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Which recovery path may we pursue?

Rashed Al Mahmud Titumir | Published: 00:02, Oct 15,2020 | Updated: 00:54, Oct 15,2020

 
 

THE COVID-19 pandemic has posed unprecedented challenges throwing the economy off-guard at a time when the country is stepping onto its 50th year of independence. There has evidently been a reversal of the gains made in terms of socio-economic progress. In order to deal with the current crisis, many countries around the world have adopted various clustered and integrated plans on an urgent basis to cater to the exasperating needs of healthcare and fiscal support. Nevertheless, there is also a requirement to mitigate, or at least diminish, the fallouts from exposure to medium and long-term shocks.

The contraction caused by the novel coronavirus infection is different from other economic recessions. The economic downturn is usually caused by a massive collapse in demand and supply. The current shrinkage has been caused by the government shutting down all economic activities to restrict movement and limit the contagion. The government, therefore has to take the lead in dealing with the consequences of such measures adeptly. There is no precedent in history for the government halting all non-essential economic activities. Hence, conventional solutions will not work.

This has been further exacerbated by the tendency of most of the consumers to spend less due to self-imposed restrictions in movements, together with intrinsic nature of consumer thrift. A fall in individuals’ spending also constrains firms to produce, on top of the decrease in production due to lower labour hours for reduction and closure of formal and informal enterprises and interruptions in workplaces and markets.

Analysing the path to recovery, however, is more important than analysing the recovery of the economy itself. In this regard, two important questions need to be explored. Firstly, how the intended recovery will be carried out and secondly, what kind of recovery will it be? Although there is much speculation on the process of the recovery, the analysis of the type or nature of the recovery trajectory has remained a less focused issue. Here, an attempt has been made to simultaneously scrutinise the economic recovery process and the nature of recovery.

 

Active restraint v active inaction

RECOVERY is deemed to be following either a U, V or W shape. Optimists project a rapid and quick recovery to the previous growth path, resembling a V-shaped curve. Nevertheless, the nature of the recovery relies on the process by which the recovery will be carried out. The determinants of recovery are set by the policies adopted by the government. Two different routes of recovery will be visible if the government adopts active restraint measures or if it ordains active inaction or business as usual measures in policy.

In the framework of active restraint, four major conditions are assumed. These include: presence of public goods provision, redistributive policies and actions, macro-financial interventions and structural policy reforms. If these conditions are met, the resources and economic benefits and opportunities will reach all citizens without being concentrated in the hands of a few groups. As a result, the recovery trajectory will not be discriminatory but will lead to a relatively low inequality equilibrium. But if these four conditions are not met in the government’s recovery policy, the economy will traverse on a path of extreme discriminatory recovery and the recovery trajectory will gradually take the form of the English letter ‘K’.

K-shaped recovery path indicates that wealth is concentrated in the hands of some of the upper classes and on the contrary the poverty incidence continues to increase. The business-as-usual policies act as a form of active inaction which accelerates a rise in inequality, and hence polarisation, whilst a paradigm shift by design could act as an active restraint that curbs the degree of aggravation of inequality and polarisation (Figure 1). Some short-term measures can be taken to meet the four conditions of active restraint measures in response to the recession. As an immediate response, the main focus should be on investing in the healthcare sector, universal basic income, creating jobs, investing in green infrastructure, regeneration of rural economy, and protecting jobs in both formal and informal sectors. In addition, tax reduction can be ordained for sectors like travel, tourism, transportation, restaurant, retail, etc to boost domestic consumption and create employment. When active restraint measures are taken, the rate of pauperisation and the rate of concentration of wealth significantly decrease leading to relatively low wealth concentration and less polarised society (Figure 1). In contrast, the rate of pauperisation and the rate of concentration of wealth in few upper classes increase if the policies are taken following active inaction or business as usual measures, which amplifies inequality, differentiation and polarisation (Figure 1).

