The Financial Express

The shape of economic recovery

| Updated: November 22, 2020 17:01:50

The shape of economic recovery

The global economy seems to be coming out of the deep recession induced by the COVID-19 pandemic. Major developed countries, e.g., USA, UK, France and Germany attained positive GDP growth in the third quarter of this year compared to the previous quarter. This is good news, and has naturally raised hopes for a strong recovery of the economy of Bangladesh as well because a sizeable part of it is now linked to the global economy. However, before one starts to rejoice, it would be prudent to pause and take a more careful look at what is happening. And in that context, several questions need to be asked.

First, what is happening on the growth front and what do the figures that are floating around mean? Second, is there a variation in the extent of recovery between different segments of the economy? Third, is recovery going to be sustained - especially given the renewed surge of the virus and reimposition of restrictions in various countries? Let us first look at some growth figures.

One figure that has recently made headlines is the third quarter GDP growth of 33.1 per cent in USA  which was regarded by many as all-time high. One needs to note a few things in this regard. First, this figure represents "percentage change from the previous quarter". And during the previous quarter, i.e., during the second quarter, GDP had declined by 31.4 per cent. One should also remember that during the first quarter, GDP registered a negative growth of 5 per cent. Taking these three figures together, one can see that at the end of the third quarter of this year, the US economy was still below the level of the beginning of the year. My calculations based on data available from the Bureau of Economic Analysis show that year-on-year growth during the third quarter was -2.9 per cent. Hence, it would be misleading to say that the US economy is attaining a V-shaped recovery.

UK's GDP registered a record 15.5 per cent growth during the third quarter of 2020 - giving rise to hopes of a V-shaped recovery. But again, one has to note that the economy had contracted by 2.5 per cent and 19.8 per cent respectively during the first and second quarters - thus implying that even after the sharp rise in the third quarter, the economy has still not attained the level of the last quarter of 2019. Growth attained during the third quarter was not sufficient to make up for the contraction that took place in the first half of the year.

A look at what has been happening on the employment side may also be sobering. In the USA, although the addition of 4.8 million jobs in June created headlines, that figure progressively came down to 1.8 million in July, 1.6 million in August and to 661,000 in September. The rate of unemployment in September stood at 7.9 per cent -- more than twice the rate of February (3.5 per cent). A paper by Brookings Institution concluded: "If job growth continues to slow, it will take years to bring the economy back to its level of employment before the COVID recession. Job growth certainly does not look like a "V" anymore". It goes on to say: "The flashy GDP growth number for the third quarter is more a statistical quirk and reflection of the sharp dive and subsequent bounce …, not an indication of current momentum". (Jay Shambaugh: Don't let flashy 3rd quarter GDP growth fool you, the economy is still in a big hole. Brookings, 26 October 2020).

On employment, the UK's experience is different from that of the USA. Thanks to the nature of the economic support provided by the government; the government paying 80 per cent of the salaries of furloughed employees and of the earnings of the self-employed workers. As a result, unemployment did not shoot up like in the USA. However, it started to rise in the third quarter when the rate went up to 4.5 per cent (from 3.9 per cent during the first two quarters). Clearly, recovery in the economy was not able to prevent a rise in unemployment.

Rather than V-shaped recovery, there is now talk about K-shaped recovery - at least in USA - because while some sectors like retail trade, finance, technology-based services etc have started growing, others like travel and tourism, food service in restaurants, entertainment etc are not growing at similar rates. Some going up and others going down created the idea of K.

The above description of the shape of economic recovery may be relevant for other countries as well - both developed and developing. Variation in the speed of recovery in the different segments of the economy and the labour market can also accentuate economic inequality. In that context, it is of interest to look at what is happening in Bangladesh.

As data on GDP growth or sectoral output growth in Bangladesh are not available on a quarterly basis, one has to look at alternative indicators in order to be able to say something on what kind of recovery is taking place. The record of implementation of the government's economic recovery programme can provide some idea about which segments are doing better and which are lagging behind.  

The only component of the government's recovery support that can boast of full delivery is the amount earmarked for export-oriented industries. For other components, the delivery rate varies substantially -- far higher for large-scale enterprises compared to the others. Clearly, it has been easier for the bigger ones to access the support funds compared to the smaller enterprises. What is a matter of concern is that very little disbursement has taken place out of the funds allocated for very small enterprises, returning migrants and the unemployed youth. 

From the point of view of inclusive recovery, the above experience does not generate much confidence. The component for the export-oriented industries may have helped protect some jobs in the RMG sector. But large swaths in the informal economy must have remained outside the coverage of the recovery package, and hence, many of the jobs lost there may not have returned.

A few characteristics of the employed labour force may be of relevance as to how economic recovery is distributed. First, 57.7 per cent of the employed labour force are either illiterate or have only primary education (according to 2016-17 data). This large segment may find it difficult to adjust to the pandemic-induced crisis and to the new situation created by it, e.g., on-line business, working from home etc. For those without any education or with only primary education, it is not easy to adjust to such changes.

An ILO report points out that in low-income and lower-middle income countries, there is potential for home-based work for only 13  per cent of the employed people. The occupations in which this is possible include managers, professionals, technicians and associated professionals, clerical support, and skilled workers in agriculture. My estimate based on this information and the occupational composition of employment in Bangladesh shows that work from home is possible for about ten per cent of total employment and 18 per cent of urban employment. While these figures are indicative, they show that only a small proportion of workers can benefit from the potential for home-based work. 

Other features of the labour market of Bangladesh, e.g., a very high proportion in the informal sector (about 85 per cent), preponderance of informal employment in low-skilled jobs, and dependence on casual work on a daily or weekly basis (about 42 per cent), show that unless micro and very small enterprises, especially those in the informal sector recover fully, a large proportion of workers would not be in a position to benefit from the ongoing economic recovery. There is thus a real danger of recovery taking K shape. 

Finally, there is also the issue of sustainability of the recovery that has started. This question was already being raised in the USA in view of the slowdown in job growth because with a weak labour market, rise in incomes and hence, in consumption and production cannot be sustained. On top of that there are the second and third waves of the spread of COVID-19 prompting various countries to re-impose restrictions on public life and economic activities. As these developments are still playing out, it is too early to say much about their impact. But it is quite possible that the nascent recovery attained during the third quarter may be threatened - thus giving way to a W-shaped instead of a V-shaped recovery. What that would imply for the recovery of the economy of Bangladesh would need to be watched carefully. So, in addition to the possibility of recovery taking a K shape, there is a danger of recovery itself faltering.


Dr Rizwanul Islam, an economist, is former Special Adviser, Employment Sector, International Labour Office, Geneva. [email protected]

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