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COVID-19 and economic crisis: Need for measures with social face

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The health crisis arising out of the coronavirus disease (COVID-19) is now causing an economic crisis. As the epicentre of the health crisis moved from China to Europe and measures to fight the crisis are being adopted, their impact is being felt on the economic front, and the global economy is now bracing for another crisis. In recent days, several financial institutions, e.g., Morgan Stanley, Bank America and Deutsche Bank, have forecast global recession for 2020.

Restrictions on travel and gatherings, cancellation of airlineflights and holidays, and restrictions on public life are adversely affecting a number of service activities, e.g., hotel and restaurant, travel, trade, etc.and hence, on the demand for goods and services. Thus, the global economy is in a demand-deficient recession which is going to jeopardise jobs and create an adverse effect on the lives and livelihoods of people. Unemployment is a natural outcome.

The International Labour Organisation (ILO) has projected that open unemployment may rise by 25 million (in the "high" scenario). Compared to the total unemployment figure of 188 million in 2019, this represents about 13 per cent increase. Even in the "mid" scenario of the ILO, unemployment is likely to increase by about 13 million.

Reports of lay-offs are already coming from countries like the USA. One projection for that country mentions that the rate of unemployment is set to rise from the current level of 3.5 per cent to 6 per cent by 2021 ("Storm of layoffs is brewing in U.S." in The New York Times International Edition, March 19, 2020).

Labour markets may adjust in other ways too, e.g., through short time work (meaning, in effect, sharing of the reduced amount of work that is available among existing workers), wage reduction, etc. 

When the virus hit China, it was thought that Bangladesh will face disruption in its supply chain which, in turn, may affect production in different sectors. But the situation changed rapidly. Now the major markets of Bangladesh's export goods, viz., USA and European countries are facing recession due to shrinking demand.

Take the case of ready-made garments for example. During the initial weeks of the crisis, there were contradictory reports in the media on whether purchase orders for new supply would be cancelled or postponed. However, with the crisis deepening and countries going into lockdown mode, there is a real danger of demand recession for the products of RMG (ready-made garments) industry of Bangladesh. Likewise, the demand for other export items like jute and jute goods may also falter.

During this recession, demand deficiency will not remain confined to export-oriented goods alone. Measures taken to fight the health crisis are having a dampening effect on a wide range of domestic economic activities including trade, transport, education, etc. Even production in manufacturing industries may be affected if factories are required to close down.

How is the labour market going to be affected? In organised sector activities like the RMG industry, lay-offs may result if purchase orders are cancelled and new orders are not received. Will they show up in higher unemployment rates as in developed countries like the US? Most likely not. That is simply because in the absence of unemployment benefits, the retrenched workers will not be able to remain unemployed for too long (and anyway, surveys are not carried out every year). They will have to do something in order to eke out a living - probably at lower levels of sustenance.

In situations where lay-offs are caused only (or primarily) by deficiency in external demand, the tendency usually is for the retrenched workers to crowd into the informal sector trade and service-type activities. But the present economic downturn is going to be different for Bangladesh in that the domestic economy is also being affected. So, there will not be many alternatives for those dependent on wage labour and petty self-employment. In fact, those working in the domestic informal sector are also facing difficulties in maintaining their livelihoods.

A number of countries have already announced measures to fight the economic crisis. Both monetary and fiscal policies are being used in order to support businesses and strengthen social protection. In US, Federal Reserve has lowered the rate of interest to nearly zero and has announced measures of quantitative easing (QE). Simultaneously, the government has announced a fiscal package to provide support to businesses that are in danger of closing down and to strengthen social protection. The basic objectives of this package are to protect jobs and to provide social protection to those who are going to be laid off. At this moment, the country's government is discussing a huge expansion of the fiscal package.

UK has also announced a financial package to provide support to various sectors - mainly in the form of loans. The declared objective is to support the economy, businesses, incomes and jobs. What is noteworthy is that in the announcement of measures by both UK and US, jobs and social protection are explicitly mentioned. So, they appear to have a social face.

What has the Government of Bangladesh done? Not much is seen up to now, except for the announcement by Bangladesh Bank of a few "policy support" measures to ease exports and imports. What these would imply in reality remains to be seen. Meanwhile, BGMEA (Bangladesh Garment Manufacturers and Exporters Association) has already come up with a case for support from the government, although the precise nature of the support sought has not been elaborated.

It may be recalled that during the global economic crisis of 2008, fiscal stimulus was provided to the RMG industry with the objective of preventing a major decline in exports. The assumption perhaps was that if the flow exports could be maintained, jobs in the industry would also be protected. Whether that expectation was met is a question that was never fully evaluated.

Given the real possibility of a decline in both export and domestic demand, it is necessary to prepare a package of fiscal and monetary stimulus to support economic activities. Furthermore, given the timing of the crisis (especially, the advent of Ramadan and Eid), it would be useful to provide support to industries. However, such support must be linked to the prevention of lay-offs and smooth payment of wages to workers during this critical period. A strong social face with transparency, accountability and independent evaluation built into the measures is needed.

What about workers outside the organised sectors mentioned above? Although there is a plethora of social protection measures in the country, it would be a challenge to find a programme that can work as an automatic stabiliser and can be expanded to provide income support to such workers who may face lay-off. Many of the workers employed in the informal segment of the labour market and many who are self-employed (including those in the gig economy) are finding their sources of livelihoods jeopardised by the present crisis. Some innovation would be needed to develop a scheme to replace their incomes, at least temporarily and partially. If income support cannot be provided, the possibility of support in kind, for example, in the form of food grains could be considered. What is important is to work out a comprehensive package of measures that could simultaneously provide stimulus to economic activities and protection to those in need. Action with social face is urgently required.

Rizwanul Islam, an economist, is former Special Adviser, Employment Sector, International Labour Office, Geneva

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