Figure 1: ‘Active restraint’ versus ‘Active inaction’

 

 

Implications for Bangladesh

THE economy has been facing numerous vulnerabilities since before the onset of the pandemic. Other than remittance inflows, all macroeconomic indicators had been performing poorly. COVID-19 has aggravated the pre-existing fragilities in the economy. The crisis has pointed fingers at the failure of the state to provide universal basic needs such as food, clothing, shelter, education, medical care, recreation, etc to its citizens. A large number of people are now hungry, under-paid and out of formal social security programmes. Since most of the people are employed in the informal sector, they are deprived of minimum wage and other benefits secured by the labour law. The programmes under social safety nets are very inadequate, in addition to being corrupted. The public sector provisions have been neglected and the allocation in these sectors is decreasing steadily. The pandemic has also exposed the weakness of the real sectors such as agriculture, industry and services in the economy. What the magnitude and nature of the impact of the COVID-19 pandemic will be at the end is still unknown; however, an attempt has been made to analyse the already visible impacts on people’s life and livelihoods.

 

Pauperisation

THE poverty rate, which had decreased in recent years, is exhibiting an upward trend for the first time since 1992. It may increase to 43.5 per cent if two million migrant workers return home due to income and job loss. A major portion of the middle class have suffered atypical loss and have become fragmented into a new poor category as they have not received a basic income grant.

Poverty has gone beyond a straightforward headcount ratio during the pandemic, indicating the differential impacts on groups without entitlements — the new poor, small businesses, female-headed enterprises — in terms of income erosion, unemployment, food security and nutrition. The vulnerable non-poor population experienced an income loss of 42 per cent in February–June 2020. Around 17.24 per cent was recorded unemployed in June 2020, with female salaried job-holders being affected the most. The fallout is, however, not limited to the informal sector or rural areas. Rights are not protected even in the formal sector, as employees face income erosion and have been sent on furlough without any subsequent financial support from the government. The pauperisation process is likely to accelerate due to natural disasters, such as cyclone Amphan and the decade’s worst flood, which have left tens of thousands of people stranded and despondent in the middle of the pandemic.

 

Differentiation

DIFFERENTIATION is turning up through several avenues, including policy-induced impacts on ‘vertical inequality’— the differences between individuals or households and systemic reasons of ‘horizontal inequality’— the difference between groups with similar origin or cognitive ability that may arise due to culturally formed disparities between them. In terms of policy-induced impacts, the informal sector, comprising 87 per cent of the total employed population, remains outside the jurisdiction of labour laws, which means workers’ employment in the sector is precarious and characterised by lower than minimum wages, unfair dismissals and extreme vulnerability to joblessness.

Social protection provisions are marred by problems of fragmentation, errors of inclusion and political patronage-based targeting. A total of 125 programmes, under 25 ministries, is being financed through the current budget that has allocated Tk 955.74 billion, which is 3.01 per cent of the GDP. On top of that, the formal mechanism for sharing information and communicating among the implementing ministries/divisions are quite lengthy and complicated. Moreover, some programmes are quite similar but initiated differently. For example, allowance for the financially insolvent people with disabilities and stipend for disabled students are different schemes. Around 30 per cent of the social security budget is allocated for pensions for retired government employees, whilst there are also 85 small programmes that each take up only 0.5 per cent of the budget. If the emerging new poor is included, the intended number of beneficiaries for safety net programmes is very few. Around eight million people receive different allowances, which has been expanded to 9.6 million in the current financial year. A lack of inclusive social safety nets has given rise to shortcomings in constructing the list of recipients, allowing a room for ineffective management of resources, extortion and abuse of power.

Systemic or inter-locking inequality referring to discrimination against certain groups based on gender or race, has resulted in more adverse impact on the marginalised who are without power and unable to take collective action. For example, women employed in the ready-made garments sector lack collective bargaining powers with their employers, and face threats of job loss due to an absence of unions to uphold their rights. Farmers, too, face the drawback of not having associations or cooperatives in bargaining with intermediaries who exercise illicit power in setting prices. Private hospitals too were accused of treatment refusals and charging exorbitantly high for the treatment of COVID-19 patients, making their services unaffordable for and inaccessible to the bulk of the population.

