• Monday, May 25, 2020
  • Last Update : 07:29 pm

How to survive the coming economic crunch

  • Published at 08:00 pm April 5th, 2020
Supporting informal sector workers is the most difficult problem REUTERS

How to effectively provide wage support to the formal and informal sector workers

All over the world, governments are struggling with the problem of maintaining incomes when much production is shut down or greatly reduced due to the lockdown of the population.

Roughly, there are two kinds of workers in Bangladesh, those in the formal sector and those in the informal sector. Workers in the formal sector are on the payroll of a functioning company; there is some legal relationship between the workers and the employer. Informal workers may be working on their own, running a small establishment [including a farm] or they may be casual workers.

Most workers in Bangladesh are in the informal sector. An estimate based on recent information from the Labour Force Surveys indicates that more than 80% of workers are in the informal sector. The estimate of the 2017 Labour Force Survey is 85% of the labour force is in the informal sector.

The government has formulated large and powerful programs to provide wage support and other credits to the economy. 

This note covers how to provide wage support. But an important point needs to be made. Prime Minister Sheikh Hasina is providing powerful leadership to the society at this time of challenge. She will make clear that the society must work together to survive this crisis and continue her demand that there will be no corruption in these financial operations; any such corruption must be dealt with as treason at a time of such great national challenge.

During WW2, the United States paid the wages of the Nationalist Army. The Nationalist leaders padded the payrolls with fake soldiers and pocketed the money. 

Laughing at the innocent Americans, the Nationalist leaders met their fate when Mao’s armies defeated them. The temptations are tremendous. But Hasina is a far better leader than Chiang Kai-Shek who lost his country to Mao’s communist movement that, at the time, was idealist and moral.

Support for the informal sector workers 

This is the most difficult problem. There are no lists of such persons and for the establishment lists of the BBS these run into the millions. It is necessary to go directly to the people. 

The local government reaches down to the union and the ward. My estimate is that in rural areas, there are about 15 million in the informal sector outside of the farms. There are 4,800 unions, so on the average there are 3,000 persons on each list. It is at this level that people have to go out and make lists of persons that have been working and are now not working.

Preparing these lists is a big job. But school teachers are free and can be mobilized to do this work. Farmers should not be included. They are working. In rural areas, such lists would then be established and people would come once a month to obtain their money.

In urban areas, this approach does not work as there are too many people in a ward to make a list. 

Instead, one takes the short cut and pays everyone on the voter lists in the cities and towns. These lists are available and good enough. Government officials should not get a payment as their salary is coming. We estimate this reaches about 8 million persons.

Someone has to determine what a reasonable payment might be to these informal workers. There may be 15 million such persons in rural areas and 8 million in urban areas. Paying Tk 2,000/month in rural areas and Tk 3,000/month in urban areas requires Tk 5,000 crore per month (roughly $600 million per month).

In designing an approach for informal workers, one has to keep two points in mind. It must be working in a month; one has to accept that there will be a lot of inequity here. This is the cost of doing something. Any complicated approach will fail. 

The crisis will last 4-5 months, so results are needed immediately, not six months from now.

In summary, what is suggested here is to go out and make lists of persons in rural areas that should get payment and set up a system for paying cash. Forget trying to use internet methods; people want cash and need cash. For urban areas, pay the people on the voter lists except for government employees, military, police, etc. But do not make a complicated system.

To make this system work, it is essential that the prime minister put her force behind demanding that there be no corruption. This will go a long way to make this work. After it is all over, the cheaters can be shamed. 

Wage support for the formal sector

Providing wage support for workers in the formal sector is relatively simple: Form a list of firms; the government can require certain firms to accept grants or loans to pay their workers even if the workers are not working. Let me use the word “suspended” for the worker of a company who is not working but has not had their employment terminated according to the labour law. Dealing with suspended workers is comparatively simple. 

There are ways to obtain lists of companies: First is through industry associations such as BGMEA; there are many such associations and a large part of the formal sector of larger companies will be included. Second is the list of Listed Companies on the stock exchanges; these are natural lists of firms that can use support for their labour force. 

There are a few principles: The best means for the wage support is loans through one of the banks that the enterprise works with in normal times. The bank establishes the labour force in the period October, 2019 to January, 2020; this is done from the actual payroll. The company borrows money to cover the payroll starting in April 2020.

Coverage is for the difference between the base payroll and the actual payroll. The company must certify its actual continuing employees plus the workers considered suspended. It is better to pay, say, 75% of the salary of suspended workers rather than 100%. One should not pay for overtime, bonuses, etc, nor any increases in wages, whether promised or not. The commercial bank lends the money at a low interest rate for a reasonable length of time. The present time of 2 years is far too short.

The central bank and the commercial banks are fully able to administer the program the government has formulated. 

Bangladesh Bank may appoint a separate inspection team tasked with review of issues related to corruption; but initially the inspector should serve as independent eyes and ears for the governor.

One must recognize that in normal times there is a lot of turnover in the labour markets. In an industrial establishment, perhaps 5% of workers are changing every month. There is a core of 75-80% of workers who have worked for more than 2 years and a revolving group that comes and goes.

The program Bangladesh Bank has set forth is an interesting example of the administrative approach of Bangladesh government civil servants. It is theoretically brilliant, but disconnected from the realities of the country. In the RMG sector, the instructions are that the payment to the worker is to be made through a mobile banking account or through a regular bank account.

My information from a number of RMG factory owners is that about 10% of their workers have regular bank accounts and perhaps another 20% have mobile banking accounts. They do not have these accounts in many instances as they do not have national ID cards. My estimate is 20-25% do not have ID cards. Without the ID card, they cannot open such accounts. Most workers receive cash.

The reality of Bangladesh is that female workers do not want their husbands or fathers to know how much money they have. Despite all the nice words, the males of the family want to control the money and, in many instances, will demand that they be given the money. The women want to receive cash; one of their biggest complaints is the interference of husbands or fathers trying to get their money. The BB requires that the commercial bank holding the workers account issue a free ATM card. Needless to say, the banks do not like this idea.

If the support to the RMG sector is going to work when it begins with the payment of the May 7 salary, then a more realistic approach must be worked out. For example, cash payments to workers who want cash; let the commercial banks provide some supervision of the payment; BB inspectors can check on some factories selected randomly. Further, in large factories, payment should be spread out over several days to allow workers to stay at a distance from each other, not make a big crowd or a line with little spacing.

Forrest Cookson is an American economist.

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