Tuesday, May 28, 2024


Dhaka Tribune

Opening up the economy at what cost?

The benefits of ending the lockdown will not outweigh the harm

Update : 24 Apr 2020, 05:16 PM

Let me get straight to the point.

The last thing one should do at this moment is to indulge oneself into some intellectual vanity while people are dying in a merciless pandemic. Many other potential deaths await as the possibility of a famine looms large.

So, let me cut to the chase.

Should we ‘open up’ our economy as a policy response to fight the economic shock related to Covid-19? This argument has already been floated in other countries, but also in Bangladesh. An article published in Dhaka Tribune (‘Will Bangladesh be able to flatten the curve?’ by Naira Khan), as well as Brac Executive Director Asif Saleh in an interview with the BBC argued this point.

The proposition being discussed goes - since the vast majority of people in our economy work in the informal sectors (which is almost 90% of the employed population), a total lockdown inevitably results in hunger, with the formal sectors falling  into similar disarray. A recent Brac survey revealed 14% of the people in the country have no food on their plates at the moment. Brac Institute for Governance and Development (BIGD), in a recent online release of their survey finding entitled ‘Livelihoods, Coping, and Support during Covid-19 Crisis’ showed significant drop in household income of urban and rural poor that ranges from an astounding 79% to 82% drop. That’s a devastating scenario. The way to fight this, the proponents of opening up the economy argue, is to ‘contextualize’ the solution by not readily adopting the globally accepted method  of lockdown to flatten the curve.

Remember, we are discussing the problem of ‘opening-up the economy’ approach as a part of government’s policy response in the context of giving respite to the poorest socio-economic group in Bangladesh, and then add the destitute middle class with no savings and utilities and debt payment hanging over their head in the mix.

The presumption that opening up the economy will lead to re-employment, therefore increase in household income of the destitute is made on questionable premises. Let us discuss the fallacies by asking two important questions. 

Should such a suggestive policy response come from rigorous research or simple data visualization?

This is a big question. And please expect a number of complementary questions to follow. First- if the workers and daily wage earners are back at work, who will enjoy the yield of their work? 

Let’s think of a cohort of employed population coming from both formal and informal sectors. Construction workers, RMG workers, small scale traders, transportation sector workers, street vendors in urban settings and farmers, harvesters of different agricultural produce, small scale traders, day labourers working in manufacturing supply chain in rural settings are among the hardest hit population from the lockdown. The destitute are not limited to only these people but let’s limit our discussion to these groups. The above groups represent industries that have been severely hit due to the Covid-19 economic shock. According to basic economic principles, aggregated economic yield resulting in working capital resulting in workers’ salary is the way to go. In the wake of a distressed supply side the world over, can we expect the economy to behave normally?

This is where I see a serious problem of rigour. Let me explain.

The most inevitable complexity arising from any financial crises is the disruption of the economy's supply side. Crippled supply side leads to structural damage in the economy which must be understood from financial system risk and risks associated with inertia in the real economy. 

Publicly traded companies will face liquidity problem during the Covid-19 financial crises since the capital market is in a shock. That means a significant reduction in capital formation that eventually reaches the real economy where household income is hit. Declined household income thus results in significant drop in demand in the economy. While capital risk devastates the financial system, the cash flow crisis disrupts the real economy and puts it into a halt.

These widely understood facts lead to the question how opening up the economy as a policy response is going to help the destitute while we do not have a clear policy proposal to deal with the supply disruption?

If this is a little ambiguous, then allow me to point to a few more simple complementary questions? Since the government is dealing with a pandemic which itself requires a huge amount of cash injection in the economy, understandably the development projects will be halted for some time to come (opening up of which also increases the risk of mass infection). How will then the opening-up is going to help day labourers who work in these projects? 

The RMG sector, which contributes to 84% of Bangladesh’s overall export, is at a massive shock (Reuters reported $6 billion loss due to order cancellation as of April 1). RMG sector’s notoriety is well reported in the media when it comes to regular wage payment. Which part of the opening-up argument presents a clear strategy that ensures further regular payments of the wage amidst the catastrophic loss, let alone payment of the overdue wages? Similar questions can be asked for all other sectors above.   

At this point, some readers might be asking ‘what about the government’s stimulus package? Why can’t the $8.5 billion injection help re-start the economy, hence minimise economic shock?’ It’s a stimulating thought, which leads to the second question.

How stimulating is the stimulus package?

The question we should add to the couple asked above is- how quickly can we expect to see the effects of the stimulus package? The answer depends on two very important aspects- financial system stability and efficient fund management system.

On the financial system stability issue, let us quickly reexamine the basics of the stimulus package. The package includes Tk300 billion at 9% interest rate (half of the interest payment will be done by the government as subsidy) for providing working-capital loans to the service sectors and affected industries. Source of this fund will be the commercial banks in Bangladesh. 

At this point the readers must be reminded of the vulnerability of Bangladesh’s banking sector that invited much discussions during the beginning of this year. Default loans in the banking sector stood all time high at Tk116,288 crore as of January, 2020. Bringing further worry to the financial system stability, the government’s bank borrowing exceeded its entire fiscal year’s target in just six months. July-December borrowing reached Tk48,015.81 crore which was initially planned at Tk47,364 crore for the entire 2019-2020 fiscal year. Outstanding loans, coupled with an all-time high government borrowing exhausted the banking sector. The result is an inevitable credit shortage for the private sector hampering the sector’s growth.

What exactly has changed since January that gives any policy analyst confidence in smooth cash flow under the stimulus package? The stimulus money is coming from the same sector! 