 

Polarisation: the K curve

INCREASING income inequality due to income concentration in the top 10 per cent at the expense of the bottom 40 per cent of the population was occurring prior to the pandemic, which have accelerated polarisation between the classes. The income shares of the middle 50 per cent had changed negligibly. The shares of the bottom 40 per cent decreased by 28.40 per cent between 1985 and 2016, whilst that acquired by the top 10 per cent rose by 21.30 per cent, along with a 17.3 per cent increase in ultra-wealthy individuals. This has been evidenced by a spurt in capital flight (USD 5.9 billion in 2015), putting Bangladesh in second highest position in South Asia.

Inequality is expected to soon cross the fault line of 0.5 in the Gini coefficient. The breaking down of the middle class into the new poor is also likely to worsen the Palma ratio, the ratio between the share of the richest 10 per cent and that of the poorest 40 per cent. The capacity to adapt to the so-called ‘new normal’ has favoured the capitalists, who can utilise new avenues of profit during a contraction in the economy, further heightening returns to capital vis-a-vis labour and resulting in a greater concentration of wealth. Physically disjointed sectors such as e-commerce avenues for groceries and online pharmacies experienced a sharp rise in orders as more consumers opted for zero-contact deliveries, decreasing the sales of local vendors. Farmers were compelled to adopt distress sales of their produce as transport services were halted. They incurred losses of more than Tk 560 billion in one and half a month only.

Figure 2: The Process of Polarisation

 

There are thus various reasons for recovery to assume a K-shaped path characterised by increased polarisation, as income groups diverge due to economic fallouts (Figure 2). Conventional budgetary measures to address the new poor may prove to be ineffectual. Simultaneously, placing more liquidity into the hands of people is unlikely to ensure that support reaches the last individual, thereby creating scope for greater inequality. This was illustrated by a reduction in consumption as a coping mechanism for households, and a decline in factory activity. Manufacturing activity declined 25.57 per cent in April compared to the previous year and wage rate in this sector also reduced to 5.18 per cent in July from 5.57 per cent in January this year, according to the Bangladesh Bureau of Statistics.

 

Power, politics and clientelism

POWER relations are assessed using forms and sources of power accorded to each stakeholder to manifest their relative influence over decision-making. The decision-making in this regard is the state-provided stimulus package — how power relations influenced the preferences in allocation. Each of the stakeholders ideally has different positions of power ie from above, lateral or from below. Poor and low-income households generally are characterised as having power from below, and this group lacks most forms of power. On the other hand, stakeholders such as large industries or clientelist groups hold more lateral sources of power, whilst public service officials and the government may exercise more power from above.

Stimulus packages were designed for groups with political leverage, or the powerful elites, and often did not reach the employees at the lower tiers. Around Tk 300 billion worth of financial stimulus was allocated to large industries and another Tk 50 billion was intended for the apparel sector, yet there were widespread demonstrations by apparel workers demanding their overdue salaries. Several labour-intensive, small-medium-cottage industries are outside the mainstream financial sector. As a result, these firms lack access to credit to keep their businesses afloat, which is more crucial during a recession. Cash assistance programmes has been highly criticised for widespread corruption as 82 per cent of beneficiaries held political alliances.

The skewed focus of the stimulus packages serves as an example of how the power dynamics mediate differentiation and eventually polarisation. The combination of collaborative and infrastructural power of clientelist groups allows them to influence decision-making to a large extent. At the same time, a shortcoming of power networked at the grassroots level of, for example, farmers, renders them vulnerable to interventions by intermediaries.

 

