderly. More alarmingly they also think that the crisis will engender a time of instability comparable to the Great Depression of 1929-33 leading to the World War II. Such predicted heightened uncertainty will further lead to declining investment, rising unemployment, falling prices (deflation) and growing income inequality. The problem is systemic requiring reform of the system itself which has been under the spell of neo-liberal gurus over the last four decades.
The pandemic-induced economic and social crisis provides a unique opportunity to fundamentally rethink how macroeconomic policy is developed in prioritising economic and social objectives. These policies should be geared to provide financial security to the people which in turn will stimulate private spending and economic growth. In this context the need for a universal basic income has become essential part of that policy reorientation. Increased investment is needed for skill development and education to reap the benefits from new sources of growth like innovation and cutting edge technologies. A transition to the post Covid-19 world will, therefore, require reorganisation of public institutions and economic governance with different approaches to taxation, public debt, monetary policy and managing inflation. In these uncertain times people also need to rethink of new ways as to how best they can live and manage their lives in a sustainable way.