While you ponder over this question, it is fair to remind you, I suppose, that this credit flow is a part of extraordinary measure to subside the Covid-19 shock while the need for government borrowing for the rest of the fiscal year still stands, which is projected to exceed Tk100,000 crore. 

If loaning from international financial institutions seems an alluring option, then let me tell you the breaking news from CNN that happens to be on my smartphone screen at the time of writing this: ‘US oil prices crash below $0 a barrel.’ Amidst the seismic shock the global economy is trying to absorb at this moment, reliance on the international credit system doesn’t seem like a pragmatic idea.

About the efficient fund management system, one has to expect miracles for the fund to reach the right hands at the right time (which is now). Why such apprehension? Starting from our recent experience of observing the frustrating lack of coordination among different government agencies as they tackle the public health emergency, to the widely evidenced inefficiency and lack of transparency of government agencies in revenue collection, there is little in the way of reassurance that can give us confidence in the system. 

One of the fundamental reasons outstanding loans stand at all time high is that loans are disbursed not on the basis of feasibility analysis but based on personal connection with the top management. While these situations prevail, why would it be unfair to assume that a vast majority of the worthy recipients will be left out of the package? Furthermore, would it not be a reasonable conclusion that weak governance in the public bank sector will further delay the cash injection?

Economists and financial analysts all over the world agree that wartime economic response is the way to go at the moment which calls for huge cash injections to fight the pandemic, aside from the stimulus package. Before we confidently suggest withdrawal of the lockdown, why don’t we finally ask- which part of the package exclusively promises anything for the 50 million people that work in the informal sectors? Loosely mentioned social safety net doesn’t cut it. To these people, a day without work is a day of starvation with family members.

The plight of these people coming from the bottom of the pyramid leads us to ask an additional question:

Why are we being so insensitive to the poor?

The view of the poor is blurred at best and rendered a theoretical problem at worst for the economist in his/her couch obsessed with data. 

By now, we all know that social distancing has been proven to be the most effective strategy to contain the pandemic. You simply cannot disregard the widely accepted strategy by resorting to common sense data visualization when the event is non-ergodic.

Why then recklessly propose sending the poor in the face of death when we have not exhausted some of the well-established methods for supporting the destitute? 14% of the population that are starving at the moment need food on their plates immediately. Do they deserve a policy response that choses one death over another (death by pandemic over death by hunger) while they really should be focusing on the preservation life?

At least some economists have got it right. Abhijit Banerjee and Esther Duflo urged the Indian government to “[B]e much, much bolder with social transfer scheme” while opining that failure to do so quickly will lead to catastrophic loss of life as people will defy lockdown. They also advocate cash transfer to the poor as a government response function to fight poverty. A similar response function could work in Bangladesh.

As far as the well being of the population is concerned, it is morally reprehensible to ask to open-up the economy before fixing the following:

Ensure food security for the impoverished   

According to government statistics, Bangladesh has 1.5 million tons of food reserve. Before we ask the poor to start earning again, risking their lives, let’s build social alliances to stop them from going hungry. Universal food rationing could be an effective strategy here, as Nabila Idris argues in the article ‘Here’s how the PM can stop the rice thieves’ published in Dhaka Tribune. The writer shows that finding the poor to provide a safety net is practically a dead-end since poor people will be targeted through outdated databases, and it’s not a stationary group. That’s just one example of thinking out-of-the-box to innovate new solutions. 

Decentralize operations: Localism is the way to go

Our prime minister has too much on her plate. Why does she have to monitor local level operations? 

The famed author of ‘The Black Swan’ Nassim Nicholas Taleb is a prominent adversary of centrally planned economy. We have seen the danger of centralized operation in testing and contact tracing of Covid-19 patients. The government had to eventually decentralize, and rightly so. 

We must learn from the example of Kerala in flattening the curve (only 3 deaths among the 370 confirmed cases). Kerala has done so by community-driven village councils that took the responsibility of feeding the poor by starting community kitchens. Economist Jacob John opines that the “devolution of power in Kerala” resulted in such a success. In Bangladesh, we must fix the supply chain for agricultural produce and a way to this is to build alliances with local communities.  

Give the poor money

Cash transfer has been proven to be more beneficial for the poor which is evidenced in Abhijit Banerjee and Esther Duflo’s work. But first, we must agree on the principle that one death is one too many, either from hunger or pandemic. Only then, we can release cash to the poor instead of pushing the dangerous idea of opening-up the economy. They must live first. The easiest way to ensure cash release to the poor is to use the mobile financial services. Economist Zahid Hussain suggested the use of post office cash cards for the cash disbursement.

And for the love of God, fix the healthcare system

Fixing the healthcare system is a long term agenda. But our healthcare system, dismal as it is, nevertheless is fighting the greatest fight at the moment. Although it is kind of common knowledge that the system is far from capable of handling such pressure and treating the most vulnerable, we can’t just leave them to die. 

The biggest cash release is required to ensure enough testing kits, PPEs, ventilators and other necessary supplies. Designers could be asked to design low cost remote isolation centres. Local community centres, private clinics, hotels and resorts could be turned into makeshift hospitals. Local riches could be asked to contribute to the government effort. Buses and taxis that are sitting idle could be mobilized to transport patients. Restaurants that are closed could run community kitchens to cook and distribute food to the healthcare workers. 

Let us stop asking the most impoverished to risk their lives to recover the economy, who, in reality, are the least beneficiary of it anyway. They bear responsibility for far too many aspects of their lives already. It’s alright to think like an economist. But if a pandemic can’t make us think like a human, what will?    

Omar Nasif Abdullah is lecturer of Marketing and International Business at North South University’s School of Business and Economics.

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