Agenda for recovery: seven principles and seven programmes

THERE have been different crises in the world at different points in time and different approaches have been taken to recover from those crises. Not all approaches are same and they vary according to the context. The last major crisis was in 2008–2009, and a ‘New Consensus’ policy framework emerged as a way out of that financial crisis. According to the new consensus, a lot of liquidity was provided against bonds as well as austerity policy measures were adopted. But while large corporations benefited immensely, employment did not increase and risks and vulnerabilities in financial sector persisted. Since the money did not go to the people but to the corporations, the policy framework adopted in the line of new consensus failed and inequality increased more rapidly. In light of the past experience, in order to recover from the current recession, the cash assistance must reach the last mile directly. Accordingly, seven principles for overcoming the crisis are listed here and if these are fulfilled, a relatively non-discriminatory recovery can be possible. First, the cash assistance must go into the pockets of every citizen regardless of current income, in the form of universal basic income. Second, provisions for universal public goods such as education, health and social security should be made adequate. Third, policies must be taken for the majority instead of considering only the interests of a few, and in that regard, cottage, micro, small and medium enterprises, which employ most of the people, need to be brought under financial incentives with emphasis. Fourth, diversification of products and their markets is crucial to augment competitiveness. Fifth, the production system must be green and clean in order to ensure sustainable and green development. Sixth, new investment and new employment must be created through fiscal policy rather than relying solely on monetary policy. Seventh, programmes and policies need to be mission-oriented and public spending should be made to create multiplier effect on the economy, which will provide public goods and internalise externalities.

Based on these principles, an extensive and systematic reconstruction of the economy is needed to address the damage caused by the COVID-19 pandemic and pre-existing structural problems. Recovering from a crisis of this magnitude, however, requires long-term prudential planning that can be carried out following the seven-point recovery programmes outlined here.

 

Universal basic income

A SCHEME with provision to provide universal basic income support to people in need at the time of COVID-19 pandemic is a mandatory immediate response. Universal basic income allowance should be introduced to support the workers who have lost their jobs or have faced a significant reduction in earnings. Workers with income below USD 1.90 (Tk 162) per day should be eligible for a universal basic income allowance for a steady and decent standard of living. The broad aim of the scheme is to help the new poor and vulnerable people above the poverty line in this pandemic. To avail the benefit, a person has to be a minimum of 15 years old. The scheme should be for the 16–59 age group and specifically for those who may be flung under the poverty line because of the economic consequences of the pandemic.

 

Universal health, education and social security programme

FAULTS in the health sector have been exposed by the COVID-19 outbreak as hospitals are overwhelmed with patients. Out of pocket expenditure in the health sector is 67 per cent and remains persistently high. Only 15.44 per cent receives treatment from qualified doctors. Health care thus requires a radical change, the necessity of which has been made more evident by the pandemic. Universal healthcare service should be promoted to ensure accessibility and affordability, with reforms beginning with primary healthcare. Health cards against the national identity cards may ensure access to universal healthcare irrespective of income level.

COVID-19 has adversely impacted the education of an estimated fifty million students from the primary to university level and it will also increase the rich-poor disparity in the education system. Since 44 per cent of Bangladeshi households have no television and an even greater proportion has no access to the internet, a huge number of children from poor families would lose access to education. The introduction of digital education platform to all levels, which can significantly curb the shortfall in education, is yet to be realised.

The existing social protection and social safety nets do not work effectively as there remains selection bias and exclusion. A lifecycle based universal social security system comprising income support, national health services, child benefits, housing benefits, disability living allowance, invalid care allowance, state pension, job seekers’ allowance has to be put in place to reduce the impact of shocks on the growing number of vulnerable people. A social security commission can be put in place to implement the programme.

 

Employment retention and creation

THERE are three major challenges regarding employment generating capacity of the economy. Firstly, employment growth has been much slower than GDP growth, implying that the employment elasticity of GDP is falling. Secondly, employment in the manufacturing and construction sector actually was contracted in 2013–2017, although value-added growth in these activities accelerated. Thirdly, the concentration of jobs in the informal service sectors further increased raising concerns about the shortage of decent jobs.

Creating new jobs largely depend on how the sectors cope with the shock, and how fiscal and financial stimuli are targeted towards creating employment. The utmost focus, however, should be on job retention in all sectors, formal and informal. Besides, a growing reverse migration of workers within the country and from abroad is going to exacerbate the unemployment scenario. An integrated solution to boost the agricultural and manufacturing sector through a rural area regeneration and industrial fund would raise the employment and wage level.

 

Expansion of domestic capacity

THOUGH the growth in agricultural output has been immense since the beginning of the century, it is concentrated mainly in rice, which also limits the income of the farmers. For example, maize production is now 3 per cent of the overall crops produced in the country whereas rice still holds the largest share with 75 per cent of total crop production. Diversifying the agricultural products basket ie production of vegetables, oil seeds, fisheries and livestock is necessary to achieve food security. At the same time manufacturing export is concentrated mostly in the ready-made garment sector. The constrained manufacturing sector is mainly due to a narrow domestic capacity. The enhancement and diversification of domestic capacity is, therefore, the way forward, given the huge domestic demand of more than 160 million people. The expansion of domestic capacity will, in the long run, strengthen the export competitiveness. This would result in creation of decent employment as well as moving away from informal sectors.

One way to speedy recovery from the recession would be a digital transformation of the economy, initiating a smart digital transformation engagement with MSMEs in specific regions.

 

Export capacity expansion

PRODUCTION has concentrated in lower value products. Only 10 types of garment products account for 68 per cent of the ready-made garments export. Business environment and skills need to be improved for increased productivity to augment competitive edge to attract industries that might seek relocation. Adapting to new technologies and innovations will diversify the narrow product basket. On the other hand, the export destinations are heavily concentrated to the European and North American countries. A shock in these countries adversely affects export performance in Bangladesh. It is high time a search was made for newer markets for export.

Bangladesh has a large trade deficit with China and India. At the same time, it has failed to maximise the potential of trade with Nepal, Bhutan and the Southeast Asian countries. Regional trade agreements would help to tap into markets of these countries. The Balkan region and Eastern European countries can also be a potential market. Trade with South American countries are still very miniscule. It is also time to explore developing countries with a more diversified product base.

 

Promoting green development and SDGs

WHILE most nations are moving towards clean energy, Bangladesh has embarked on creating a fossil fuel-based energy sector. Fossil fuel still accounts for more than 85 per cent of total generation whereas renewable sources generate only 1.34 per cent. The cost of installing one MW solar power plants has fallen to $1.3 million in 2018 from $4.1 million in 2010. Installation cost of one MW onshore wind turbine has come down to $1.41 million in 2018 from $1.76 million in 2010. Yet the government has opted for costlier coal and LNG to replace natural gas in electricity generation. The green deal recovery is a must for a successful and sustainable restructuring of the economy.

Bangladesh must derive maximum benefit from the existing policies for the least developed countries, as it is expected to graduate from this tier by 2024, implying that strategies need to be devised in order to utilise LDC benefits before they are lost. Negotiating with financing agencies for lower rates of interest, longer repayment and grace period should be the priority to ease debt servicing, besides seeking relief, writing-off and deferrals of debts. Moreover, current account imbalance will hinder financing for implementation of the sustainable development goals. The progress made so far may be reversed as poverty has increased, education and health sectors have been left in shambles by the pandemic. The progress in achieving SDGs must be reassessed once the pandemic slows down. Attaining the targets in time will require increased financing from global agencies.

 

Fiscal prudence and active citizenship

ACTIVE citizenship plays a crucial role in restoring the economy by ensuring accountability through checks and balances. Restoring the economy to a post-COVID-19 scenario will require a concerted effort and a mix of both monetary and fiscal policy measures. The goal is to create new employment and increase the earnings. The government will need to look for alternative sources for financing as revenue earnings from tax and VATs are highly likely to face steep decline due to income losses and declining consumption spending.

COVID-19 has created unprecedented challenges when Bangladesh is awaiting to celebrate its 50th year of independence. In determining the strategy to recover from this crisis, it is, therefore, necessary to evaluate the successes and failures in the past 50 years, as well as to hold on to the spirit of the war of independence at the core of policy formulation and framework. In a just state, meeting the basic needs of the citizens should be the mainstay of the recovery policy. In the case of Bangladesh, the three pillars of the declaration of liberation war — equality, human dignity and social justice — must lie at the centre of the policy framework. The state must be transformed into a citizen-state, for which far-sighted politics and appropriate political settlement are essential.

 

Dr Rashed Al Mahmud Titumir is a professor of economics at the development studies at Dhaka University. He is the chairperson of Unnayan Onneshan, an independent multidisciplinary think-tank.

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